EA Part 2 Set 1

Every business entity must figure taxable income for an annual accounting period called a: __________.

Explanation: Every business entity must figure taxable income for an annual accounting period called a tax year. The calendar year is the most common tax year, but many businesses report their income and loss on a fiscal year. An annual accounting period does not include a short tax year, but businesses will generally have a short tax year in the year that they begin operations and in the final year (the year of dissolution). For more information, see Publication 538, Accounting Periods and Methods. Correct answer: Tax year.

The IRS evaluates three primary characteristics to determine the relationship between a business and workers it pays for services:

* Behavioral Control: Covers whether the business has a right to direct or control how the work is done. * Financial Control: Covers whether the business has a right to direct or control the financial and business aspects of the worker's job. * Type of Relationship: Relates to how the worker and the business owner perceive their relationship. Whether a person is classified as an employee or an independent contractor depends on the facts and circumstances of each individual case. Employers who misclassify workers as independent contractors may face substantial tax penalties for failing to pay employment taxes and failing to file payroll tax forms. For more information on employee classification, see the IRS detail page here.

Carrier Mobile, Inc. and Wheaton Corp. are both C corporations. During the year, Carrier Mobile Corporation received $200,000 of dividends from Wheaton Corp., its 85%-owned subsidiary. How much of this dividend income is taxable to Carrier Mobile? * $0 * $30,000 * $40,000 * $60,000

Because of the dividends-received deduction, the income is not taxable to Carrier Mobile. If the corporation receiving the dividends owns more than 80% of the distributing corporation, it is allowed to deduct 100% of the dividends it receives. See table below. The Tax Cuts and Jobs Act modified the DRD rate for corporations. The dividends-received deduction has been reduced to 65% and 50%, respectively. For corporations who own 80% or more of the distributing company, the deduction remains unchanged at 100%. Correct answer: $0

If a corporation makes a below-market load to a shareholder, the corporation generally is deemed to make a payment to the shareholder for federal tax purposes. This deemed payment is treated as a(n): * Gift * Dividend * A payment of compensation * Honorarium

Correct answer: Dividend ***Sometimes called a constructive dividend

Vermilion Realty, Inc. is a calendar-year, accrual-based S corporation that requested an extension of time to file its 2020 corporate tax return. When is Vermilion Realty's extended due date for filing Form 1120S? * March 15, 2021 * April 15, 2021 * September 15, 2021 * October 15, 2021

Explanation: A calendar-year S corporation must file its tax return by March 15 of the following year. If the S corporation requests a six-month extension, the extended due date would be September 15. Note: C Corporations and S Corporations do NOT have the same due date, but they do use the same form to file an extension request. An S-corporation that wants to extend its filing deadline must file the extension Form 7004, Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Return, no later than the original due date of Form 1120-S. Correct answer: September 15, 2021.

Cancellation of Debt (COD) income for an S Corporation: * Flows to shareholder if income is excluded by the S corporation * Is recognized as income to an S Corporation regardless of the extent of corporate insolvency * Is not excluded from gross income to the S Corporation when granted in Chapter 11 reorganizations * Gives rise to income which flows to shareholders if the income is not excluded by the S Corporation

Correct answer: Gives rise to income which flows to shareholders if the income is not excluded by the S Corporation

An S corporation stockholder's basis is generally increased by: * Distributions * Nontaxable discharge of indebtedness * Separately stated loss items * Taxable income

Correct answer: Taxable income

Which form is used for a sole proprietor to make quarterly payments of self-employment tax?

Explanation: Form 1040-ES, Estimated Tax for Individuals, is used by sole proprietors to pay quarterly estimated taxes. A sole-proprietor may also choose to pay estimated taxes online, using EFTPS or Direct Pay, on the IRS website. Correct answer: Form 1040-ES.

Which of the following is a characteristic of a complex trust? * It cannot make discretionary distributions of income * It is not allowed to accumulate income * It can make discretionary distributions to charity * It cannot make distributions of principal

Explanation: A complex trust can make discretionary distributions to charity. There are two types of trusts: a simple trust and a complex trust. The IRC defines a simple trust as a trust that: Distributes all of its income currently; Makes no distributions from principal; and Makes no distributions to charity. Any trust that is not a simple trust is automatically a complex trust. A complex trust: Is allowed to accumulate income; Can make discretionary distributions of income; Can make mandatory (or discretionary) distributions of principal; and Can make distributions to charity. Correct answer: It can make discretionary distributions to charity.

Which of the following businesses would be eligible to claim the Disabled Access Credit? * A sole proprietor with $2 million of gross receipts and 32 full-time employees * A corporation with $5 million of gross receipts and 40 full-time employees * A corporation with $7 million in gross receipts and 10 employees * A partnership with $1 million of gross receipts and 20 full-time employees

Explanation: A partnership with $1 million of gross receipts and 20 full-time employees would be able to take the Disabled Access Credit. The Disabled Access Credit is a nonrefundable tax credit for an eligible small business that incurs expenses to provide access to persons who have disabilities. The expenses must be incurred for the business to comply with the Americans with Disabilities Act. The amount of the Disabled Access Credit is 50% of qualified expenses, with a maximum credit per year of $5,000. To be eligible, a business must have had gross receipts of $1 million or less or had no more than 30 full-time employees during the preceding tax year. To see more information about business credits, see the instructions for Form 3800, General Business Credit. Correct answer: A partnership with $1 million of gross receipts and 20 full-time employees.

All of the following are characteristics of a simple trust except: * Distributes all of its income currently * Makes no distributions to charity * Can make discretionary distributions of principal * Makes no distributions of principal

Explanation: A simple trust CANNOT make discretionary distributions of principal. The IRS defines a simple trust as a trust that: Distributes all of its income currently; Makes no distributions of principal; and Makes no distributions to charity. Correct answer: Can make discretionary distributions of principal.

Cromwell Corporation buys a factory building for $650,000 cash and also assumes a mortgage of $2,400,000 on it. The seller of the building had not paid property taxes in over a year, so Cromwell Corporation had to pay $15,000 in back property taxes to close the sale.What is Cromwell Corporation's basis in the building? * $650,000 * $2,400,000 * $3,050,000 * $3,065,000

Explanation: All of the costs must be added to the basis of the building. If you buy property and become liable for an existing mortgage on the property, your basis is the amount you pay for the property plus the amount remaining to be paid on the mortgage. Delinquent property taxes are also added to basis if the taxes accrued before the sale. For more information on how to calculate basis, see IRS Publication 551, Basis of Assets. Correct answer: $3,065,000

The unrelated business income tax (UBIT) applies to: * LLCs * LLPs * Exempt organizations. * S corporations

Explanation: Although an exempt organization must be operated primarily for tax-exempt purposes, it may engage in income-producing activities that are unrelated to those purposes, as long as these activities are not a substantial part of the organization's regular activities. Income from unrelated business activities is subject to a federal tax called the unrelated business income tax (UBIT). For most organizations, an activity is considered an unrelated business and subject to UBIT if: It is a trade or business, It is regularly carried on, and It is not substantially related to furthering the exempt purpose(s) of the organization. An exempt organization that has $1,000 or more of gross income from an unrelated business must file Form 990-T by the fifteenth day of the fifth month after the tax year ends. An exempt organization must make quarterly payments of estimated tax on unrelated business income if it expects its tax for the year to be $500 or more. Correct answer: Exempt organizations.

The Pendit Corporation owns 90% of the outstanding stock of Silverwork Holdings, Inc. Both are C corporations. During the current year, Pendit Corporation receives $40,000 of dividends from Silverwork Holdings, Inc. Pendit Corporation has taxable income of $195,000 before taking into account its dividend income. What is Pendit Corporation's taxable income for the year? * $155,000 * $203,000 * $207,000 * $195,000

Explanation: Because Pendit Corporation has 90% ownership of Silverwork Corporation, it can claim the 100% dividends-received deduction and the dividends received from Silverwork. In other words, the dividends are not taxable to Pendit, which is the receiving corporation and majority owner of Silverwork. The Tax Cuts and Jobs Act modified the DRD rate for corporations. The dividends-received deduction has been reduced to 65% and 50%, respectively. For corporations who own 80% or more of the distributing company, the deduction remains unchanged at 100%. The DRD is calculated like this: Correct answer: $195,000

Affiliate Advisors Group, Inc. is a cash-based, calendar-year corporation. Affiliate Advisors was formed on February 1 and incurred qualifying start-up costs of $24,000 before the company began operations. What is the maximum amount of start-up expenses that Affiliate Advisors deduct on its first corporate tax return?

