Qualifying Property
The specific property eligible for a particular nontaxable exchange
Which of the following statements about like-kind exchanges is false?
a. Like-kind property must be held for either business or investment use
b. Businesses cannot engage in like-kind exchanges of inventory
c. Businesses cannot engage in like-kind exchang
Business cannot exchange undeveloped land for developed real estate
Vincent Company transferred business realty (FMV $2.3 million; adjusted tax basis $973,000) to Massur Inc. in exchange for Massur common stock. Which of the following statements is false?
a. If Vincent does not recognize gain on its exchange of property f
If Vincent is not in control of Massur immediately after the exchange, both Vincent and Massur must recognize a $1,327,000 gain.
Which of the following statements about S corporations is true?
a. An S corporation has unlimited liability
b. An S corporation is a flow-through entity for federal income tax purposes
c. S corporations can only have 75 shareholders
d. S corporations can
An S corporation is a flow-through entity for federal income tax purposes.
Which of the following statements about partnerships is false?
a. A partnership is a legal entity that may enter into valid contracts
b. Partnerships are unincorporated entities
c. Only individuals may be partners in a partnership
d. Partnerships are some
Only individuals may be partners in a partnership.
Fleet, Inc. owns 85% of the stock of Pete, Inc. and 35% of the stock of Zete, Inc. The remaining stock of Pete and Zete is owned by unrelated individuals. Which of the following statements is correct?
a. Fleet, Pete, and Zete are an affiliated group
b. Fl
Fleet and Pete are an affiliated group.
Aaron, Inc. is a nonprofit corporation that collects and distributes food for needy families. Aaron, Inc. also operates a small grocery store for profit. Which of the following statements is true?
a. The income from the collection and distribution of food
Only the income from the grocery store is taxable
Sonic Corporation has a 21% marginal tax rate and received $10,000 of dividends from Roller, Inc., a U.S. corporation in which Sonic owns less than 2% of the outstanding stock. Sonic's effective tax rate on the Roller dividend is:
a. 21%
b. 0%
d. 10.5%
c.
10.5%
*NOTE: Because of the 50% DRD, Sonic's taxable income includes only $5,000 of the $10,000 Roller dividend. The tax on $5,000 is $1,050, and $1,050/$10,000 equals a 10.5% effective tax rate.
Which of the following would not be a successful means of avoiding double tax on the earnings of a closely-held corporation?
a. Having a shareholder lend money to the corporation at a reasonable rate of interest
b. Having a shareholder lease warehouse spa
Having the corporation pay the shareholder a fixed percentage of the par value of the stock the shareholder owns.
The three Crosby children intend to form a business. The business will borrow $900,000 from a local bank. Which of the following statements is true?
a. Regardless of whether the business is a partnership or an S corporation, the owners will include the ba
If the business is a partnership the owners can allocate income and losses in any reasonable manner.
Homer currently operates a successful S corporation. He would like to bring his two teenage children into the business. If he gives each child 10% of the stock, which of the following statements is true?
a. Since the children did not pay for the stock, Ho
Homer must receive a reasonable salary for any time he spends working on behalf of the business.
The tax basis in property received in a like-kind exchange in which no gain or loss is recognized is a:
a. FMV basis
b. Cost basis
c. Substituted basis
d. Carryover basis
Substituted basis
Mr. Weller and the Olson Partnership entered into an exchange of investment real property. Mr. Weller's property was subject to a $428,000 mortgage, which Olson assumed. Olson's property was subject to a $235,000 mortgage, which Mr. Weller assumed. Which
Mr. Weller received $193,000 boot; Olson paid $193,000 boot.
Which of the following statements regarding a sole proprietorship is false?
a. A sole proprietorship is an unincorporated business operated by one individual
b. Taxable income from a sole proprietorship is reported on Schedule D of the proprietor's indivi
Taxable income from a sole proprietorship is reported on Schedule D of the proprietor's individual income tax return
XYZ, Inc. wishes to make an election to become an S corporation for federal tax purposes. Which of the following statements regarding the election is false?
a. All of the corporation's shareholders must consent to make an S election
b. If a shareholder in
All of the shareholders must consent to voluntarily terminating an S election.
