Enrolled Agent Part 2 Sample Test 4
1. Overstreet Corporation is owned by three individuals who have more than 80% of the combined voting power for four other corporations. These three individuals also have identical common ownership within the five corporations of at least 50%. The five corporations represent an example of: A. Personal services corporations. B. Closely-held corporations. C. A parent-subsidiary controlled group. D. A brother-sister controlled group.
D
20. A company is struggling to pay its bills. The company's controller decides to pay off creditors by using amounts withheld from the employees' paychecks for income and Social Security taxes, rather than depositing them as required with the federal government. The controller would be subject to: A. A late payment penalty. B. A substantial understatement penalty. C. Criminal charges for money laundering. D. The trust fund recovery penalty.
D
22. Anderson Architects is a cash-basis C corporation and also a personal service corporation. The corporation's net income in 2015 is $68,000 before applying a net operating loss carryover of $22,000 from the previous year. What amount of corporate tax does the company owe in 2015? A. $10,200 B. $23,800 C. $46,000 D. $16,100
D
28. All of the following types of entities must be taxed as a corporation except: A. An insurance company. B. A joint-stock association. C. A business owned by a local government. D. A business with annual gross receipts of $50 million or more.
D
41. In 2015, Exposition Convention Corporation made a nondividend distribution of $800 to its sole shareholder, Ned. Ned's stock basis before the distribution was $1,000. What is the effect of this transaction? A. Ned must report a $1,000 capital gain. B. Ned must report a $200 capital loss. C. Ned must report an $800 capital gain. D. Ned must reduce his stock basis by $800.
D
47. Renee is a general partner in a partnership. Renee receives a distribution of a parcel of land from the partnership that has a fair market value of $50,000 and a basis to the partnership of $40,000. Her outside basis in the partnership was $32,000 prior to the distribution. How must Renee recognize this transaction? A. She must recognize a capital gain of $10,000, and her basis in the land is $50,000. B. She must recognize a capital gain of $8,000, and her basis in the land is $50,000. C. She must reduce her partnership basis to zero, and her basis in the land is $40,000. D. She must reduce her partnership basis to zero, and her basis in the land is $32,000.
D
52. Dermahydrate Corporation is an accrual-basis, calendar-year C corporation. On December 15, 2015, the board of directors authorizes a charitable contribution of $3,000 to a qualified charity. What is the last day that Dermahydrate can make this charitable contribution and still take the expense on its 2015 tax return? A. December 15, 2015 B. December 31, 2015 C. January 15, 2016 D. March 15, 2016
D
54. Which of t he following is deductible as a business expense? A. A political contribution. B. Lobbying expenses related to a state election. C. Repairs to equipment that increase the useful life of an asset. D. A prepayment penalty on a mortgage.
D
70. On October 1, 2015, Spillway Corporation, a cash-basis, calendar-year corporation, purchases land and a building with a $20,000 cash down payment and a mortgage of $30,000. Spillway also pays attorneys' fees of $2,300 to complete the purchase. Spillway demolishes the existing building in order to start construction of a new building. The demolition costs are $12,000. What is the basis of the land, and how much can be taken as a current expense in 2015? A. $50,000 land basis; $14,300 current expense B. $52,300 land basis; $12,000 current expense C. $62,000 land basis; $2,300 current expense D. $64,300 land basis; $0 current expense
D
72. Without an extension, what is the maximum period of time allowed for a 501(c)(3) exempt entity to submit an IRS application for exemption, starting with the date of its creation? A. Four months. B. Six months. C. Nine months. D. 15 months.
D
73. Which of the following business-related meal expenses would not be subject to the 50% rule? A. A meal incurred while entertaining a business client. B. A meal while attending a business convention. C. A meal fully reimbursed to an employee under an accountable plan. D. A business meal that qualifies as a de minim is fringe benefit.
D
75. Jaime is the sole shareholder of Nicoletta Corporation, which is a calendar-year, accrual-basis C corporation. On December 31, 2015, Nicoletta had accrued a $20,000 bonus for Jaime and $32,000 of wage expenses for other employees. The wages and the bonus were not actually paid until January 15, 2016. How much of these expenses (if any) can Nicoletta Corporation deduct on its 2015 tax return? A.$0 8. $20,000 C. $32,000 D. $52,000
D
77. With S corporations, which of the following is not a shareholder loss limitation? A. Debt basis limitation. B. At-risk limitation. C. Passive activity loss limitation. D. Casualty loss limitation.
D
79. In 2015, Jacobo decides to invest in Blue Dog Corporation, a cash-basis C corporation. In exchange for 70% of the corporation's total stock, he exchanges a business building with an adjusted basis to him of $360,000 and a fair market value of $700,000. Based on this information, what is Jacobo's stock basis and his recognized gain on the exchange? Jacobo's Stock Basis Recognized gain A. $360,000 $0 8. $340,000 $360,000 C. $700,000 $238,000 D. $700,000 $340,000
D
80. A two-member LLC is formed during the year. How can this entity elect to be taxed? A. As a corporation. B. As a partnership. C. As an estate. D. Both A and B.
