Taxes and Business Decisions Practice Test

Taxes and Business Decisions Practice Test

 

1. Which of the following is a key tax benefit of choosing a sole proprietorship over a corporation?
   A) The sole proprietor is subject to double taxation.
   B) The sole proprietor enjoys more flexibility in income distribution.
   C) The sole proprietor’s income is taxed at corporate rates.
   D) The sole proprietor can avoid self-employment taxes.

 

2. What is the primary tax advantage of a partnership compared to a sole proprietorship?
   A) Partnerships are subject to lower tax rates.
   B) Partnerships allow for more effective asset protection.
   C) Partnerships provide the ability to allocate income and losses among partners.
   D) Partnerships avoid paying self-employment taxes.

 

3. Which of the following is true about a corporation’s tax liability?
   A) Corporate income is taxed only once at the individual level.
   B) Corporations must file a partnership return.
   C) Corporations are subject to double taxation on income.
   D) Corporations are exempt from corporate income taxes.

 

4. A fiduciary tax return is filed for which of the following?
   A) Trusts and estates
   B) Sole proprietors
   C) Limited liability companies (LLCs)
   D) Individuals only

 

5. Which of the following is true regarding a C corporation’s tax rates?
   A) A C corporation’s profits are taxed at the individual tax rate.
   B) A C corporation can pass through its income to shareholders.
   C) A C corporation is taxed at the corporate tax rate.
   D) A C corporation does not pay taxes on its income.

 

6. Which tax form is generally used to report income and deductions for a sole proprietorship?
   A) Form 1065
   B) Form 1040, Schedule C
   C) Form 1120
   D) Form 1040, Schedule D

 

7. What is the tax consequence of a partnership distributing property to a partner?
   A) The partnership recognizes a gain or loss on the distribution.
   B) The partner recognizes a gain or loss only when the property is sold.
   C) The partnership does not recognize gain or loss on the distribution.
   D) The partner must pay capital gains tax immediately.

 

8. Which of the following is not a common tax deduction for a sole proprietor?
   A) Health insurance premiums
   B) Office supplies
   C) Depreciation of business assets
   D) Charitable donations to political campaigns

 

9. Which of the following would trigger the recognition of capital gains for an individual?
   A) Selling a personal residence at a profit
   B) Selling stocks in a tax-advantaged retirement account
   C) Receiving interest income from municipal bonds
   D) Receiving rental income from a commercial property

 

10. In a partnership, which of the following is typically not a deductible expense for the business?
    A) Employee wages
    B) Office rent
    C) Personal expenses of the partners
    D) Depreciation of business equipment

 

11. What is the tax treatment of dividends received by shareholders of an S corporation?
    A) They are subject to corporate income tax.
    B) They are taxed at the shareholder’s individual tax rate.
    C) They are not taxable if the S corporation has no retained earnings.
    D) They are tax-free.

 

12. When a partnership terminates, which of the following occurs?
    A) The partners must file a corporate tax return.
    B) The partnership must recognize a gain or loss on any distributions of property.
    C) The partnership’s income is not taxed until the business is liquidated.
    D) The partners are no longer liable for the partnership’s debts.

 

13. In which of the following scenarios is a corporation’s income subject to double taxation?
    A) When the corporation distributes income to its employees.
    B) When the corporation sells its assets and realizes a gain.
    C) When the corporation distributes dividends to its shareholders.
    D) When the corporation makes a charitable contribution.

 

14. Which of the following is a key difference between a C corporation and an S corporation?
    A) C corporations are taxed at the corporate level, whereas S corporations are pass-through entities.
    B) C corporations allow shareholders to deduct business expenses, while S corporations do not.
    C) S corporations pay self-employment taxes, while C corporations do not.
    D) C corporations can only have one shareholder, whereas S corporations can have multiple.

 

15. Which of the following taxes must be paid by a sole proprietor in addition to income taxes?
    A) Federal income tax
    B) Self-employment tax
    C) Corporate income tax
    D) Excise tax

 

16. What tax consequence occurs when a partner in a partnership sells their interest to another person?
    A) The partnership must recognize income from the sale.
    B) The partner must pay capital gains taxes on the sale.
    C) The transaction is not taxable until the partnership is dissolved.
    D) The partnership must pay taxes on the income earned by the selling partner.

 

17. Which of the following is the primary purpose of the IRS Form 1065?
    A) To report the income of an S corporation.
    B) To report the income of a partnership.
    C) To report the income of a sole proprietorship.
    D) To report the income of a corporation.

 

18. Which of the following is a characteristic of a tax-deferred investment?
    A) Taxes are paid when the investment is sold.
    B) Taxes are not owed until the investment generates income.
    C) Taxes are paid as the investment grows.
    D) Taxes are never owed on tax-deferred investments.

 

19. How does a C corporation account for charitable contributions for tax purposes?
    A) The corporation may deduct the contributions from its gross income, subject to limits.
    B) The contributions are not deductible for tax purposes.
    C) The corporation must pay taxes on the contributions.
    D) The contributions are deducted as an ordinary business expense.

 

20. Which of the following is generally true for a corporation that qualifies as a “small business corporation” under Subchapter S?
    A) It can deduct all employee benefits from its income.
    B) It is subject to corporate income tax on its earnings.
    C) Its income and losses pass through to its shareholders’ personal returns.
    D) It is prohibited from having more than 100 shareholders.

 

21. How are profits and losses distributed in a partnership?
    A) Based on the agreement between the partners.
    B) Equally among all partners, regardless of investment.
    C) Based on the size of the business.
    D) Based on the individual partner’s level of participation.

 

22. A business owner who chooses the LLC structure for their business can expect which of the following?
    A) Double taxation on corporate profits.
    B) Pass-through taxation of business income.
    C) The ability to deduct unlimited amounts of income.
    D) Protection from paying any self-employment taxes.

 

23. Which of the following tax-related decisions is most likely to have a significant impact on a business owner’s tax liability?
    A) Deciding whether to take a salary or dividends from a corporation.
    B) Selecting the business’s primary color scheme.
    C) Choosing between different office supply providers.
    D) Determining which state to incorporate the business in.

 

24. What tax form is used to report income from a trust or estate?
    A) Form 1040
    B) Form 1065
    C) Form 1041
    D) Form 1120

 

25. What is the tax consequence when an individual sells their rental property at a gain?
    A) The sale is completely tax-free.
    B) The gain is taxed as ordinary income.
    C) The gain is taxed as capital gains.
    D) The gain is deferred until the property is resold.

 

26. When a corporation issues stock to raise capital, what is the tax consequence for the shareholders?
    A) Shareholders immediately pay taxes on the stock issued.
    B) Shareholders pay taxes on any dividends received, not on the stock itself.
    C) Shareholders do not pay taxes until they sell their stock.
    D) Shareholders pay taxes on the issuance price of the stock.

 

27. What is the primary purpose of the IRS Form 1120?
    A) To report the income of an S corporation.
    B) To report the income of a partnership.
    C) To report the income of a corporation.
    D) To report the income of a sole proprietorship.

 

28. Which of the following is true for individual taxpayers who invest in tax-exempt bonds?
    A) They are exempt from both federal and state income taxes.
    B) They are subject to federal income tax but exempt from state taxes.
    C) They are exempt from federal income tax, but may be subject to state income tax.
    D) They are taxed on the income at the federal level but can deduct the taxes paid to the state.

 

29. A business owner that elects to operate as a pass-through entity (e.g., LLC or partnership) is taxed on which of the following?
    A) Business income at the corporate rate.
    B) Business income on their personal tax return.
    C) Business income and wages as separate entities.
    D) The entity’s dividends distributed to shareholders.

 

30. How is a partnership’s income generally taxed?
    A) At the partnership level, with profits taxed before distribution.
    B) Only when the partnership distributes profits to the partners.
    C) At the individual level, with profits passed through to partners.
    D) Partnership income is always taxed as corporate income.

 

 

31. Which of the following is a major tax advantage of an S corporation over a C corporation?
    A) The S corporation is exempt from income taxes.
    B) The S corporation avoids double taxation on earnings.
    C) The S corporation can issue multiple classes of stock.
    D) The S corporation has no filing requirements.

 

32. When a partnership dissolves, what tax consequence occurs for the partners?
    A) The partnership recognizes a gain or loss on the distribution of assets.
    B) The partners recognize a gain or loss based on their share of the partnership’s liabilities.
    C) The partners are taxed on the entire amount distributed.
    D) The partners are not required to file tax returns until the partnership is fully liquidated.

 

33. Which of the following must be included in gross income for tax purposes for a sole proprietor?
    A) Only revenue from sales of goods.
    B) Revenue from sales and services provided.
    C) Only revenue from services.
    D) Revenue after deducting business expenses.

 

34. Which of the following best describes the tax treatment of a business’s capital gains?
    A) Capital gains are always taxed as ordinary income.
    B) Capital gains are taxed at the capital gains tax rate, which may be lower than ordinary income tax rates.
    C) Capital gains are not taxed.
    D) Capital gains are taxed at the same rate as dividends.

 

35. What is the key difference between a limited liability company (LLC) and a corporation in terms of taxation?
    A) An LLC is taxed as a partnership, while a corporation is taxed as a separate entity.
    B) An LLC pays income taxes on behalf of its members.
    C) A corporation’s income is passed through to shareholders, while an LLC’s income is not.
    D) An LLC is exempt from taxation, while a corporation is not.

 

36. Which of the following is a primary advantage of forming a C corporation rather than a sole proprietorship?
    A) C corporations face lower tax rates than sole proprietorships.
    B) C corporations have the ability to raise capital by issuing stock.
    C) C corporations are not subject to self-employment taxes.
    D) C corporations avoid paying income taxes altogether.

 

37. A business owner who withdraws cash from the business for personal use in a sole proprietorship is treated as having: A) Received taxable income subject to self-employment taxes.
    B) Made a loan to the business.
    C) Taken a tax-free distribution.
    D) Been paid a salary.

 

38. How are S corporation shareholders taxed on their share of the company’s income?
    A) They are taxed at the corporate tax rate.
    B) They pay self-employment taxes on their share of income.
    C) They report the income on their personal income tax returns and pay taxes at their individual rates.
    D) They are not taxed until dividends are received.