A corporation that owns more than $10 million of total assets uses which schedule to reconcile book income to taxable income?
a. Schedule M-1
b. Schedule M-2
c. Schedule M-3
d. Schedule M-4
Schedule M-3
The stock of Wheel Corporation, a U.S. company, is publicly traded, with no single shareholder owning more than 5 percent of its outstanding stock. Wheel owns 90 percent of the outstanding stock of Axle, Inc, also a U.S. company. Axle owns 100% of the out
Wheel, Axle, and Trunk are an affiliated group.
Which of the following items might an IRS agent seek to recharacterize as a constructive dividend?
a. Payment of interest expense to a corporate shareholder, where the loan bears interest at a market rate, has fixed written terms with a repayment required
Payment of salary expense to a corporate shareholder's wife, where the wife performs no services for the corporation
Which of the following statements regarding the accumulated earnings tax is true?
The accumulated earnings tax is intended to coerce corporations to pay dividends.
Which of the following statements about nontaxable exchanges is true?
a. The parties to the exchange agree that the properties exchanged are of equal value
b. The parties to the exchange both realize gain on the exchange
c. No cash can change hands in a n
The parties to the exchange agree that the properties exchanged are of equal value
Which of the following statements about the transfer of debt in a like-kind exchange is false?
a. The party relieved of debt treats the relief as boot received
b. The party assuming debt treats the assumption as boot paid
c. If both properties in the exch
If both properties in the exchange are subject to debt, both parties will be treated as receiving boot
Randolph Scott operates a business as a sole proprietorship. This year his net profit was $10,570. For tax purposes this amount should be reported on:
a. Schedule C, Statement of Profit or Loss from Business
b. The first page of Form 1040 as other income
Schedule C, Statement of Profit or Loss from Business
Which of the following statements regarding the taxation of corporate profits is true?
a. Dividends payments are deductible in computing corporate taxable income
b. The tax treatment of corporate dividends creates a bias in favor of debt financing
c. Corp
The tax treatment of corporate dividends creates a bias in favor of debt financing
Fleet, Inc. owns 85% of the stock of Pete, Inc. and 35% of the stock of Zete, Inc. and 90% of the stock of Bete, Inc. Bete owns 5% of the stock of Pete and 5% of the stock of Zete. Zete owns 10% of the stock of Bete. The remaining stock of Pete and Zete i
Fleet, Pete, and Bete are an affiliated group
Which of the following statements about the wash sale rule is false?
a. The rule disallows loss recognition but not gain recognition
b. The rule applies to both individual and corporate taxpayers
c. The rule applies only to sales of marketable securities
None of these choices are false
Which of the following statements about the inclusion of boot in a nontaxable exchange is false?
a. The purpose of including boot in a nontaxable exchange is to equalize the adjusted tax bases of the properties exchanged
b. The receipt of boot can trigger
The purpose of including boot in a nontaxable exchange is to equalize the adjusted tax bases of the properties exchanged
*NOTE: The purpose of including boot is to equalize the FMV of the properties exchanged.
Debbie is a limited partner in ADK Partnership. Her partnership Schedule K-1 reports $19,000 ordinary business income, $2,000 long-term capital gain, and $830 dividend income. Which of these items are subject to self-employment tax?
a. None of the items a
None of the items are subject to SE tax because Debbie is a limited partner
Which of the following entities does not provide all the owners with limited liability for debts incurred by the entity?
a. C corporation
b. S corporation
c. Limited partnership
d. LLC
Limited partnership
Grant and Amy have formed a new business to be operated through an S corporation. They each own 50% of the corporation's outstanding common stock. During the first year of operations, the business incurred an operating loss of $100,000. In allocating this
Grant and Amy must each be allocated $50,000 of the operating loss
For tax years beginning after December 31, 2015, which of the following statements regarding corporate tax filing requirements is false for corporations with a calendar year end?
a. Corporations must file their annual federal income tax returns by the 15t
Corporations must file their annual federal income tax returns by 15th day of the third month following the close of the taxable year
Which of the following is a primary legal characteristic of the corporate form of business?
a. The management of the business is centered in a Board of Directors elected by the shareholders
b. A shareholder must seek permission to sell his stock
c. The li
The management of the business is centered in a Board of Directors elected by the shareholders
Marcia is a shareholder in an S corporation and also works for the corporation. This year, her share of ordinary income was $250,000 and her compensation was $100,000. Which of the following accurately describes her tax consequences from these earnings?