D
84. For a business expense to be deductible, it must be each of the following except: A. Ordinary. B. Reasonable in amount. C. Necessary. D. Required.
D
85. All of the following characterize a complex trust except: A. It may make discretionary distributions of principal. B. It reports its accounting income on Form 1041. C. It may make distributions to charity. D. It is not allowed to accumulate income.
D
91. Anne-Marie died in 2015. At the time of her death, she had not received $5,000 of wages from her employer or $1,000 of rental income from a duplex she owned. A couple of weeks after her death, AnneMarie's sole heir, her son, Mateo, received checks for the wages and the rent. He deposited the checks into his own bank account. How should Mateo treat this income? A. Since Mateo received the funds as an inheritance, they are not taxable to Mateo. B. This income must be reported on Anne-Marie's final tax return (Form 1040), not on Mateo's. C. This is income in respect of a decedent. Mateo must include $6,000 of IRD in his gross income. IRD is always treated to favorable capital gains rates. D. This is income in respect of a decedent. Mateo must include $6,000 of IRD in his gross income. The income will retain its character as ordinary income for the wages and as passive activity rental income.
D
10. Quicker Relay Corporation is going through a final liquidation and distributes property with a fair market value of $500,000 and an adjusted basis of $190,000. The property is encumbered by an existing mortgage of $620,000. How much gain {or loss) would Quicker Relay recognize in this distribution? A. $430,000 gain B. $120,000 loss C. $310,000 gain D. $180,000 loss
A
11. The Sutter Partners hip's fiscal year-end is September 30. When is its 2015 partnership tax return due? A. January 15, 2016 B. April 15, 2016 C. May 15, 2016 D. March 15, 2016
A
12. Ileana is a self-employed tax preparer who files a Schedule C to report her business income. In 2015, she has the following purchases, all of which are 100% business-use. She files on the cash basis. Ignoring any income limitations, what is her section 179 deduction for 2015? New computer system $4,600 New multi-line phone system 3,600 Telephone bills 1,300 Bathroom renovation for her business office 23,000 A. $8,200 B. $31,200 C. $9,500 D. $32,500
A
14. Burrier Corporation sets up an HSA (Health Savings Account) for its employees during the year. Burrier Corporation will make contributions to the HSA on the employee's behalf. Which form must Burrier Corporation file in order to report contributions to an employee's HSA? A. Form 5498-SA. B. Form 1099-SA. C. The HSA contributions are reported on the corporation's yearly tax return (Form 1120). D. The employee is required to report the value of the HSA on his individual return (Form 1040). No other reporting is required.
A
2. Hadiya is a managing partner of RealTime Partnership. She has a 50% partnership interest and shares profits and losses based on that percentage. At the beginning of the year, the basis of Hadiya's partnership interest is $35,000. RealTime Partnership has an $82,000 net operating loss for the year. How would RealTime Partnership report this loss on her Schedule K-1, and how would this loss be reported on Hadiya's individual return? A. $35,000 of partnership losses and a $6,000 loss carryforward. B. $41,000 of partnership losses a $5,000 loss carryforward. C. $41,000 of partnership losses. D. $6,000 of partnership losses.
A
25. Kristy is a 10% shareholder in Bosch Corporation, a C corporation. She is not an employee of Bosch. The C corporation loans Kristy $40,000 interest-free for one year. The applicable federal rate at the time of the loan is 2%. How will this transaction be reported, and will Kristy have to recognize any income? A. She must recognize $800 of imputed interest as dividend income. The corporation is not allowed a deduction for the dividend paid. B. She will not be required to recognize any dividend income as long as she repays the loan within the year. C. She must recognize $800 of imputed interest as dividend income, and the corporation will be allowed a tax deduction for the dividend paid. D. She must recognize $800 as taxable wages. Bosch Corporation is not allowed a deduction for the wages paid.
A
27. Which of the following statements is correct regarding a husband and wife who own and run a business together? A. A married couple can choose to report their business as a sole proprietorship by electing to file as a qualified joint venture and filing two separate Schedules C. They must file jointly. 8. A married couple can choose to report their business as a sole proprietorship by electing to file as a qualified joint venture and filing a combined Schedule C. They must file jointly. C. A married couple cannot operate a partnership together because of the related party transaction rules. D. A married couple can elect to be treated as a single individual for Social Security tax purposes.
A
32. Jorge is a 10% shareholder in Octagon Corporation with an outstanding $10,000 loan from the corporation. Jorge defaults on the loan shortly thereafter. Octagon cancels Jorge's debt in 2015. How should this cancellation of debt be reported? A. As a $10,000 taxable distribution to Jorge. B. As a liquidation of corporate stock. C. The cancelled debt would be taxable as wages to Jorge, because he is a corporate shareholder. D. As a $10,000 return of capital.