 

39. When a partner in a partnership contributes property to the partnership, how is the contribution treated for tax purposes?
    A) The partner must pay tax on the property at the time of the contribution.
    B) The partnership must recognize a gain or loss on the contribution.
    C) The partner does not recognize any gain or loss on the contribution.
    D) The partner is taxed as though they sold the property at fair market value.

 

40. A corporation distributes a dividend to its shareholders. How is this dividend taxed?
    A) The corporation pays tax on the dividend before distribution, and the shareholders pay tax on the dividend.
    B) The shareholders pay tax on the dividend, but the corporation does not.
    C) The dividend is not taxed.
    D) The corporation does not pay taxes on dividends, but shareholders must pay taxes on the dividend.

 

41. What is the main advantage of a tax-deferred retirement plan like a 401(k)?
    A) Contributions are made after taxes, and distributions are tax-free.
    B) Contributions are tax-deductible, but distributions are taxed as income.
    C) Both contributions and distributions are tax-free.
    D) Contributions are taxed at a lower rate than ordinary income.

 

42. Which of the following is not deductible as a business expense for a sole proprietor?
    A) Office rent
    B) Wages paid to employees
    C) Personal clothing worn to work
    D) Advertising expenses

 

43. Which of the following statements about corporate tax rates is correct?
    A) Corporate income is taxed only at the individual shareholder level.
    B) Corporate income is taxed at a fixed tax rate regardless of profits.
    C) Corporate income is never taxed; only dividends are.
    D) Corporate tax rates vary depending on the amount of the company’s income.

 

44. What is the tax consequence of a partnership’s sale of an asset?
    A) The partnership recognizes a gain or loss, which flows through to the partners.
    B) The partnership does not recognize gain or loss; the partners are taxed individually.
    C) The partners recognize gain or loss, but the partnership is not taxed.
    D) The partnership pays capital gains tax on the asset sale.

 

45. What is a key tax feature of a Limited Liability Partnership (LLP)?
    A) LLPs are subject to double taxation.
    B) LLPs are taxed as partnerships, meaning income passes through to partners’ personal returns.
    C) LLPs do not have to file tax returns.
    D) LLPs are taxed like C corporations.

 

46. A corporation’s deductible business expenses include which of the following?
    A) Shareholder distributions
    B) Salaries and wages paid to employees
    C) Dividends paid to shareholders
    D) Capital gains on asset sales

 

47. Which of the following is true regarding self-employment tax for a sole proprietor?
    A) A sole proprietor is only subject to income tax, not self-employment tax.
    B) A sole proprietor must pay both the employer and employee portions of Social Security and Medicare taxes.
    C) A sole proprietor pays no self-employment tax on their business profits.
    D) A sole proprietor pays self-employment tax only on dividends.

 

48. Which of the following is true regarding the taxation of a trust?
    A) A trust’s income is always taxed at the individual beneficiary’s rate.
    B) A trust must file its own tax return, and its income is taxed at the trust’s rate.
    C) A trust is not taxed on its income.
    D) A trust is only taxed when it distributes income to beneficiaries.

 

49. What is the tax consequence of a partner receiving a distribution of cash from a partnership?
    A) The partner recognizes income equal to the amount of the distribution.
    B) The partnership must pay taxes on the distribution.
    C) The distribution is treated as a loan to the partner.
    D) The distribution is not taxed unless the partnership has no income.

 

50. How does a corporation handle losses for tax purposes?
    A) Losses can offset income, but only within the same tax year.
    B) Losses can offset corporate income, but not shareholder income.
    C) Losses are passed through to the shareholders.
    D) Losses are carried over to future years to offset taxable income.

 

51. A shareholder of an S corporation receives a salary. How is the salary taxed?
    A) The salary is taxed as ordinary income, subject to payroll taxes.
    B) The salary is taxed as capital gains.
    C) The salary is not taxed if it is reinvested into the company.
    D) The salary is taxed at a reduced rate.

 

52. What is the tax consequence of a corporation issuing stock in exchange for property?
    A) The corporation recognizes a gain or loss on the exchange.
    B) The corporation does not recognize any gain or loss on the transaction.
    C) The corporation’s shareholders are taxed on the exchange.
    D) The property owner is taxed on the exchange of property for stock.

 

53. What tax form does a fiduciary use to report the income of a trust or estate?
    A) Form 1065
    B) Form 1040
    C) Form 1041
    D) Form 1120

 

54. How are rental income and expenses typically reported for tax purposes?
    A) Rental income is exempt from income taxes, but expenses are deductible.
    B) Rental income is reported on Schedule E, and expenses are deducted from the income.
    C) Rental income is taxed as ordinary income, and expenses are not deductible.
    D) Rental income is reported as business income, and deductions are treated as operating expenses.

 

55. In a C corporation, how are retained earnings treated for tax purposes?
    A) Retained earnings are taxed at the corporate level but are not subject to shareholder taxation.
    B) Retained earnings are taxed when distributed as dividends.
    C) Retained earnings are taxed at the shareholder level only.
    D) Retained earnings are not taxable until the corporation is dissolved.

 

 

56. Which of the following is true about the tax treatment of a corporation’s charitable contributions?
    A) Charitable contributions are deductible at the individual shareholder level.
    B) Charitable contributions are not deductible for corporations.
    C) Charitable contributions are deductible at the corporate level, but limited to 10% of taxable income.
    D) Charitable contributions are subject to capital gains tax.

 

57. A corporation incurs a loss during the current year. Which of the following is true regarding the tax treatment of the loss?
    A) The corporation cannot carry forward or carry back the loss to offset income in other years.
    B) The corporation can carry the loss forward to offset future income.
    C) The loss can only be carried back to offset income in the prior year.
    D) The corporation must pay taxes on the loss regardless of future profits.

 

58. How is income from a self-employed individual’s consulting business typically reported for tax purposes?
    A) As salary on a Form W-2.
    B) As business income on Schedule C (Form 1040).
    C) As passive income on Schedule E (Form 1040).
    D) As dividends on Form 1099-DIV.

 

59. Which of the following best describes how passive income from rental property is taxed?
    A) Passive income is taxed as ordinary income.
    B) Passive income is not taxed, but expenses are deductible.
    C) Passive income is subject to self-employment tax.
    D) Passive income is taxed at a lower rate than ordinary income.

 

60. How are business expenses related to a home office treated for tax purposes for a sole proprietor?
    A) Home office expenses are not deductible.
    B) A portion of home expenses can be deducted based on the percentage of the home used for business.
    C) Home office expenses are fully deductible without limitation.
    D) Home office expenses are only deductible if the business is run from a separate building.

 

61. Which of the following is the primary reason why partnerships are considered “pass-through” entities for tax purposes?
    A) Partnerships are taxed separately from their owners.
    B) Partnership income is taxed at the individual owner level, not at the partnership level.
    C) Partnerships are not subject to income tax.
    D) Partners are required to pay taxes on income before it is distributed.

 

62. What is the primary tax benefit of forming a corporation?
    A) Corporations avoid paying taxes on income altogether.
    B) Corporations are eligible for a lower tax rate on their income compared to individuals.
    C) Shareholders are not taxed on corporate income.
    D) Corporations can raise capital by issuing stock.

 

63. What is the tax treatment of a distribution of property from a partnership?
    A) The partnership recognizes gain on the distribution, and the partner recognizes gain.
    B) The partner recognizes gain only if the distribution exceeds their basis in the partnership.
    C) The partnership does not recognize gain, and the partner is not taxed until the property is sold.
    D) Both the partnership and the partner recognize gain on the distribution.

 

64. How are dividends from a corporation typically taxed?
    A) As capital gains, regardless of the shareholder’s tax bracket.
    B) As ordinary income, subject to the individual’s tax rate.
    C) As tax-free income.
    D) As long-term capital gains.

 

65. What is the tax effect of a partner’s liability relief when the partnership assumes a partner’s debt?
    A) The partner is treated as receiving taxable income equal to the debt relief.
    B) The partner is not taxed on liability relief under any circumstances.
    C) The debt relief is treated as a capital gain.
    D) The partner is treated as making a capital contribution to the partnership.

 

66. What is the tax consequence when a corporation issues stock in exchange for services provided by an employee or independent contractor?
    A) The corporation recognizes no income, and the recipient is taxed on the fair market value of the stock received.
    B) The corporation must recognize income equal to the fair market value of the stock issued.
    C) The employee or contractor is not taxed unless the stock is sold.
    D) The transaction is treated as a loan, and neither party recognizes income.

 

67. Which of the following is true about the tax treatment of a fiduciary’s income?
    A) Fiduciaries must file a separate tax return and pay tax on any income earned by the trust or estate.
    B) Fiduciaries are taxed on income only when the estate or trust is fully distributed.
    C) Fiduciaries are taxed at the individual beneficiaries’ rates for any income passed to them.
    D) Fiduciaries do not need to file a tax return for the trust or estate income.

 

68. How does the IRS treat a sole proprietor’s business loss on a personal income tax return?
    A) The loss is not deductible.
    B) The loss offsets other income from the proprietor’s personal income.
    C) The loss must be carried forward to future tax years.
    D) The loss is only deductible if the business is sold.

 

69. A corporation’s deduction for business interest paid is limited to: A) 100% of the business interest paid.
    B) 30% of the corporation’s adjusted taxable income.
    C) 50% of the corporation’s total gross income.
    D) The total amount of business interest paid.

 

70. What is the tax treatment of an individual’s gain from the sale of business assets used in a sole proprietorship?
    A) The gain is subject to self-employment taxes.
    B) The gain is taxed as ordinary income.
    C) The gain is treated as capital gains and taxed at the capital gains rate.
    D) The gain is not taxable until the business is liquidated.

 

71. Which of the following best describes the tax treatment of a limited partnership’s income?
    A) The partnership itself is taxed on income, and partners are taxed on distributions.
    B) The partnership is not taxed, and income passes through to the partners who report it on their individual tax returns.
    C) Partners in a limited partnership are not taxed on income until the partnership dissolves.
    D) Limited partnerships are taxed at the corporate level.