a
Both the ordinary income and the compensation are subject to income tax and the compensation is subject to payroll tax
Which of the following statements regarding the personal holding company tax is false?
a. The personal holding company tax is imposed in addition to the regular corporate income tax
b. The personal holding company tax was originally enacted to discourage
The personal holding company tax is assessed on a qualifying corporation's undistributed personal holding company income
Loretta is the sole shareholder of Country Collectibles, a calendar year S corporation. Although Loretta spends at least 40 hours per week supervising Country Collectible's employees, she has never drawn a salary from the business. Country Collectibles ha
There is significant risk that the IRS could recharacterize the payments to Loretta as salary. Such treatment would reduce the S corporation's ordinary income, but would not change Loretta's taxable income
*NOTE: Loretta would report salary income and an
Which of the following statements regarding Schedule M-1 is true?
a. The corporate dividends-received deduction is reported on Line 8 of Schedule M-1
b. A corporation incurring nondeductible fines and penalties would report those amounts on line 5 of Sche
A corporation incurring nondeductible fines and penalties would report those amounts on line 5 of Schedule M-1
Sandy, Sue, and Shane plan to open Friends, an upscale restaurant. They project that the business will incur a $90,000 operating loss in Year 1, and $75,000 of profit in Year 2. Which of the following statements is true?
a. If the business is a C corporat
If the business is a C corporation, it will owe income tax in Year 2
Mr. Eddy loaned his solely-owned corporation $3,000,000. The corporation paid a market rate of interest annually. Upon audit, the IRS reclassified some of the debt as equity. Which of the following statements is true?
a. The interest paid by the corporati
The interest paid by the corporation on the reclassified amount is treated as a dividend
Grantly Seafood is a calendar year taxpayer. In 2020, a hurricane destroyed three of Grantly's fishing boats with a $784,500 aggregate adjusted tax basis. On October 12, 2020, Grantly received a $1.2 million reimbursement from its insurance company. What
December 31, 2022
In 2020, Mike Elfred received a $165,000 salary from his employer and generated $39,000 net earnings from self-employment from his small business. Which of the following statements is true?
a. Mike does not owe any self-employment tax because his salary e
Mike owes Medicare tax but not Social Security tax on his $39,000 earnings from his small business
In determining the incidence of the corporate income tax:
a. Corporations may pass the tax burden onto consumers in the form of higher prices
b. Corporate shareholders may bear the burden of the corporate tax in the form of lower return on investment
c. C
All of these parties may bear the indirect burden of the corporate income tax
Which of the following statements regarding the tax burden imposed on business entities is true?
a. The tax burden imposed on corporate earnings is always lower if the corporation makes an S election
b. Business owners desiring current cash flow can maxim
Current tax cost associated with shareholder cash flow received as dividends may be lower than cash flow received as payments of salary, interest, or rental income
Which of the following is not a good reason to form a family partnership?
a. Income can be shifted to lower-tax-rate individuals
b. A buy-sell agreement can ensure that all ownership interests are retained in the family
c. No gift tax is due on the transf
No gift tax is due on the transfer
Which of the following statements regarding the basis limitation on deduction of partnership losses is false?
a. If a partner's share of partnership losses exceeds the partner's tax basis in the partnership interest, the excess is not deductible in the cu
Partners can increase tax basis in their partnership interest only by making additional capital contributions
Which of the following statements regarding alternative business forms is true?
a. If an S corporation's election terminates, the corporation is forced to liquidate
b. Some states treat S corporations as taxable corporations for purposes of corporate fran
Some states treat S corporations as taxable corporations for purposes of corporate franchise taxes
Carman wishes to exchange 10 acres of Iowa farm land in a like-kind exchange. Which of the following properties will qualify for like-kind exchange treatment?
a. New York office building
b. Tractor
c. 35 hogs raised for slaughter
d. Personal residence in
New York office building
Martha Pim is a general partner in PLF Partnership. This year, Martha received a $48,000 guaranteed payment from PLF, and her distributive share of PLF's ordinary business income was $93,200. Which of the following is accurate?
a. Martha must pay income t
Martha must pay both income tax and self-employment tax on $141,200
Loretta is the sole shareholder of Country Collectibles, a calendar year S corporation. Although Loretta spends at least 40 hours per week supervising Country Collectible's employees, she has never drawn a salary from the business. Country Collectibles ha
Loretta and Country Collectibles will each be liable for unpaid payroll taxes as a result of the audit
Kyrsten Haas expects her S corporation to generate a profit of $200,000. What is the effective tax rate on the $200,000 if no cash is distributed? Kyrsten's marginal tax rate on ordinary income is 37%.