A
35. Mario and Juan form an equal partnership. Mario contributes $30,000, and Juan contributes property with an FMV of $40,000 and an adjusted basis of $25,000. What is the basis in the partnership of each partner? A. Mario has a $30,000 basis, and Juan has a $25,000 basis. B. Mario has a $30,000 basis, and Juan has a $40,000 basis. C. Mario has a $25,000 basis, and Juan has a $25,000 basis. D. None of the above.
A
4. Form 3115 is used by a business to: A. Apply for a change in accounting method. B. Choose entity classification. C. Report partnership income. D. Report cash payments over $10,000.
A
46. All of the following qualify for a deduction for depletion except: A. Patents. B. Timber. C. Gas wells. D. Mines and natural deposits.
A
60. Quigley Corporation rents office space from its only employee-shareholder. The fair rental value of the office space is $4,500 per month, but the corporation pays the shareholder $6,000 per month, and the corporation deducts the full amount as rent expense. Which of the following statements is correct? A. The IRS may reclassify the excess $1,500 per month of rental payments as a constructive dividend. B. The IRS may reclassify the $4,500 per month of rental payments as a constructive dividend. C. The IRS may reclassify the entire $6,000 per month of rental payments as a constructive dividend. D. The IRS may reclassify the excess $1,500 per month of rental payments as a stock dividend.
A
63. The Lawton Partnership has three partners: Carl, Diana, and Sherry. During the year, Carl wishes to liquidate his partnership interest. Diana and Sherry agree, and Carl receives a cash distribution of $20,000 in exchange for his entire partnership interest. Carl's partnership basis at the time of the distribution was $12,000. How would this transaction be reported by Carl? A. $8,000 capita l gain B. $20,000 capital gain C. $8,000 ordinary income D. No gain or loss is recognized in this transaction.
A
66. Sunshine Surfwear is a new corporation that elects to amortize its organizational costs. Which of the following is considered a qualifying organizational cost? A. State incorporation fees. B. Costs for issuing and selling stock or securities. C. The cost of transferring assets to the corporation. D. All of the costs are qualifying organizational costs.
A
68. The Affordable Care Act contains responsibilities for employers. For ACA purposes, which businesses are considered Applicable Large Employers (ALEs)? A. A large employer for ACA purposes has 50 or more full -time employees. B. A large employer for ACA purposes has 100 or more full -time employees. C. A large employer for ACA purposes has 25 or more full -time employees. D. A large employer for ACA purposes has 2 or more full-time employees.
A
71. Jacob is a 10% partner in Texas Tumbleweed Partnership. In 2015, his beginning partnership basis was $7,000. He received a distribution of $10,000 of cash, plus a car with a partnership basis of $3,000 and a fair market value of $4,500. What is the result of this transaction to Jacob, and how must he recognize the distributions? A. $3,000 of capital gain; his partnership basis is zero; and his basis in the car is zero. B. $6,000 of capita l gain; his partnership basis is zero; and his basis in the car is $3,000. C. Zero of capital gain; his partnership basis is ($3,000); and his basis in the car is $3,000. D. $4,500 of capital gain; his partnership basis is zero; and his basis in the car is $4,500.
A
82. Qualset Corporation initiates a section 1031 exchange of an airplane {adjusted basis $30,000) for another airplane (FMV $75,000). Qualset pays an additional $40,000 of cash to complete the exchange. What is Qualset's basis in the new plane? A. $70,000 B. $75,000 C. $105,000 D. $115,000
A
88. Amara formed Kubik Corporation in 2015 as a wholly-owned S corporation and contributed $75,000 of capital to the business. During 2015, Kubik had the following results: Ordinary income $52,000 Short-term capital loss 4,000 Tax-exempt interest income 5,000 Charitable contributions 5,000 Section 179 deduction 20,000 On June 3, Amara received a $20,000 cash distribution from the corporation. What is the adjusted basis of her stock on December 31, 2015? A. $83,000 8. $108,000 C. $103,000 D. $118,000
A
90. Chris became a limited partner in the Dubishar Partnership by contributing $12,000 of cash upon formation of the partnership. The adjusted basis of his partnership interest at the end of the current year is $21,000, which includes his $15,000 share of partnership liabilities. At the end of the year, Chris sells his partnership interest for $10,000 of cash. How must Chris report this transaction? A. $4,000 capital gain B. $2,000 capital loss C. $19,000 capital gain D. $6,000 capital gain
A
93. Which of the following property is not eligible for the section 179 deduction? A. Inventory. B. Qualified leasehold, retail, and restaurant improvements. C. Off-the-shelf computer software. D. Livestock.