Explanation: Business start-up costs are the expenses incurred before a business actually begins business operations. Affiliate Advisors can elect to deduct $5,000 of its start-up costs in the year the business begins operations. The remainder would have to be amortized ratably over 180 months. A company can elect to deduct $5,000 of its start-up and $5,000 organizational costs immediately. For more information, see Publication 583, Starting a Business and Keeping Records. Correct answer: $5,000

Lilliana's basis in the Crichton Partnership on January 1, was $22,000. She is a 50% partner and shares profits and losses in the same ratio. The partnership's ordinary income for the year was $80,000 and its tax-exempt muni-bond interest income was $1,400. If the partnership were to liquidate on December 31, what would be Lilliana's partnership basis for determining gain or loss? * $49,800 * $60,600 * $61,500 * $62,700

Explanation: Lilliana's basis on December 31, would be determined as follows: Basis at the beginning of the year, on January 1: $22,000+50% share of ordinary income: $40,000+50% share of tax-exempt interest income: $700=Basis on December 31: $62,700 Correct answer: $62,700

Townsend Patio Furniture had the following expenses in the current year. Based on the information below, what is Townsend's cost of goods sold? Beginning inventory: $1,200,000 Ending inventory: 1,000,000 Raw materials: 1,800,000 Freight charges: 300,000 Factory depreciation and section 179: 100,000 Direct manufacturing labor wages and benefits: 450,000 Indirect manufacturing labor wages and benefits: 100,000 Administrative/sales wages and benefits: 250,000 Administrative/sales depreciation deductions: 50,000 * $3,250,000 * $2,950,000 * $2,850,000 * $2,550,000

Explanation: Cost of goods sold (COGS) is deducted from a business's gross receipts to determine its gross profit. The following expenses related to inventory sold are included in COGS: The cost of products or raw materials, including freight Storage Factory overhead Labor costs for workers who produce the products In a manufacturing business, labor costs allocable to the cost of goods sold include both the direct and indirect labor used in fabricating the raw material into a finished, saleable product. Other labor costs not associated with the manufacturing process, such as selling or administrative expenses, are not included in the COGS equation. COGS is recorded as an expense as a company sells its goods. The answer is calculated as follows: Beginning inventory balance: $1,200,000Manufacturing costs:Raw materials purchases: $1,800,000+Freight charges: 300,000+Manufacturing wages and benefits: 550,000+Factory depreciation and section 179 deductions: 100,000-Ending inventory balance: (1,000,000)=Cost of goods sold for the current year: $2,950,000 For additional information, refer to the chapter on Cost of Goods Sold, Publication 334, Tax Guide for Small Businesses and the chapter on Inventories, Publication 538, Accounting Periods and Methods. Correct answer: $2,950,000

Franklin is the sole shareholder of Flint Enterprises, Inc. an S corporation. Franklin's basis at the beginning of the year is $59,000. The company did not have any activity during the year. He receives a distribution of $63,000 in cash on December 31. Franklin's basis after the distribution is: * Zero. He must report the excess $4,000 as a capital gain. * Negative $4,000 basis * Zero basis, no gain or loss. * Zero. He has no reporting requirement of the excess $4,000 until he disposes of his shares of the corporation

Explanation: Distributions from an S corporation with no accumulated earnings and profits are considered a return of capital and reduce the shareholder's basis in the stock of the corporation. Distributions that exceed the shareholder's adjusted stock basis are treated as capital gains and must be reported by the shareholder on Schedule D, so Frank must report the excess $4,000 ($63,000 - $59,000.) Note: Distributions in excess of basis are uncommon in actual practice. Such transactions, while they may be possible, are rare. However, this scenario has been tested on the EA exam in previous years, so you must understand the concept. Correct answer: Zero. He must report the excess $4,000 as a capital gain.

Hamish is a qualified farmer who received federal disaster payments during the tax year due to hurricane damage to his crops. He wants to postpone recognition of the payments to the following year. Hamish can postpone recognition of the income if his business uses the: * Non-Political * Charitable * Nonprofit * Exempt

Explanation: Hamish can postpone recognizing the revenue if he uses the cash method. Insurance proceeds, including government disaster payments, may be received as a result of destruction or damage to crops or the inability to plant crops because of drought, flood, or other natural disasters. These payments are generally taxable in the year they are received. However, a farmer can elect to postpone reporting the income from the disaster payment until the following year if he meets all of these conditions: The farming business must use the cash method of accounting. Crop insurance proceeds were received in the same tax year the crops were damaged. Under normal business practices, the farming business would have reported income from the damaged crops in any tax year following the year the damage occurred. Correct answer: Cash method.

Redstar Construction, Inc. purchases the following assets in 2020: $525,000 used heavy machinery $25,000 patent $230,000 land $1,500 off-the-shelf computer software The company's gross income is $800,000, and its net taxable business income for the year is $475,000, after applying all its other business expenses. What amount can Redstar Construction, Inc. claim for its section 179 deduction? * $0 * $475,000 * $525,000 * $526,500

Explanation: In this scenario, only the used machinery and the software would be "qualifying" property for the purposes of the section 179 deduction. Real property and most intangible property (the patent and the land) do not qualify for Section 179 treatment. However, the Section 179 deduction is also limited to a business's taxable income. Therefore, Redstar, Inc.'s allowable section 179 deduction is $475,000, which is the amount of its taxable income for the year. After the application of the Section 179 deduction, the corporations' taxable income would be zero. For more information, see Publication 946, How to Depreciate Property. Correct answer: $475,000

Paulson died on April 10. He had the following IRD (income earned by Paulson when he was alive, but not received until after his death): Unpaid wages: $13,500 Rental income that was not paid at the time of death: $1,000 Interest from muni bonds: $750 Short-term capital gain from a stock sale: $1,000 The beneficiary of Paulson's estate is his brother, Devon, and Devon receives all the amounts above. What amount, if any, must Devon recognize as taxable income, and what is the nature of the income?

Explanation: Income in respect of a decedent (IRD) must be included in the income of one of the following: The decedent's estate, if the estate receives it. The beneficiary, if the right to income is passed directly to the beneficiary and the beneficiary receives it. Any person to whom the estate property distributes the right to receive it. IRD retains the same tax character after death as if the taxpayer were still alive. For example, if the income would have been short-term capital gain to the deceased, it would be taxed the same way to the beneficiary. Although the income retains its character, none of the amounts would be subject to self-employment tax. Correct answer: $14,500 ordinary income; $1,000 short-term capital gain.

Individual shareholders of an S corporation generally have to make estimated tax payments if they expect to owe tax of ______ or more when their return is filed. * $1,000 * $600 * $2,500 * $500

Explanation: Individuals, including business owners like: sole proprietors, partners in a partnership, and S corporation shareholders, generally have to make estimated tax payments if they expect to owe tax of $1,000 or more when their return is filed. STUDY TIP: Please note that this question focuses on the estimated taxes owed by the individual shareholder, not the entity itself. (Note that C Corporations and S Corporations generally have to make estimated tax payments if the corporation itself expects to owe tax of $500 or more when the corporate return is filed. For more information, see the IRS detail page on estimated payments. Correct answer: $1,000

Mires Robotics, Inc. is a C corporation that owns 15% of Western Forest, Inc. Mires Robotics has taxable income of $135,000 before taking into account its dividend income. In the current year, Mires Robotics received $60,000 of dividends from Western Forest. What is Mires Robotics Corporation's taxable net income? * $105,000 * $135,000 * $165,000 * $195,000

Explanation: Mires Robotics Corporation is allowed a 50% dividends-received deduction, calculated as follows: $30,000 = ($60,000 × 50%). Therefore, only $30,000 of the dividends ($60,000 - $30,000) received from Western Forest. are taxable. The Mires Robotics Corporation's taxable net income is $165,000 ($135,000 + $30,000). The Tax Cuts and Jobs Act modified the DRD rate for corporations. The dividends-received deduction has been reduced to 65% and 50%, respectively. For corporations who own 80% or more of the distributing company, the deduction remains unchanged at 100%. The DRD is calculated like this: Correct answer: $165,000

Royal Properties, Inc. is a corporation with twenty employees. During the year, the company starts having financial difficulties and stops paying its payroll taxes. Which of the following penalties would apply in this scenario? * Trust Fund Recovery Penalty * Failure-to-file penalty * Accumulated earnings tax * FBAR penalties

Explanation: Royal Properties, Inc. will likely be assessed a Trust Fund Recovery Penalty. An employer is required by law to withhold payroll tax from employees and then send the withholding to the IRS. The Trust Fund Recovery Penalty (TFRP) applies when a business fails to properly remit its payroll taxes. The Trust Fund Recovery Penalty may be assessed against any person who: Is responsible for collecting or paying withheld income and employment taxes, or for paying collected excise taxes, and Willfully fails to collect or pay them. In assessing the trust fund recovery penalty, the IRS may hold anyone responsible who intentionally disregarded the law or was "plainly indifferent" to its requirements (including a non-owner of the company or an employee). No evil intent or bad motive is required. Correct answer: Trust Fund Recovery Penalty.

