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Chapter 01: Understanding and Working with the Federal Tax Law True / False 1. Many states have balanced budgets because laws or constitutional amendments preclude deficit spending. a. True b. False 2. The U.S. Federal government has a provision in the Constitution that precludes deficit spending. a. True b. False 3. Revenue-neutral tax laws reduce deficits. a. True b. False 4. Longer class lives for depreciable property and the required use of the straight-line method of depreciation would likely dampen the tax incentive for purchasing capital assets. a. True b. False 5. The Internal Revenue Code is a compilation of Federal tax legislation that appears in Title 26 of the United States Code. a. True b. False 6. The favorable treatment of research and development expenses (via amortization deductions and tax credits) is one means of controlling the economy. a. True b. False 7. The encouragement of private-sector pension plans can be justified under the encouragement of certain industries. a. True b. False 8. One Internal Revenue Code section enables shareholders in a small business corporation to obtain an ordinary deduction for any loss recognized on a stock investment. a. True b. False 9. One of the justifications for the enactment of the tax law governing corporate reorganizations was the economic benefit it would provide businesses (including making them more efficient). a. True b. False 10. Although a corporation is subject to a Federal income tax, a partnership is not. a. True b. False Powered by Cognero

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Chapter 01: Understanding and Working with the Federal Tax Law 11. The Federal income tax law allows a taxpayer to claim a deduction for state and local income taxes but limits all state taxes to a maximum of $10,000. a. True b. False 12. Alabama and South Carolina are community property states. a. True b. False 13. A tax bill cannot originate in the Senate Finance Committee. a. True b. False 14. Taxpayers may read Committee Reports to determine the intent of Congress. a. True b. False 15. These Internal Revenue Code citations are incorrect: § 212(1) and § 1221(1). a. True b. False 16. Internal Revenue Code § 6 involves gross income and § 7 outlines itemized deductions. a. True b. False 17. Subchapter P refers to the subchapter in the Internal Revenue Code that deals with partners and partnerships. a. True b. False 18. Regulations are arranged in a different sequence than the Internal Revenue Code. a. True b. False 19. Proposed Regulations have the force and effect of law. a. True b. False 20. Temporary Regulations have the same authoritative value as Final Regulations for four years. a. True b. False 21. Proposed Regulations are published in the Federal Register. a. True b. False 22. Regulations are issued by the Treasury Department. Powered by Cognero

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Chapter 01: Understanding and Working with the Federal Tax Law a. True b. False 23. Revenue Rulings carry the same legal force and effect as Regulations. a. True b. False 24. A Revenue Ruling is a legislative source of Federal tax law. a. True b. False 25. Revenue Procedures deal with the internal management practices and procedures of the IRS. a. True b. False 26. Treasury Decisions are issued by the Treasury Department to promulgate new Regulations. a. True b. False 27. Determination letters usually involve proposed transactions. a. True b. False 28. Letter rulings are issued by the National Office of the IRS. a. True b. False 29. A taxpayer must pay any tax deficiency assessed by the IRS and sue for a refund to bring suit in the U.S. District Court. a. True b. False 30. In a U.S. District Court, a jury can decide both questions of fact and questions of law. a. True b. False 31. A U.S. District Court must abide by the precedents set by the U.S. Court of Appeals of its jurisdiction. a. True b. False 32. Appeals from the U.S. Court of Federal Claims go to the U.S. Supreme Court. a. True b. False 33. A jury trial is available when a case is heard by a U.S. Court of Appeals. a. True Powered by Cognero

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Chapter 01: Understanding and Working with the Federal Tax Law b. False 34. Only one judge hears a trial in a U.S. District Court. a. True b. False 35. The Golsen rule no longer applies to the U.S. Tax Court. a. True b. False 36. When there is a direct conflict between an Internal Revenue Code section and a treaty provision, the most recent item takes precedence. a. True b. False 37. “Legislative" regulations carry more weight than “interpretative” regulations. a. True b. False 38. The U.S. national debt is around $20 trillion. a. True b. False 39. A change in the individual tax rate has an almost immediate impact on the economy. a. True b. False 40. The like-kind tax free exchange treatment is an example of the wherewithal to pay concept. a. True b. False 41. Indexation of various income tax components was eliminated by the Tax Cuts and Jobs Act of 2017. a. True b. False 42. When there is a direct conflict between a tax treaty and the Internal Revenue Code, the Internal Revenue Code takes precedence. a. True b. False 43. The Standard Federal Tax Reporter is published by Research Institute of America. a. True b. False 44. The annual gift tax exclusion in 2024 is $16,000. a. True Powered by Cognero

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Chapter 01: Understanding and Working with the Federal Tax Law b. False 45. Internal Revenue Code Section 318, which deals with the definition of related parties with respect to stock redemptions, includes brothers and sisters in the related-party definition. a. True b. False 46. Complete avoidance of a capital gain tax occurs when the owner of appreciated property transfers it by death. a. True b. False 47. The taxation part of the CPA exam (REG) includes both multiple choice questions and task-based simulations. a. True b. False Multiple Choice 48. Which provision could best be justified as a means of controlling the economy? a. Write-off of research and development expenditures. b. The § 179 immediate expensing of depreciable capital expenditures. c. Amortization of pollution control facilities. d. The rehabilitation tax credit. 49. Which provision could best be justified as encouraging small business? a. Ordinary loss allowed on § 1244 stock. b. Percentage depletion. c. Charitable contributions deduction. d. Interest deduction on home mortgage. 50. Which provision is not justified by social considerations? a. Refundable earned income credit. b. Adoption tax credit. c. Like-kind exchange treatment. d. Disallowance of illegal kickbacks. 51. Which state is not a community property state? a. Arizona. b. Texas. c. New Mexico. d. Virginia. 52. Douglas and Sue, related parties, are landlord and tenant as to certain business property. If the IRS questions the amount of rent Sue is paying to Douglas, this is an illustration of the: a. Arm’s length concept. b. Continuity of interest concept. Powered by Cognero

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Chapter 01: Understanding and Working with the Federal Tax Law c. Tax benefit rule. d. Substance over form concept. 53. Federal tax legislation generally originates in what committee? a. House Budget Committee. b. Senate Finance Committee. c. House Ways and Means Committee. d. House Taxation Committee. 54. Regulations are first published in: a. Federal Register. b. Cumulative Bulletin. c. Internal Revenue Bulletin. d. I.R.S. Digest. 55. Which citation is considered to be a statutory (legislative) citation? a. Ltr. Rul. 199952058. b. Ann. 94-5, 1994-2 I.R.B. 39. c. Reg. § 1.1014-1(c)(1). d. § 351. 56. A Technical Advice Memorandum is issued by: a. Treasury Department. b. National Office of the IRS. c. Office of Chief Council. d. Area Director. 57. Revenue Procedures are published in the: a. Congressional Record. b. Federal Revenue Bulletin. c. Internal Revenue Bulletin. d. I.R.S. Digest. 58. Determine the incorrect citation: a. TAM 20002704. b. George W. Guill, 112 T.C.__, No. 22 (1999). c. John H. Wong, T.C. Summary Opinion 2009-152. d. Rev. Rul. 98-32, 1998-25 I.R.B. 4. 59. Regarding Technical Advice Memoranda, which statement is incorrect? a. Issued by the National Office of IRS. b. Most often deal with a completed transaction. c. May be cited and used as precedent. d. Issued with multi-digit file numbers. Powered by Cognero

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Chapter 01: Understanding and Working with the Federal Tax Law 60. Which of the following sources has the highest tax authority? a. Treasury Regulation. b. Revenue Procedure. c. Internal Revenue Code. d. Temporary Regulation. 61. Which of the following is an administrative source of tax law? a. Rev. Rul. 2010-19. b. Joint Conference Committee Report. c. Section 12(a) of the Internal Revenue Code. d. All of these. 62. A decision in which of the following courts carries the lowest tax authority? a. U.S. Court of Appeals for the Federal Circuit. b. U.S. Court of Appeals for the Second Circuit. c. U.S. District Court. d. U.S. Supreme Court. 63. In Forty-Four Cigar Co., 2 B.T.A. 1156, the 1156 stands for: a. The volume number. b. The year of the decision. c. The paragraph number. d. The page number. 64. Which statement is not true about this citation: Bonkowski v. Comm., 29 TCM 1645 (1970), aff’d 458 F.2d 709 (CA-7, 1972), cert. den.? a. The Supreme Court decided not to agree or disagree with the Seventh Court of Appeals. b. The Seventh Court of Appeals disagreed with the Tax Court. c. The Tax Court decision starts on page 1645. d. The Seventh Court of Appeals decision appears in Vol. 458. 65. Which of these notations would appear after a U.S. Tax Court citation if the IRS disagrees with the decision? a. Rev’d 935 F.2d 203 (1991). b. Nonacq. 1979-1 C.B. 1. c. Cert. den. 361 U.S. 875 (1959). d. Acq. 1990-1 C.B. 2. 66. Which of the following refers to a trial court rather than an appellate court decision? a. Forgeus v. Comm., 6 B.T.A. 291 (1927). b. Farris v. Comm., 222 F.2d 320 (CA-10, 1955). c. Danville Plywood Corp., 899 F.2d 3 (Fed Cir. 1990). d. Boehm v. Comm., 326 U.S. 287 (1945). 67. Which citation refers to a Third Circuit Court of Appeals decision? Powered by Cognero

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Chapter 01: Understanding and Working with the Federal Tax Law a. 40 T.C. 1018. b. 2 TCM 205 (1951). c. 354 F.Supp. 1003 (D. Ct. Ga, 1972). d. 914 F.2d 396 (CA-3, 1990). 68. Which state is located in the jurisdiction of the Fifth Circuit Court of Appeals? a. Louisiana. b. California. c. New York. d. South Carolina. 69. Interpret the following citation: 64-1 USTC 9618, aff’d in 344 F. 2d 966. a. A U.S. Tax Court Small Cases Division decision that was affirmed on appeal. b. A U.S. Tax Court decision that was affirmed on appeal. c. A U.S. District Court decision that was affirmed on appeal. d. A U.S. Court of Appeals decision that was affirmed on appeal. 70. Which citation refers to a Second Circuit Court of Appeals decision? a. 40 T.C. 1018. b. 159 F. 2d 848 (CA-2, 1947). c. 354 F. Supp. 1003 (D. Ct. Ga, 1972). d. 914 F. 2d 396 (CA-3, 1990). 71. Which citation refers to a U.S. Court of Federal Claims decision? a. Apollo Computer, Inc. v. U.S., 95-1 USTC ¶ 50,015 (Fed. Cl., 1994). b. Westreco, Inc., T.C. Memo. 1992-561 (1992). c. Bausch & Lomb, Inc. v. Comm., 933 F. 2d 1084 (CA-2, 1991). d. Portland Manufacturing Co. v. Comm., 35 AFTR 2d 1439 (CA-9, 1975). 72. If these citations appeared after a trial court decision, which one means that the decision was viewed favorably? a. Aff’d 633 F. 2d 512 (CA-7, 1980). b. Rem’d 399 F. 2d 800 (CA-5, 1968). c. Rev’d 914 F. 2d 396 (CA-3, 1990). d. Rev’d 935 F. 2d 203 (CA-5, 1991). 73. Which trial court normally has 16 judges? a. U.S. Tax Court. b. U.S. Court of Federal Claims. c. U.S. Supreme Court. d. U.S. Court of Appeals. 74. Which trial court’s jurisdiction depends on the geographical location of the taxpayer? a. U.S. Tax Court. b. U.S. District Court. Powered by Cognero