A
95. Best Notary SeNice has gross receipts of $11,253 and supply expenses of $3,175 in 2015. The owner, Cecelia, uses her own car for business. Her written mileage log shows she drove 1,200 business-related miles. She uses the standard mileage rate to determine her driving expenses. How much can Cecilia deduct for her total business expenses on Schedule C? A. $3,865 B.$690 C. $8,078 D. $7,388
A
96. Flooding destroyed a warehouse owned by Telecast Corporation, and the company received $45,000 as an insurance reimbursement. The adjusted basis of the warehouse was $20,000, and the FMV of the building at the time of the flood was $50,000. Telecast spends $41,000 of the insurance proceeds on qualifying replacement property. What is Telecast's taxable gain (or loss) from this involuntary conversion? A. $4,000 gain B. $5,000 loss C. $9,000 gain D. No gain or loss is recognized in this involuntary conversion.
A
98. Which of the following would make a corporation ineligible to elect S corporation status? A. A shareholder is a partnership. B. A shareholder is a bankruptcy estate. C. The corporation has both voting and nonvoting stock. D. The corporation has 100 shareholders.
A
13. Talmage is a 100% shareholder in Best Builder Corporation, a calendar-yea r S corporation. On January 1, Talmage's stock basis in Best Builder was $95,000. Best Builder reported the following income and loss during the year: Ordinary losses $15,000 Long-term capital gains 4,000 Short-term capital losses 9,000 Municipal bond interest income 2,000 What was Ta Image's basis in Best Builder Corporation at the end of the year? A. $73,000 B. $77,000 C. $87,000 D. $95,000
B
18. Paul and his sister, Margaret, have formed a limited liability company (LL(}. If they do not file Form 8832, Entity Classification Election, how will the IRS classify their business entity? A. As a qualified family joint venture, with two separate sole proprietorships. B. As a partnership. C. As a C corporation. D. As an S corporation.
B
21. Joshua is a sole proprietor who uses the cash method. In 2015, he pays $3,000 for a business insurance policy that is effective for three years, beginning on July 1, 2015. How much of the insurance policy is deductible on his 2015 tax return? A.$250 B.$500 C. $1,750 D. $3,000
B
23. Lorna is the sole owner and shareholder in Mechanics Corporation, a cash -basis S corporation. In 2015, Mechanics had the following activity: Gross income from operations $50,000 Tax-exempt interest 1,000 Residential rental income 5,000 Charitable contribution 2,000 Deductible business expenses 20,000 How much ordinary income must Mechanics Corporation report? A. $28,000 B. $30,000 C. $35,000 D. $55,000
B
24. Carey is a farmer whose crops were wiped out by a flood. He receives $100,000 of crop insurance payments in 2015 due to the disaster. What method of accounting must he use in order to postpone recognizing the gain in 2015? A. Accrual method. B. Cash method. C. Hybrid method. D. Crop method.
B
26. Tony is a partner in the Care Heart Partnership. At the end of the year, his adjusted basis in Care Heart was $65,000. Tony received a nonliquidating distribution of land from Care Heart, as well as $15,000 of cash. The land had an adjusted basis of $65,000 to Care Heart and a fair market value of $54,000 immediately before the distribution. What is Tony's basis in the land after the distribution? A. $44,000 8. $50,000 C. $54,000 D. $65,000
B
29. Cheryl is a 100% shareholder in Waterston Corporation, a cash basis C corporation. At the end of the year, Waterston has $20,000 of current and accumulated earnings and profits. Waterston makes a $30,000 cash distribution to Cheryl. At the time of the distribution, Cheryl's stock basis in the corporation was $0. What is the effect of this distribution? A. $30,000 taxable dividend B. $20,000 taxable dividend; $10,000 capita l gain C. $20,000 taxable dividend; $10,000 capital loss D. $30,000 capital gain
B
31. For a business to deduct entertainment expenses, all of the following must have occurred except: A. The main purpose of the entertainment was the conduct of business. B. The entertainment resulted in new or expanded business. C. Business was engaged in during the entertainment event. D. The entertainment occurred either directly before or directly after a substantial business discussion.
B
34. Shania owns a small hair salon as a sole proprietor. She has the following income and expenses: Gross receipts $42,000 Supplies expense 3,500 Wages for part-time employee 5,000 Utility expenses 800 Section 1231 gain 800 Charitable contribution 1,200 How much business income should Shania report on her Schedule C? A. $53,300 B. $32,700 C. $33,500 D. $32,300
B
36. Which business is not eligible to start a SIMPLE retirement plan for its employees? A. A business that has union employees. B. A business that has 110 workers. C. A business that is organized as a partnership. D. A business that is organized as a corporation.
B
38. Manny is an attorney. He transfers property worth $150,000 and renders legal services valued at $13,000 to the Beltway Corporation in exchange for stock valued at $138,000. After these transactions, Manny owns 85% of the outstanding corporate stock. How much gain, income, and/or loss does Manny recognize? A. $1,000 capital loss. 8. $13,000 ordinary income. C. $12,000 capital loss and $13,000 ordinary income. D. No gain or loss is recognized in this transaction.
