Question

In which of the following entities will all persons who participate in management be protected from liability beyond their investment?

1. C corporation.

2. S corporation.

3. Limited liability company.

4. Limited partnership.

Select one:

a. 1 only.

b. 2 and 3.

c. 1 and 4.

d. 1, 2, and 3.

2. On January 1st of this year Patti purchased a home worth $1.5 million with an interest-only mortgage of $1.2 million. She is currently only paying interest on the mortgage at the rate of 5% annually. What amount of qualified residence interest may she deduct as home mortgage interest on Schedule A of her individual income tax return this year?

Select one:

a. $55,000.

b. $50,000.

c. $60,000.

d. $37,500.

Answer 1

For the first question, the answer will be option d (1, 2, and 3).

Both C corporation and S corporation are company form of business / entities, which we all know has separate legal entity status and hence, all persons who participate in management be protected from liability beyond their investment.

As the name suggests, Limited liability companies are hybrid entities that combine the characteristics of a corporation with those of a partnership or sole proprietorship and so all persons who participate in management be protected from liability beyond their investment. It restricts the liability of the persons in management from liability beyond their investments.

So, now we are left with Limited Partnership where all persons who participate in management are not protected from liability beyond their investment. Here, we should not be confused with a limited liability partnership (LLP). Limited partnership is made up of two or more partners and there are general partner who oversees and runs the business while limited partners do not partake in managing the business. The general partner has unlimited liability for the debt, and any limited partners have limited liability up to the amount of their investment. Hence, here all persons are not protected from liability beyond their investments.

So, the answer or the correct option is d.

We can deduct home mortgage interest on the first $750,000 ($375,000 if married filing separately) of indebtedness. However, higher limitations ($1 million ($500,000 if married filing separately)) apply if you are deducting mortgage interest from indebtedness incurred before December 16, 2017.

Looking at the options available, we can say the correct answer will be option D, i.e., $37,500.

Which we arrive by using the following calculation :

$750,000 * 5% = $37,500

So, answer to second question is option D, i.e., $37,500.