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Chapter 01: Understanding and Working with the Federal Tax Law c. U.S. Court of Federal Claims. d. Small Cases Division of the Tax Court. 75. Which trial court decision is generally less authoritative? a. U.S. District Court. b. U.S. Tax Court. c. U.S. Court of Federal Claims. d. Small Cases Division of the Tax Court. 76. A Memorandum decision of the U.S. Tax Court could be cited as: a. T.C. Memo. 1990-650. b. 68-1 USTC 9200. c. 37 AFTR 2d 456. d. All of these. 77. Which court decision is generally more authoritative? a. A U.S. Tax Court decision. b. A U.S. Court of Federal Claims decision. c. A U.S. District Court decision. d. A U.S. Court of Appeals decision. 78. Which of the following statements about an acquiescence is correct? a. An acquiescence is issued in the Federal Register. b. Acquiescences are published only for certain regular decisions of the U.S. Tax Court. c. An acquiescence is published in the Internal Revenue Bulletin. d. The IRS does not issue acquiescences to adverse decisions that are not appealed. 79. Which is a primary source of tax law? a. J.W. Yarbo v. Comm., 737 F. 2d 479 (CA-5, 1984). b. Article by a Federal judge in Harvard Law Review. c. IRS Determination letter. d. IRS Letter ruling. 80. A landlord leases property upon which the tenant makes improvements. The improvements are significant and are not made in lieu of rent. At the end of the lease, the value of the improvements is not income to the landlord. This rule is an example of: a. The wherewithal to pay concept. b. The tax benefit rule. c. The arm’s length concept. d. A clear reflection of income result. 81. The Internal Revenue Code was codified for the first time in what year? a. 1913. b. 1923. Powered by Cognero

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Chapter 01: Understanding and Working with the Federal Tax Law c. 1939. d. 1954. 82. What statement is not true with respect to Temporary Regulations? a. They may not be cited as precedent. b. They are issued with Proposed Regulations. c. They automatically expire within three years after the date of issuance. d. They can be found in the Federal Register. 83. What administrative release deals with a proposed transaction rather than a completed transaction? a. Letter Ruling. b. Technical Advice Memorandum. c. Determination Letter. d. Field Service Advice. 84. If a taxpayer decides not to pay a tax deficiency, they must go to which court? a. Appropriate U.S. Circuit Court of Appeals. b. U.S. District Court. c. U.S. Tax Court. d. U.S. Court of Federal Claims. 85. Both economic and social considerations can be used to justify: a. Various tax credits, deductions, and exclusions that are designed to encourage taxpayers to obtain additional education. b. Disallowance of any deduction for expenditures deemed to be contrary to public policy (e.g., fines, penalties, illegal kickbacks, bribes to government officials). c. Favorable tax treatment for accident and health plans provided for employees and financed by employers. d. Allowing a deduction for state and local income taxes paid. 86. Social considerations can be used to justify: a. Allowing a federal income tax deduction for state and local sales tax. b. Allowing excess capital losses to be carried over to other years. c. Allowing accelerated amortization for the cost of installing pollution control facilities. d. Allowance of a credit for child care expenses. 87. Allowing a net operating loss (NOL) carryforward can be justified: a. As mitigating the effect of the annual accounting period concept. b. By economic considerations. c. As promoting administrative feasibility. d. Based on the wherewithal to pay concept. 88. Which, if any, of the following provisions of the tax law cannot be justified as promoting administrative feasibility (simplifying the task of the IRS)? a. Penalties are imposed for failure to file a return or pay a tax on time. b. Prepaid income is taxed in the year received, not in the year earned. Powered by Cognero

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Chapter 01: Understanding and Working with the Federal Tax Law c. Annual adjustments for indexation increase the amount of the standard deduction allowed. d. A deduction is allowed for charitable contributions. Essay 89. What impact has the community property system had on our Federal tax laws? 90. How does a treaty with a foreign country impact a section in the Internal Revenue Code? 91. Explain the Golsen doctrine. 92. What is the value of Actions on Decisions to a tax researcher? 93. What value is a tax citator to a tax researcher?

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Chapter 01: Understanding and Working with the Federal Tax Law Answer Key 1. True 2. False 3. False 4. True 5. True 6. False 7. False 8. True 9. True 10. True 11. True 12. False 13. False 14. True 15. False 16. False 17. False 18. False 19. False 20. False 21. True 22. True 23. False 24. False 25. True Powered by Cognero

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Chapter 01: Understanding and Working with the Federal Tax Law 26. True 27. False 28. True 29. True 30. False 31. True 32. False 33. False 34. True 35. False 36. True 37. True 38. False 39. True 40. True 41. False 42. False 43. False 44. False 45. False 46. True 47. True 48. b 49. a 50. c Powered by Cognero

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Chapter 01: Understanding and Working with the Federal Tax Law 51. d 52. a 53. c 54. a 55. d 56. b 57. c 58. a 59. c 60. c 61. a 62. c 63. d 64. b 65. b 66. a 67. d 68. a 69. c 70. b 71. a 72. a 73. b 74. b 75. d 76. a Powered by Cognero

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Chapter 01: Understanding and Working with the Federal Tax Law 77. d 78. c 79. a 80. a 81. c 82. a 83. a 84. c 85. a 86. d 87. a 88. d 89. The position of the residents of community property states was so advantageous that many common law states actually adopted community property systems. The political pressure placed on Congress to correct the disparity in tax treatment was considerable. To a large extent, this correction was accomplished in the Revenue Act of 1948, which extended many of the community property tax advantages to residents of common law jurisdictions. Thus, common law states avoided the trauma of discarding their time-honored legal system familiar to everyone. The impact of community property law on the Federal estate and gift taxes is further explored in Chapters 18 and 19. 90. The United States enters into tax treaties (sometimes called tax conventions) with foreign countries to render mutual assistance in tax enforcement and to avoid double taxation. Neither a tax law nor a tax treaty takes precedence. When there is a conflict, the most recently enacted item will take precedence. 91. Because the Tax Court is a national court, it decides cases from all parts of the country. For many years, the Tax Court followed a policy of deciding cases based on what it thought the result should be, even though its decision might be appealed to a U.S. Circuit Court of Appeals that had previously decided a similar case differently. A number of years ago, this policy was changed in the Golsen decision. After that change, the Tax Court will decide a case as it feels the law should be applied only if the Circuit Court of Appeals of the appropriate jurisdiction has not yet passed on the issue or has previously decided a similar case in accord with the Tax Court’s decision. If the Circuit Court of Appeals of the appropriate jurisdiction has previously held otherwise, the Tax Court will conform under the Golsen rule even though it disagrees with the holding. 92. Actions on Decisions tell a taxpayer the IRS’s reaction to certain court decisions. The IRS follows a practice of either acquiescing (agreeing) or nonacquiescing (not agreeing) with court decisions where guidance may be helpful. This practice does not mean that a particular decision has no value if the IRS has nonacquiesced in the result. It does, however, indicate that the IRS will continue to litigate the issue involved. 93. The use of manual citators or a computer citator search is invaluable to tax research. A citator provides the history of a Powered by Cognero

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Chapter 01: Understanding and Working with the Federal Tax Law case including the authority relied on (e.g., other judicial decisions) in reaching the result. Reviewing the references listed in the citator discloses whether the decision was appealed and, if so, with what result (e.g., affirmed, reversed, and remanded). It also reveals other cases with the same or similar issues and how they were decided. Thus, a citator reflects on the validity of a case and may lead to other relevant judicial material.

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Chapter 02: The Deduction for Qualified Business Income for Noncorporate Taxpayes True / False 1. Tomas owns a sole proprietorship, and Lucy is the sole shareholder of a C corporation. In the current year, both businesses make a net profit of $60,000. Neither business distributes any funds to the owners in the year. For the current year, Tomas must report $60,000 of income on his individual tax return, but Lucy is not required to report any income from the corporation on her individual tax return. a. True b. False 2. Carol and Candace are equal partners in Peach Partnership. In the current year, Peach had a net profit of $75,000 ($250,000 gross income – $175,000 operating expenses) and distributed $25,000 to each partner. Peach must pay tax on $75,000 of income. a. True b. False 3. Rajib is the sole shareholder of Cardinal Corporation, a calendar year S corporation. In the current year, Cardinal generated a net profit of $350,000 ($520,000 gross income – $170,000 operating expenses) and distributed $80,000 to Rajib. Rajib must report the Cardinal Corporation profit of $350,000 on his Federal income tax return. a. True b. False 4. Donald owns a 45% interest in a partnership that earned $130,000 in the current year. He also owns 45% of the stock in a C corporation that earned $130,000 during the year. Donald received $20,000 in distributions from each of the two entities during the year. With respect to this information, Donald must report $78,500 of income on his individual income tax return for the year. a. True b. False 5. Quail Corporation is a C corporation that generates net income of $125,000 during the current year. If Quail paid dividends of $25,000 to its shareholders, the corporation must pay tax on $100,000 of net income. Shareholders must report the $25,000 of dividends as income. a. True b. False 6. Eagle Company, a partnership, had a short-term capital loss of $10,000 during the current year. Aaron, who owns 25% of Eagle, will report $2,500 of Eagle’s short-term capital loss on his individual tax return. a. True b. False 7. Matt, the sole shareholder of Pastel Corporation (a C corporation), has the corporation pay him a salary of $600,000 in the current year. The Tax Court has held that $200,000 represents unreasonable compensation. Matt must report a salary of $400,000 and a dividend of $200,000 on his individual tax return. a. True b. False 8. Double taxation of corporate income results because dividend distributions are included in a shareholder’s gross income and are not deductible by the corporation. Powered by Cognero

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Chapter 02: The Deduction for Qualified Business Income for Noncorporate Taxpayes a. True b. False 9. Jake, the sole shareholder of Peach Corporation (a C corporation) has the corporation pay him $100,000. For income tax purposes, Jake would prefer to have the payment treated as a dividend instead of salary. a. True b. False 10. Thrush Corporation files its Form 1120, which reports taxable income of $200,000 in the current year. The corporation’s tax is $42,000. a. True b. False 11. The corporate marginal income tax rate is lower than the top individual tax rate. a. True b. False 12. Under the Check-the-box Regulations, a two-owner LLC that fails to elect to be to treated as a corporation will be taxed as a sole proprietorship. a. True b. False 13. Employment taxes apply to all entity forms of operating a business. As a result, employment taxes are a neutral factor in selecting the most tax-effective form of operating a business. a. True b. False 14. A C corporation with taxable income of $100,000 in the current year will have a tax liability of $22,250. a. True b. False 15. Katherine, the sole shareholder of Penguin Corporation, has the corporation pay her a salary of $300,000 in the current year. The Tax Court has held that $90,000 represents unreasonable compensation. Katherine has avoided double taxation only to the extent of $210,000 (the portion of the salary that is considered reasonable compensation). a. True b. False 16. One of the purposes of the qualified business income deduction is to reduce the taxes on businesses that are operating in noncorporate business forms (e.g., sole proprietors, partnerships, and S corporations). a. True b. False 17. Instead of providing the qualified business income deduction to owners of noncorporate businesses, Congress could have applied a special tax rate to the business income to achieve a similar result. a. True b. False Powered by Cognero