B
42. Doreen acquires a 20% interest in a partnership by contributing a building that had an adjusted basis to her of $800,000 and is encumbered by a $400,000 mortgage. The partnership assumes payment of the mortgage. The basis of Doreen's partnership interest is: A. $400,000 B. $480,000 C. $640,000 D. $800,000
B
43. If an S corporation distributes appreciated property (rather than money) to a shareholder, what is the income effect on the corporation? A. Gains or losses are not recognized because an S corporation is a pass-through entity. B. Gains are recognized for distributions of appreciated property, but losses are not. C. Gains are not recognized for distributions of appreciated property but losses are recognized. D. Both gains and losses are recognized for distributions of appreciated property.
B
44. Jack is a self-employed plumber. He purchased the following equipment in 2015: Video recorder $195 laptop 450 Digital camera 123 Desk chair 53 Cellular phone 75 Work tools 178 Tool belt 95 Total $1,169 What portion of his equipment purchases is considered listed property for depreciation purposes? A. $0 B.$768 C. $843 D. $1,041
B
48. The Georgia Literary Club qualifies for tax-exempt status as an animal rescue organization. Which form is used by the organization to apply for exemption under IRC section 501(c)(3)? A. Form 990. B. Form 1023. C. Form 1024. D. None of the above. Literary clubs do not qualify for tax exemption under 501(c)(3).
B
49. Which of the following activities qualifies for the domestic production activities deduction? A. Selling food or beverages prepared at restaurants or dining establishments. B. Software development in the United States. C. Leasing items to a related party. D. Customer service businesses.
B
56. Pascal Textiles, a qualified S corporation, has no accumulated earnings and profits. In 2015, Pascal Textiles distributed property to Lydia, its sole shareholder, with a fair market value of $75,000 and an adjusted basis of $62,000. After recognizing her share of Pascal's current year income, Lydia's adjusted basis in the company's stock at the end of the year was $60,000. What is Lydia's tax treatment for the distribution? A. $60,000 as a return of capital and $15,000 as a nontaxable distribution B. $73,000 as a return of capital and $15,000 as taxable capital gain C. $60,000 as a return of capital and $15,000 as taxable capital gain D. $75,000 as a-nontaxable distribution
B
57. During the year, Premium Pet Food Company had the following items of income and expense: Income from operations $50,000 Expenses from operations 40,000 Dividends received from TAM Corp. (a 20% owned corporation) 120,000 Premium Pet Food Corporation is a calendar-year C corporation. Based on the information above, what is Premium Pet Food Corporation's dividends-received deduction? A. $10,000 B. $96,000 C. $104,000 D. $84,000
B
6. Rick wants to transfer assets to a corporation in exchange for a controlling interest in the corporation's stock. Which of the following transfers would create a taxable event for Rick under section 351? A. Rick exchanges depreciated property in exchange for 100% of the corporation's stock. B. The corporation assumes liabilities in excess of the basis of the assets transferred. C. Cash is exchanged for 100% of the corporate stock. D. Rick will not be required to recognize gain from a transfer, as long as he has ownership of over 80% of the corporation's stock after the transfer is complete.
B
64. Bruns Corporation is having financial trouble and liquidates in 2015. In the course of liquidation, Bruns distributes $10,000 of cash and a machine with a fair market value of $12,000 and an adjusted basis of $8,000 to Gordon, a 10% shareholder. Gordon's basis in his stock is $17,000. How much gain will Gordon recognize in this transaction? A. $2,000 B. $5,000 C. $3,000 D. $18,000
B
7. Alex sold his office building to Cassandra, a real estate investor, who plans to use it as a business rental property. Alex was liable for $2,000 in delinquent real estate taxes on the property, which Cassandra agreed to pay. Which of the following statements is correct? A. Cassandra can deduct these taxes as a business expense. 8. Cassandra cannot deduct these taxes as a current expense, but should instead add the amount to her basis in the property. C. Alex can deduct these taxes as an expense because he was the owner of the property. D. The expense must be divided equally between Alex and Cassandra in order to be deductible.
B
74. Hudson River Corporation has $260,000 of current and accumulated earnings and profits. The company distributes a parcel of land with a fair market value of $200,000 and a basis of $90,000 to one of its shareholders, Samuel. This is not a liquidating distribution. How much gain (or loss) would Hudson River Corporation realize in this transaction, and how much dividend income would Samuel report on his individual return? A. Hudson: $200,000 gain; Samuel: $110,000 dividend. B. Hudson: $110,000 gain; Samuel: $200,000 dividend. C. Hudson: $110,000 gain. Samuel: $90,000 dividend. D. Hudson: $200,000 gain. Samuel: $170,000 dividend.
B
76. Which of the following businesses that otherwise qualifies for the DPAD cannot use one of two simplified calculation methods? A. A farming business that is not required to use the accrual method. B. A business with total trade or business assets at the end of the tax year of $20 million or less. C. A business with average annual gross receipts of $5 million or less in the prior three years. D. A qualifying small business taxpayer that is eligible to use the cash method.