 

72. Which of the following best describes the tax treatment of a corporation’s capital losses?
    A) Capital losses can offset ordinary income for tax purposes.
    B) Capital losses can offset capital gains, but not ordinary income.
    C) Capital losses are never deductible for tax purposes.
    D) Capital losses can offset the corporation’s other income.

 

73. How are deductions for business expenses generally handled in a partnership?
    A) Each partner is responsible for claiming business expenses on their personal tax return.
    B) The partnership claims all business expenses on its tax return, and partners receive deductions based on their share of income.
    C) Partners must pay taxes on their share of the expenses.
    D) Business expenses are deducted by the partners only when they withdraw funds from the partnership.

 

74. Which of the following is true about the tax treatment of a partnership’s guaranteed payments to partners?
    A) Guaranteed payments are deducted by the partnership and are taxable to the partners as ordinary income.
    B) Guaranteed payments are treated as dividends and not subject to self-employment tax.
    C) Guaranteed payments are not taxable to the partners until the partnership is dissolved.
    D) Guaranteed payments are treated as capital gains for the partner receiving them.

 

75. How is income from investments in stocks and bonds generally taxed?
    A) Income from stocks and bonds is always treated as capital gains.
    B) Interest income is taxed as ordinary income, while dividends are taxed at capital gains rates.
    C) Interest income and dividends are taxed at the same rate as long-term capital gains.
    D) Income from stocks and bonds is not taxed unless sold.

 

76. When a corporation redeems its own stock, the transaction is treated as: A) A dividend, subject to tax at the corporate level.
    B) A capital gain for the corporation.
    C) A redemption subject to tax on any gain or loss.
    D) An exempt transaction, not subject to tax.

 

77. How are S corporation shareholder distributions treated for tax purposes?
    A) Distributions are taxed as capital gains.
    B) Distributions are not taxed as long as they do not exceed the shareholder’s basis in the stock.
    C) Distributions are taxable as ordinary income.
    D) Distributions are always taxed, regardless of the shareholder’s basis.

 

78. A corporation that owns 80% or more of another corporation’s stock is considered: A) A subsidiary of the parent corporation.
    B) A member of an affiliated group for tax purposes.
    C) A parent corporation for tax purposes.
    D) A related party for tax purposes.

 

79. In the context of a partnership, what is “distributive share”?
    A) The portion of the partnership’s income, gain, loss, deductions, or credits allocated to each partner.
    B) The amount of income the partnership distributes to each partner.
    C) The total capital account balance of each partner in the partnership.
    D) The amount of guaranteed payments paid to the partner.

 

80. What tax form must a corporation file to report its income and deductions?
    A) Form 1120
    B) Form 1065
    C) Form 1040
    D) Form 1099-DIV

 

 

81. A partnership’s income is reported on: A) Form 1120
    B) Form 1065
    C) Form 1040
    D) Form 1099

 

82. Which of the following is true about the tax treatment of a partnership’s debt?
    A) Debt is considered taxable income when it is assumed by a partner.
    B) A partner is not required to report debt relief as income unless it exceeds their basis in the partnership.
    C) A partnership’s debt is taxed at the entity level, not at the partner level.
    D) Partners are not required to pay taxes on any debt associated with the partnership.

 

83. How are payments made by a corporation to its shareholders in the form of dividends typically taxed?
    A) Dividends are taxed as ordinary income.
    B) Dividends are taxed as capital gains.
    C) Dividends are not taxed unless the shareholder sells the shares.
    D) Dividends are exempt from taxation if paid from retained earnings.

 

84. How are gains from the sale of a partnership interest taxed?
    A) As ordinary income, subject to self-employment tax.
    B) As capital gains, regardless of the holding period.
    C) As a combination of capital gains and ordinary income, depending on the partnership’s assets.
    D) As interest income.

 

85. Which of the following is true about a sole proprietor’s tax treatment of business expenses?
    A) Business expenses are fully deductible from the proprietor’s personal income.
    B) Business expenses are deducted from the proprietor’s gross income, lowering the taxable amount.
    C) Business expenses can only be deducted after a business is sold.
    D) Business expenses are only deductible if the business generates a profit.

 

86. If a partnership makes a loss in a tax year, how is the loss passed through to its partners?
    A) The loss is absorbed by the partnership and does not affect the partners.
    B) Each partner receives a loss that can offset their other income.
    C) Partners are not permitted to use partnership losses to offset personal income.
    D) The loss is carried forward to future tax years to be deducted later.

 

87. Which of the following best describes the tax treatment of a corporation’s charitable contributions?
    A) Charitable contributions made by a corporation are fully deductible with no limits.
    B) Charitable contributions are deductible by a corporation, but limited to 10% of taxable income.
    C) Charitable contributions made by a corporation are not deductible.
    D) Charitable contributions are treated as dividends for tax purposes.

 

88. What is the tax treatment of income derived from a fiduciary’s estate or trust?
    A) The fiduciary is taxed on the income, and the beneficiaries are taxed on distributions.
    B) The fiduciary is taxed on the income, and the beneficiaries are not taxed until the estate is liquidated.
    C) The fiduciary does not pay taxes on the income, but beneficiaries must report the income.
    D) The fiduciary’s income is taxed at a lower rate than the beneficiaries.

 

89. Which of the following is correct regarding self-employment tax for a sole proprietor?
    A) A sole proprietor is not required to pay self-employment tax.
    B) A sole proprietor pays self-employment tax on their net earnings from the business.
    C) A sole proprietor is exempt from paying self-employment tax if their income is below $400.
    D) Self-employment tax only applies to earnings from selling goods, not services.

 

90. How does a partner’s share of the partnership’s income affect their personal tax return?
    A) The partner must report their share of income as part of their personal income on their tax return.
    B) The partner does not report the income until the partnership distributes funds to them.
    C) The partner’s share of the income is exempt from taxation if the partnership reinvests the funds.
    D) The partner only reports income if the partnership’s net income exceeds $100,000.

 

91. Which of the following is true about the tax treatment of a corporation’s stock repurchases?
    A) Stock repurchases are treated as a dividend for the shareholder.
    B) Stock repurchases are considered a sale of stock for the shareholder, potentially subject to capital gains tax.
    C) Stock repurchases are not taxable.
    D) Stock repurchases are deductible for the corporation.

 

92. What is the tax effect of a corporation issuing stock in exchange for services provided by an employee?
    A) The employee recognizes income equal to the fair market value of the stock as compensation.
    B) The corporation recognizes income on the issuance of stock.
    C) The employee recognizes income only when the stock is sold.
    D) The employee is not taxed unless the stock appreciates.

 

93. Which of the following is true regarding tax deductions for business interest?
    A) Business interest is deductible in full if the business is a sole proprietorship.
    B) Business interest deductions are limited to 30% of adjusted taxable income for some businesses.
    C) Business interest deductions are only allowed for corporations.
    D) Business interest is never deductible.

 

94. What is the primary tax benefit of forming an S corporation?
    A) S corporations are taxed as a separate entity and pay lower taxes than partnerships.
    B) S corporations pass income, deductions, and credits through to the shareholders, avoiding double taxation.
    C) S corporations are not required to file tax returns.
    D) S corporations can deduct all employee benefits without limits.

 

95. How are self-employed individuals’ health insurance premiums treated for tax purposes?
    A) Health insurance premiums for self-employed individuals are fully deductible as an adjustment to gross income.
    B) Health insurance premiums are not deductible for self-employed individuals.
    C) Health insurance premiums are deductible as business expenses only if the business is incorporated.
    D) Health insurance premiums are deducted from taxable income but subject to limitations.

 

96. When a sole proprietor sells their business assets, the tax treatment of the sale depends primarily on: A) The purchase price of the assets.
    B) The length of time the assets were held and whether they are considered capital assets.
    C) The tax rate applied to the sale of business assets.
    D) The personal use of the assets after the sale.

 

97. How is a partnership’s capital gain or loss treated for tax purposes?
    A) Capital gains and losses are passed through to the individual partners based on their share of ownership.
    B) Capital gains and losses are reported at the entity level, and the partnership pays tax on them.
    C) Partners do not pay taxes on capital gains or losses until the partnership is dissolved.
    D) Capital gains from partnership sales are taxed at a flat rate of 15%.

 

98. What is the primary difference between a sole proprietorship and a partnership in terms of taxation?
    A) A sole proprietorship is taxed at the entity level, while a partnership’s income passes through to the partners.
    B) A sole proprietorship’s income is subject to self-employment tax, whereas a partnership’s income is not.
    C) A partnership is taxed as an entity, while a sole proprietorship is not taxed.
    D) A sole proprietorship’s income is reported on the owner’s personal return, while a partnership files a separate return.

 

99. Which of the following is the tax consequence when a partnership distributes property to a partner?
    A) The partnership must recognize gain or loss on the distribution, and the partner must recognize income.
    B) The partnership recognizes gain or loss only if the property is sold to the partner.
    C) The partner recognizes gain only if the distribution exceeds their basis in the partnership.
    D) The distribution of property is not taxable to either the partnership or the partner.

 

100. What is the tax treatment of a corporation’s losses?
     A) A corporation cannot deduct losses from income in the current year.
     B) Corporate losses can be carried forward to future tax years to offset future profits.
     C) Corporate losses can only be carried back to previous tax years.
     D) A corporation’s losses cannot be offset by income from other sources.

 

101. How are dividends paid by an S corporation taxed?
     A) Dividends are taxed at the shareholder level, not at the corporate level.
     B) Dividends are taxed at the corporate level and then at the shareholder level.
     C) Dividends are not taxable to S corporation shareholders.
     D) Dividends paid by an S corporation are subject to self-employment tax.

 

 

102. When a corporation pays a salary to an employee-shareholder, the salary is: A) Not deductible by the corporation
     B) Deductible by the corporation as a business expense
     C) Taxed as dividend income to the employee
     D) Treated as capital gain income to the employee

 

103. Which of the following statements is true regarding a tax-free exchange of property under section 1031?
     A) It is applicable to exchanges of personal-use property.
     B) It allows for the deferral of gain recognition if the properties are like-kind.
     C) The properties exchanged must be of the same value for the exchange to be tax-free.
     D) It applies to exchanges of inventory property only.