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Chapter 02: The Deduction for Qualified Business Income for Noncorporate Taxpayes 18. A qualified trade or business includes any trade or business including providing services as an employee. a. True b. False 19. Unless Congress makes a change, the QBI deduction will expire after 2025. a. True b. False 20. The QBI deduction percentage matches the 21% tax rate applicable to C corporations. a. True b. False 21. Code § 199A permits an individual to deduct 25% of the qualified business income generated through a sole proprietorship, a partnership, or an S corporation. a. True b. False 22. There are three limitations on the qualified business income deduction: an overall limitation (based on modified taxable income), another that applies to high-income taxpayers, and a third that applies to certain types of service businesses. a. True b. False 23. The QBI deduction will reduce both the income tax and self-employment taxes owed by a self-employed individual. a. True b. False 24. Qualified business income (QBI) is defined as the ordinary income less ordinary deductions that a taxpayer

earns from a qualified trade or business (e.g., from a sole proprietorship, S corporation, or partnership) conducted in the United States by the taxpayer. a. True b. False 25. Jane is a self-employed attorney and single. Her annual net earnings from her law practice always exceed $275,000. Jane also has a business selling stained glass windows that she makes. Her earnings from this business are usually about $35,000 per year. Jane claims the standard deduction. Because Jane’s 2024 taxable income exceeds the $241,950 threshold, she may not claim a QBI deduction for either business. a. True b. False 26. Qualified business income includes the reasonable compensation paid to the taxpayer by a qualified trade or business and guaranteed payments made to a partner for services rendered. a. True b. False 27. Ginger is a self-employed driver finding rides via a few different platform companies such as Lyft. In 2024, she is single and claims the $14,600 standard deduction. For 2024, her income from driving is $67,000 and she has no other Powered by Cognero

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Chapter 02: The Deduction for Qualified Business Income for Noncorporate Taxpayes income. Ginger’s QBI deduction for 2024 is $13,400 ($67,000 x 20%). a. True b. False 28. A partnership will need to report wages paid to its employees as a separate line item on Schedule K-1 to help partners calculate their QBI deduction. a. True b. False 29. Qualified property is used to determine one of the limitations to the qualified business income (QBI)

deduction. Specifically, 2.5% of the unadjusted basis (immediately after acquisition) of qualified property is added to 50% of W-2 wages to determine this limitation. a. True b. False 30. Once a taxpayer reaches certain taxable income thresholds, § 199A limits the qualified business income (QBI) deduction. These thresholds are indexed for inflation every year. a. True b. False 31. For purposes of the qualified business income (QBI) deduction, qualified business income does not include

certain types of investment income [e.g., capital gains or capital losses, dividends, and interest income (unless properly allocable to a trade or business, such as lending)]. a. True b. False 32. Carla is a self-employed online retailer and single. She has no employees. Her annual taxable income is usually around $200,000. Carla could increase her QBI deduction if she incorporated her business, made an S election, and paid herself wages. a. True b. False Multiple Choice 33. Luis is the sole shareholder of a regular C corporation, and Eduardo owns a proprietorship. In the current year, both businesses make a profit of $80,000, and each owner withdraws $50,000 from his business. With respect to this information, which of the following statements is incorrect? a. Eduardo must report $80,000 of income on his return. b. Luis must report $80,000 of income on his return. c. Eduardo’s proprietorship is not required to pay its own income tax, separate from Eduardo, on its $80,000 of income. d. Luis’s corporation must pay income tax on $80,000. 34. Which of the following statements is incorrect about LLCs and the Check-the-box Regulations? a. If an LLC with more than one owner does not make an election, the entity is taxed as a corporation. b. An entity with more than one owner and formed as a corporation cannot elect to be taxed as a partnership. Powered by Cognero

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Chapter 02: The Deduction for Qualified Business Income for Noncorporate Taxpayes c. If an LLC with one owner does not make an election, the entity is taxed as a sole proprietorship. d. An LLC with one owner can elect to be taxed as a corporation. 35. An individual in a specified service business, such as accounting, with taxable income over the threshold amounts ($241,950 for single or head-of-household taxpayers, or $483,900 if married filing jointly in 2024), will not lose the QBI deduction on such income if: a. Taxable income exceeds the thresholds due to income of a spouse. b. Taxable income did not exceed the thresholds in the prior three years. c. Taxable income exceeds the thresholds because of net capital gain income. d. None of these. 36. In 2024, Sam and Betty, each single, both generate sole proprietor income of $250,000. Sam’s income is generated from a wholesale business while Betty’s is earned from her law practice. Neither has any employees or qualified assets. Both claim the standard deduction and have other income equal to the standard deduction amount. a. Both Sam and Betty will have a QBI deduction of $50,000. b. Sam can obtain a QBI deduction, but Betty cannot because of the taxable income level and law practice is a specified service business. c. Neither Sam nor Betty will be allowed a QBI deduction due to their taxable income levels. d. None of these. 37. In 2024, Layla has $200,000 of QBI from her neighborhood clothing store (a sole proprietorship). Her proprietorship paid $30,000 in W-2 wages and has $20,000 of qualified property. Layla’s spouse earned $51,500 of wages as an employee, and the couple earned $20,000 of interest income during the year. They will be filing jointly and take the standard deduction of $29,200. What is their QBI deduction for 2024? a. $-0-. b. $40,000. c. $48,460. d. $54,000. 38. Jenna owns and manages her single-member LLC, which provides a wide variety of financial services to her clients. She is married and will file a joint tax return with her spouse, Paul. In 2024, her LLC reports $300,000 of net income, W2 wages of $120,000, and assets with an unadjusted basis of $75,000. Their taxable income before the QBI deduction is $285,000 (this is also their modified taxable income). What is their QBI deduction for 2024? a. $0. b. $57,000. c. $60,000. d. $70,000. 39. Ellie (a single taxpayer) is the owner of ABC, LLC. In 2024, the LLC (a sole proprietorship) reports QBI of $900,000 and is not a specified services business. ABC paid total W-2 wages of $300,000, and the total unadjusted basis of property held by ABC is $30,000. Ellie’s taxable income before the QBI deduction is $740,000 (this is also her modified taxable income). What is Ellie’s QBI deduction for 2024? a. $75,750. b. $148,000. c. $150,000. d. $180,000. Powered by Cognero

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Chapter 02: The Deduction for Qualified Business Income for Noncorporate Taxpayes 40. Danielle is a partner in and sales manager for DG Partners, a domestic business that is not a specified service

trade or business. During the tax year, she receives guaranteed payments of $250,000 from DG Partners for her services to the partnership as its sales manager. In addition, her distributive share of DG Partners’ ordinary income (its only item of income or loss) was $175,000. What is Danielle’s qualified business income? a. $-0-. b. $175,000. c. $250,000. d. $425,000. 41. Aaron is the sole shareholder and CEO of ABC, Inc., an S corporation that is a qualified trade or business.

During the current year, ABC has net income of $325,000 after deducting Aaron’s $100,000 salary. In addition to his compensation, ABC pays Aaron dividends of $250,000. What is Aaron’s qualified business income? a. $-0-. b. $100,000. c. $250,000. d. $325,000. 42. Alicia is the sole shareholder and CEO of ABC, Inc., an S corporation that is a qualified trade or business.

During the current year, ABC has net income of $325,000 after deducting Alicia’s $100,000 salary. In addition to her compensation, ABC pays Alicia dividends of $250,000. After reviewing comparable companies, you determine that reasonable compensation for someone with her experience and responsibilities is $200,000. What is Alicia’s qualified business income? a. $-0-. b. $200,000. c. $225,000. d. $325,000. 43. Taylor, a single taxpayer, has taxable income before the QBI deduction of $221,950 in 2024. Taylor, a CPA,

operates an accounting practice as a single-member LLC (which he reports as a sole proprietorship). During 2024, his proprietorship reports net income of $150,000, W-2 wages of $125,000, and $10,000 of qualified property. What is Taylor’s qualified business income deduction? a. $-0-. b. $12,000. c. $30,000. d. $31,500. 44. Jason and Paula are married. They file a joint return for 2024 on which they report taxable income before the

QBI deduction of $200,000. Jason operates a sole proprietorship, and Paula is a partner in the PQRS Partnership. Both are a qualified trade or business and neither is a specified services business. Jason’s sole proprietorship reports $150,000 of net income, W-2 wages of $45,000, and has qualified property of $50,000. Paula’s partnership reports a loss for the year, and her allocable share of the loss is $40,000. The partnership reports no W-2 wages and Paula’s share of the partnership’s qualified property is $20,000. What is their qualified business income deduction for the year? a. $-0-. Powered by Cognero

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Chapter 02: The Deduction for Qualified Business Income for Noncorporate Taxpayes b. $11,750. c. $22,000. d. $30,000. e. None of these. 45. Tanuja Singh is a CPA and operates her own accounting firm (Singh CPA, LLC). As a single-member LLC, she reports her accounting firm operations as a sole proprietor. In 2024, Tanuja has QBI from her accounting

firm of $540,000, reports W-2 wages of $156,000, and the unadjusted basis of property used in the LLC is $425,000. Tanuja is married and will file a joint tax return with her spouse. Their taxable income before the QBI deduction is $520,000, and their modified taxable income is $448,000. What is Tanuja’s QBI deduction for 2024? a. $-0-. b. $49,625. c. $78,000. d. $89,600. 46. Which of the following types of income are included in qualified business income (QBI)? a. Income generated from a qualified trade or business. b. Guaranteed payments made in compensation for services performed by a partner to a partnership. c. Wages paid to an employee. d. Income earned from foreign business operations. 47. What happens to the § 199A deduction if a qualified trade or business generates a loss? a. If the net amount of income, gain, deduction, and loss is less than zero, the net amount of the

deduction can be carried back to a previous year or the taxpayer can elect to carry it forward. b. If the net amount of income, gain, deduction, and loss is less than zero, the net amount of the deduction is lost and is not available to carryforward or carryback. c. If the net amount of income, gain, deduction, and loss is less than zero, the net amount is treated as a loss in the succeeding year. d. None of these. 48. Where is the § 199A deduction taken on Form 1040? a. It is a deduction from AGI, much like the standard deduction or itemized deductions, and is the last

deduction taken in determining taxable income. b. It is a business deduction and is taken on Schedule C (Form 1040). c. It is a deduction that reduces self-employment income and is taken on Schedule SE (Form 1040). d. It is an itemized deduction taken on Schedule A (Form 1040). 49. Which of the following is considered qualified property in the calculation of the deduction for qualified

business income (§ 199A)? a. All business property (both tangible and intangible). b. Tangible business property subject to depreciation. c. Tangible property placed in service during the year, but not used in the production of qualified Powered by Cognero

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Chapter 02: The Deduction for Qualified Business Income for Noncorporate Taxpayes business income. d. Fully depreciated tangible business property. 50. In 2024, Kendra has taxable income before the QBI deduction of $274,000. Kendra is single and has income

from her law firm (a sole proprietorship operating as an LLC) of $200,000. Her law firm paid wages of $82,000 and has qualified property of $20,000. What is Kendra’s QBI deduction? a. $0. b. $40,000. c. $41,000. d. $54,800. Multiple Response 51. Which of the following taxpayers is eligible for a qualified business income deduction regarding the activity noted? (circle all that apply) a. Tom’s Burger Place, a sole proprietorship. b. A driver for Uber or Lyft. c. An employee working for Apple, Inc. d. A partner of a Big 4 firm. 52. Which of the following taxpayers is potentially eligible for a qualified business income deduction based on the noted activity? (circle all that apply) a. A shareholder of General Electric. b. A sole proprietor operating a restaurant. c. A self-employed doctor. d. Jennifer, owner of a winery operated as an S corporation. 53. Which of the following self-employed individuals are in a specified service trade or business? (circle all that apply) a. Dentist. b. Consultant. c. Architect. d. CPA. Subjective Short Answer 54. Rebecca and Elizabeth are married and will file jointly in 2024. Rebecca earns $300,000 from her single-member LLC (a law firm). She reports her business as a sole proprietorship. Wages paid by the law firm amount to $40,000; the law firm has no significant property. Elizabeth is employed as a tax manager by a local CPA firm. Their modified taxable income is $443,900 (this is also their taxable income before the deduction for qualified business income). Determine their QBI deduction for 2024. 55. Ashley (a single taxpayer) is the owner of ABC, LLC. In 2024, the LLC (a sole proprietorship) reports QBI

of $900,000 and is not a specified services business. ABC paid total W-2 wages of $300,000, and the total unadjusted basis of property held by ABC is $30,000. Ashley’s taxable income before the QBI deduction is $740,000 (this is also her modified taxable income). What is Ashley’s QBI deduction for 2024? Powered by Cognero