a. 21%
b. 58%
c. 36.8%
d. 37%
37%
*NOTE: There is only one level of tax
Which of the following statements about boot included in a nontaxable exchange is false?
a. The purpose of boot is to equalize the values of the exchanged properties
b. The payment of boot triggers recognition of realized gain to the payer
c. The receipt
The payment of boot triggers recognition of realized gain to the payer
Which of the following statements regarding sole proprietorships is false?
a. A sole proprietorship has no legal identity separate from that of its owner
b. Sole proprietorships are the most common form of business entity in the U.S
c. The cash flow gener
The assets and liabilities of a sole proprietorship are held in the name of the business, not the owner
Which of the following statements regarding partnerships versus S corporations is false?
a. Ordinary income allocated from both types of passthrough entities is subject to self-employment tax
b. Partners are not permitted to be employees of their partners
Ordinary income allocated from both types of passthrough entities is subject to self-employment tax
Three individuals transferred property to newly formed Triple Inc. in exchange for 1,000 shares of common stock. Mr. Albert transferred assets with a $50,000 tax basis in exchange for 820 shares, Mrs. Billig transferred assets with a $9,000 tax basis in e
None of these choices are false
*NOTE: Mr. Albert's and Mrs. Billig's exchanges are nontaxable because the three transferors in the aggregate own 80% or more (100%) of Triple's outstanding stock immediately after the exchange.
Which of the following statements concerning partnerships is false?
a. A properly-drafted partnership agreement is crucial
b. A general partner's basis in a partnership includes his share of partnership debt
c. Limited partnerships must have at least one
A partner is taxed annually on only that portion of a partnership's taxable income that is actually distributed
Which of the following is NOT one of the characteristics of a constructive dividend?
a. Payment between a corporation and a shareholder
b. Original payment treated as deductible by the corporation
c. Original payment treated as made to the shareholder in
All of these choices are common characteristics of constructive dividends
The revenue agent who audited the Form 1120 filed by LCW Inc. recharacterized $125,000 of the salary paid to Ms. Lewis (LCW's president and controlling shareholder) as a constructive dividend. LCW's marginal tax rate is 21%, and Ms. Lewis' marginal tax ra
Ms. Lewis' taxable income will increase
*Note: LCW's taxable income will increase by $125,000. Ms. Lewis' taxable income will not increase because $125,000 of her salary is recharacterized as a dividend. However, her payroll tax liability and her income t
Berly Company transferred an old asset with a $12,300 adjusted tax basis in exchange for a new asset worth $20,000. Which of the following statements is false?
a. The old asset's FMV is $20,000
b. If the exchange is nontaxable, Berly's tax basis in the ne
None of these statements are false
Which of the following statements regarding the home office deduction is true?
a. In order to qualify for the deduction, a portion of the taxpayer's home must be used regularly and exclusively to meet with clients or customers
b. A home office deduction i
The home office deduction is limited to the taxable income of the business before the deduction
Chad is the president and sole shareholder of Greenfield, Inc., a regular corporation. The corporation reported taxable income of $575,000 after deducting his $900,000 salary. If the IRS disallowed $550,000 as unreasonable compensation, Chad's taxable inc
Stay the same
Which of the following amounts are not subject to self-employment tax?
a. General partner's share of partnership income
b. Limited partner's share of partnership income
c. Sole proprietor's income from business activity
d. Guaranteed payment to general pa
Limited partner's share of partnership income
Which of the following is a consequence of establishing a family partnership or a family-owned S corporation?
a. The original owners will have their control of the business diluted
b. For the structure of the family business to be honored, the transfers t
All of these choices are consequences of establishing a family partnership or a family-owned S corporation
Which of the following statements regarding the tax treatment of start-up losses is false?