Sheldon owns a popular barbershop with ten employees. In 2020, his gross revenues are $900,000. He makes $24,000 of modifications to his shop to provide restroom access to customers with disabilities. What is the amount of Sheldon's Disabled Access Credit? * $0, he is not eligible to claim the credit * $5,000 * $12,000 * $24,000

Explanation: Sheldon can claim a Disabled Access Credit of $5,000. The nonrefundable tax credit is for an eligible small business that incurs expenses to provide access to persons who have disabilities. The expenses must be incurred for the business to comply with the Americans with Disabilities Act. The amount of the Disabled Access Credit is 50% of qualified expenses, with a maximum credit per year of $5,000. To be eligible, a business must have had gross receipts of $1 million or less, or had no more than 30 full-time employees during the preceding tax year. To see more information about business credits, see the instructions for Form 3800, General Business Credit. Correct answer: $5,000

Allwize, Inc. is a calendar year, cash-basis C Corporation. In 2020, this corporate taxpayer has $100,000 of taxable income at the end of the year, after allocation of its expenses. What is the company's federal tax liability for the year?

Explanation: Since the company is a C corporation, it is taxed at a flat rate of 21%. Therefore, the corporation's federal income tax would be calculated as follows: $100,000 x 21% =$21,000. The Tax Cuts and Jobs Act established a flat 21% corporate rate. This flat rate applies to all domestic C corporations, including personal service corporations. For more information, see Publication 542, Corporations. Correct answer: $21,000

Allwize, Inc. is a calendar year, cash-basis C Corporation. In 2020, this corporate taxpayer has $100,000 of taxable income at the end of the year, after allocation of its expenses. What is the company's federal tax liability for the year? * Cannot determine the amount based on the information in the question * $6,000 * $12,000 * $21,000

Explanation: Since the company is a C corporation, it is taxed at a flat rate of 21%. Therefore, the corporation's federal income tax would be calculated as follows: $100,000 x 21% =$21,000. The Tax Cuts and Jobs Act established a flat 21% corporate rate. This flat rate applies to all domestic C corporations, including personal service corporations. For more information, see Publication 542, Corporations. Correct answer: $21,000

Supersonic Realty, Inc. purchases a large parcel of land to use in its business operations. Before actually using the land, the company demolishes an existing foundation on the land. The business incurred the following costs in this transaction: Cash sales price: $715,000 Existing mortgage that the company assumes: 235,000 Broker's commission on the sale: 55,000 Demolition costs: 85,000 What is Supersonic Realty's basis in the property? * $920,000 * $1,090,000 * $1,005,000 * $950,000

Explanation: Supersonic Realty, Inc.'s basis in the land is $1,090,000 ($715,000 cash + $235,000 mortgage + $55,000 broker's commission + $85,000 demolition costs.) Demolition costs increase an asset's basis because they are necessary to prepare the property for use. As such, costs incurred to demolish a foundation, a building or other existing structure are added to the basis of the land. The costs of clearing land for construction (like removing stumps and levelling) also must be added to the basis of the land. For more information on how to calculate basis, see IRS Publication 551, Basis of Assets. Correct answer: $1,090,000

Tuxedo House, a clothing retailer, had the following expenses during the current year. Based on the information below, what is Tuxedo House's cost of goods sold for the year? Tuxedos purchased for resale: $20,000 Freight in: 3,000 Beginning inventory: 15,600 Ending inventory: 12,000 * 26,600 * 38,600 * 23,000 * 19,400

Explanation: The COGS is $26,600 ($15,600 beginning inventory + $20,000 purchases + $3,000 freight in, minus $12,000 ending inventory). Freight in and merchandise purchased for resale are part of the COGS. For additional information, refer to the chapter on Cost of Goods Sold, Publication 334, Tax Guide for Small Businesses and the chapter on Inventories, Publication 538, Accounting Periods and Methods. Correct answer: $26,600

If a company is an accrual basis taxpayer, what is the amount of gross receipts reported on the taxpayer's Form 1040 Schedule C based on the information below? Service income $25,000 Gain on the sale of an asset $1,500 Interest on accounts receivable $3,000 * $25,000 * $26,500 * $28,000 * $29,500

Explanation: Gain on the sale of asset $1,500 is on Form 4797 so it is not included Correct answer: $28,000

How does a partnership claim the 199A deduction? * The partnership doesn't take the deduction, the individual does. * A partnership is not eligible for the 199A deduction. * The partnership may take the QBI deduction directly on Form 1065. * The partnership may claim the QBI deduction as a business expense on Form 1065

Explanation: The Section 199A deduction is available to eligible partners of partnerships with qualifying business income. The partnership doesn't take the deduction, the partner does.The Schedule K-1 includes codes for the QBI deduction items. The partnership needs to provide each partner with their share of QBI items, W-2 wages, UBIA of qualified property, and other information necessary for partners to compute their deduction. If a partnership fails to provide this information, IRS regulations provide that the QBI will be presumed to be zero. For information on the 199A deduction, see the official IRS FAQ page: Qualified Business Income Deduction FAQs. Correct answer: The partnership doesn't take the deduction, the individual partner does.

Wayne is a self-employed plumber who files a Schedule C to report his business income. In the current year, he has the following purchases, all of which are 100% business use. New computer system: $5,600 New multi-line phone system: $3,600 Plumbing tools: $4,200 Phone bill charges: $2,300 A small warehouse to store his equipment: $43,000 He is on the cash basis. What is his allowable section 179 deduction for these asset purchases? * $13,400 * $15,700 * $38,700 * $56,400

Explanation: The amount is figured as follows: New computer system: $5,600 New multi-line phone system: $3,600 Plumbing tools: $4,200 Total qualifying section 179 purchases: $13,400 Section 179 only applies to certain asset purchases. The telephone bills are a regular business expense, not a capital cost or a section 179 deduction. The warehouse is real property (real estate) and is not qualifying property for section 179. Instead, real estate must be depreciated. Correct answer: $13,400

Sigil Welding purchases a welding machine for a bargain price of $50,000 and places it into service. Three years later, Sigil Welding sells the welding machine for $51,500, after having taken $22,000 in MACRS depreciation on the machine. What is the amount of ordinary income that Sigil Welding must recognize on this transaction? * $0 * $1,500 * $22,000 * $23,500

Explanation: The amount of ordinary income that must be recognized in this transaction is equal to the amount of depreciation recapture ($22,000). The additional gain of $1,500 is treated as section 1231 gain and receives beneficial capital gain treatment. The answer is calculated as follows: Cost basis: $50,000 Accumulated depreciation: (22,000) Adjusted basis: 28,000 Sale price: 51,500 Basis: (28,000) Total gain: 23,500 Gain from accumulated depreciation: ($22,000--taxable as ordinary income) Remainder: $1,500 For more information and examples, see Publication 544, Sales and Other Dispositions of Assets. Correct answer: $22,000

The amount of the section 179 deduction _______ basis in an asset. * Increases * Reduces * Doubles * Terminates

Explanation: The amount of the section 179 deduction reduces a taxpayer's basis in an asset. The Section 179 deduction allows businesses to deduct the full cost of capital assets in the year the asset is placed in service. The deduction applies to tangible personal property such as machinery and equipment purchased for use in a trade or business, and if the taxpayer elects, qualified real property (QIP). For more information, see Publication 946, How to Depreciate Property. Correct answer: Reduces

Broussard Advisors, Inc. is a cash-basis, calendar-year corporation that began doing business on January 15. The corporation incurred the following costs before it opened for business: Legal fees to issue corporate stock: $12,000 State incorporation fees: $750 Cost of temporary directors: $4,000 Broussard Advisors elects to deduct these organizational costs. What is the maximum amount of organizational costs that the company can deduct on its initial tax return? * $4,750 * $5,000 * $16,000 * $16,750

Explanation: The answer is determined as follows: ($750 + $4,000 = $4,750). The cost of legal fees to issue corporate stock is not deductible and cannot be expensed or amortized. A business can deduct up to $5,000 of organizational costs on its first year tax return. If those costs exceed $50,000, the $5,000 first-year deduction is reduced dollar-for-dollar by the amount the expenses exceeded $50,000. Examples of qualifying organizational costs include: The cost of temporary directors. The cost of organizational meetings. State incorporation fees. The cost of legal services. The following items are capital expenses that cannot be amortized or deducted: Costs for issuing and selling stock or securities, such as commissions, professional fees, and printing costs. Costs associated with the transfer of assets to the corporation. Correct answer: $4,750

Jackson Realty Services made a $200,000 down payment on a commercial building and assumed the seller's mortgage of $120,000. The company paid an additional $4,000 in attorney's fees for perfecting the title. Jackson Realty paid $20,000 for permanent improvements to the building before placing it into service. The building's property tax bill provides a valuation of the land at $70,000. What is Jackson Realty's basis for depreciation? * $320,000 * $324,000 * $250,000 * $274,000

Explanation: The answer is figured as follows: ([$200,000 + $120,000 + $4,000 + $20,000] - $70,000 land value = $274,000). If a business buys property and assumes an existing mortgage or other debt on the property, the basis includes the amount paid for the property plus the amount of the assumed debt. Legal fees for acquiring or defending title to a property are added to the property's basis. The permanent improvements would also be added to the basis. Land is never depreciated, so the $70,000 must be subtracted from the total. For more information on how to calculate basis, see IRS Publication 551, Basis of Assets. Correct answer: $274,000

A C corporation using the ACCRUAL method of accounting can choose to deduct unpaid charitable contributions for the tax year the board of directors authorizes them if it pays them by which date? * The due date for filing the corporation's tax return, including extensions * By December 31. * The due date for filing the corporation's tax return (not including extensions). * By the end of the corporation's tax year

Explanation: A corporation using an accrual method of accounting can choose to deduct unpaid contributions for the tax year the board of directors authorizes them if it pays them by the due date for filing the corporation's tax return (not including extensions). A corporation using the cash method deducts contributions in the tax year they are paid. The due date for filing C corporation returns now is the 15th day of the 4th month after the end of the corporation's tax year. (However, special rules apply to C corporations with tax years ending in June). Correct answer: The due date for filing the corporation's tax return (not including extensions).