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Chapter 02: The Deduction for Qualified Business Income for Noncorporate Taxpayes 56. Susan, a single taxpayer, owns and operates a bakery (as a sole proprietorship). The business is not a

specified services business. In 2024, the business pays $60,000 in W-2 wages, has $150,000 of qualified property, and $200,000 in net income (all of which is qualified business income). Susan also has a part-time job earning wages of $15,200, receives $4,000 of interest income, and will take the standard deduction. What is Susan’s qualified business income deduction? 57. Ben owns and operates a machine repair shop as a sole proprietorship. It generates a profit of about

$180,000 annually. The business pays wages of about $50,000 annually. The building and most of the equipment are leased so there is no qualified property. Ben files as single and claims the standard deduction. He has a large unrealized gain in bitcoin that he acquired in 2019 and is wondering when he should sell it and whether he should sell it all in one year or over a few years. Advise Ben as to how the sale of the bitcoin and its resulting capital gain can affect his QBI deduction in 2024. 58. Sergio owns and manages his single-member LLC which provides a wide variety of accounting services to

his clients. He is married and will file a joint tax return with his spouse, Goretty. His LLC reports $250,000 of net income, W-2 wages of $120,000, and assets with an unadjusted basis of $75,000. Their taxable income before the QBI deduction is $215,000 (this is also their modified taxable income). Determine their QBI deduction for 2024. 59. Taylor owns a wide variety of commercial rental properties held in a single-member LLC. Her LLC reports

rental income of $750,000. The LLC pays no W-2 wages; rather, it pays a management fee to an S corporation that Taylor controls. The management company pays W-2 wages, but reports no income (or loss). Taylor’s total unadjusted basis of the commercial rental property is $5,000,000 and her taxable income before the QBI deduction (and her modified taxable income) is $1,000,000. What is Taylor’s QBI deduction for 2024? 60. Jansen, a single taxpayer, owns and operates a restaurant (as a sole proprietorship). The business is not a

specified services business. In 2024, the business pays $125,000 in W-2 wages, has $187,500 of qualified property, and $440,000 in net income (all of which is qualified business income). Jansen has no other items of income or loss and will take the standard deduction. What is Jansen’s qualified business income deduction? 61. Felicia, who is single, operates three sole proprietorships that generate the following information in 2024

(none are “specified services” businesses): Business A B C

QBI $240,000 $(108,000) $120,000

W-2 Wages $72,000 $48,000 $-0-

Capital Investment $ -0$ -0$ -0-

Felcia chooses not to aggregate the businesses. She also earns $150,000 of wages from an unrelated business and her modified taxable income (before any QBI deduction) is $304,000. a. b.

What is Felicia’s QBI deduction? Assume that Felicia can aggregate these businesses. Determine her QBI deduction if she decides to aggregate the businesses.

Essay Powered by Cognero

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Chapter 02: The Deduction for Qualified Business Income for Noncorporate Taxpayes 62. Compare the basic tax and nontax factors of doing business as a partnership, an S corporation, and a C

corporation. Circle the correct answers. Tax Questions

Column A Partnership

Column B S Corporation

Who pays tax on the entity’s income?

Partners Partnership

Shareholders S corporation

Column C C Corporation Shareholders C Corporation

Are operating losses passed through to owners?

Yes No

Are distributions of profits taxable to owners?

Yes No

Nontax Factors

Partnership

S Corporation

C Corporation

Is the liability of owners limited?

Yes No

Is there free transferability of ownership interests?

Yes No

Are capital gains (losses) reported on owners’ tax returns as such?

63. Sofía is the sole shareholder of Thrush Corporation, a C corporation. In the current year, Thrush earned $350,000 and distributed $75,000 to Sofía. Kirk is the sole shareholder of Swallow Corporation, an S corporation. In the current year, Swallow earned $350,000 and distributed $75,000 to Kirk. Contrast the tax treatment of Thrush Corporation and Sofía with the tax treatment of Swallow Corporation and Kirk. 64. What is a limited liability company? What favorable nontax and tax attributes does the LLC entity form offer taxpayers? 65. The qualified business income deduction is severely limited for specified services businesses. What is a specified services trade or business? 66. Describe the limitations on the qualified business income deduction that apply to high income taxpayers. 67. How does property used in a qualified trade or business factor into the QBI deduction calculation? What

types of property are considered for the QBI deduction? Powered by Cognero

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Chapter 02: The Deduction for Qualified Business Income for Noncorporate Taxpayes Answer Key 1. True 2. False 3. True 4. True 5. False 6. True 7. True 8. True 9. True 10. True 11. True 12. False 13. False 14. False 15. True 16. True 17. True 18. False 19. True 20. False 21. False 22. True 23. False 24. True 25. False Powered by Cognero

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Chapter 02: The Deduction for Qualified Business Income for Noncorporate Taxpayes 26. False 27. False 28. True 29. False 30. True 31. True 32. True 33. b 34. a 35. d 36. c 37. b 38. b 39. b 40. b 41. d 42. c 43. b 44. c 45. a 46. a 47. c 48. a 49. b 50. a Powered by Cognero

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Chapter 02: The Deduction for Qualified Business Income for Noncorporate Taxpayes 51. a, b, d 52. b, c, d 53. a, b, d 54. Normally, Rebecca and Elizabeth would be entitled to a QBI deduction of $60,000 ($300,000 x 20%). But

since their taxable income exceeds the threshold for married taxpayers ($383,900), and Rebecca’s QBI is from a specified services business (a law firm), their QBI deduction is limited to $14,400, computed as follows: (1)

Determine Applicable Percentage:

Applicable % = 100%–$60,000 ($443,900 – $383,900) $100,000 (2) Determine QBI deduction: 1. 20% of QBI ($300,000 x 20%)

= 40%

$60,000

x Applicable percentage

x 40% $24,000

But no more than the greater of: •

50% of W-2 wages ($40,000 x 50% x 40%), or

•

25% of W-2 wages ($40,000 x 25% x 40%) plus

$ 8,000

$4,000 •

2.5% of the unadjusted basis of qualified property 2.5% x 40%)

($-0- x

-0- $ 4,000

Because Rebecca and Elizabeth’s modified taxable income exceeds $383,900, but is less than $483,900 and the W-2 Wages/Capital portion of the computation is the limiting factor, the general 20% QBI amount is used, but reduced as follows:

(1)

Determine difference between the general 20% QBI deduction amount and the W-2 Wages/Capital amount.

General 20% QBI deduction amount Less: The W-2 Wages/Capital Investment limit Excess

$ 24,000

( 8,000) $16,000

(2) Determine the Reduction Ratio: Reduction Ratio = $60,000 ($443,900 – $383,900) = 60% Powered by Cognero

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Chapter 02: The Deduction for Qualified Business Income for Noncorporate Taxpayes $100,000

(3)

Determine the reduction in the W-2 Wages/Capital Investment limit: Excess ($16,000) x Reduction Ratio (60%) = $9,600

(4) Determine final QBI amount:

General 20% QBI deduction amount Less: Reduction in the W-2 Wages/Capital limit Final QBI amount

$24,000 ( 9,600) $14,400

55. As Ashley’s taxable income before the QBI deduction exceeds the $241,950 threshold, the W-2

Wages/Capital Investment Limit must be considered. Ashley’s QBI deduction is $148,000, computed as follows: 1.

20% of QBI ($900,000 x 20%)

But no more than the greater of: •

50% of W-2 wages ($300,000 x 50%), or

•

25% of W-2 wages ($300,000 x 25%) plus

•

2.5% of the unadjusted basis of qualified property ($30,000 x 2.5%)

$180,000

$150,000 $ 75,000 750 $ 75,750

And, no more than: 3.

20% of modified taxable income ($740,000 x 20%)

$148,000

56. Susan’s taxable income before the QBI deduction is $204,600 (her proprietorship net income of

$200,000 plus her wages of $15,200 and her $4,000 of interest income less her $14,600 standard deduction). Because Susan’s taxable income before the QBI deduction exceeds $191,950, the W-2 Powered by Cognero

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Chapter 02: The Deduction for Qualified Business Income for Noncorporate Taxpayes Wages/Capital Investment limit must be considered: $ 40,000

1. 20% of QBI ($200,000 x 20%) 2.

But no more than the greater of: •

50% of W-2 wages ($60,000 x 50%), or

•

25% of W-2 wages ($60,000 x 25%) plus

• •

2.5% of the unadjusted basis of qualified property ($150,000 x 2.5%)

$ 30,000 $ 15,000

3,750

$ 18,750

And, no more than:

$ 40,920

3. 20% of modified taxable income ($204,600 x 20%)

So, initially, Susan’s QBI deduction is limited to $30,000. However, as Susan’s taxable income before the QBI deduction exceeds $191,950, but is less than $241,950 and the W-2 Wages/Capital Investment portion of the computation is the limiting factor, the general 20% QBI amount is used, but reduced as follows: (1)

Determine difference between the general 20% QBI deduction amount and the W-2 Wages/Capital amount.

General 20% QBI deduction amount Less: The W-2 Wages/Capital limit Excess

$40,000 (30,000) $10,000

(2) Determine the Reduction Ratio: Reduction Ratio = $12,650 ($204,600 – $191,950) = 25.3% $50,000

(3)

Determine the reduction in the W-2 Wages/Capital Limit: excess ($10,000) x Reduction Ratio (25.3%) = $2,530

(4) Determine Final QBI Amount:

General 20% QBI deduction amount Less: Reduction in the W-2 Wages/Capital limit Powered by Cognero

$40,000 ( 2,530) Page 15

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Chapter 02: The Deduction for Qualified Business Income for Noncorporate Taxpayes Final QBI Amount

$37,470

57. The capital gain might increase Ben’s taxable income to the point that it could exceed $191,950. At that

point, his QBI deduction will be limited to 50% of the W-2 wages paid ($25,000). If taxable income remains at $191,950 or less, his QBI deduction will be 20% of his income from the repair business ($36,000; $180,000 x 20%). Ben might want to sell all of the bitcoin in one year rather than over several years if doing so prevents his taxable income from exceeding $191,950 and thereby imposing a limit on his QBI deduction. 58. Even though this is a “specified services” business, Sergio and Goretty’s taxable income before the QBI

deduction is below the $383,900 threshold in 2024. As a result, their QBI deduction is $43,000, computed as follows: 1.