B
78. Fernanda is a general partner in the Yolo Davis Partnership. The adjusted basis of her partnership interest is $165,000. During the year, she receives a cash distribution of $80,000 and property with an adjusted basis of $28,000 and a fair market value of $30,000. This is a nonliquidating distribution. What is the basis of Fernanda's partnership interest after this distribution? A. $55,000 B. $57,000 C. $85,000 D. $113,000
B
81. When can the expenses incurred during a complete liquidation of a corporation be deducted? A. In the year they are incurred. B. On the final corporate return. C. In the year they are accrued. D. Never. liquidation expenses of a corporation are not a deductible business expense.
B
83. Robin invests $1,000 in the Dayton Partnership in return for a 20% general partnership interest. The Dayton Partnership takes out a $500,000 loan and incurs $100,000 of losses during the first year. What is Robin's basis in the partnership and how should she treat the loss? A. $20,000 nondeductible loss; $101,000 basis B. $20,000 deductible loss; $81,000 basis C. $20,000 nondeductible loss; $0 basis D. $20,000 deductible loss; $0 basis
B
9. Lisa is the sole beneficiary of a trust that her father, Isaac, set up before his death. Given the following information related to activity following her father's death in 2015, how much income related to the trust, if any, must Lisa report on her tax return? Taxable income $27,000 Tax-exempt interest 3,000 Distributable net income 30,000 Required distributions 15,000 Discretionary distributions 7,500 A. $15,000 B. $22,500 C. $27,000 D. $30,000
B
94. Drew operates a farming business as a sole proprietorship and has the following income and expenses: Sales of grain and produce $2,000,000 Sales of livestock raised on the farm 200,000 Crop insurance proceeds 150,000 Rental income from excess land 100,000 Proceeds from the sale of used farm machinery 24,000 Car and truck expenses 100,000 Depreciation expense 700,000 Fertilizer and other supplies 500,000 Contribution to SEP-IRA 25,000 Utilities 200,000 Repairs 100,000 Based on the information above, what amount of net farm profit or loss should be reported on Drew's Schedule F? A. $850,000 B. $750,000 C. $874,000 D. $825,000
B
97. Which of the following occurs when a corporation cannot deduct the full amount of its alternative net operating loss (ATNOL)? A. The ATNOL cannot be carried back or forward. B. The ATNOL can be carried back two years or forward up to 20 years. C. The ATNOL can be carried back two years, but it cannot be carried forward. D. The ATNOL can be carried forward up to five years.
B
99. Bethany and Allen are long-time business partners. Allen dies suddenly on September 18, 2015, and Bethany takes over Allen's former ownership in the business following his death. When is the final partnership tax return due? A. December 31, 2015 B. January 15, 2016 C. January 18, 2016 D. April 15, 2016
B
100. Naylor Corporation is going through a complete liquidation. Jackson, a shareholder, receives a liquidating distribution of property (a truck). Naylor Corporation's basis in the truck is $12,000 and its fair market value is $52,000. However, the truck is encumbered by a liability of $60,000 (an unpaid loan), which Jackson assumes. How much gain would the corporation recognize, and what is the amount of Jackson's liquidating distribution? A. $40,000 taxable gain to corporation; $60,000 liquidating distribution to Jackson. B. $48,000 taxable gain to corporation; $48,000 liquidating distribution to Jackson. C. $48,000 taxable gain to corporation; $0 liquidating distribution to Jackson. D. $40,000 taxable gain to corporation; $0 liquidating distribution to Jackson.
C
15. Jetta is a sole proprietor who operates a shuttle service to the airport. She owns a van she drives herself for business purposes and four additional vans that her employees drive. How should she deduct her mileage for business purposes? A. She can deduct the standard mileage rate, but cannot deduct related parking fees and tolls. B. She can deduct the standard mileage rate in addition to related parking fees and tolls. C. She cannot use the standard mileage rate, but she must instead deduct actual expenses of operating the vehicles. D. She can choose whether to use the standard mileage rate or deduct actual expenses of operating the vehicles.
C
16. Rita transferred property to an S corporation for stock, and immediately after the transfer, she was in control of the corporation. She received stock with a fair market value of $20,000 plus cash of $15,000. The corporation also assumed a $6,000 mortgage on the property for which Rita was liable. Rita's basis in the transferred property was $25,000. What amount must she recognize as gain, if any, in this section 351 transfer? A.$0 B. $6,000 C. $15,000 D. $16,000
C
17. Bruce paid $5,500 for a new commercial bandsaw for his construction business. The shipping cost was $125. When the machine arrived, it was too difficult for Bruce to assemble and install himself, so he paid a professional to set up the machine for a cost of $250. What is Bruce's adjusted basis in this asset? A. $5,500 B. $5,625 C. $5,875 D. $5,125
C
19. Parcel Express Corporation is a calendar-year C corporation. In 2015, Parcel Express had taxable income of $125,000 before figuring the dividends-received deduction. The company is entitled to a $40,000 dividends-received deduction. The company also donated $30,000 to several qualified 501(c)(3} charities during the year. What is Parcel Express's allowable deduction for charitable contributions on Form 1120? A. $30,000 B. $10,000 C. $12,500 D. $8,500
C
3. Eugene owns a large plot of farmland. In 2015, he foregoes growing his own crops and rents the farmland to someone else. After the new tenants arrive, Eugene takes a vacation and is gone for most of the year. Eugene does not materially participate in the farming activity on his farm in 2015. How should Eugene report this income? A. Eugene must report the income on Schedule F. B. Eugene must report the income on Schedule E. C. Eugene must report the income on Form 4835. D. Eugene must report the income on Schedule C.