Cameo Corporation owned a building that burned down on January 4, 2020. The basis of the building before the fire was $240,000. The insurance company reimbursed Cameo Corporation $500,000 on December 3, 2020. How long does Cameo have to reinvest the insurance proceeds in order to receive nonrecognition treatment for this involuntary conversion? * December 31, 2022 * December 31, 2023 * January 4, 2021 * January 4, 2022

Explanation: The business has up to three years after the close of the year that the involuntary conversion occurred. In general, a taxpayer has two years after the close of the year that the involuntary conversion occurred to replace the property and make the reinvestment. However, for real estate, the replacement period is generally three years after the close of the year in which the gain is realized. For example, for a building, an insurance reimbursement received any time in 2018 must be invested into a similar property by December 31 of 2021 (three years) to qualify for tax deferral. The replacement period for personal residences destroyed by a Federally declared disaster is even longer, at 4 years. Note: If the property is not replaced within the allowed time period, an amended tax return would have to be filed, reporting the income as taxable. For more information about business casualty losses, refer to Publication 547, Casualties, Disasters, and Thefts and Publication 551, Basis of Assets. Correct answer: December 31, 2023

Albert Davis is a wealthy investor who is interested in purchasing a professional sports franchise. He makes a bid during the year to purchase the Boston Yellowjackets, a semi-professional hockey team. Mr. Davis pays 1.5 million dollars to purchase the franchise, including the existing player's contracts. He plans to run the team and sell sports merchandise for the production of income. The sports franchise is a section 197 intangible. How should the cost of the franchise be treated for tax purposes? * The cost of purchasing the franchise is not a deductible business expense * The taxpayer may amortize the capitalized costs of the franchise over a 15-year period (180 months). * The cost of purchasing the franchise is deductible as a regular business expense in the current year. * The cost of purchasing the franchise is eligible for bonus depreciation.

Explanation: The taxpayer may amortize the capitalized costs of the franchise over a 15-year period (180 months). Generally, a taxpayer may amortize the capitalized costs of "section 197 intangibles" ratably over a 15-year period. The taxpayer may amortize these costs if they hold the section 197 intangibles in connection with a trade or business or in an activity engaged in for the production of income. Note: According to Publication 535, a franchise "engaged in professional sports" and any intangible assets acquired in connection with acquiring the franchise (including player contracts) is treated as a "section 197 intangible" for tax purposes and is amortizable over a 15-year period. Correct answer: The taxpayer may amortize the capitalized costs of the franchise over a 15-year period (180 months).

All of the following are characteristics of a "qualified retirement plan" except: * A qualified retirement plan is subject to federal regulation under ERISA * A qualified retirement plan must meet minimum funding requirements * A qualified retirement plan is mandated by the federal government for certain types of employers * A qualified retirement plan administrator must file a tax return annually.

Explanation: The term "qualified" refers to certain IRS requirements that the plan and the employer must adhere to in order to obtain tax-favored status. All qualified plans are subject to federal regulation under the Employee Retirement Income Security Act (ERISA). The federal government does not require an employer to establish a retirement plan, but it provides minimum federal standards for qualified plans. ERISA covers qualified retirement plans, as well as health and welfare benefit plans. Among other things, ERISA requires that individuals who manage plans (and other fiduciaries) meet certain standards of conduct. The administrator of an employee benefit plan subject to ERISA must file an information return for the plan each year. Form 5500, Annual Return/Report of Employee Benefit Plan, must be filed by the last day of the seventh month after the plan year ends. Correct answer: A qualified retirement plan is mandated by the federal government for certain types of employers.

Makita transfers machinery to Heusen Corp. in exchange for 100% of the corporation's outstanding stock. The machinery's FMV at the time of the transfer is $400,000. Makita's adjusted basis in the machinery is $160,000. The machinery is encumbered by an outstanding loan of $60,000, which the corporation assumes. What is Makita's basis in the stock and what amount of gain or loss is recognized in the transaction? * $0 basis; no gain or loss * $160,000 basis; $60,000 gain * $100,000 basis; no gain or loss * $100,000 basis; $60,000 gain

Explanation: This is a valid section 351 exchange, and no gain or loss is recognized in the transaction, however, Makita must reduce the basis in her stock by the amount of the loan. Makita's basis in the stock is $100,000 ($160,000 basis of property contributed minus the $60,000 loan that was assumed by the corporation). If, in an otherwise nontaxable exchange of property for stock, the shareholder receives money or property in exchange for the contribution of property, she would recognize gain to the extent of the money and the fair market value of property received. If the corporation assumes the shareholder's liabilities, the assumption generally is not taxable, unless: The liabilities the corporation assumes are more than the shareholder's adjusted basis in the property transferred, in which case gain is recognized up to the difference. However, if the liabilities assumed give rise to a deduction when paid, such as a trade account payable or interest, no gain is recognized. There is no good business reason for the corporation to assume the liabilities, or if the main purpose in the exchange is to avoid federal income tax. Makita's basis in her stock must be reduced by the amount of the liabilities assumed by the corporation. Correct answer: $100,000 basis; no gain or loss.

Which of the following entities is considered a disregarded entity for tax purposes? * A grantor trust * A decedent's estate * A charitable remainder trust * A private foundation

Explanation: A grantor trust is a legal trust under state law that is not recognized as a separate tax entity because the grantor retains control. A grantor trust is recognized as an entity at the state level, and a grantor trust can be useful for several reasons, (it can be used to avoid probate, for example) but for federal tax purposes, it is considered a disregarded entity. Correct answer: A grantor trust.

What is the allowable personal exemption that can be claimed by a qualified disability trust (QDT) in 2020? * $100 * $300 * $4,300 * $12,400

Explanation: A qualified disability trust (QDT) is a non-grantor trust created solely for the benefit of a disabled individual under age 65. Although the Tax Cuts and Jobs Act suspended personal exemptions for individuals, a qualified disability trust is still allowed to take a personal exemption. In 2020, a qualified disability trust can claim an exemption of up to $4,300, which is the same as the "deemed exemption" amount for individuals. Correct answer: $4,300

The state of Nevada condemned Julio's motel in order to widen a highway. The condemnation award was set at $325,000. The state paid Julio $240,000. The state also paid $80,000 to his mortgage lender and $5,000 of accrued real estate taxes, which were delinquent at the time of the condemnation. Julio's adjusted basis in the hotel was $150,000 at the time of the condemnation. What amount must he report as taxable gain, assuming he does not invest in a replacement property? * $175,000 * $95,000 * $90,000 * $85,000

Explanation: This is an example of an involuntary conversion. The condemnation is treated as a forced sale, so Julio is considered to have received the entire $325,000 as a condemnation award, since the state paid his mortgage and real estate taxes. Julio must report $175,000 of taxable gain ($325,000 condemnation award - $150,000 adjusted basis). If Julio is a cash-basis taxpayer, he realizes gain when he receives payments that are more than his basis in the property. If the condemning authority makes deposits with the court, he will realize gain when he withdraws (or has the right to withdraw) amounts that are more than his basis. For accrual-basis taxpayers, gain accrues in the earlier year when either of the following occurs: All events have occurred that fix the right to the condemnation award and the amount can be determined with reasonable accuracy. All or part of the award has been actually or constructively received. For example, if Julio had an absolute right to a part of a condemnation award when it is deposited with the court, the amount deposited accrues in the year the deposit is made even though the full amount of the award may still not be available.Note: If Julio would have reinvested the amount in a similar property, (for example, if he would have reinvested the proceeds in another hotel), then he would not have to recognize any gain. For more information and examples, see Publication 544, Sales and Other Dispositions of Assets. Correct answer: $175,000

Axiom Consulting, LLC, sells a factory building with an adjusted basis of $300,000. The buyer agrees to pay Axiom Consulting $600,000, with a cash down payment of $200,000 and $40,000 (plus 5% interest) in each of the next ten years. What is Axiom Consulting's gross profit and his gross profit percentage on this installment sale? * The gross profit is $10,000 and the gross profit percentage is 100% * The gross profit is $10,000 and the gross profit percentage is 50% * The gross profit is $300,000 and the gross profit percentage is 50% * The gross profit is $20,000 and the gross profit percentage is 100%

Explanation: This is an installment sale. Axiom's gross profit is $300,000 ($600,000 selling price - $300,000 adjusted basis), and the gross profit percentage is 50% ($300,000 ÷ $600,000). Axiom must report half of each payment received as gain from the sale. Axiom Consulting must also report all interest received as ordinary income. For more information, see Publication 537, Installment Sales. Correct answer: The gross profit is $300,000, and the gross profit percentage is 50%.