20% of qualified business income ($250,000 x 20%), or $50,000

20% of modified taxable income ($215,000 x 20%)

$43,000

59. Because Taylor’s modified taxable income exceeds the $483,900 threshold in 2024, the W-2 Wages/Capital

Investment Limit comes into play. Taylor’s QBI deduction is $125,000, computed as follows:

1. 20% of qualified business income ($750,000 x 20%)

$150,000

2. But no more than the greater of: $

-50% of W-2 wages ($-0- x 50%), or -25% of W-2 wages ($-0- x 25%) plus 0-2.5% of the unadjusted basis of qualified property ($5,000,000 x 2.5%)

-0-

125,000 $ 125,000

And, no more than: 20% of modified taxable income ($1,000,000 x 3. 20%)

$ 200,000

60. Jansen’s taxable income before the QBI deduction is $425,400 (his proprietorship net income of Powered by Cognero

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Chapter 02: The Deduction for Qualified Business Income for Noncorporate Taxpayes $440,000 less the $14,600 single standard deduction); this is also his modified taxable income. Because Jansen’s taxable income before the QBI deduction exceeds the $241,950 threshold, the W-2 Wages/Capital Investment

limit must be considered. Jansen’s QBI deduction is $62,500, computed as follows: 1. 20% of qualified business income ($440,000 x 20%) $ 88,000 2. But no more than the greater of: 50% of W-2 wages ($125,000 x 50%), or 25% of W-2 wages ($125,000 x 25%) plus 2.5% of the unadjusted basis of qualified property ($187,500 x 2.5%)

$ 62,500 $31,250 4,688

$ 35,938

And, no more than:

3. 20% of modified taxable income ($425,400 x 20%)

$ 85,080

61. a. Under Reg. § 1.199A-1(d), Felicia must allocate Business B’s negative QBI

to Business A and Business C in proportion to their positive QBI amounts ($240,000 for Business A; $120,000 for Business C). As a result, the negative QBI from Business B is apportioned 66.66% to Business A and 33.33% to Business C. So $(72,000) is apportioned to Business A and $(36,000) to Business C. Business A

Adjusted QBI $168,000 ($240,000 – $72,000) $-0- [$(108,000) + $108,000] $84,000 ($120,000 $36,000)

B C

W-2 Wages $72,000

Capital Investment $ -0-

$48,000

$ -0-

$-0-

$ -0-

Felicia now applies the “W-2 Wages” limitation by determining the lesser of 20% of QBI and 50% of W-2 wages for each business.

Business

QBI x 20%

A B C

$33,600 ($168,000 x 20%) $ -0$16,800 ($84,000 x 20%)

W-2 Wages x 50% $36,000 $24,000 $ -0-

Lesser $33,600 $ -0$ -0-

Felicia’s “combined qualified business income amount” is $33,600 ($33,600 + $-0- + $-0-). Because this amount is less than 20% of Felicia’s modified taxable income ($60,800; $304,000 x 20%), Powered by Cognero

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Chapter 02: The Deduction for Qualified Business Income for Noncorporate Taxpayes Felicia’s QBI deduction is $33,600 and her taxable income is $270,400. There is no carryover of any loss into the following taxable year for purposes of § 199A (the Business B negative QBI was completely used).

b. Because Felicia’s taxable income is above the threshold amount, her QBI deduction is subject to the W-2 wages and capital investment limitations. Because the businesses are aggregated, these limitations are applied on an aggregated basis. Business A B C Total

QBI $240,000 $(108,000) $120,000 $252,000

W-2 Wages $72,000 $48,000 $-0$120,000

Capital Investment $ -0$ -0$ -0$ -0-

None of the businesses own “qualified property.” As a result, only the “W-2 Wages” limitation applies. Felicia’s “combined qualified income amount” is $50,400, the lesser of 20% of the QBI from the aggregated businesses ($50,400; $252,000 x 20%), or 50% of W-2 wages from the aggregated businesses ($60,000; $120,000 x 50%). Felicia’s QBI deduction is equal to the lesser of $50,400 or 20% of her modified taxable income ($60,800; $304,000 x 20%). As a result, Felicia’s QBI deduction is $50,400, and her taxable income is $253,600. By aggregating her businesses, Felicia has increased the size of her QBI deduction.

62. The correct answers are shaded. Tax Questions

Column A Partnership

Column B S Corporation

Column C C Corporation

Who pays tax on the entity’s income?

Partners Partnership

Shareholders S corporation

Shareholders C Corporation

Are operating losses passed through to owners?

Yes No

Are capital gains (losses) reported on owners’ tax returns as such?

Yes No

Are distributions of profits taxable to owners?

Yes No

Nontax Factors

Partnership

S Corporation

C Corporation

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Chapter 02: The Deduction for Qualified Business Income for Noncorporate Taxpayes Is the liability of owners limited?

Yes No

Is there free transferability of ownership interests?

Yes No

63. A C corporation is a separate taxable entity; thus, Thrush Corporation is taxed on the $350,000 of earnings. Income of a C corporation has no effect on the shareholders until such time a dividend is paid. When dividends are paid, shareholders must report dividend income on their tax returns. Thus, Sofía is taxed on $75,000 of dividends, and the 0%/15%/20% preferential tax rate applies with respect to the dividends. Generally, an S corporation is not subject to an entity-level Federal income tax. Instead, the corporation’s income, gains, deductions, and losses are passed through to and reported by the shareholders on their tax returns. Thus, Swallow reports the $350,000 of earnings on its tax return (Form 1120S) but pays no income tax. Kirk is taxed on the $350,000 of earnings from Swallow on his individual income tax return (Form 1040). Distributions from S corporations are not taxable to the shareholder (to the extent of stock basis). Thus, Kirk is not taxed on the $75,000 distribution from Swallow. 64. Similar to the corporate entity form, a limited liability company is an entity created under the laws of a specific state (or the District of the Columbia) and, pursuant to such laws, an LLC has the corporate feature of limited liability. This is the primary nontax characteristic that makes LLC status attractive. Other nontax attributes that are available with the LLC entity form include centralized management, continuity of life, and free transferability of ownership interests. Which of these nontax attributes are allowed will be dependent on the laws of the state of LLC organization. The principal tax advantage of the LLC entity form is the ability to avoid double taxation of the entity’s profits. Most LLCs will be taxed as either partnerships (two or more owner LLCs) or sole proprietorships (one-owner LLCs), although the Check-the-box Regulations do provide the opportunity to have an LLC taxed as a corporation (including an S corporation). 65. A specified service trade or business includes those involving: The performance of services in certain fields, including health, law, accounting, actuarial science, performing arts, consulting, athletics, financial services, and brokerage services; Services consisting of investing and investment management, trading or dealing in securities, partnership interests, or commodities; and Any trade or business in which its principal asset is the reputation of one or more of its employees or owners. Architects and engineers are specifically excluded from this definition.

66. The basic application of § 199A becomes considerably more complex once a taxpayer reaches certain taxable income thresholds. These taxable income thresholds – determined without regard to the QBI deduction are $383,900 for married taxpayers filing jointly and $191,950 for single taxpayers in 2024. These amounts will be indexed for inflation annually. Powered by Cognero

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Chapter 02: The Deduction for Qualified Business Income for Noncorporate Taxpayes Once these thresholds are reached, § 199A imposes two independent limitations:

First, § 199A imposes a cap on the QBI deduction that is determined by reference to a percentage of the W-2 wages paid by the business (i.e., wages paid to its employees) or by references to a smaller percentage of W-2 wages paid and a percentage of the cost of its depreciable property used to produce QBI. Second, the QBI deduction generally is not available for income earned from certain specified service businesses.

67. Qualified property is used to determine one of the limitations to the QBI deduction. Specifically, 2.5 percent

of qualified property is added to 25 percent of W-2 wages to determine this limitation. Qualified property includes depreciable tangible property – real or personal – that is used by the QTB during the year and whose “depreciable period” has not ended before the end of the taxable year. As a result, land and intangible assets are not qualified property. Given the broad-based changes to MACRS – allowing taxpayers to expense (via § 179 and/or bonus depreciation) property other than real estate – the depreciable period for qualified property under § 199A is a minimum of 10 years.

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Chapter 03: Corporations Introduction and Operating Rules True / False 1. Thrush Corporation, a calendar year C corporation, files its current year Form 1120, which reports taxable income of $200,000 for the year. The corporation’s tax is $42,000. a. True b. False 2. For taxable years beginning in 2024, the corporate income tax is a flat 25%. a. True b. False 3. A personal service corporation must use a calendar year and is not permitted to use a fiscal year. a. True b. False 4. As a general rule, C corporations must use the accrual method of accounting. However, under several exceptions to this rule (e.g., average annual gross receipts of $30,000,000 or less for the most recent 3-year period), a C corporation can use the cash method. a. True b. False 5. On December 31, 2024, Lavender, Inc., (an accrual basis, calendar year C corporation), accrues a $50,000 bonus to Barry, its vice president and a 40% shareholder. Lavender pays the bonus to Barry, who is a cash basis taxpayer, on March 10, 2025. Lavender can deduct the bonus in 2025, the year in which it is included in Barry’s gross income. a. True b. False 6. Azure Corporation, a C corporation, had a long-term capital gain of $50,000 in the current year. The amount of tax applicable to the capital gain is $10,500 ($50,000 × 21%). a. True b. False 7. Albatross, a C corporation, had $140,000 net income from operations and a $25,000 short-term capital loss in the current year. Albatross Corporation’s taxable income is $140,000. a. True b. False 8. If a C corporation uses straight-line depreciation on real estate (§ 1250 property), no portion of a recognized gain on the sale of the property will be recaptured as ordinary income. a. True b. False 9. The passive activity loss rules apply to closely held C corporations and to personal service corporations but not to S corporations. a. True b. False Powered by Cognero

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Chapter 03: Corporations Introduction and Operating Rules 10. Peach Corporation had $210,000 of net active income, $45,000 of portfolio income, and a $230,000 passive activity loss during the current year. If Peach is a closely held C corporation that is not a PSC, it can deduct $210,000 of the passive activity loss in the year. a. True b. False 11. On December 16, 2024, the directors of Quail Corporation (an accrual basis, calendar year C corporation) authorized a cash donation of $5,000 to the American Cancer Society, a qualified charity. The payment, which is made on April 6, 2025, may be claimed as a deduction for tax year 2024. a. True b. False 12. In the current year, Oriole Corporation donated a painting worth $30,000 to the Texas Art Museum, a qualified public charity. The museum included the painting in its permanent collection. Oriole Corporation purchased the painting five years ago for $10,000. Oriole’s charitable contribution deduction is $30,000 (ignoring the taxable income limitation). a. True b. False 13. In the current year, Crow Corporation, a C corporation, donated scientific property (basis of $30,000, fair market value of $50,000) to State University, a qualified charitable organization, to be used in research. Crow had held the property for four months as inventory. Crow Corporation may deduct $50,000 for the charitable contribution (ignoring the taxable income limitation). a. True b. False 14. The $1,000,000 limitation on the deduction of executive compensation currently applies to compensation paid to a publicly traded corporation's principal executive officer, principal financial officer, and board of directors. a. True b. False 15. Heron Corporation, a calendar year C corporation, had an excess charitable contribution for 2023 of $5,000. In 2024, Heron made a further charitable contribution of $20,000. Heron’s 2024 deduction is limited to $15,000 (10% of taxable income). The 2024 contribution must be applied first against the $15,000 limitation. a. True b. False 16. A corporate net operating loss arising in 2024 for a calendar year C corporation can be carried back 2 years and forward 20 years to offset taxable income for those years. a. True b. False 17. In the current year, Azul Corporation, a calendar year C corporation, received a dividend of $30,000 from Naranja Corporation. Azul owns 25% of the Naranja Corporation stock. Assuming it is not subject to the taxable income limitation, Azul’s dividends received deduction is $19,500. a. True b. False Powered by Cognero