 

104. Which of the following best describes the tax treatment of a C corporation’s earnings?
     A) The corporation is taxed at the entity level, and dividends paid to shareholders are taxed again at the shareholder level.
     B) Earnings are only taxed at the shareholder level.
     C) The corporation pays taxes only on its profits, with no tax on dividends.
     D) Earnings are not taxed at the corporate level, only at the shareholder level.

 

105. Which of the following is true about the taxation of corporate distributions to shareholders?
     A) Corporate distributions to shareholders are always subject to self-employment tax.
     B) Corporate distributions are generally treated as dividends and subject to double taxation.
     C) Distributions made to shareholders are treated as loan repayments and are tax-free.
     D) Shareholders are never taxed on corporate distributions.

 

106. How is a partnership’s income divided among its partners?
     A) The income is divided equally among all partners.
     B) The income is divided based on the partnership agreement, typically according to each partner’s ownership interest.
     C) The income is divided equally, but partners who provide more capital receive more income.
     D) The income is not divided and remains in the partnership until all liabilities are settled.

 

107. A partner’s basis in a partnership is increased by: A) Cash contributions to the partnership
     B) Partnership income allocated to the partner
     C) Property distributions from the partnership
     D) Liabilities assumed by the partner

 

108. Which of the following is true regarding the tax treatment of debt relief in a partnership?
     A) Debt relief is considered taxable income to the partner if it exceeds their basis in the partnership.
     B) Debt relief is not taxable under any circumstances.
     C) Debt relief is always taxable to the partnership, not to the individual partners.
     D) Debt relief is taxable only if the partnership is dissolved.

 

109. How does a corporation treat its stock buybacks for tax purposes?
     A) A corporation can deduct the cost of repurchasing its stock from its taxable income.
     B) Stock buybacks are treated as dividends to shareholders.
     C) Stock buybacks are treated as a reduction in the corporation’s taxable income.
     D) Stock buybacks are not subject to tax unless the stock is resold.

 

110. How is rental income from property owned by a sole proprietor taxed?
     A) Rental income is treated as part of the proprietor’s business income and is taxed as ordinary income.
     B) Rental income is excluded from taxation if it is reinvested into the business.
     C) Rental income is taxed at a reduced rate.
     D) Rental income is not subject to income tax but is subject to self-employment tax.

 

111. Which of the following is true about a partner’s ability to deduct business expenses in a partnership?
     A) Business expenses can only be deducted by the partnership, not by individual partners.
     B) Business expenses can be deducted by individual partners on their personal returns if incurred personally.
     C) Business expenses are not deductible by the partner unless the expenses are reimbursed by the partnership.
     D) Business expenses are always deductible by the partner, even if the partnership makes no profit.

 

112. Which of the following is the main tax consequence of a business’s decision to operate as an S corporation?
     A) S corporations avoid self-employment taxes.
     B) S corporations are taxed at the entity level, and shareholders report their share of income on their personal returns.
     C) S corporations are not required to file a tax return.
     D) Shareholders of S corporations pay tax on the corporation’s income only if it is distributed.

 

113. A limited liability company (LLC) that elects to be treated as a corporation for tax purposes: A) Must file its taxes as a partnership.
     B) Is taxed as a separate entity, and owners pay taxes on dividends received.
     C) Avoids all forms of taxation, including self-employment taxes.
     D) Is treated as a sole proprietorship for tax purposes.

 

114. Which of the following is true regarding a corporation’s tax treatment of net operating losses (NOLs)?
     A) NOLs can only be carried forward and never backward.
     B) NOLs can be carried back up to two years and carried forward for up to 20 years.
     C) NOLs can only offset capital gains, not other types of income.
     D) NOLs are only available for C corporations, not S corporations.

 

115. The “stepped-up basis” rule applies when: A) A partner buys out another partner’s interest in a partnership.
     B) A corporation sells its assets to another corporation.
     C) Property is inherited, increasing the property’s basis for tax purposes.
     D) A sole proprietor liquidates their business.

 

116. How is income from a trust or estate taxed?
     A) Income is taxed to the fiduciary, not to the beneficiaries.
     B) Income is taxed to the beneficiaries when distributed.
     C) Income is only taxed when the estate is closed.
     D) Income is taxed at both the fiduciary and beneficiary levels, depending on whether it is distributed.

 

117. How is the sale of a corporation’s stock by a shareholder taxed?
     A) As ordinary income, with tax based on the stock’s appreciation.
     B) As capital gains, depending on the holding period of the stock.
     C) As rental income, if the stock was used in a rental business.
     D) As dividend income, subject to dividend tax rates.

 

118. Which of the following is a tax consequence of liquidating a corporation?
     A) Shareholders are not taxed on the liquidation proceeds.
     B) The corporation is taxed on the sale of its assets, and shareholders are taxed on the distribution of proceeds.
     C) Liquidation proceeds are treated as dividends, not sales proceeds.
     D) Liquidation proceeds are tax-free to the corporation.

 

119. What is the impact of selling a partnership interest on the selling partner’s tax obligations?
     A) The partner must pay tax on the capital gain from the sale of the interest.
     B) The partner can defer paying tax on the capital gain until they liquidate the partnership’s assets.
     C) The partner is not taxed on the sale if the partnership has no profit.
     D) The partner’s capital gain is taxed at ordinary income tax rates.

 

120. Which of the following is true regarding self-employment tax for independent contractors?
     A) Independent contractors are subject to self-employment tax on their net earnings.
     B) Independent contractors are exempt from self-employment tax if their earnings are less than $400.
     C) Independent contractors can deduct self-employment tax from their taxable income.
     D) Independent contractors are not required to pay self-employment tax, regardless of their income.

 

121. What is the tax treatment of a partner’s distribution of cash from a partnership?
     A) The distribution is taxable as ordinary income to the partner.
     B) The distribution is taxable only if it exceeds the partner’s basis in the partnership.
     C) Cash distributions are never taxable to the partner.
     D) The partnership itself is taxed on the distribution.

 

122. Which of the following is true about the taxation of S corporations?
     A) S corporations are taxed at the entity level, with no tax on shareholders.
     B) S corporation shareholders report their share of income on their personal tax returns, avoiding double taxation.
     C) S corporations are subject to corporate tax rates, not individual tax rates.
     D) Shareholders of S corporations pay self-employment tax on all of the corporation’s income.

 

 

123. Which of the following is true about the tax treatment of a partnership’s capital gains?
     A) Capital gains are always passed through to the partners and taxed at their individual rates.
     B) Capital gains are taxed at the partnership level, with no tax liability for the partners.
     C) Capital gains are not taxable in a partnership if the gain is reinvested into the business.
     D) Capital gains are split equally among all partners, regardless of their ownership interest.

 

124. What is the tax consequence of a corporation issuing new stock to raise capital?
     A) The corporation is taxed on the proceeds received from the stock issuance.
     B) Shareholders are taxed on the amount of capital they contribute to the corporation.
     C) The proceeds from stock issuance are not taxed at the corporate or shareholder level.
     D) Shareholders must report their portion of the new capital as income.

 

125. How is a limited liability partnership (LLP) taxed?
     A) It is taxed as a corporation, with income taxed at the entity level.
     B) It is taxed as a partnership, with income passed through to partners who report it on their individual returns.
     C) The LLP is taxed at the individual level, but partners are taxed separately.
     D) It avoids taxation entirely, with no tax obligation at the entity or individual level.

 

126. When a business deducts depreciation, what is the primary effect on its tax situation?
     A) The business reduces its tax liability by lowering taxable income.
     B) Depreciation increases taxable income by decreasing assets.
     C) Depreciation is not deductible, but is only used for financial reporting.
     D) Depreciation reduces a business’s tax liability by increasing its expenses.

 

127. How is income from a sole proprietorship taxed?
     A) Income is taxed as ordinary income on the proprietor’s personal tax return.
     B) Income is taxed at the corporate tax rate.
     C) The proprietor must pay taxes on the business income only when it is distributed to them.
     D) Income is taxed only if the business generates a net profit.

 

128. What is the tax implication for a corporation that pays dividends to shareholders?
     A) The corporation gets a tax deduction for dividend payments, reducing its taxable income.
     B) The dividend payments are taxable to the shareholders but not deductible by the corporation.
     C) Dividend payments are not taxable to shareholders.
     D) The corporation is taxed on the dividend payments, but shareholders are not taxed.

 

129. Which of the following describes the tax treatment of a partnership’s income?
     A) Partnership income is taxed only at the partner level.
     B) Partnership income is taxed at the entity level, with partners paying tax based on their share.
     C) Income is not taxed in a partnership, but profits are shared among the partners.
     D) Partners are only taxed on the income that is distributed to them.

 

130. Which of the following best describes a tax consequence of liquidating a partnership?
     A) The partnership must pay tax on its capital gains from the liquidation of assets.
     B) Partners are taxed based on the liquidation proceeds only if the proceeds exceed their partnership basis.
     C) The liquidation is tax-free for all partners, regardless of proceeds.
     D) Liquidation proceeds are taxed at the corporate tax rate, not the individual level.

 

131. How does a corporation’s net operating loss (NOL) affect its tax obligations?
     A) It increases the corporation’s tax liability in the current year.
     B) It can be carried forward to offset future taxable income.
     C) It results in an automatic tax refund.
     D) NOLs are only applied to the income of shareholders.

 

132. Which of the following is true regarding tax treatment of shareholder loans to a corporation?
     A) Shareholder loans are treated as taxable dividends.
     B) Loans from shareholders are subject to the same tax rules as any other corporate debt.
     C) Loans from shareholders are not deductible by the corporation.
     D) Shareholder loans are treated as capital contributions and are not subject to tax.

 

133. What tax rule applies when a sole proprietor purchases a vehicle used for business purposes?
     A) The vehicle’s full purchase price is deductible in the year of purchase.
     B) The cost of the vehicle must be capitalized and depreciated over time.
     C) The purchase price is not deductible but can be deducted only for repairs and maintenance.
     D) The full cost of the vehicle can be deducted only if it is used 100% for business purposes.

 

134. In what situation is an S corporation subject to the built-in gains tax?
     A) When the corporation has capital gains that were earned before it became an S corporation.
     B) When the S corporation has income from sources outside the U.S.
     C) When the S corporation issues new stock to shareholders.
     D) S corporations are never subject to the built-in gains tax.