C
30. Allay Corporation is an accrual-based, calendar-year C corporation. At the end of the year, Allay reported book net income of $380,000. The calculation of book net income included the following items: Municipal bond interest income $60,000 Federal income tax expense 120,000 In addition, $4,300 of Allay's charitable contributions resulted in a contribution carryover for tax purposes because they exceeded the deductible limit for the year. Based on this information, what is the amount of Allay Corporation's taxable income that would be reconciled and reported on Schedule M-1 of Form 1120? A. $324,300 B. $440,000 C. $444,300 D. $500,000
C
33. Which of the following statements regarding distributions from trusts and estates is not correct? A. Distributable net income (DNI) represents taxable net income, before the income distribution deduction. B. The income distribution deduction is limited to DNI. C. Beneficiaries must report taxable distributions in the year they are received. D. The amounts taxable to beneficiaries are reported to them on Schedules K-1.
C
37. The Darby Corporation was organized on May 15. It elected the calendar year as its accounting period. When is the tax return due for this corporation? A. October 15 B. April 15 C. March 15 D. May 31
C
39. Which of the following is not a pass-through entity? A. Sole proprietorship. B. S corporation. C. C corporation. D. Partnership.
C
40. Rodolfo and Lenora formed SuperCleaners, a calendar-year partnership, to provide janitorial services to residential customers. Before they began operations in November 2015, they incurred legal fees of $2,000 and consulting expenses of $1,000 to draft the partnership agreement and file the required forms. They also paid a commission of $600 to a broker to market partnership interests to other potential partners. How much of these expenses may be either deducted or amortized? A. $0 B.$600 C. $3,000 D. $3,600
C
45. Five years ago, Messenger Corporation purchased land for a cost of $90,000. In 2015, the land is condemned by the federal government for development of a new highway. The company receives a $160,000 condemnation award for the land. Within the same year, the company purchases replacement land for $80,000. How much gain, if any, should Messenger Corporation recognize on this transaction? A. $10,000 B. $20,000 C. $70,000 D. $160,000
C
5. Saul operates a tuna fishing boat and reports his income on Schedule F. Saul hires his 16-year-old son, Ingram, part-time to help him run the business. Saul pays his son a reasonable wage of $6,200 for the year. Which of the following statements is correct about Ingram's wages? A. Ingram's wages are subject to the kiddie tax. B. Saul cannot deduct the wages he paid to Ingram because of related party transaction rules. C. Saul may deduct Ingram's wages as a business expense, and the wages are not subject to Social Security and Medicare taxes. D. Ingram's wages are subject to backup withholding.
C
50. What tax returns, if any, is First Community Church required to file in 2015? • Paid $30,000 of wages to three church employees • Received $800 of unrelated business income • Received $300,000 of donations from parishioners A. A church is not required to file a tax return. B. First Community Church must file payroll tax returns and Form 990-T. C. First Community Church must file payroll tax returns. D. First Community Church must file Form 990, Form 941, and Form 990-T.
C
51. Stuart and Kara are father and daughter. Stuart is a 70% partner in the Bluerock Partnership and Kara is a 60% partner in the Sumpter Partnership. If the Bluerock Partnership sells property at a loss to the Sumpter Partnership, what is the result of the transaction? A. Stuart can deduct his share of the loss on his Schedule K-1. B. Stuart and Kara can each deduct his or her share of the loss according to their percentage ownership in the respective partnerships. C. No loss is allowed in the transaction because the partnerships are considered related parties. D. The transaction is prohibited and will be disallowed by the IRS.
C
53. Angie owns a 30% interest in the Gunter Partnership, which is in the business of selling sporting equipment. All the general partners share profit and loss according to their ownership stakes. There are no limited partners. The partnership reports $90,000 of income for 2015 and distributes $23,000 to Angie. How much income will Angie recognize on her individual ret urn, and what is the character of the income? A. $23,000 income, subject to self-employment tax B. $23,000 income, not subject to self-employment tax C. $27,000 income, subject to self-employment tax D. $27,000 income, not subject to self-employment tax
C
55. Benevolent Inc. is a fiscal year C corporation that reports income and loss on the accrual basis. Which of the following is required for Benevolent to deduct an expense? A. Benevolent must first pay the expense in order to deduct it. B. Benevolent must receive an invoice or other bill for an expense in order to deduct it. C. Benevolent must meet the all events test and have economic performance in order to deduct the expense. D. Benevolent must have received a bill for the expense and paid it before the end of its fiscal year.