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Chapter 03: Corporations Introduction and Operating Rules 18. Because of the taxable income limitation, no dividends received deduction is allowed if a corporation has an NOL for the current taxable year. a. True b. False 19. No dividends received deduction is allowed unless the corporation has held the stock for more than 90 days. a. True b. False 20. Hornbill Corporation, a cash basis and calendar year C corporation, was formed and began operations on May 1, 2024. Hornbill incurred the following expenses during its first year of operations (May 1 – December 31, 2024): temporary directors meeting expenses of $10,500, state of incorporation fee of $5,000, stock certificate printing expenses of $1,200, and legal fees for drafting corporate charter and bylaws of $7,500. Wanting to deduct as much as possible in the current year, Hornbill Corporation’s 2024 deduction for organizational expenditures is $5,800. a. True b. False 21. Lilac Corporation incurred $4,700 of legal and accounting fees associated with its incorporation. The $4,700 is deductible as startup expenditures on Lilac’s tax return for the year in which it begins business. a. True b. False 22. A calendar year personal service corporation with taxable income of $100,000 in the current year will have a tax liability of $21,000. a. True b. False 23. The accumulated earnings and personal holding company taxes both can be avoided by distributing sufficient dividends. a. True b. False 24. A calendar year C corporation can receive an automatic 9-month extension to file its corporate return (Form 1120) by timely filing a Form 7004 for the tax year. a. True b. False 25. A corporation must file a Federal income tax return even if it has no taxable income for the year. a. True b. False 26. For purposes of the estimated tax payment rules, a “large corporation” is defined as a corporation that had taxable income of $1,000,000 or more in any of the three preceding years. a. True b. False 27. Schedule M-1 is used to reconcile net income as computed for financial accounting purposes with taxable income Powered by Cognero

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Chapter 03: Corporations Introduction and Operating Rules reported on the corporation’s income tax return. a. True b. False 28. An expense that is deducted in computing net income per books but not deductible in computing taxable income is a subtraction item on Schedule M-1. a. True b. False 29. On December 31, 2024, Flamingo, Inc., a calendar year, accrual method C corporation, accrues a bonus of $50,000 to its president (a cash basis taxpayer) who owns 75% of the corporation’s outstanding stock. The $50,000 bonus is paid to the president on February 4, 2025. For Flamingo’s 2024 Form 1120, the $50,000 bonus will be a subtraction item on Schedule M-1. a. True b. False 30. Income that is included in net income per books but not included in taxable income is a subtraction item on Schedule M-1. a. True b. False 31. Schedule M-2 is used to reconcile unappropriated retained earnings at the beginning of the year with unappropriated retained earnings at the end of the year. a. True b. False 32. A corporation with $5,000,000 or more in assets must file Schedule M-3 (instead of Schedule M-1). a. True b. False 33. Schedule M-3 is similar to Schedule M-1 in that the form is designed to reconcile net income per books with taxable income. However, an objective of Schedule M-3 is more transparency between financial statements and tax returns than that provided by Schedule M-1. a. True b. False 34. Katherine, the sole shareholder of Penguin Corporation, has the corporation pay her a salary of $300,000 in the current year. The Tax Court has held that $90,000 represents unreasonable compensation. Katherine has avoided double taxation only to the extent of $210,000 (the portion of the salary that is considered reasonable compensation). a. True b. False 35. In general, all corporations that maintain inventory for sale to customers are required to use the accrual method of accounting for determining sales and cost of goods sold. a. True b. False Powered by Cognero

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Chapter 03: Corporations Introduction and Operating Rules 36. Canary Corporation, a calendar year C corporation, received an $80,000 dividend from Stork Corporation. Canary owns 18% of the Stork Corporation stock. Assuming it is not subject to the taxable income limitation, Canary’s dividends received deduction is $40,000. a. True b. False 37. The limitation on the deduction of business interest does not apply to noncorporate taxpayers. a. True b. False 38. The accumulated earnings and personal holding company taxes are designed to prevent the accumulation of earnings within a corporation. a. True b. False 39. Canary Corporation, which sustained a $5,000 net short-term capital loss during the year, will enter $5,000 as an addition on Schedule M-1 of Form 1120. a. True b. False 40. In tax planning for charitable contributions, a current-year’s contribution might have to be deferred to a later year in order to deduct a contribution carryover amount. a. True b. False 41. An alternative minimum tax applies to a 2024 calendar year C corporation with more than $1 billion average annual adjusted financial statement income for the 3-year period ending December 31, 2023. a. True b. False Multiple Choice 42. Elk, a C corporation, has $370,000 operating income and $290,000 operating expenses during the current year. In addition, Elk has a $10,000 long-term capital gain and a $17,000 short-term capital loss. Elk’s taxable income is: a. $63,000. b. $73,000. c. $80,000. d. $90,000. 43. Patrick, an attorney, is the sole shareholder of Gander Corporation, a C corporation. Gander is a personal service corporation with a fiscal year ending November 30 (pursuant to a § 444 election). The corporation paid Patrick a salary of $180,000 during its fiscal year ending November 30, 2024. How much salary must Gander pay Patrick during the period December 1 through December 31, 2024, to permit the corporation to continue to use its fiscal year without negative tax effects? a. $0 b. $15,000 c. $30,000 Powered by Cognero

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Chapter 03: Corporations Introduction and Operating Rules d. $180,000 44. Copper Corporation, a C corporation, had gross receipts of $30,000,000 in 2021, $31,000,000 in 2022, and $28,000,000 in 2023. Gold Corporation, a personal service corporation (PSC), had gross receipts of $28,000,000 in 2021, $31,000,000 in 2022, and $32,000,000 in 2023. Which of the corporations will be allowed to use the cash method of accounting in 2024? a. Copper Corporation only. b. Gold Corporation only. c. Both Copper Corporation and Gold Corporation. d. Neither Copper Corporation nor Gold Corporation. 45. Saleh, an accountant, is the sole shareholder of Turquoise Corporation, a C corporation. Turquoise is a personal service corporation with a fiscal year ending September 30 (pursuant to a § 444 election). The corporation paid Saleh a salary of $330,000 during its fiscal year ending September 30, 2024. How much salary must Turquoise pay Saleh during the period October 1 through December 31, 2024, if the corporation is to continue to use its fiscal year without negative tax effects? a. $0 b. $27,500 c. $82,500 d. $247,500 46. On December 31, 2024, Peregrine Corporation, an accrual method, calendar year taxpayer, accrued a performance bonus of $100,000 to Charles, a cash basis, calendar year taxpayer. Charles is president and sole shareholder of the corporation. When can Peregrine deduct the bonus? a. In 2024, if the bonus was authorized by the Board of Directors and payment was made on or before April 15, 2025. b. In 2025, if payment was made at any time during that year. c. In 2024, if payment was made on or before April 15, 2025. d. In 2025, but only if payment was made on or before April 15, 2025. 47. Ivory Corporation, a calendar year, accrual method C corporation, has two cash method, calendar year shareholders who are unrelated to each other. Craig owns 35% of the stock, and Oscar owns the remaining 65%. During 2024, Ivory paid a salary of $100,000 to each shareholder. On December 31, 2024, Ivory accrued a bonus of $25,000 to each shareholder. Assuming that the bonuses are paid to the shareholders on February 1, 2025, compute Ivory Corporation’s 2024 deduction for the above amounts. a. $250,000 b. $225,000 c. $200,000 d. $125,000 48. Carrot Corporation, a C corporation, has a net short-term capital gain of $65,000 and a net long-term capital loss of $250,000 during 2024. Carrot Corporation had taxable income from other sources of $720,000. Prior years’ transactions included the following: 2020 2021 Powered by Cognero

Net long-term capital gain Net short-term capital gain

$150,000 60,000 Page 6

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Chapter 03: Corporations Introduction and Operating Rules 2022 2023

Net short-term capital gain Net long-term capital gain

45,000 35,000

Compute the amount of Carrot’s capital loss carryover to 2025. a. $0 b. $32,000 c. $45,000 d. $185,000 49. In 2024, Bluebird Corporation had net income from operations of $100,000. Further, Bluebird recognized a long-term capital gain of $30,000 and a short-term capital loss of $45,000. Which of the following statements is correct? a. Bluebird Corporation will have taxable income in 2024 of $100,000 and will have a net capital loss of $15,000 that can be carried back 3 years and forward 5 years. b. Bluebird Corporation may use the capital loss to offset the capital gain and must carry the net capital loss of $15,000 forward five years as a short-term capital loss. c. Bluebird Corporation may deduct $33,000 of the capital loss in 2024 and may carry forward the remainder of the capital loss indefinitely to offset capital gains. d. Bluebird Corporation will have taxable income in 2024 of $85,000. 50. In the current year, Sunset Corporation (a C corporation) had operating income of $200,000 and operating expenses of $175,000. In addition, Sunset had a $30,000 long-term capital gain, a $52,000 short-term capital loss, and $5,000 taxexempt interest income. What is Sunset Corporation’s taxable income for the year? a. $0 b. $3,000 c. $22,000 d. $25,000 51. Beige Corporation, a C corporation, purchases a warehouse on August 1, 2008, for $1,000,000. Straight-line depreciation is taken in the amount of $411,750 before the property is sold on June 12, 2024, for $1,200,000. What is the amount and character of the gain recognized by Beige on the sale of the realty? a. Ordinary income of $0 and § 1231 gain of $611,750. b. Ordinary income of $411,750 and § 1231 gain of $200,000. c. Ordinary income of $82,350 and § 1231 gain of $529,400. d. Ordinary income of $117,650 and § 1231 gain of $494,100. 52. In the current year, Woodchuck, Inc., a closely held personal service corporation, has $115,000 of net active income, $40,000 of portfolio income, and $135,000 of passive activity loss. What is Woodchuck’s taxable income for the current year? a. $0 b. $20,000 c. $40,000 d. $155,000 53. Grackle Corporation, a personal service corporation, had $230,000 of net active income, $40,000 of portfolio income, and a $250,000 passive activity loss during the current year. How much is Grackle’s taxable income for the year? a. $20,000 Powered by Cognero

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Chapter 03: Corporations Introduction and Operating Rules b. $40,000 c. $270,000 d. $520,000 54. Grebe Corporation, a closely held corporation that is not a PSC, had $75,000 of net active income, $60,000 of portfolio income, and a $105,000 passive activity loss during the current year. How much of the passive activity loss can Grebe deduct in the current year? a. $0 b. $60,000 c. $75,000 d. $105,000 55. In the current year, Violet, Inc., a closely held corporation (not a PSC), has $55,000 of passive activity loss, $80,000 of net active income, and $20,000 of portfolio income. How much is Violet’s taxable income for the current year? a. $20,000 b. $45,000 c. $80,000 d. $100,000 56. Kingbird Corporation (a calendar year C corporation) reports the following income and expenses in the current year: Income from operations Expenses from operations Dividends received (15% ownership)

$200,000 140,000 15,000

On October 1, Kingbird Corporation made a contribution to a qualified charitable organization of $9,000 in cash (not included in any of the above items). Determine Kingbird’s charitable contribution deduction for the year. a. $9,000 b. $7,500 c. $6,750 d. $6,525 57. Owl Corporation (a C corporation), a retailer of children’s apparel, made the following donations to qualified charitable organizations in the current year. Adjusted Basis Fair Market Value Children’s clothing held as inventory, to Haven for Hope

$10,000

$15,000

Stock in Exxon Corporation acquired two years ago and held as an investment, to City University

5,000

3,000

Land acquired four years ago and held as an investment, to Humane Society

50,000

75,000

How much qualifies for the charitable contribution deduction (ignoring the taxable income limitation)? Powered by Cognero

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Chapter 03: Corporations Introduction and Operating Rules a. $63,000 b. $65,000 c. $90,500 d. $92,500 58. Plum Corporation (a C corporation and a computer manufacturer) donated 100 laptop computers to a local university (a qualified educational organization) in the current year. The computers were constructed by Plum earlier this year, and the university will use the computers for research and research training. Plum’s basis in the computers is $35,000, and their fair market value is $120,000. What is Plum’s deduction for the contribution of the computers (ignoring the taxable income limitation)? a. $35,000 b. $70,000 c. $77,500 d. $85,000 59. Wanda is the Chief Executive Officer of Pink corporation, a publicly traded, calendar year C corporation. For the current year, Wanda's compensation package consists of: Cash compensation Nontaxable fringe benefits Taxable fringe benefits Bonus tied to company performance