 

135. When is a partner taxed on the distribution of property from a partnership?
     A) A partner is taxed on the distribution at fair market value.
     B) A partner is taxed on the distribution based on the cost of the property.
     C) A partner is not taxed on the distribution of property unless the property is sold.
     D) The partner is not taxed on property distributions if the distribution is in the form of cash.

 

136. Which of the following is a primary tax advantage of forming an S corporation rather than a C corporation?
     A) S corporations avoid self-employment taxes on income from active business activities.
     B) S corporations allow for the avoidance of corporate taxes entirely.
     C) S corporations allow their income to pass through to the shareholders, avoiding double taxation.
     D) S corporations have no limits on the number of shareholders.

 

137. Which of the following is a tax consequence for a shareholder in a C corporation when the corporation sells assets?
     A) The shareholder must report the sale as capital gains.
     B) The shareholder is taxed on the corporation’s gain from the sale of its assets.
     C) The corporation is taxed on the sale, and the shareholders are taxed on distributions.
     D) No taxes are owed by the shareholder on the corporation’s sale of assets.

 

138. How are interest payments from a partnership to a partner treated for tax purposes?
     A) Interest is deductible by the partnership and is taxed as ordinary income to the partner.
     B) Interest is taxable to the partnership, but the partner does not report it on their tax return.
     C) Interest payments are subject to self-employment tax.
     D) Interest payments are not deductible by the partnership.

 

139. How is a partner’s share of income from a partnership reported for tax purposes?
     A) It is reported on the partner’s individual income tax return as ordinary income.
     B) It is reported by the partnership as dividends, which are taxed at the dividend rate.
     C) It is reported as rental income.
     D) It is excluded from the partner’s income for tax purposes.

 

140. What tax treatment applies when a corporation merges with another corporation?
     A) The merged corporation must recognize any gains or losses on the transaction.
     B) The tax basis of the acquired assets is stepped up to the fair market value.
     C) The merger is typically tax-free if certain requirements are met.
     D) Both corporations are subject to capital gains tax on the transaction.

 

141. How are capital losses treated for a corporation?
     A) Capital losses can offset capital gains but not ordinary income.
     B) Capital losses can offset both capital gains and ordinary income.
     C) Capital losses can be carried forward and back to offset future or past income.
     D) Capital losses are not deductible by corporations.

 

142. What is the tax effect of a corporation’s charitable contributions?
     A) Charitable contributions are deductible by the corporation up to a percentage of its taxable income.
     B) Charitable contributions are not deductible by corporations.
     C) Charitable contributions are fully deductible and reduce the corporation’s taxable income.
     D) Charitable contributions are taxed at the individual level.

 

143. When is a business required to file a tax return for an LLC?
     A) If the LLC is treated as a sole proprietorship, it does not need to file a separate tax return.
     B) If the LLC elects to be taxed as a corporation, it must file a separate tax return.
     C) If the LLC is a partnership, it is exempt from filing a tax return.
     D) An LLC is only required to file if it has employees.

 

 

144. Which of the following is true about the tax treatment of distributions from a partnership to its partners?
     A) Distributions are generally not taxable, except to the extent they exceed the partner’s basis in the partnership.
     B) Distributions are taxable to the partner, regardless of the partner’s basis in the partnership.
     C) Distributions are taxable only when the partner decides to sell the partnership interest.
     D) Distributions are tax-free for the partners if the partnership has no profits.

 

145. How are distributions from a C corporation to its shareholders taxed?
     A) Distributions are taxed at the corporate level only, with no additional tax on shareholders.
     B) Distributions are taxable as dividends to shareholders and taxed at the shareholder’s individual rate.
     C) Distributions from a C corporation are exempt from tax for shareholders.
     D) Shareholders pay self-employment taxes on distributions from C corporations.

 

146. When a partner’s share of income is subject to self-employment tax, which of the following applies?
     A) Only guaranteed payments to a partner are subject to self-employment tax.
     B) All partnership income is automatically subject to self-employment tax.
     C) A partner’s distributive share of business income is subject to self-employment tax if the partner is involved in the business.
     D) Self-employment tax is not applicable to any income earned from a partnership.

 

147. What is the tax consequence for a corporation that receives property in exchange for stock?
     A) The corporation does not recognize gain or loss on the property received in exchange for stock.
     B) The corporation must recognize gain on the property received and pay tax.
     C) The stock issued is taxable to the corporation, and gain is recognized on the transaction.
     D) The property received is taxed as a capital gain for the corporation.

 

148. What is the treatment of a shareholder’s loan to a corporation if the loan is repaid with interest?
     A) The interest on the loan is treated as taxable income to the shareholder and deductible by the corporation.
     B) The loan repayment is not taxable, but interest is taxed at the corporate rate.
     C) The loan repayment and interest are tax-free for both the shareholder and the corporation.
     D) The repayment of the loan is treated as a dividend.

 

149. When is a business considered a tax-exempt entity?
     A) A business must apply for tax-exempt status and be approved by the IRS.
     B) All businesses are tax-exempt by default under the U.S. tax code.
     C) Tax-exempt status is automatically granted to businesses with no income.
     D) Only nonprofit organizations, such as charities, can be tax-exempt.

 

150. What is the impact of a business’s bad debt expense on its tax liability?
     A) A business can deduct bad debt expense if it is incurred in the ordinary course of business.
     B) Bad debts are never deductible by businesses under any circumstances.
     C) Bad debt expense is only deductible for corporations, not for partnerships.
     D) Bad debt expense increases the business’s taxable income.

 

151. In a liquidation of a corporation, how is the shareholder taxed on the distribution of assets?
     A) The distribution of assets is not taxed as long as it is a complete liquidation.
     B) The shareholder is taxed on the difference between the fair market value of the assets and the shareholder’s stock basis.
     C) The shareholder is taxed on the liquidation value of the corporation, regardless of the fair market value.
     D) Shareholders are not taxed if the assets are reinvested in another corporation.

 

152. What is the tax effect of a business reorganizing as a different type of entity, such as from an LLC to an S corporation?
     A) The reorganization triggers taxes on all appreciated assets.
     B) The reorganization is treated as a taxable event, and any appreciation is subject to tax.
     C) The reorganization is generally not a taxable event if certain conditions are met.
     D) The business will pay corporate tax, and shareholders will be taxed as well.

 

153. Which of the following is true about the tax treatment of net operating losses (NOLs) for a C corporation?
     A) NOLs can be carried forward and used to offset future taxable income.
     B) NOLs must be carried back to prior years to claim refunds.
     C) NOLs cannot be carried forward or back under any circumstances.
     D) NOLs reduce the corporation’s equity and are not used to offset taxable income.

 

154. How does the IRS classify income from a partnership’s real estate activities?
     A) Income from real estate activities is always treated as rental income and subject to passive activity loss rules.
     B) Income is treated as ordinary income, with no special tax treatment.
     C) Income may be treated as capital gains, subject to long-term or short-term rates depending on holding period.
     D) Income is classified as self-employment income, subject to payroll taxes.

 

155. When a partner sells their partnership interest, how is the transaction treated for tax purposes?
     A) The sale is treated as a sale of the underlying business assets and may result in capital gains tax.
     B) The transaction is treated as ordinary income because it represents a change in ownership of the business.
     C) The sale of a partnership interest is never subject to capital gains tax.
     D) The partner is taxed on the entire partnership’s income for the year of the sale.

 

156. What is the tax effect of a corporation issuing a stock dividend?
     A) The issuance of stock dividends is generally not taxable to the shareholder.
     B) The shareholder is taxed on the market value of the stock dividend at the time it is issued.
     C) Stock dividends are treated as ordinary income to the shareholder.
     D) A corporation cannot issue stock dividends due to tax implications.

 

157. What is the tax treatment of an S corporation’s income?
     A) The S corporation itself is taxed on its income at the corporate tax rate.
     B) S corporation income is passed through to shareholders and taxed on their individual returns.
     C) The S corporation does not have to report its income to the IRS.
     D) S corporation income is only taxable to shareholders when distributed as dividends.

 

158. How are contributions to a sole proprietorship treated for tax purposes?
     A) Contributions by the owner are treated as taxable income to the business.
     B) The business owner’s contributions are not taxable and do not affect business income.
     C) Contributions are treated as capital gains and subject to tax.
     D) Contributions are considered loans and must be paid back with interest.

 

159. What is the effect of a partner receiving a distribution of property that has a higher value than the partner’s adjusted basis in the partnership?
     A) The partner must recognize gain equal to the difference between the value of the property and their basis.
     B) The partner can defer the gain until the property is sold.
     C) The distribution is not taxable, regardless of the value.
     D) The partner’s basis is increased by the amount of the distribution.

 

160. Which of the following best describes the taxation of a corporation’s income in a year it elects to be an S corporation?
     A) The corporation continues to pay taxes on its income at the corporate level.
     B) The corporation’s income is passed through to shareholders and taxed at their individual rates.
     C) The corporation is taxed only on the income earned after the election.
     D) The corporation is exempt from all taxes for the year of election.

 

 

161. What is the tax treatment of a partnership’s liabilities when a partner contributes property to the partnership?
     A) The partner is relieved of any liability associated with the property contributed.
     B) The partner is required to pay taxes on the liability of the property contributed.
     C) The partnership assumes the liabilities of the property, and the partner’s basis is adjusted accordingly.
     D) The partnership does not assume liabilities, and the partner’s basis remains unchanged.

 

162. How is the sale of a shareholder’s stock in an S corporation taxed?
     A) The sale is taxed as ordinary income.
     B) The sale is taxed as a capital gain, with a possible 15% rate depending on the holding period.
     C) The sale is exempt from taxes if the shareholder has held the stock for more than 1 year.
     D) The sale is subject to both ordinary income tax and payroll taxes.

 

163. What is the tax consequence when a sole proprietor sells their business?
     A) The sale is treated as a sale of business assets, and the owner recognizes gain or loss based on the asset’s adjusted basis.
     B) The sale is treated as ordinary income because the business is sold as a whole entity.
     C) The sale of a sole proprietorship is always tax-free.
     D) The business owner is not required to pay taxes if the business was profitable.