a. Start-up losses of a business organized as a C corporation create NOL carryforwards, deductible in future years when the business generates a profit
b. Start-up
Start-up losses of a business organized as an S corporation create NOL carryforwards, deductible in future years when the business generates a profit
Loonis Inc. and Rhea Company formed LooNR Inc. by transferring business assets in exchange for 1,000 shares of LooNR common stock. Loonis transferred assets with a $820,000 FMV and a $444,000 adjusted tax basis and received 820 shares. Rhea transferred as
The FMV of Rhea's 180 shares is $180,000
Alan is a general partner in ADK Partnership. His partnership Schedule K-1 reports $50,000 ordinary business income, $22,000 guaranteed payment, $5,000 long-term capital gain, and $400 dividend income. Which of these items are subject to self-employment t
$50,000 ordinary business income and $22,000 guaranteed payment
G&G Inc. transferred an old asset with a $110,300 adjusted tax basis plus $20,000 cash in exchange for a new asset worth $150,000. Which of the following statements is false?
a. The old asset's FMV is $150,000
b. If the exchange is nontaxable, G&G's recog
The old asset's FMV is $150,000
*NOTE: The old asset's FMV is $130,000.
Which of the following statements regarding a partner's tax basis in a partnership interest is true?
a. Partnership tax basis is increased annually by cash distributions from the partnership
b. Partnership tax basis is reduced by the partner's share of no
Partnership tax basis is reduced by the partner's share of nondeductible partnership expenses
Which of the following is NOT a commonality across nontaxable exchanges?
The transaction often gives rise to a permanent book-tax difference
Which of the following is NOT a consequence of boot in a nontaxable exchange?
Inclusion of boot can trigger gain or loss recognition for the receiver
Which of the following situations does NOT give rise to a deferral of a gain or loss recognition for tax purposes?
A property is destroyed by a tornado, and insurance proceeds are less than the adjusted basis of the property
Which of the following would NOT be an example of an involuntary conversion?
A stock becomes worthless
In which of the following properties would be qualifying property in a like-kind exchange?
An apartment complex
Which of the following is NOT legal characteristic of a corporation?
Limited professional liability of employees
Corp A owns 100% Corp B. Which of the following is NOT a member of the affiliated group?
Corp C, which is 50% owned by Corp A, 20% owned by Corp B, and 30% own by unaffiliated owners
Which of the following IRC code sections gives tax exempt status to charitable nonprofit corporations?
Section 501(c)(3)
The charitable contributions deduction limitation is calculated as 10% of taxable income before all of the following items EXCEPT:
NOL carryforwards
In which of the following is NOT a percentage used to calculate the dividends received deduction?
75%
In which of the following statements about tax credits is FALSE?
Corporations do no receive tax credits
Which of the following is a taxpayer federal income tax purposes (i.e., is not a pass through entity)?
C Corporation
Which of the following does NOT reduce Qualified Business Income?
Deduction for home mortgage insurance
Which of the following is NOT a potential limit on the amount of QBI deduction?
Taxable income (before QBI deduction) in excess of $326,600 (MFJ) or $163,300 (all others)
Which of the following taxes was NOT discussed in the videos?
Unemployment taxes
In which of the following is NOT a tax provision we have previously discussed that is still applicable to the taxation of flow through entities?
The dividends received deduction
On what form are business income and expenses for a sole proprietorship listed?
Form 1040, Schedule C
Which of the following roles has the LEAST amount of liability protection?
General Partner
Which of the following does NOT increase a partner's basis in their partnership interest?
FMV of property contributed
Which of the following statements about S Corp shareholders is FALSE?
Shareholders cannot be an estate
Which of the following conditions would prevent a corporation from successfully electing S status?
51% of shareholders agree to making the S election
Which of the following does NOT impact an owner's basis in an S Corp?
Increases in corporate liabilities
On what form are business income and expenses for a S Corp listed?
Form 1120S
Assume an S Corp owner was not able to take a loss deduction last year because basis in the S Corp stock had been reduced to $0. Which of the following would NOT enable the owner to deduct the loss this year?
The S Corp takes out a loan from the bank
Which of the following is NOT is not a benefit of organizing as a passthrough entity for tax purposes?
Limited liability
Which of the following is NOT a limitation on shifting of passthrough entity income?
Family members can never be partners in a personal service business
Which of the following is NOT a potential difference between a partnership and an S Corp?
Single layer of taxation vs two layers of taxation
Which of the following is NOT a means by which a C Corp can make a deductible cash distribution to a owner?
Pay the owner a dividend on their shares of stock
Which of the following taxes can only be assessed after a corporation is audited?
Accumulated earnings tax