$ 2,500,000 250,000 150,000 2,000,000

How much of Wanda's compensation is deductible by Pink Corporation? a. $1,000,000. b. $1,250,000. c. $3,250,000. d. $4,900,000. 60. In the current year, Crimson, Inc., a calendar year C corporation, has income from operations of $180,000 and operating deductions of $225,000. Crimson also had $30,000 of dividends from a 15% stock ownership in a domestic corporation. Which of the following statements is correct with respect to Crimson for the current year? a. Crimson’s NOL is $15,000. b. A dividends received deduction is not allowed in computing Crimson’s NOL. c. The NOL is carried back 3 years and forward 10 years by Crimson. d. Crimson’s dividends received deduction is $15,000. 61. In the current year, Red Corporation (a calendar year C corporation), which owns stock in Blue Corporation, had net operating income of $200,000 for the year. Blue pays Red a dividend of $40,000. Red takes a dividends received deduction of $20,000. Which of the following statements is correct? a. Red owns 80% of Blue Corporation. b. Red owns 20% or more but less than 80% of Blue Corporation. c. Red owns 80% or more of Blue Corporation. d. Red owns less than 20% of Blue Corporation. Powered by Cognero

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Chapter 03: Corporations Introduction and Operating Rules 62. Which of the following statements is incorrect with respect to the treatment of a net operating loss arising in 2024? a. The deduction for any carryover year of the NOL is limited to 80% of taxable income (determined without regard to the NOL deduction). b. A corporation may claim a dividends received deduction in computing an NOL. c. An NOL is generally carried back 2 years and forward 20 years. d. Unlike individuals, corporations do not adjust their NOLs for net capital losses or nonbusiness deductions. 63. Eagle Corporation, a calendar year C corporation, owns stock in Hawk Corporation and has taxable income of $100,000 for the year before considering the dividends received deduction. In the current year, Hawk Corporation pays Eagle a dividend of $130,000, which was considered in calculating the $100,000. What amount of dividends received deduction may Eagle claim if it owns 15% of Hawk’s stock? a. $0 b. $50,000 c. $65,000 d. $84,500 64. Copper Corporation, a calendar year C corporation, owns stock in Bronze Corporation and has net operating income of $900,000 for the current year. Bronze Corporation pays Copper a dividend of $150,000. What amount of dividends received deduction may Copper claim if it owns 85% of Bronze stock (and the two corporations are members of the same affiliated group)? (Assume Copper’s dividends received deduction is not limited by its taxable income.) a. $75,000 b. $97,500 c. $120,000 d. $150,000 65. Orange Corporation, a calendar year C corporation, owns stock in White Corporation and has net operating income of $400,000 for the current year. White Corporation pays Orange a dividend of $60,000. What amount of dividends received deduction may Orange claim if it owns 45% of White stock (assuming Orange’s dividends received deduction is not limited by its taxable income)? a. $30,000 b. $39,000 c. $42,000 d. $60,000 66. Which of the following statements is incorrect regarding the dividends received deduction? a. A corporation must hold stock for more than 90 days in order to qualify for a deduction with respect to dividends on such stock. b. The taxable income limitation does not apply with respect to the 100% deduction available to members of an affiliated group. c. If a stock purchase is financed 75% by debt, the deduction for dividends on such stock is reduced by 75%. d. The taxable income limitation does not apply if the normal deduction (i.e., 50% or 65% of dividends) results in a net operating loss for the corporation. 67. Emerald Corporation, a calendar year C corporation, was formed and began operations on April 1, 2024. The following expenses were incurred during the first tax year (April 1 through December 31, 2024) of operations. Powered by Cognero

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Chapter 03: Corporations Introduction and Operating Rules Expenses of temporary directors and of organizational meetings Fee paid to the state of incorporation Accounting services incident to organization Legal services for drafting the corporate charter and bylaws Expenses incident to the printing and sale of stock certificates

$27,000 1,000 15,500 9,500 6,000

Assuming a § 248 election, what is Emerald’s deduction for organizational expenditures for 2024? a. $0 b. $4,550 c. $5,000 d. $7,400 68. During the current year, Sparrow Corporation, a calendar year C corporation, had operating income of $425,000, operating expenses of $280,000, a short-term capital loss of $10,000, and a long-term capital gain of $25,000. How much is Sparrow’s income tax liability for the year? a. $32,700 b. $33,600 c. $45,650 d. $62,400 69. Nancy Smith is the sole shareholder and employee of White Corporation, a calendar year C corporation that is engaged exclusively in accounting services. During the current year, White has operating income of $320,000 and operating expenses (excluding salary) of $150,000. Further, White Corporation pays Nancy a salary of $100,000. The salary is reasonable in amount and Nancy is in the 32% marginal tax bracket regardless of any income from White. Assuming that White Corporation distributes all after-tax income as dividends, how much total combined income tax do White and Nancy pay in the current year? (Ignore any employment tax considerations.) a. $40,295 b. $54,995 c. $63,325 d. $64,396 70. Which of the following statements is incorrect regarding the taxation of C corporations? a. NOLs may be carried forward indefinitely. b. A corporation with total assets of $1 million or more is required to file Schedule M–3. c. A tax return must be filed whether or not the corporation has taxable income. d. The alternative minimum tax does not apply to most corporations. 71. Which of the following statements is correct regarding the taxation of C corporations? a. Schedule M-1 is used to reconcile net income computed for financial accounting purposes with taxable income reported on the corporation’s tax return. b. The corporate tax return is filed on Form 1120S. c. Corporations can receive an automatic extension of nine months for filing the corporate return by filing Form 7004 by the due date for the return. d. A corporation with total assets of $7,500,000 or more is required to file Schedule M-3. Powered by Cognero

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Chapter 03: Corporations Introduction and Operating Rules 72. Robin Corporation, a calendar year C corporation, had taxable income of $700,000, $1,200,000, and $1,000,000 for 2022, 2023, and 2024, respectively. Robin has taxable income of $1,800,000 for 2025. The minimum 2025 estimated tax installment payments for Robin are: a. April 15, 2025, $52,500; June 17, 2025, $52,500; September 16, 2025, $52,500; December 16, 2025, $52,500. b. April 15, 2025, $52,500; June 17, 2025, $94,500; September 16, 2025, $94,500; December 16, 2025, $94,500. c. April 15, 2025, $94,500; June 17, 2025, $94,500; September 16, 2025, $94,500; December 16, 2025, $94,500. d. April 15, 2025, $52,500; June 17, 2025, $136,500; September 16, 2025, $94,500; December 16, 2025, $94,500. 73. Schedule M-1 of Form 1120 is used to reconcile financial net income with taxable income reported on the corporation’s income tax return as follows: net income per books + additions – subtractions = taxable income. Which of the following items is an addition on Schedule M-1? a. Tax depreciation in excess of book depreciation. b. Proceeds of life insurance paid on death of key employee. c. Excess of capital losses over capital gains. d. Tax-exempt interest. 74. Schedule M-1 of Form 1120 is used to reconcile financial net income with taxable income reported on the corporation’s income tax return as follows: net income per books + additions – subtractions = taxable income. Which of the following items is a subtraction on Schedule M-1? a. Book depreciation in excess of tax depreciation. b. Excess of capital losses over capital gains. c. Proceeds on key employee life insurance. d. Income subject to tax but not recorded on the books. 75. Luis is the sole shareholder of a regular C corporation, and Eduardo owns a proprietorship. In the current year, both businesses make a profit of $80,000, and each owner withdraws $50,000 from his business. With respect to this information, which of the following statements is incorrect? a. Eduardo must report $80,000 of income on his return. b. Luis must report $80,000 of income on his return. c. Eduardo’s proprietorship is not required to pay income tax on $80,000. d. Luis’s corporation must pay income tax on $80,000. 76. Rodney, the sole shareholder of Orange Corporation, an accrual method, calendar year corporation, loaned the corporation a substantial amount of money on January 1, 2024. Orange Corporation accrued $45,000 of interest expense on the loan on December 31, 2024. Orange pays the interest to Rodney, a cash basis taxpayer, on January 1, 2025. Based on these facts: a. Orange Corporation will be allowed to deduct the interest expense in 2024 and Rodney will be required to report the interest income in 2025. b. Orange Corporation will be allowed to deduct the interest expense in 2025 and Rodney will be required to report the interest income in 2024. c. Orange Corporation will be allowed to deduct the interest expense in 2024 and Rodney will be required to report the interest income in 2024. d. Orange Corporation will be allowed to deduct the interest expense in 2025 and Rodney will be required to report the interest income in 2025. 77. Opal Corporation, an accrual method, calendar year C corporation, was formed and began operations on July 1, 2024. Powered by Cognero

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Chapter 03: Corporations Introduction and Operating Rules The following expenses were incurred during the first tax year (July 1 through December 31, 2024) of operations. Expenses of temporary directors and of organizational meetings Fee paid to the state of incorporation Accounting services incident to organization Legal services for drafting the corporate charter and bylaws Expenses incident to the printing and sale of stock certificates

$8,000 2,000 3,500 4,300 6,000

Assuming a § 248 election, what is Opal’s deduction for organizational expenditures for 2024? a. $593. b. $460. c. $5,427. d. $5,627. 78. During the current year, Jay Corporation, a calendar year personal service C corporation, had operating income of $300,000, operating expenses of $200,000, a short-term capital gain of $5,000, and a long-term capital loss of $35,000. How much is Jay’s income tax liability for the year? a. $14,700. b. $21,000. c. $22,250. d. $35,000. 79. In working with Schedule M-2 (analysis of unappropriated retained earnings per books) of Form 1120, which of the following is an addition to beginning retained earnings? a. Cash dividends. b. Net loss per books. c. Property dividends. d. Net income per books. 80. In the current year, Tern, Inc., a calendar year C corporation, has $9,000,000 of adjusted taxable income, $300,000 of business interest income, zero floor plan financing interest, and $3,200,000 million of business interest expense. Tern has average gross receipts for the prior three-year period of $45,000,000. Which of the following statements is correct about the treatment of Tern's business interest expense? a. Current year deduction of $3,200,000. b. Current year deduction of $2,790,000, carryforward of $410,000. c. Current year deduction of $2,790,000, carryback of $410,000. d. Current year deduction of $3,000,000, carryforward of $200,000. 81. Plum Corporation, a calendar year C corporation, reports net income of $2.3 billion on its 2024 financial statements, including financial statement depreciation of $300 million. Also, for 2024, Plum reports taxable income of $1.1 billion, including tax depreciation of $500 million. Assume that Plum’s average annual AFSI for the 3-year period ending December 31, 2024, is in excess of $1 billion. Also assume that Plum has no AMT foreign tax credit for 2024. What is Plum 's 2024 corporate AMT? a. $0. b. $84 million. c. $114 million. Powered by Cognero

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Chapter 03: Corporations Introduction and Operating Rules d. $315 million. Subjective Short Answer 82. During the current year, Skylark Company (a calendar year entity) had operating income of $420,000 and operating expenses of $250,000. In addition, Skylark had a long-term capital loss of $20,000, and a charitable contribution of $5,000. How does Toby, the sole owner of Skylark Company, report this information on his individual income tax return under following assumptions? a.

Skylark is an LLC, and Toby does not withdraw any funds from the company during the year.

Skylark is an S corporation, and Toby does not withdraw any funds from the company during the year.