 

164. Which of the following is true about the taxation of partnership income?
     A) Partnership income is taxed at the partnership level, and partners report their share on their individual returns.
     B) Partnership income is never taxed to the partners but is taxed at the partnership level only.
     C) Partners pay tax on the income only when it is distributed to them.
     D) The partnership pays income tax on its net income and shareholders pay taxes on their dividends.

 

165. Which of the following is a tax advantage of forming a limited liability company (LLC) over a corporation?
     A) LLCs are generally taxed as partnerships, which means income is passed through to owners and taxed only once.
     B) LLCs pay corporate taxes, whereas corporations do not.
     C) LLCs are not required to file annual tax returns, while corporations must.
     D) LLCs can avoid capital gains taxes on all income distributions to owners.

 

166. How does a partnership calculate its basis in a partnership interest?
     A) The basis is determined by the fair market value of the property contributed.
     B) The basis is the amount of capital invested by the partner and adjusted for share of income, loss, and distributions.
     C) The basis is fixed and does not change unless the partnership is dissolved.
     D) The partner’s basis is the same as their share of the partnership’s gross receipts.

 

167. How is a liquidating distribution from a corporation to a shareholder taxed?
     A) The distribution is taxed as a capital gain if the shareholder’s basis is less than the distribution received.
     B) Liquidating distributions are taxed as ordinary income.
     C) Shareholders do not have to pay taxes on liquidating distributions.
     D) A liquidating distribution is only taxable when the corporation liquidates more than half of its assets.

 

168. Which of the following situations would result in the recognition of a taxable gain by a C corporation?
     A) The corporation distributes cash to shareholders.
     B) The corporation sells property at its fair market value to another business.
     C) The corporation contributes property to an S corporation.
     D) The corporation reinvests income in new business assets.

 

169. Which tax form does a partner use to report their share of partnership income?
     A) Form 1040, Schedule D
     B) Form 1065
     C) Schedule K-1 (Form 1065)
     D) Form 1120

 

170. What is the tax treatment of a distribution from an S corporation to a shareholder?
     A) The distribution is not taxable unless it exceeds the shareholder’s basis in the stock.
     B) All distributions from S corporations are taxed as dividends at a flat 15% rate.
     C) Distributions are always taxable to the shareholder as ordinary income.
     D) S corporation distributions are tax-free and do not affect the shareholder’s basis.

 

171. What is the tax treatment of a sole proprietor’s income?
     A) Sole proprietors pay taxes on their net business income at the individual income tax rates, including self-employment tax.
     B) Sole proprietors only pay taxes on income over $100,000.
     C) Sole proprietors pay corporate tax rates on their net income.
     D) Sole proprietors do not have to pay any taxes on their income if it is reinvested in the business.

 

172. How are gains from the sale of a partnership interest treated for tax purposes?
     A) Gains are always treated as capital gains, regardless of the partnership’s activities.
     B) Gains from the sale of a partnership interest are taxed as ordinary income, to the extent they are attributable to unrealized receivables or inventory.
     C) Gains are tax-free to the seller if the partnership has not been operating for more than 5 years.
     D) Partnership interests are always taxed at long-term capital gains rates, regardless of holding period.

 

173. What is the tax treatment of a gift of business assets from one partner to another?
     A) The donor is required to recognize gain on the transfer of business assets.
     B) The recipient of the business asset gift must recognize gain when the asset is sold.
     C) The gift of business assets is treated as a taxable event to both the donor and recipient.
     D) The gift is generally not taxable for either the donor or the recipient, but the recipient’s basis in the asset is the same as the donor’s.

 

174. What is the effect of a tax-free reorganization on the shareholders of a corporation?
     A) The shareholders will recognize gain on the exchange of shares in a tax-free reorganization.
     B) The shareholders do not recognize gain, but their basis in the new shares will be adjusted based on the old shares.
     C) Shareholders are taxed immediately on any profits, even in a tax-free reorganization.
     D) The shareholders will pay a flat tax rate on the value of the shares they receive in the reorganization.

 

175. Which of the following describes the tax treatment of business expenses in a sole proprietorship?
     A) Business expenses are generally deductible from the proprietor’s gross income to arrive at taxable income.
     B) Business expenses are only deductible if the proprietor earns more than $100,000 annually.
     C) Business expenses are not deductible by sole proprietors under the IRS rules.
     D) Business expenses must be capitalized and deducted over several years.

 

 

176. How is the income from a sole proprietorship taxed?
     A) The income is taxed at corporate tax rates.
     B) The income is passed through to the owner and taxed on their individual tax return.
     C) The income is exempt from taxation for the first year of the business.
     D) The income is only taxed when the business is sold.

 

177. What is the primary tax benefit of an S corporation?
     A) S corporations avoid paying any federal income tax.
     B) The income of an S corporation is passed through to shareholders and taxed at their individual rates, avoiding double taxation.
     C) S corporations can deduct business expenses on behalf of their shareholders.
     D) S corporations pay taxes at the corporate level and then at the individual level on distributions.

 

178. In a partnership, how are profits and losses generally allocated?
     A) Profits and losses are allocated based on the percentage of ownership interests in the partnership.
     B) Profits and losses are allocated equally among all partners, regardless of ownership.
     C) Profits and losses are allocated according to the agreement made between the partners.
     D) Profits are allocated based on hours worked, and losses are allocated equally.

 

179. Which of the following statements is true regarding the taxation of corporations?
     A) Corporations are taxed on their income, and shareholders are also taxed on any dividends received (double taxation).
     B) Corporations are exempt from paying income tax on profits.
     C) Corporations are taxed on the same basis as partnerships, with income passed through to shareholders.
     D) Corporations are only taxed on income above $1 million.

 

180. What is the tax treatment of a partner who contributes property to a partnership?
     A) The partner must pay taxes based on the fair market value of the property contributed.
     B) The partner’s contribution is not taxable, but the basis in the property carried over from the partner to the partnership.
     C) The partner is required to pay capital gains tax on the contribution of property.
     D) The partner must pay taxes based on the appreciation of the property in the partnership.

 

181. When an individual owns stock in a C corporation, what is the tax consequence of receiving a dividend from the corporation?
     A) The dividend is taxed as ordinary income.
     B) The dividend is not taxable if the shareholder has held the stock for more than one year.
     C) The dividend is taxed as capital gains.
     D) The dividend is tax-free to the shareholder.

 

182. In the context of federal income taxation, what is a “liquidating distribution” in a corporation?
     A) A distribution made by the corporation to its shareholders in the event of liquidation, which may be subject to capital gains tax.
     B) A dividend distribution that is considered ordinary income for the shareholders.
     C) A transfer of assets from the corporation to its creditors.
     D) A distribution that is always non-taxable.

 

183. Which of the following describes the tax treatment of a C corporation’s sale of business assets?
     A) The corporation recognizes gain or loss on the sale, and the shareholders are taxed based on the distribution of proceeds.
     B) The corporation recognizes a loss, but no gain is recognized on the sale of assets.
     C) The corporation does not recognize gain or loss on the sale of assets.
     D) Shareholders pay tax on the sale proceeds regardless of the corporation’s tax treatment.

 

184. What is the tax treatment of a distribution from a partnership to a partner?
     A) The distribution is generally not taxable if the partner’s basis in the partnership is greater than the amount distributed.
     B) The distribution is taxable immediately as income to the partner.
     C) All distributions from partnerships are taxed as ordinary income.
     D) Partnership distributions are taxable only when the partnership is dissolved.

 

185. What is the impact of tax-deferred income on business decision-making?
     A) Tax-deferred income increases the current taxable income of the business.
     B) Tax-deferred income provides an immediate reduction in taxable income, leading to lower taxes in the short term.
     C) Tax-deferred income is always taxed immediately, leading to higher current tax payments.
     D) Tax-deferred income has no impact on the decision-making process, as it is exempt from tax.

 

186. What is the tax consequence of a partner’s death in a partnership?
     A) The partnership is dissolved immediately, and the surviving partner must report all assets.
     B) The deceased partner’s estate must pay taxes on the partner’s share of the partnership’s income.
     C) The deceased partner’s share of the partnership is generally treated as if the partner sold their interest, and tax consequences are recognized.
     D) The deceased partner’s estate is not responsible for any taxes due to the pass-through taxation of the partnership.

 

187. How does the IRS treat a distribution from a C corporation to its shareholders?
     A) The distribution is treated as ordinary income.
     B) The distribution is treated as a dividend and is taxed at the corporate tax rate.
     C) The distribution is treated as a tax-free return of capital unless it exceeds the shareholder’s basis in the stock.
     D) The distribution is always exempt from taxes under IRS rules.

 

188. When a business converts from a partnership to an S corporation, how is the tax treatment affected?
     A) The S corporation is taxed as a corporation, and partners are taxed at the individual level.
     B) The conversion has no effect on tax treatment, as it remains a partnership for tax purposes.
     C) The S corporation is treated as a pass-through entity, and income is taxed at the individual level.
     D) The conversion results in immediate tax penalties for all partners.

 

189. What is the effect of claiming a business deduction on a tax return?
     A) Business deductions lower taxable income, which may reduce the amount of taxes owed.
     B) Business deductions increase taxable income.
     C) Business deductions are only available to corporations, not to sole proprietors.
     D) Business deductions have no effect on the taxable income of a business.

 

190. How is income from a sole proprietorship generally reported for tax purposes?
     A) The income is reported on Form 1065.
     B) The income is reported on Form 1040, Schedule C, and taxed at the individual income tax rate.
     C) The income is not taxed if the business owner has fewer than 10 employees.
     D) The income is reported on Form 1120.

 

 

191. What is the tax treatment of a C corporation’s accumulated earnings?
     A) Accumulated earnings are taxed at the shareholder level.
     B) Accumulated earnings are not taxed if the corporation reinvests them in business operations.
     C) A penalty tax may be imposed if the corporation accumulates earnings beyond a reasonable business need.
     D) Accumulated earnings are tax-free to both the corporation and the shareholders.