Under the Affordable Care Act, a "full-time employee" is defined as:

Explanation: Under the ACA, a full-time employee is an employee who works an average 30 hours or more per workweek, or at least 130 hours per calendar month. Employers that have more than 50 employees who meet either of these full-time thresholds are required to comply with the ACA. Note: Although the Tax Cuts and Jobs Act eliminated the individual penalty that required individuals to have insurance, the ACA employer requirements for employers with more than 50 full-time equivalent employees are still in full effect. For information on how a business determines whether it is an ALE, see Publication 5208, Affordable Care Act: Determining if you are an applicable large employer. Correct answer: An employee who works an average 30 hours or more per workweek, or at least 130 hours per calendar month.

When is a business required to file Form 8300? * When it reports employee withholding amounts. * When it receives a cash payment of more than $10,000 * When it wants to change its account method * When it hires a new employee

Explanation: When a business receives a cash payment of more than $10,000 from one transaction or from two or more related transactions, it must file Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business,by the fifteenth day after the date of the cash transaction. By January 31 of the year following the reportable transaction, the business must also provide to each person whose name is required to be included in Form 8300 a written statement that shows the aggregate amount of reportable cash transactions the business reported to the IRS for that person. These requirements are intended to combat money laundering. For more information on the reporting required for cash transactions, see the IRS detail page for Form 8300 and Reporting Cash Payments of Over $10,000. Correct answer: When it receives a cash payment of more than $10,000.

Employers can choose from a wide range of retirement plans. Which of the following is NOT a benefit of a SEP-IRA, from an employer's perspective? * Contributions to a SEP are flexible and can vary from year to year * A SEP-IRA is relatively simple to start and manage * There is minimal paperwork and no requirement to file FORM 5500 each year * In a company with multiple employees, high-performing employees can be rewarded with larger contributions

Explanation: A SEP-IRA is relatively simple to start and manage. SEP plans offer high contribution and deduction limits, require minimal paperwork, and generally have no requirement to file Form 5500, Annual Return/Report of Employee Benefit Plan. SEP plans are funded exclusively by contributions from the employer, but the plans are extremely flexible, with the employer able to determine each year how much he will contribute and to suspend contributions when he chooses. However, an employer is not able to discriminate between employees and contribute more to some individuals than to others. If an employer sets up a SEP, all employees who are eligible employees must be allowed to participate and the contribution rate must be uniform for all employees. Correct answer: In a company with multiple employees, high-performing employees can be rewarded with larger contributions.

Semiconductor Manufacturing Corp. is closing down its operations. The corporation distributed inventory in the redemption of all its outstanding stock in a complete liquidation. On the date of the distribution, the inventory had a cost basis of $100,000 and a fair market value of $900,000. All the inventory was distributed to Michael, the sole shareholder of the company. What is the nature and the amount of the gain to the Corporation in this liquidating transaction? * There is no gain or loss recognized by the corporation * Capital gain: $800,000 * Ordinary income: $800,000 * Ordinary income: $10,000

Explanation: A corporation must recognize gain or loss on the distribution of property in a complete liquidation. The distribution is treated as though the property was sold to the distributee at fair market value. The tax treatment depends on the type of property. In this case, the property distributed was inventory, (not a capital asset) which would be treated as though the company sold the inventory to a buyer at Fair Market Value. Therefore, the company must recognize $800,000 of ordinary income ($900,000 FMV - $100,000 cost basis). Correct answer: Ordinary income: $800,000.

A self-employed individual with net earnings of ______ or more from self-employment is required to pay self-employment tax:

Explanation: A self-employed individual with net earnings of $400 or more from self-employment is required to pay self-employment tax by filing a Schedule C as well as a Schedule SE, Self-Employment Tax, with his Form 1040. Correct answer: $400

Allison is an independent contractor who sells make-up for a well-known cosmetics company, Mary-Shay Cosmetics. She reports her income and loss from this activity on Schedule C. In December, she makes the following holiday gifts to her best customers to thank them for their business: $75 pair of earrings to customer #1 $80 bracelet to customer #2 $30 candle to customer #3 $50 floral arrangement to customer #4 $75 tea and coffee set to customer #5 $65 decorative wreath to customer #6 $40 pen set to the spouse of customer #6 She spends an additional $90 on packaging and shipping expenses. What total amount can Allison deduct on her Schedule C in connection with these client gifts? * $0, because gifts cannot be business expenses * $240 * $265 * $505

Explanation: A taxpayer can deduct no more than $25 for business gifts she gives to a single client or customer during the tax year. A gift to a member of a customer's family is generally considered a gift to the customer, so Allison can only deduct $25 for the gifts to customer #6 and her spouse. Incidental costs such as packaging and shipping expenses are generally not included in determining the cost of a gift for purposes of the $25 limit. Thus, the answer is calculated as follows: $25 × 6 customers = $150 + $90 packaging/shipping = $240. Allison must maintain copies of receipts for any gifts of $25 or more. Correct answer: $240

Raneiro owns a small dairy farm with three employees. He files on Schedule F to report his farming income. How long is Raneiro required to keep payroll tax records related to his employees?

Explanation: A taxpayer is required to keep records relating to employment taxes for at least four years after filing the fourth quarter's returns. Employment and payroll records must be available for IRS review. Examples include copies of employees' income tax withholding allowance certificates (Forms W-4), and the dates and amounts of payroll tax deposits made. Correct answer: Four years.

Form 3115 is used by a business to: * Report partnership income * Choose entity classification * Apply for a change in accounting method * Report cash payments over $10,000

Explanation: A taxpayer must file Form 3115, Application for Change in Accounting Method, to request a change in either an overall accounting method or the accounting treatment for an individual item. Correct answer: Apply for a change in accounting method.

Algiers Manufacturing Inc. is a C Corporation. The corporation was officially formed on October 1. It elected the calendar year as its tax year. Algiers Manufacturing's first tax return will cover the period from ________________. * January 1 through December 31 * March 15 through December 31 * October 1 through December 31 * October 1 through April 15

Explanation: Algiers Manufacturing Inc. was organized on October 1. It elected the calendar year as its tax year. Therefore, the corporation's first tax return will cover the short period from October 1 through December 31. (See Publication 538). Correct answer: October 1 through December 31.

INTEGRA, Inc. purchased heavy machinery this year for use in its computer-chip manufacturing operations. The invoice price of the machinery was $50,000. Sales tax on the purchase was an additional 3,200. The machinery is fragile and had to be transported by a special courier service. The transport costs were $10,000. The installation costs were an additional $4,000. Calculate the basis of the machinery.

Explanation: All of the costs would be added to basis. The basis of the machinery is figured as follows ($50,000 invoice cost + $10,000 freight charges + 4,000 installation costs + sales tax $3,200) = $67,200. For more information on how to calculate basis, see IRS Publication 551, Basis of Assets. Correct answer: $67,200 basis

An Employer Identification Number (EIN) is also known as a ______________.

Explanation: An Employer Identification Number (EIN) is also known as a "Federal Tax Identification Number" and is used to identify a business entity. Generally, businesses need to apply for an EIN. Correct answer: Federal Tax Identification Number.

A trust may be created during an individual's lifetime. If a trust is created while the grantor is still alive, what is this type of trust called?

Explanation: An Inter-vivos trust (also known as a living trust) is created while the grantor is alive. A trust may be created during an individual's life (an inter-vivos trust) or at the time of death under a will (a testamentary trust). Correct answer: An inter-vivos trust.

Which one of the following items is a business expense that is deductible in deriving an S corporation's ordinary income? * Investment interest expense * Charitable contributions * Amortized organizational expenses * Section 1231 losses.

Explanation: An S corporation can deduct amortized organizational expenses, because these expenses are simply a business expense. The other items listed are separately-stated items, and must be passed through to the shareholder on Schedule K-1, and are not deductible in deriving ordinary income. Correct answer: Amortized organizational expenses.

The Children's Reading Exchange is a qualified 501(c)(3) organization with a fiscal year that ends on June 30. What is the normal (not extended) due date for its tax return?

Explanation: An exempt entity using a fiscal year is required to file by the fifteenth of the fifth month after the end of the year. Since the Children's Reading Exchange's fiscal year ended on June 30, its due date would be November 15. To learn more about the filing requirements for exempt entities, see the IRS detail page: Return Due Dates for Exempt Organizations. Correct answer: November 15.