Skylark is a regular (C) corporation, and Toby does not withdraw any funds from the company during the year.

83. Canary Corporation, an accrual method C corporation, uses the calendar year for tax purposes. Leticia, a cash method taxpayer, is both a shareholder of Canary and the corporation’s CFO. On December 31, 2024, Canary has accrued a $75,000 bonus to Leticia. Describe the tax consequences of the bonus to Canary and to Leticia under the following independent situations. a.

Leticia owns 35% of Canary Corporation’s stock and the corporation pays the bonus to Leticia on February 4, 2025.

Leticia owns 75% of Canary Corporation’s stock and the corporation pays the bonus to Leticia on May 6, 2025.

Leticia owns 75% of Canary Corporation’s stock and the corporation pays the bonus to Leticia on April 7, 2025.

84. Ostrich, a C corporation, has a net short-term capital gain of $20,000 and a net long-term capital loss of $90,000 during 2024. Ostrich also has taxable income from other sources of $1,000,000. Prior years’ transactions included the following: 2020 net short-term capital gains 2021 net long-term capital gains 2022 net short-term capital gains 2023 net long-term capital gains a. b. c. d.

$20,000 15,000 25,000 5,000

How are the capital gains and losses treated on Ostrich’s 2024 tax return? Determine the amount of the 2024 net capital loss that is carried back to each of the previous years. Compute the amount of capital loss carryover, if any, and indicate the years to which the loss may be carried. If Ostrich were a proprietorship, how would Ellen, the owner, report these transactions on her 2024 tax return?

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Chapter 03: Corporations Introduction and Operating Rules

85. During the current year, Gray Corporation, a C corporation in the financial services business, made charitable contributions to qualified organizations as follows: ∙

Stock (basis of $20,000, fair market value of $45,000) in Drab Corporation, held for six months as an investment, to the Salvation Army. (Salvation Army plans on selling the stock.)

∙

Painting (basis of $90,000, fair market value of $250,000), held for four years as an investment, to the Museum of Fine Arts. (The Museum plans on including the painting in its collection.)

Gray Corporation’s taxable income (before any charitable contribution deduction) is $1,800,000. a.

What is the total amount of Gray’s charitable contributions for the year?

What is the amount of Gray’s charitable contribution deduction in the current year, and what happens to any excess charitable contribution, if any?

86. On December 28, 2024, the board of directors of Taupe Corporation, a calendar year, accrual method C corporation, authorized a contribution of land to a qualified charitable organization. The land (basis of $75,000, fair market value of $125,000) was acquired five years ago and held as an investment. For purposes of the taxable income limitation applicable to charitable deductions, Taupe has taxable income of $800,000 and $950,000 for 2024 and 2025, respectively. Describe the tax consequences to Taupe Corporation under the following independent situations. a.

The donation is made on February 15, 2025.

The donation is made on May 10, 2025.

87. During the current year, Quartz Corporation (a calendar year C corporation) has the following transactions: Income from operations Expenses from operations Dividends received from ABC Corporation

$350,000 370,000 50,000

Quartz owns 25% of ABC Corporation’s stock. How much is Quartz Corporation’s taxable income (loss) for the year? 88. Warbler Corporation, an accrual method regular corporation, was formed and began operations on March 1, 2024. The following expenses were incurred during its first year of operations (March 1 - December 31, 2024): Expenses of temporary directors and organizational meetings Incorporation fee paid to state Expenses incurred in printing and selling stock certificates Accounting services incident to organization

$25,000 2,000 10,000 12,000

Assuming a valid election under § 248 to amortize organizational expenditures, what is the amount of Warbler’s deduction for 2024?

Same as a., except that Warbler also incurred in 2024 legal fees of $15,000 for the drafting of the corporate charter and bylaws. What is the amount of

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Chapter 03: Corporations Introduction and Operating Rules Warbler’s 2024 deduction for organizational expenditures?

89. During the current year, Coyote Corporation (a calendar year C corporation) has the following transactions: Income from operations Expenses from operations Dividends received from Roadrunner Corporation

$260,000 305,000 115,000

Coyote owns 5% of Roadrunner Corporation’s stock. How much is Coyote Corporation’s taxable income (loss) for the year?

Would your answer change if Coyote owned 25% of Roadrunner Corporation’s stock?

90. In each of the following independent situations, determine the C corporation’s income tax liability. Assume that all corporations use a calendar year 2024.

Violet Corporation Indigo Corporation Orange Corporation Blue Corporation Green Corporation (personal service corporation)

Taxable Income $ 63,000 180,000 510,000 11,100,000 225,000

91. Tonya, an actuary, is the sole shareholder of Shrike Corporation, a professional C corporation. The corporation paid Tonya a salary of $360,000 during its fiscal year ending September 30, 2024. How much salary must Shrike Corporation pay Tonya during the period October 1 through December 31, 2024, to enable the corporation to continue to use its fiscal year without negative tax effects?

92. Almond Corporation, a calendar year C corporation, had taxable income of $900,000, $1,100,000 million, and $1,200,000 million for 2022, 2023, and 2024, respectively. Almond’s taxable income is $2,000,000 for 2025. Compute the minimum estimated tax payments for 2025 for Almond Corporation. 93. Heron Corporation, a calendar year, accrual basis taxpayer, provides the following information for the current year and asks you to prepare Schedule M-1. Net income per books (after-tax) Taxable income Federal income tax liability Interest income from tax-exempt bonds Interest paid on loan incurred to purchase tax-exempt bonds Life insurance proceeds received as a result of death of Heron’s president Powered by Cognero

$258,050 195,000 40,950 5,000 2,000 100,000 Page 16

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Chapter 03: Corporations Introduction and Operating Rules Premiums paid on policy on life of Heron’s president Excess of capital losses over capital gains Retained earnings at beginning of year Cash dividends paid Tax depreciation in excess of book depreciation

4,500 2,000 375,000 90,000 7,500

Essay 94. Adrian is the president and sole shareholder of Pigeon Corporation. He also lends money and rents a building to the corporation. Discuss how these business relationships between Adrian and Pigeon Corporation can help avoid double taxation. What limitations are there on the use of such relationships? 95. Nancy is a 40% shareholder and president of Robin Corporation, a calendar year C corporation. The board of directors of Robin has decided to pay Nancy a $75,000 bonus for the current year based on her outstanding performance. The directors want to pay the $75,000 as salary, but Nancy would prefer to have it paid as a dividend. If Nancy is in the 37% marginal tax bracket regardless of the treatment of the bonus, discuss which form of payment would be most beneficial for each party. (Ignore any employment tax considerations.) 96. Dawn is the sole shareholder of Thrush Corporation, a calendar year C corporation. In the current year, Thrush earned $350,000 and distributed $75,000 to Dawn. Kirk is the sole shareholder of Swallow Corporation, an S corporation. In the current year, Swallow earned $350,000 and distributed $75,000 to Kirk. Contrast the tax treatment of Thrush Corporation and Dawn with the tax treatment of Swallow Corporation and Kirk. 97. Explain the rules regarding the accounting periods available to corporate taxpayers. 98. Huan, a cash basis taxpayer, owns 70% of the stock of Black Corporation, a calendar year, accrual basis C corporation. On December 31, 2024, Black accrued a bonus of $80,000 to Huan, and paid the bonus to Huan on January 1, 2025. When does Huan report the bonus, and when does Black Corporation deduct the bonus? Would your answers change if Huan was a 40% shareholder of Black? 99. Briefly describe the accounting methods available for adoption by a C corporation. 100. Contrast the tax treatment of capital gains and losses of C corporations with that of individual taxpayers. 101. Briefly describe the charitable contribution deduction rules applicable to C corporations. 102. Briefly discuss the current-year requirements for the dividends received deduction. 103. In connection with the deduction for startup expenditures, comment on the following: a. b. c.

Qualifying expenditures. Election process. Amount of deduction.

104. What is the annual required estimated tax payment for a C corporation? What are the rules regarding payment of the estimated tax? 105. What is the purpose of Schedule M-3? Which corporations are required to file Schedule M-3? Powered by Cognero

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Chapter 03: Corporations Introduction and Operating Rules 106. For purposes of the accumulated earnings tax, earnings can be accumulated for reasonable needs of the business. List several examples of what is included and several examples of what is not included in the reasonable needs of the business. 107. In applying the $1,000,000 limit on deducting executive compensation, what corporations are subject to the deduction limit? What executives are covered? What compensation is included in the limit? 108. How is the limitation on the deduction of business interest computed? Does it apply to all taxpayers? What happens to any business interest deduction disallowed by the limitation?

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Chapter 03: Corporations Introduction and Operating Rules Answer Key 1. True 2. False 3. False 4. True 5. False 6. True 7. True 8. False 9. True 10. True 11. True 12. True 13. False 14. False 15. True 16. False 17. True 18. False 19. False 20. True 21. False 22. True 23. True 24. False 25. True Powered by Cognero

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Chapter 03: Corporations Introduction and Operating Rules 26. True 27. True 28. False 29. False 30. True 31. True 32. False 33. True 34. True 35. True 36. True 37. False 38. True 39. True 40. True 41. True 42. c 43. b 44. c 45. c 46. b 47. b 48. c 49. a 50. d Powered by Cognero

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Chapter 03: Corporations Introduction and Operating Rules 51. c 52. d 53. c 54. c 55. b 56. b 57. c 58. b 59. b 60. d 61. d 62. c 63. b 64. d 65. b 66. a 67. b 68. b 69. b 70. b 71. a 72. d 73. c 74. c 75. b 76. d Powered by Cognero

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Chapter 03: Corporations Introduction and Operating Rules 77. c 78. b 79. d 80. d 81. b 82. a.

A single-member LLC is taxed as a proprietorship. Consequently, Toby reports the $170,000 operating profit, $20,000 long-term capital loss, and $5,000 charitable contribution on his individual return (Form 1040). The LTCL will be subject to the capital loss limitations applicable to individual taxpayers. Toby would report any related deduction for qualified business income on his Form 1040. Income, deductions, gains, and losses of an S corporation flow through to the shareholders. Separately stated items (e.g., LTCL and charitable contribution) retain their character at the shareholder level. Consequently, Toby reports the $170,000 operating profit, $20,000 longterm capital loss, and $5,000 charitable contribution on his individual return (Form 1040). The LTCL will be subject to the capital loss limitations applicable to individual taxpayers. Toby would report any related deduction for qualified business income on his Form 1040. Shareholders of a regular (C) corporation report income from the corporation to the extent of dividends received. Therefore, Toby does not report any of Skylark’s operating profit, longterm capital loss, or charitable contribution on his individual return. [Skylark Company would report taxable income of $165,000 ($170,000 operating profit – $5,000 charitable contribution) on its corporate return (Form 1120). The net capital loss of $20,000 is not deductible in the current year; rather, the loss is carried back three years and forward five years (as STCL).]

83. Under § 267(a)(2), an accrual method taxpayer must defer a deduction for an expenditure attributable to a cash method related party until such time the related party reports the amount as income. For purposes of this limitation, a more-than50% shareholder of the corporation is a related party. a.

Leticia is not a related party for purposes of the § 267(a)(2) limitation; thus, Canary deducts the bonus, under the accrual method, in 2024. Since Leticia is on the cash method, she includes the bonus in her income in 2025.

Since Leticia, a cash method related party, does not include the bonus in her income until its receipt in 2025, Canary’s deduction for the bonus occurs in 2025.

Again, Leticia is a cash method related party who does not include the bonus in her income until its receipt in 2025; thus, Canary’s deduction for the bonus is deferred until 2025. The fact that the payment to Leticia occurs prior to the filing date for Canary’s 2024 tax return is of no consequence.

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