 

192. Which of the following is true about tax-deferred contributions to a qualified retirement plan by a sole proprietor?
     A) The sole proprietor must pay tax on the contributions in the year they are made.
     B) The contributions are taxed when they are withdrawn, usually after retirement.
     C) The sole proprietor can deduct contributions for tax purposes, reducing taxable income in the current year.
     D) Tax-deferred contributions are subject to a penalty if the proprietor withdraws them before the business is sold.

 

193. How does the IRS classify the profits and losses of an S corporation?
     A) They are taxed at the corporate level.
     B) They are passed through to shareholders and taxed on their personal returns.
     C) They are not subject to taxation until the corporation is sold.
     D) They are taxed at the state level only.

 

194. How are guaranteed payments to a partner treated for tax purposes?
     A) Guaranteed payments are considered a distribution of profits and are not taxable.
     B) Guaranteed payments are considered ordinary income and subject to self-employment tax.
     C) Guaranteed payments are considered dividends and are taxed at a lower rate.
     D) Guaranteed payments are not deductible for tax purposes.

 

195. What is the tax consequence of a corporation’s sale of appreciated property?
     A) The corporation recognizes a gain or loss on the sale, and shareholders are taxed on the distribution of proceeds.
     B) The corporation is not required to pay taxes on the sale if the property is sold to a related party.
     C) The corporation is exempt from paying taxes on appreciated property if the sale is part of the regular business operations.
     D) The corporation pays no taxes, and shareholders are taxed on the appreciated value of the property.

 

196. How are business expenses for a sole proprietor typically deducted?
     A) Business expenses are deducted on the business’s corporate tax return.
     B) Business expenses are deducted on Schedule C of the owner’s personal income tax return.
     C) Business expenses are deducted at the partner level in the case of a partnership.
     D) Business expenses are deducted on Form 1065 for a partnership.

 

197. Which of the following is a tax consequence of a partnership liquidation?
     A) The partnership is not required to recognize any gain or loss during the liquidation process.
     B) Partners are taxed on the amount of cash and property they receive as a result of the liquidation.
     C) The partnership continues to pay taxes on any remaining profits even after liquidation.
     D) Liquidating distributions to partners are automatically tax-free.

 

198. What tax form is typically used by a corporation to report income, deductions, and taxes?
     A) Form 1065
     B) Form 1120
     C) Form 1040
     D) Form 4562

 

199. Which of the following is a key difference between a corporation and a partnership in terms of taxation?
     A) A corporation is taxed on its income, while a partnership’s income passes through to its partners and is taxed on their personal returns.
     B) A corporation’s income passes through to its shareholders, while a partnership pays taxes on its income.
     C) A corporation’s income is taxed only when the business is sold, while a partnership’s income is taxed on an annual basis.
     D) A partnership is taxed as a corporation, while a corporation is not taxed at all.

 

200. What is the effect of a business expense deduction on a sole proprietor’s tax liability?
     A) The deduction increases the sole proprietor’s taxable income.
     B) The deduction reduces the taxable income, which may reduce the amount of taxes owed.
     C) The deduction is not allowed for tax purposes.
     D) The deduction is only allowed if the business owner has a net profit.

 

201. How are partnership distributions taxed when the partner’s basis in the partnership is less than the amount of the distribution?
     A) The partner recognizes ordinary income equal to the excess of the distribution over the partner’s basis.
     B) The distribution is not taxable, regardless of the basis.
     C) The partner’s basis is increased by the amount of the distribution.
     D) The partner is subject to capital gains tax on the distribution.

 

202. What is the treatment of tax-exempt income earned by a corporation?
     A) The corporation does not have to report tax-exempt income.
     B) Tax-exempt income is included in the corporation’s gross income but is not subject to tax.
     C) Tax-exempt income is not included in gross income and is not reported.
     D) Tax-exempt income is taxed at a lower rate.

 

203. How does the IRS treat the sale of stock by a shareholder in an S corporation?
     A) The sale is taxed as capital gains.
     B) The sale is taxed as ordinary income.
     C) The sale is tax-free if the stock was held for more than five years.
     D) The sale is taxed as a dividend.

 

204. How does a tax-free reorganization work for business entities?
     A) A tax-free reorganization allows a business to merge with another entity without recognizing gain or loss, subject to certain conditions.
     B) A tax-free reorganization results in an immediate tax penalty for the business.
     C) A tax-free reorganization allows businesses to deduct all transaction costs without taxation.
     D) A tax-free reorganization only applies to sole proprietorships and partnerships.

 

205. What is the tax impact of a business owner withdrawing funds from their S corporation?
     A) The withdrawal is treated as a dividend and taxed at the corporate tax rate.
     B) The withdrawal is treated as a distribution, potentially subject to tax if it exceeds the owner’s basis in the stock.
     C) The withdrawal is subject to self-employment taxes.
     D) The withdrawal is not taxable if the corporation is taxed as a pass-through entity.

 

206. How is a corporation’s net operating loss (NOL) treated for tax purposes?
     A) The NOL can only be carried forward to offset future profits.
     B) The NOL can only be carried back to offset prior year profits.
     C) The NOL can be carried forward or carried back to offset taxable income in other years.
     D) The NOL is not deductible for tax purposes.

 

207. What tax form does a sole proprietor file to report business income and expenses?
     A) Form 1065
     B) Form 1040, Schedule C
     C) Form 1120
     D) Form 4562

 

 

208. What is the primary tax benefit of a Section 1031 like-kind exchange for a business owner?
     A) It allows the business owner to defer taxes on the gain from the sale of property.
     B) It provides an immediate tax credit for the exchange.
     C) It reduces the basis of the property being exchanged.
     D) It eliminates the need for business income reporting.

 

209. What is the tax consequence when a corporation makes a distribution to its shareholders?
     A) The distribution is generally taxable as ordinary income to the shareholder.
     B) The distribution is subject to self-employment tax for the corporation.
     C) The distribution is taxable to the corporation but not the shareholders.
     D) The distribution is tax-free to both the corporation and the shareholders.

 

210. How does the IRS classify dividends received by a corporation from another corporation in which it owns stock?
     A) The dividend is always taxable as ordinary income.
     B) The dividend is generally tax-free if the corporation owns less than 20% of the stock.
     C) The dividend is partially excluded from taxable income based on the percentage of ownership.
     D) The dividend is taxable as a capital gain.

 

211. How is a business owner’s taxable income affected by the depreciation of business property?
     A) Depreciation increases taxable income by reducing the basis of the property.
     B) Depreciation decreases taxable income by reducing the value of the property for tax purposes.
     C) Depreciation has no effect on taxable income.
     D) Depreciation creates a taxable event each year.

 

212. Which of the following is true about the tax treatment of a partnership’s income?
     A) A partnership is taxed on its income, and individual partners report their share of income.
     B) A partnership is not required to file a tax return.
     C) Income generated by the partnership is reported on the partnership’s tax return but taxed at the partner level.
     D) The partnership is taxed only if it has accumulated earnings beyond $100,000.

 

213. What is the primary tax consideration when choosing between a sole proprietorship and a corporation?
     A) A sole proprietorship is taxed at the corporate level, while a corporation is taxed at the individual level.
     B) A corporation may provide tax advantages through deductions that are unavailable to a sole proprietor.
     C) A sole proprietorship cannot deduct business expenses, whereas a corporation can.
     D) A corporation’s tax rate is lower than a sole proprietor’s individual tax rate.

 

214. What is the tax consequence of a shareholder in an S corporation receiving a distribution in excess of their stock basis?
     A) The distribution is taxed as capital gain.
     B) The distribution is taxed as ordinary income.
     C) The distribution is not taxable if it is reinvested in the business.
     D) The distribution is taxed as a dividend.

 

215. In which of the following situations would a business owner be subject to self-employment tax?
     A) The owner operates the business through a corporation.
     B) The owner operates the business through a partnership.
     C) The owner operates the business through an LLC taxed as an S corporation.
     D) The owner earns wages as an employee of their own corporation.

 

216. What is the tax treatment of a net operating loss (NOL) carried back by a corporation?
     A) The NOL is deducted from the corporation’s income in prior years, which may result in a refund of taxes paid.
     B) The NOL is deducted from the corporation’s income in future years to reduce future taxes.
     C) The NOL can only be carried back to offset future income, not prior years.
     D) The NOL is not deductible for tax purposes.

 

217. What is the impact of an increase in business expenses on a sole proprietor’s tax liability?
     A) The increase in business expenses will increase taxable income.
     B) The increase in business expenses will decrease taxable income.
     C) The increase in business expenses has no effect on taxable income.
     D) The increase in business expenses will reduce the amount of self-employment tax due.

 

218. How does the IRS treat business losses for a partner in a limited partnership?
     A) The partner can deduct business losses only up to the amount of their capital contribution.
     B) The partner can deduct business losses against other income without limitation.
     C) The partner cannot deduct losses if the partnership is in debt.
     D) The partner is not allowed to deduct business losses.

 

219. How does a corporation’s status as a C corporation impact the taxation of dividends?
     A) C corporations are subject to double taxation, where income is taxed at the corporate level, and dividends are taxed at the shareholder level.
     B) C corporations are not subject to taxation on dividends paid to shareholders.
     C) C corporations only pay taxes on dividends that are reinvested into the business.
     D) C corporations do not distribute dividends, so no tax applies.

 

220. What is the tax treatment of a capital gain from the sale of business property by a corporation?
     A) The gain is treated as ordinary income and taxed at the corporate level.
     B) The gain is excluded from taxable income under Section 1031.
     C) The gain is treated as capital gain and taxed at the individual level if the corporation is a pass-through entity.
     D) The gain is taxed only if the property is sold to a related party.

 

221. How are state taxes typically treated for federal income tax purposes for a business?
     A) State taxes are not deductible for federal tax purposes.
     B) State taxes paid by a business are deductible as a business expense for federal tax purposes.
     C) State taxes paid are treated as tax credits on the federal return.
     D) State taxes paid by a business do not impact federal taxes.

 

222. How does the IRS treat a partner’s share of income from a partnership?
     A) The partner’s share of income is taxed at the partnership level.
     B) The partner’s share of income is passed through and taxed on the partner’s individual tax return.
     C) The partner is exempt from taxes on their share of income if the partnership has no net profit.
     D) The partner’s share of income is taxed as a capital gain.