C
58. Justine and Richard are equal partners in a partnership. At the end of the year, the adjusted basis of Justine's partnership interest was $60,000. She received cash of $31,000 as a year-end distribution, plus property with a fair market value of $38,000 and an adjusted basis to the partnership of $46,000. This was a nonliquidating distribution. What is Justine's basis in the property that was distributed? A. $46,000 B. $38,000 C. $29,000 D. $9,000
C
59. Driveline Corporation is a calendar-year S corporation. Driveline has four shareholders. The corporation has 10,000 shares outstanding. The shareholders have the following ownership: Shareholder Ownership 1. Thomas 4,500 shares 2. Ashley 2,000 shares 3. Simon 2,000 shares 4. Charlotte 1,500 shares Total Shares 10,000 shares Charlotte and Thomas wish to terminate Drive line's 5-election in order to become a C corporation, but Ashley and Simon do not. Which of the following statements is correct? A. Charlotte and Thomas do not have enough stock ownership to terminate the election. B. All of the shareholders must agree to terminate an S-election. C. Charlotte and Thomas have enough stock ownership to terminate the election. D. At least 75% of the shareholders with active ownership must agree to the termination.
C
61. Lynden Corporation gives each of its traveling salespeople $1,000 a month ($12,000 a year) as a car allowance. The salespeople do not have to provide any proof of their car expenses to Lynden Corporation. How should these payments be treated? A. The car allowances are deductible as contractor payments, and they are not taxable to the employees. B. Lynden must include $12,000 on each salesperson's Form W-2. The amounts are not subject to Social Security or Medicare tax. C. Lynden must include $12,000 on each salesperson's Form W-2. The amounts are subject to income tax withholding, as well as to Social Security and Medicare tax. D. The payments can be treated as gifts.
C
62. Which entity does not have to use the accrual method of accounting? A. AC corporation with average annual gross receipts of $6 million. B. A partnership with average annual gross receipts of $7 million. C. A PSC with average annual gross receipts of $23 million. D. A sole proprietor with average annual gross receipts of $1,750,000. His business carries inventory valued at $200,000.
C
65. Of the following examples, only a _____ would be considered section 1250 property: A. Backhoe. B. Welding machine. C. Factory building. D. Race horse.
C
67. Philip is the sole shareholder of Leisure Crafts Corporation. In 2015, Leisure Crafts sells a utility van with an adjusted basis of $12,000 and a fair market value of $22,000 to Philip's sister, Gayle, for $11,500. Gayle plans to use the utility van in her business. How must this transaction be reported? A. Leisure Crafts can claim a deductible loss of $500 on the sale of the asset. B. Leisure Crafts must recognize gain of $500 on the sale of the asset. C. Leisure Crafts will not recognize gain or loss on the sale of the asset. D. Leisure Crafts can claim a deductible loss of $10,500 on the sale of the asset.
C
69. Gloss-X Corporation is a C corporation. Gloss-X has a net short-term capital gain of $3,000 and a net long term capital loss of $9,000. The short-term gain offsets some of the long-term loss, leaving a net capital loss of $6,000. The corporation also has $50,000 of ordinary taxable income. Which of the following statements is correct regarding this corporation's capital loss? A. The corporation can use $3,000 of this $6,000 loss to offset ordinary income. The remainder must be carried forward. B. The corporation treats this $6,000 as a long-term loss that may be carried back for one year and carried forward for up to five years. C. The corporation treats this $6,000 as a short-term loss that may be carried back for three years and carried forward for up to five years. D. The corporation treats this $6,000 as a long-term loss that may be carried back for two years and carried forward for up to 20 years.
C
8. Which of the following cannot be a shareholder in an S corporation? A. A bank. 8. A U.S. resident who is not an American citizen. C. A nonresident alien. D. A 501(c)(3) exempt entity that is also a corporation.
C
86. When can a business carry back a net operating loss for longer than the normal two years? A. When the business has filed for bankruptcy protection. 8. When a corporation has average gross annual receipts totaling less than $5 million. C. When the NOL is due to a casualty or theft. D. When the IRS has approved a request for an extension of time for payment of tax because of undue hardship.
C
87. Which of the following exempt organizations is required to file an annual information return? A. A church. 8. A governmental unit. C. A private foundation. D. All of the above.
C
89. Which of the following businesses would not be required to file Form 4626, Alternative Minimum Tax Corporations? A. A corporation that claimed the credit for prior year minimum tax. 8. A corporation that claimed the qualified electric vehicle passive activity credit from prior years. C. A corporation with $4 million of average annual gross receipts. D. A corporation that claims any general business credit.
C
92. A 501(c)(3) corporation has $1,200 in unrelated business income. How should this income be reported? A. The entity should report the unrelated business income on Form 1120. B. The IRS will revoke the exempt status of a charitable organization if it has business income. C. The entity should report the unrelated business income on Form 990-T. D. The entity should report the income on Form 990, and include a letter of explanation.
C