Aaron owns a 30% interest in a limited partnership that runs a deli and a 15% interest in an S corporation that runs a coffee shop. He has no involvement in the day-to-day operation of either business, and is merely an investor. In 2020, the deli has an ordinary loss of $60,000. The coffee shop business has ordinary income of $90,000. How should Aaron treat this income and loss? * Aaron must report $13,500 of ordinary income in 2020. He can deduct an $18,000 ordinary loss in 2020 * Aaron can deduct a $4,500 loss in the current year * Aaron must report $13,500 of ordinary income in 2020. He has no deductible losses. * Aaron can carry over a $4,500 loss to the following taxable year

Explanation: Because Aaron is a limited partner and has no involvement in the day-to-day operations of either business, each is considered a passive activity. Losses from passive activities that exceed the income from passive activities in a given year are generally disallowed and carried forward to the next taxable year. Aaron has an $18,000 loss from the deli ($60,000 × .30) and income of $13,500 from the coffee shop ($90,000 × .15). As Aaron's loss from passive activities for the year exceeds his income from passive activities by $4,500 ($18,000 loss minus $13,500 income), deduction of the excess loss is disallowed. Aaron can carry forward the excess $4,500 losses to the next year. Correct answer: Aaron can carry over a $4,500 loss to the following taxable year.

Owen's father died during the year, and he inherited his father's farm and all of its equipment. Owen inherited an industrial thresher that was fully depreciated at the time of his father's death (his father's adjusted basis was zero). Owen's father had originally purchased the thresher eight years ago, for $272,000. On the date of his father's death, the thresher had a fair market value of $235,000. What is Owen's basis for depreciation on the thresher? Also, ignoring any income limitations, what is the amount of section 179 depreciation allowed on this piece of equipment? * Owen's Basis: $272,000; Section 179 deduction: $0 * Owen's Basis: $272,000; Section 179 deduction: $252,000 * Owen's Basis: $235,000; Section 179 deduction: $0 * Owen's Basis: $235,000; Section 179 deduction: $272,000

Explanation: Beneficiaries of inherited property receive a stepped-up basis. Therefore, Owen's tax basis is $235,000, the value at the date of his father's death, and the asset is treated as if it was first placed in service when Owen acquired ownership. No section 179 depreciation is allowed on inherited property; the property has to be acquired by purchase in order to qualify, but less accelerated methods of depreciation are still allowable. Correct answer: Owen's Basis: $235,000; Section 179 deduction: $0

Neco Automotive, LLC is a partnership that needs accounting services. Brody, a licensed CPA, offers to do all the tax filings as well as the bookkeeping in exchange for a 20% partnership interest. Neco Automotive agrees to this arrangement, and once the accounting services are provided, the partnership grants Brody a 20% ownership interest. There was no prior agreement to compensation, but Neco Automotive's assets on the date of the transfer had a basis of $40,000 and a fair market value of $90,000. How much income must Brody recognize from the transfer of the 20% partnership interest? * $0. This is not a taxable event * $18,000 of capital gain * $8,000 of capital gain * $18,000 of ordinary income

Explanation: Brody did not contribute cash or property to the partnership, he contributed services. This means that he must recognize the fair market value of the compensation he received (a 20% partnership interest) in exchange for the accounting services he provided. If a partner receives a capital interest as compensation for services, the partner must recognize ordinary income equal to the fair market value of a partnership interest that is transferred in exchange for services. The answer is calculated as follows: $90,000 FMV of partnership assets × 20% = $18,000 of ordinary income to Brody. Correct answer: $18,000 of ordinary income.

Carlsbad Accounting, Inc. provides accounting and payroll services to Stevenson Engraving. Stevenson Engraving then becomes insolvent. Their outstanding invoice for accounting services to Carlsbad Accounting is $13,000. In lieu of payment, Carlsbad Accounting accepts a diamond necklace with a fair market value of $10,000 and a commercial copy machine with a fair market value of $5,000 and an adjusted basis of $3,500. What amount of income must Carlsbad Accounting report for this transaction? * $10,000 * $13,000 * $15,000 * $0; this is not a reportable transaction

Explanation: Carlsbad Accounting must include $13,000 as income. Property exchanged for services must generally be included as income at its fair market value, which would be $15,000 ($10,000 necklace + $5,000 copier). However, If the services were performed for a price agreed on beforehand, it will be accepted as the FMV of the property if there is no evidence to the contrary. Since the outstanding invoice was for services that were performed beforehand, then the amount that Carlsbad Accounting would recognize in this transaction would be $13,000, the amount of the delinquent invoice. Correct answer: $13,000

Claude is an accrual-based, calendar-year taxpayer who repairs high-end computer systems. He reports his income and loss on Schedule C. He receives twenty $5,000 payments in 2020 for one-year repair and warranty contracts, under which he agrees to repair or replace broken computer parts that have been manufactured and sold by unrelated parties. When would Claude include the payments in gross income? * As he earns the income * He must report the income when he receives the customer's checks * 2021 * 2020

Explanation: Claude's business is an accrual-based business, so special rules apply. An advance payment for services to be performed in a later tax year is generally taxable in the year it is received, even by an accrual-based taxpayer. However, if there is an agreement that the service will be completed by the end of the next tax year, (such as in the case of a warranty contract) recognition of the income can be delayed until the following year. In this case, since his business is an accrual-based business, Claude may report the income from his service contracts as it is earned. Correct answer: As he earns the income.

Daniella and her husband, Roger, file articles of incorporation in their state of residence, Nevada. They will be the sole owners of the business, which will provide web design services. Nevada is a community property state. What tax classifications are available to them, with respect to this new entity? * A corporation or a partnership * A partnership or a corporation * An S corporation or a C corporation * A qualified joint venture, a C corporation or a partnership

Explanation: Daniella and Roger filed articles of incorporation (not articles of organization), which means their entity type is a corporation by default. They cannot choose to be treated as a partnership or a qualified joint venture. However, if they file a Form 2553 with the IRS, then they can make the election to be classified as an S corporation for tax purposes. Their only choices are: a C corporation or an S corporation. Correct answer: An S corporation or a C corporation.

Which of the following retirement plans must file an annual information return (Form 5500)? * Simple IRA * SEP-IRA * Traditional 401(k) * Roth IRA

Explanation: Every employer who sponsors a retirement plan must file a Form 5500 unless the plan is exempt from the IRS filing requirements. SEP-IRAs, Roth IRAs and Simple IRAs do not require annual filings. A 401(k) would be required to file an annual Form 5500. Correct answer: Traditional 401(k).

Which of the following is not considered a "Specified Service Trade or Business" for the purposes of calculating the 199A Qualified Business Income Deduction? * Actuarial science * Medical professionals * Licensed engineers * Accounting professionals

Explanation: For the purposes of calculating the 199A Qualified Business Income Deduction, the fields of architecture and engineering are specifically excluded as "Specified Service Businesses." Specified Service Businesses include: medical professionals, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, brokerage services, or any trade or business where the principal asset of such trade or business is the reputation or skill of one or more of its employees or owners. Architecture and engineering are specifically not included in the list. Correct answer: Licensed engineers.

Geraldo is a self-employed farmer with the following transactions during the year: Sale of three horses at auction for $18,750. They had been born on the farm. He had sales expenses of $650. Sale of eight goats he had purchased for resale for $500. They sold at auction for $1,200. He had sales expenses of $110. What is Geraldo's gain on the livestock sales? * $590 * $18,100 * $18,690 * $19,450

Explanation: Gain on the sale of livestock raised on a farm is generally the gross sales price reduced by any expenses of the sale, such as commissions or freight charges. The basis of the animal sold is zero if the costs of raising it were deducted during the years the animal was being raised. Thus, Geraldo had a gain of $18,100 on the horses ($18,750 sale price - $650 sales expenses.) When a farmer sells farm products, including livestock, that he bought for resale, his profit or loss is the difference between his basis in the item (usually cost) and any payment received for it. The sale of the goats nets $590 ($1,200 sales price - $500 basis - $110 sales expenses). Geraldo must report $18,690 for the sale of both the horses and the goats on his Schedule F. Correct answer: $18,690

Halifax Media, Inc. is an S corporation with a single shareholder, Alphonse. In the current year, it has the following activity: Gross receipts from business operations: $200,000 Reasonable wages paid to Alphonse: (80,000) Charitable contributions paid to qualifying charities: (30,000) Rental losses: (20,000) Capital gains from the sale of property: 16,000 How much is the corporation's ordinary income? * $90,000 * $100,000 * $120,000 * $170,000

Explanation: Halifax Media's ordinary income is $120,000 ($200,000 gross receipts minus $80,000 wages). The other items are all separately stated on Form 1120S, but are not used to determine ordinary income or loss. Correct answer: $120,000

Ciara is a 30% partner in Timberland Farms, LLC. The adjusted basis of Ciara's partnership interest is $85,000. She receives a distribution of $40,000 cash and farming equipment that has an adjusted basis to the partnership of $80,000 and a fair market value of $94,000. What is her basis in the distributed farming equipment after the distribution? * $45,000 * $54,000 * $94,000 * $80,000

Explanation: Her basis for the distributed farming equipment is limited to $45,000 ($85,000 basis − $40,000, the cash she receives). In this case, the fair market value of the equipment is irrelevant. Unless there is a complete liquidation of a partner's interest, the basis of property (other than money) distributed to the partner by a partnership is its adjusted basis to the partnership immediately before the distribution. However, the basis of the property to the partner cannot be more than the adjusted basis of his or her interest in the partnership reduced by any money received in the same transaction. Question is modified from an example in IRS Publication 541, Partnerships. Correct answer: $45,000

Elena is a self-employed bookkeeper. She reports her income on Schedule C. She makes estimated payments throughout the year. When is her first estimated payment due?

Explanation: Her first estimated payment would be due April 15. A self-employed taxpayer's first estimated payment is generally due April 15. Estimated tax payments for individuals are due as follows:- January 1 to March 31 payment is due April 15.- April 1 to May 31 payment is due June 15.- June 1 to August 31 payment is due September 15.- September 1 to December 31 payment is due January 15 of the following year.(Note: There are special exceptions to the estimated tax due dates for Farmers and Fishermen). See the Form 1040-ES Instructions for more information. Correct answer: April 15.

IRC 501(c)(3) requires that an organization's purposes be exclusively __________.

Explanation: IRC 501(c)(3) requires that an organization's purposes be exclusively charitable. Organizations described in section 501(c)(3) are commonly referred to as "charitable organizations." The organization must not be organized or operated for the benefit of private interests, and no part of the organization's earnings may inure to the benefit of any private shareholder or individual. Correct answer: Charitable

If an LLC is owned by a single individual, and the taxpayer does not file an entity classification with the IRS, how will the business be taxed?

Explanation: If a "disregarded entity" (LLC) is owned by an individual, it is treated as a sole proprietor, unless the taxpayer files an entity classification election and elects to be taxed as a corporation. If the "disregarded entity" is owned by any other entity, it is treated as a branch or division of its owner. Correct answer: As a sole proprietorship.

If a corporation allows earnings to accumulate beyond the reasonable needs of the business, it may be subject to an accumulated earnings tax of: * 10% * 15% * 30% * 20%

Explanation: If a corporation allows earnings to accumulate beyond the reasonable needs of the business, it may be subject to an accumulated earnings tax of 20%. A corporation can accumulate its earnings for a possible expansion or other bona fide business reasons. However, if a corporation allows earnings to accumulate beyond the reasonable needs of the business, it may be subject to an accumulated earnings tax. If the accumulated earnings tax applies, interest applies to the tax from the date the corporate return was originally due, without extensions. Correct answer: 20%

Donna is the sole owner of Savvy Shoes, LLC. Donna wants to elect to have the LLC taxed as a C corporation. What is the correct procedure for making this election? * The LLC must file Form 8832 * The LLC must file a formal statement * The LLC must incorporate at the state level, and then send a copy of the formal incorporation documents to the IRS. * The LLC must file form 2553

Explanation: If members of an LLC agree that the LLC should be classified as a C corporation, the LLC must file Form 8832, Entity Classification Election. Form 2553, Election by a Small Business Corporation, is used instead of Form 8832 when an LLC makes the election to be taxed as an S corporation. Correct answer: The LLC must file Form 8832.

In which of the following entities is a minor child working in a family business NOT subject to Social Security, Medicare, and FUTA taxes? * A corporation where the child's parent is the sole shareholder * An exempt entity (nonprofit) where the parent is one of the founders * A child's wages are always subject to payroll taxes * A partnership in which each partner is the child's parent

Explanation: If the parents' business is a sole proprietorship or a partnership in which each partner is the child's parent, payments for the child's services are subject to income tax withholding regardless of age. If the child is under 18, payments are not subject to Social Security and Medicare taxes. If the child is under 21, payments are not subject to FUTA tax. In contrast, if the parents' business is a corporation, an estate, or a partnership in which only one of the child's parents is a partner, payments for the child's services are subject to all federal taxes, including income, unemployment, Social Security, and Medicare. Correct answer: A partnership in which each partner is the child's parent.

Molina Medical, Inc. has four equal shareholders. The shareholders vote to revoke the S election of the Molina Medical, Inc. and become a C corporation on January 1. How long must the shareholders wait if they decide they again want to elect to become an S corporation?

Explanation: If the status of an S corporation is terminated, either because the shareholders elect to become a C corporation or because a terminating event has occurred, the S corporation generally cannot elect to become an S corporation within the next five years (60 months). However, the IRS can choose to waive the five-year restriction. Correct answer: Five years.

To deduct a business expense, the expense must be: * Ordinary and necessary * Reasonable and typical * Appropriate and helpful * Required and reasonable

Explanation: In order to be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in the taxpayer's industry. A necessary expense is one that is helpful and appropriate for the particular trade or business. However, an expense does not have to be indispensable to be considered necessary. Correct answer: Ordinary and necessary.

Iron Mining, LLC has three partners. Two of the partners are individuals, and one partner is a C Corporation. Based on the information below, which is Iron Mining's required tax year-end? Thomas: 20% partner. Elaine: 10% partner. C Corporation: 70% partner with a June 30 fiscal year-end. * June 30 * March 15 * April 15 * December 31

Explanation: Iron Mining's required tax year-end would be June 30, the same year-end of its majority-interest partner (the C Corporation). A partnership must generally conform its tax year to its partners' tax years. Most partnerships use a calendar year, because they have partners that are individuals. But if a partnership has partners that are not individuals (such as a C Corporation, a trust, or some other entity) then the partnership must conform to the majority interest partner's tax year. Correct answer: June 30

Modern Brokers acquires another brokerage firm by purchasing it. Part of the assets that were purchased in the contract sale involved goodwill. How should the acquisition be reported to the IRS? * By using Form 8275 * By using Form 8300 * By using Form 8594 * By submitting a copy of the appraisal report with the entity's timely filed return.

Explanation: Modern Brokers must file Form 8594, Asset Acquisition Statement. If a group of assets that makes up a trade or business is acquired by another business, and those assets involve goodwill or going concern value, the seller and purchaser must file Form 8594, Asset Acquisition Statement. This form is used to allocate the total consideration paid among the various categories, or classes, of assets acquired and to establish the purchaser's cost basis for each category. Correct answer: By using Form 8594.

Pinnacle Services, Inc. has 110 employees, all of whom earned more than $5,000 last year. Pinnacle Services wants to establish a retirement plan for its employees. Which of the following types of retirement plan is not allowed for this company? * SEP-IRA * SIMPLE-IRA * 401(K) plan * Defined benefit plan

Explanation: Pinnacle Services is not eligible to start a SIMPLE (Savings Incentive Match Plan for Employees) plan because its total number of employees is over the threshold for this type of retirement plan. A business must have 100 or fewer employees who received $5,000 or more in compensation during the preceding year to establish a SIMPLE plan. Correct answer: SIMPLE-IRA.

Patrick is a self-employed fisherman. How should he report his self-employment income?

Explanation: Qualified farmers and fishermen who are self-employed must report their income and losses on Schedule F (Form 1040). See IRS Tax Topic 416, Farming and Fishing Income. Correct answer: Schedule F (Form 1040).

Rachel is a general partner in the Baruch Partnership. Under the terms of her partnership agreement, she is entitled to an annual guaranteed payment of $15,000, regardless of how profitable the partnership is. In the current year, Rachel's distributive share of partnership income is 20%. Before accounting for her guaranteed payment, Baruch Partnership has $100,000 of ordinary income. What amount of ordinary income must Rachel include on her individual income tax return? * $35,000 * $32,000 * $20,000 * $15,000

Explanation: Rachel's guaranteed payment first must be subtracted from the partnership's ordinary income ($100,000 - $15,000 = $85,000). She must include ordinary income of $32,000 ($15,000 guaranteed payment + $17,000 [$85,000 × 20%] for her distributive share) on her individual income tax return. Correct answer: $32,000

Corrine is a 10% partner in Maritime Medical Group, LLP. Under the terms of her partnership agreement, Corrine is entitled to an annual guaranteed payment of $90,000 without regard to the income of the partnership. Her distributive share of the partnership income is 10%. Maritime Medical Group has $500,000 of ordinary income after deducting Corrine's guaranteed payment. How much partnership income must she recognize on her individual tax return? * $90,000 * $140,000 * $550,000 * $240,000

Explanation: She must include ordinary income of $140,000 ($90,000 guaranteed payment + $50,000 [$500,000 × 10%] her distributive share) on her individual income tax return for her tax year in which the partnership's tax year ends. Correct answer: $140,000

Which of the following exempt organizations would be allowed to file Form 990-N, also known as an e-postcard? * Tax exempt organization with gross receipts of $50,000 or less * Private foundation with gross receipts of $10,000 or less * Church with gross receipts of $100,000 or less * Tax-exempt organization with $100,000 of gross receipts or less

Explanation: Tax-exempt organizations with gross receipts of $50,000 or less can file Form 990-N, Electronic Notice for Tax Exempt Organizations Not Required to File Form 990. This form is also called an "e-postcard" because it is filed electronically and is short. A small tax-exempt organization can also voluntarily choose to file a long form (Form 990) instead. Correct answer: Tax exempt organization with gross receipts of $50,000 or less. Score: 1 out of 1

The Conway Trust was set up as a family trust in which investments are shared. The Conway Trust expects to have $28,000 of undistributed investment income at the end of the year. The trust paid $2,049 of federal income tax last year on $10,800 of taxable investment income. The trust has no tax withheld. What minimum amount should the Conway Trust pay in estimated taxes in the current year, in order to avoid an underpayment penalty? * $0; trusts are not required to pay estimated taxes * $1,844 * $2,049 * $2,254

Explanation: The Conway Family Trust must pay at least $2,049 of estimated tax to avoid incurring an underpayment penalty. Trusts and estates are subject to the same rules regarding estimated tax as individuals. Estimated tax payments must be made if the trust or estate owes $1,000 or more of tax. An underpayment penalty will not apply if the trust pays estimated tax of at least 100% of the tax shown on Form 1041 for the prior tax year. Correct answer: $2,049

The Form 5500 is due on the end of the ________ month after the plan year ends.

Explanation: The Form 5500 is due on the end of the seventh month after the plan year ends. For example, if a retirement plan is a calendar year plan, that means the plan year begins on 1/1 and ends on 12/31, then the last date to file the Form 5500 is July 31st. Correct answer: Seventh

Who is responsible for requesting an EIN for a bankruptcy estate and filing taxes for the estate?

Explanation: The bankruptcy trustee (or debtor-in-possession) must obtain an EIN for a bankruptcy estate and filing all tax returns for the estate. The social security number of the individual debtor cannot be used as the EIN for the bankruptcy estate. For more information about bankruptcy estates, see IRS Publication 908, Bankruptcy Tax Guide. Correct answer: The trustee of the bankruptcy estate.

Charles is a general partner in Good Buns LLC, a bakery business. Charles discovers an error in the useful life of a depreciable asset. The asset should have been depreciated over 10 years rather than seven. The asset originally cost $250,000 and depreciation deductions are currently $120,000. What is the proper treatment of this error? * The business can disregard the depreciation error. * The business does not have to ask the IRS for permission to correct the depreciation error * The business must ask the IRS for permission to correct the depreciation error * The business must exchange the property at a later date

Explanation: The business does not have to ask the IRS for permission to correct the depreciation error. Correct answer: The business does not have to ask the IRS for permission to correct the depreciation error.

The Kewitt Corporation is an S corporation. The business official began business operations on December 1, 2020, and incurred $53,000 of organizational costs in its first year of business. How should these costs be treated?

Explanation: The corporation can deduct up to $2,000 in organizational costs in the current year. The rest must be amortized. The corporation exceeded the $50,000 threshold for deductible organizational costs by $3,000, so it must reduce its immediate deduction by this amount. The corporation can deduct $2,000 of its organizational costs ($5,000 maximum allowable deduction minus the excess of $3,000) immediately. The remaining amount of organizational costs, $51,000 ($53,000 - $2,000 allowable deduction), must be amortized over 180 months starting in the month it commences business. Correct answer: The corporation can deduct up to $2,000 in organizational costs in the current year. The rest must be amortized.

Alaska Steel, Inc. is a C Corporation. Alaska Steel has a net short-term capital gain of $6,000 and a net long-term capital loss of $18,000. The short-term gain offsets some of the long-term loss, leaving a net capital loss of $12,000 in the current year. How should the corporation treat this loss? * The corporation treats this $12,000 capital loss as a short-term loss when carried back or forward * The corporation treat this $12,000 capital loss as a short-term loss, which will offset ordinary income in the current year. * The corporation treats this $12,000 capital loss as a long-term capital loss, which will offset ordinary income in the current year. * The corporation treats this $12,000 capital loss as a long-term loss when carried back or forward.

Explanation: The corporation treats the $12,000 capital loss as a short-term loss when carried back or forward. Capital losses of a corporation cannot offset ordinary income. Question based on an example in Publication 542, Corporations. Correct answer: The corporation treats this $12,000 capital loss as a short-term loss when carried back or forward.

Buckley owns a dairy farm. He has income from the following sources: Income from milk production: $74,000 Sale of old dairy cows that have stopped producing milk: 40,000 Sale of grain that was grown on the farm: 12,000 Sale of used farm machinery: 9,000 What amount of income should be reported on Buckley's Schedule F, Profit or Loss from Farming? * $126,000 * $114,000 * $86,000 * $74,000

Explanation: The farming income reported is from milk production and sale of grain ($74,000 + $12,000 = $86,000). Gross income from farming activity is reported on Schedule F, and includes farm income, farm rental income, and gains from livestock that were raised specifically for sale on the farm, or purchased specifically for resale. The sale of old dairy cows and the sale of used machinery are not reported on Schedule F. Instead, these amounts should be reported on Form 4797, Sales of Business Property. Correct answer: $86,000

The personal representative of an estate must file a separate _____ for each beneficiary of the estate.

Explanation: The personal representative of an estate must file a separate Schedule K-1 for each beneficiary of the estate in connection with the filing of Form 1041. See the IRS Publication 559, Survivors, Executors and Administrators for more information on estates and their beneficiaries. Correct answer: Schedule K-1.

The replacement period for the sale of livestock due to weather-related conditions is generally: * Two Years * Three Years * Four Years * Five Years

Explanation: The replacement period for the sale of livestock due to weather-related conditions is usually four years, and up to five years if the property is subject to an involuntary conversion in a federally-declared disaster area. Correct answer: Four years.

Gayle is a professional wedding photographer. She buys and places in service professional camera equipment. She pays $9,700 in cash and receives a $2,500 trade-in allowance for some used camera equipment. Both the old and the new equipment were used 80% for business and 20% for personal purposes. Gayle's allowable section 179 deduction is: * $12,200 * $9,760 * $7,760 * 0; this property does not qualify for the section 179 deduction

Explanation: The section 179 deduction applies only to the amount actually paid in cash and not to the value of Gayle's trade-in allowance, and further applies only to the portion used for business purposes. Thus, the deduction is limited to (80% business-use percentage x $9,700 cash paid) = $7,760. Correct answer: $7,760

When is the latest that a partnership agreement can be modified? * Before the due date for filling the partnership for the year, including extensions * Anytime * Before the due date for filing the partnership return for the year, not including extensions * A modification nulls the partnership agreement and a new agreement must be executed

Explanation: The term partnership agreement refers to any written document or oral agreement that bears on the underlying economic arrangement of the partners, including allocations of income, gain, loss, deductions, and credit. A partnership agreement can be modified during the tax year and even after the tax year has closed. However, the partnership agreement cannot be modified after the due date for filing the partnership return for the year, not including extensions. The modifications must be agreed to by all partners or adopted in any other manner provided by the partnership agreement. The agreement of modifications can be oral or written. Correct answer: Before the due date for filing the partnership return for the year, not including extensions.

Express Corp. has three full-time employees. The company's payroll tax liability during the four-quarter lookback period was $20,000. How often must Express Corp deposit payroll? * Daily * Monthly * Quarterly * Yearly

Explanation: There are two deposit schedules—monthly and semi-weekly—that determine when an employer must deposit Social Security, Medicare, and withheld income taxes. As Express Corp. is a smaller employer whose total taxes during a lookback period were $50,000 or less, the company is required to deposit on a monthly schedule. Correct answer: Monthly.

Fabienne owns a warehouse. Her basis in the building is $50,000. She organizes a corporation when the warehouse has a fair market value of $125,000 and transfers the building to the corporation for all its authorized capital stock. How much gain must Fabienne and/or the corporation recognize on this transaction? * Fabienne: $75,000 gain; corporation: $50,000 * Corporation: $75,000 gain; Fabienne: $0 * Corporation: $50,000 gain; Fabienne: $75,000 * Fabienne: $0; corporation: $0

Explanation: This is a qualified nontaxable transfer under section 351. Under section 351, if a taxpayer transfers property to a corporation in exchange for stock and immediately afterward, the taxpayer controls the corporation, the exchange may not be taxable. The effect is to allow the investing shareholder to contribute assets to a corporation without immediate tax consequences, and to defer recognition of taxable gain until the stock received is later disposed. Fabienne owns at least 80% of the corporation's stock, so she is "in control" of the corporation after the transfer. Correct answer: Fabienne: $0; corporation: $0.

Fabienne owns a warehouse. Her basis in the building is $50,000. She organizes a corporation when the warehouse has a fair market value of $125,000 and transfers the building to the corporation for all its authorized capital stock. How much gain must Fabienne and/or the corporation recognize on this transaction? * Fabienne: $75,000; corporation: $50,000 * Corporation: $75,000 gain; Fabienne: $0 * Corporation: $50,000 gain; Fabienne: $75,000 * Fabienne: $0; corporation: $0

Explanation: This is a qualified nontaxable transfer under section 351. Under section 351, if a taxpayer transfers property to a corporation in exchange for stock and immediately afterward, the taxpayer controls the corporation, the exchange may not be taxable. The effect is to allow the investing shareholder to contribute assets to a corporation without immediate tax consequences, and to defer recognition of taxable gain until the stock received is later disposed. Fabienne owns at least 80% of the corporation's stock, so she is "in control" of the corporation after the transfer. Correct answer: Fabienne: $0; corporation: $0.