 

223. What is the tax consequence when a corporation’s debt is forgiven by a lender?
     A) The corporation is not taxed on the forgiven debt.
     B) The corporation must report the forgiven debt as income, which is subject to taxation.
     C) The corporation’s shareholders are responsible for paying taxes on the forgiven debt.
     D) The forgiven debt is treated as a capital gain.

 

 

224. What is the tax treatment of business expenses incurred by a sole proprietor?
     A) They are not deductible and must be paid out of pocket.
     B) They are deducted from the gross income of the business, reducing the taxable income.
     C) They are deductible only if the sole proprietor has a profit.
     D) They are treated as personal expenses and are not deductible.

 

225. What is the tax consequence when a C corporation distributes dividends to its shareholders?
     A) The dividend is deductible by the corporation and is not taxable to the shareholder.
     B) The dividend is taxable to the shareholder, and the corporation must pay corporate income tax on its earnings.
     C) The dividend is not taxable to the shareholder.
     D) The corporation is only taxed if the dividend exceeds $10,000.

 

226. When does a corporation’s election to be taxed as an S corporation become effective?
     A) Immediately upon filing, regardless of the corporation’s fiscal year.
     B) On the first day of the following year after filing.
     C) It becomes effective on the date specified in the election form or the beginning of the tax year.
     D) It is only effective after a waiting period of 90 days from the filing date.

 

227. What is the tax impact of a partner withdrawing from a partnership and receiving a distribution in kind (property instead of cash)?
     A) The partner must recognize the fair market value of the property as income.
     B) The partner may recognize a gain or loss depending on the difference between the fair market value and the partner’s basis in the partnership.
     C) The distribution is tax-free as long as the property is retained for over a year.
     D) The distribution is treated as a loan and does not result in a taxable event.

 

228. What is the tax implication of selling a capital asset held for more than one year?
     A) The sale results in ordinary income taxed at the same rate as wages.
     B) The sale is subject to a capital gains tax, typically taxed at a lower rate than ordinary income.
     C) The sale is tax-free.
     D) The sale results in self-employment tax on the gain.

 

229. What happens to the tax consequences when a sole proprietor sells business assets for more than the original cost?
     A) The sale results in a capital loss.
     B) The sale results in taxable income in the form of a capital gain.
     C) The sale results in ordinary income tax only.
     D) The sale does not affect the proprietor’s tax situation.

 

230. How is a partnership’s income taxed?
     A) The partnership pays tax on its income, and partners pay tax on their distributions.
     B) The partnership itself does not pay tax; the income is passed through to the individual partners, who report it on their personal returns.
     C) The partnership is taxed at the individual partner’s rate, and each partner pays tax on the entire partnership income.
     D) The partnership does not have to file taxes unless its income exceeds $500,000.

 

231. What is the result if a corporation issues stock for property (non-cash)?
     A) The corporation does not recognize income from the issuance.
     B) The corporation recognizes income equal to the fair market value of the property received.
     C) The corporation recognizes a loss based on the fair market value of the property issued.
     D) The issuance is tax-free and does not affect the corporation’s income.

 

232. How is the taxation of a business owner in a limited liability company (LLC) determined?
     A) LLCs are taxed as corporations, and owners are taxed separately on distributions.
     B) The taxation depends on whether the LLC is taxed as a sole proprietorship, partnership, or corporation.
     C) LLC owners are taxed at corporate tax rates on their share of income.
     D) LLC income is taxed only when the owner withdraws the funds from the business.

 

233. How does a business owner’s tax liability change if the business converts from a sole proprietorship to a C corporation?
     A) The business owner’s income tax will be lower due to corporate tax rates.
     B) The business owner will pay both corporate tax on business income and individual tax on dividends received.
     C) The business owner will not experience any change in tax treatment.
     D) The business will avoid paying taxes altogether.

 

234. What is the tax impact of selling a business that operates as a partnership?
     A) The partnership must pay tax on any gains from the sale.
     B) The partners must recognize income or loss based on their individual share of the business and their partnership basis.
     C) The sale results in a tax-free transaction if the business has been operating for over 10 years.
     D) The partnership distributes all assets to the partners, and no taxes are owed.

 

235. What is the treatment of interest payments on a business loan for tax purposes?
     A) Interest payments are generally not deductible for businesses.
     B) Interest payments are deductible as a business expense, reducing taxable income.
     C) Interest payments are treated as capital expenses and must be depreciated.
     D) Interest payments are treated as a tax credit.

 

236. How are business owners taxed on income received from a qualified retirement plan?
     A) The income is taxed immediately at the time of contribution.
     B) The income is taxed as capital gains when withdrawn.
     C) The income is taxed at ordinary income tax rates when withdrawn.
     D) The income is never taxed.

 

237. What is the tax treatment of a corporation that buys back its own stock from shareholders?
     A) The transaction is generally tax-free to the corporation.
     B) The corporation must recognize income from the repurchase.
     C) Shareholders are taxed on the proceeds from the sale as capital gains.
     D) The repurchase is treated as a dividend to shareholders.

 

238. How is the sale of a business in an asset sale treated for tax purposes?
     A) The business reports the sale as ordinary income.
     B) The sale results in the recognition of capital gain or loss on the business assets sold.
     C) The transaction is tax-free.
     D) The transaction is subject to self-employment tax.

 

 

239. When a partnership distributes property to a partner, what is the partner’s tax basis in the property received?
     A) The partner’s basis is the fair market value (FMV) of the property at the time of distribution.
     B) The partner’s basis is the same as the partnership’s basis in the property.
     C) The partner’s basis is reduced by any debt associated with the property.
     D) The partner’s basis is always zero.

 

240. What is the primary tax advantage of choosing S corporation status for a business?
     A) The S corporation does not pay any taxes.
     B) The business income is not subject to self-employment tax.
     C) The S corporation pays no corporate income tax.
     D) The business is not required to file any tax returns.

 

241. Which of the following is true regarding the tax treatment of a self-employed person’s retirement plan contributions?
     A) Contributions to a self-employed retirement plan are always taxable in the year they are made.
     B) Contributions to a self-employed retirement plan are tax-deductible as business expenses.
     C) Contributions to a self-employed retirement plan are not deductible but grow tax-free.
     D) Contributions to a self-employed retirement plan are taxed as income when withdrawn.

 

242. When a business is liquidated and a sole proprietor sells its business assets, how is the sale treated for tax purposes?
     A) The sale is treated as a capital gain or loss, depending on the type of asset sold.
     B) The sale is treated as ordinary income.
     C) The sale is treated as a gift, and no tax is owed.
     D) The sale proceeds are entirely tax-free.

 

243. How is the tax treatment different for a corporation that elects S corporation status versus one that remains a C corporation?
     A) S corporations are subject to corporate income tax, while C corporations are not.
     B) C corporations can pass income through to shareholders, while S corporations cannot.
     C) S corporations avoid double taxation, whereas C corporations are taxed at both the corporate and shareholder levels.
     D) S corporations are taxed as individuals, while C corporations are taxed as partnerships.

 

244. How does the tax treatment of an LLC differ from a corporation when it comes to distribution of profits?
     A) LLC members are subject to self-employment tax on distributions, while corporate shareholders are not.
     B) LLC members can take tax-free distributions, whereas corporate shareholders must pay taxes on their dividends.
     C) LLCs are always taxed as corporations, whereas corporations always tax shareholders on dividends.
     D) LLC members cannot receive distributions, while corporations can.

 

245. What is the tax treatment of capital gains for an individual?
     A) Capital gains are always taxed as ordinary income.
     B) Long-term capital gains (held for more than one year) are typically taxed at a lower rate than ordinary income.
     C) Capital gains are tax-free if the individual is in a low-income bracket.
     D) Capital gains are not taxed if the individual has no other income.

 

246. What is the tax implication for a business that incurs net operating losses (NOL)?
     A) The business cannot use the NOL to offset any future income.
     B) The business can carry the NOL forward to offset future taxable income or carry it back to offset past taxable income.
     C) The NOL is used to reduce the tax rate for the business in the year it is incurred.
     D) NOLs can only be used to offset self-employment income.

 

247. What is the tax effect of a corporation’s issuance of new shares to an investor in exchange for cash?
     A) The issuance results in a taxable event for the corporation.
     B) The issuance does not result in taxable income to the corporation or the investor.
     C) The issuance triggers a capital gains tax for the investor.
     D) The issuance is treated as a dividend to the investor.

 

248. How does a self-employed person handle the taxation of their health insurance premiums?
     A) Health insurance premiums are not deductible for self-employed individuals.
     B) Health insurance premiums are deducted as business expenses, reducing taxable income.
     C) Health insurance premiums are taxed as income to the self-employed person.
     D) Health insurance premiums are eligible for the same tax treatment as employees’ benefits.

 

249. What is the tax impact of transferring ownership of a business to a family member through a gift?
     A) The donor is required to pay taxes on the gift at the time of the transfer.
     B) The transfer is tax-free as long as the value does not exceed the annual gift exclusion limit.
     C) The recipient pays taxes based on the gift’s fair market value.
     D) The transaction is treated as a sale, and the transferor is subject to capital gains tax.

 

250. How is a partner’s share of the partnership’s income or loss reported for tax purposes?
     A) The income or loss is reported directly on the partnership’s tax return, and no individual report is necessary.
     B) The income or loss is passed through to the partner and reported on the partner’s individual tax return.
     C) The partner must file a separate tax return for their share of the partnership’s income.
     D) The partnership pays tax on the income, and no additional reporting is required from the partners.

 

251. When is a corporation required to pay tax on dividends paid to its shareholders?
     A) The corporation does not pay tax on dividends but must withhold taxes for shareholders.
     B) The corporation pays taxes on the dividends at the same rate as its ordinary income tax rate.
     C) The corporation must pay tax on dividends at a lower rate than its regular income.
     D) The corporation does not pay taxes on dividends, but shareholders must pay taxes on the amount they receive.

 

252. How are the costs of operating a business typically treated for tax purposes?
     A) Operating costs are considered personal expenses and are not deductible.
     B) Operating costs are considered capital expenditures and must be capitalized.
     C) Operating costs are generally deductible as business expenses, reducing taxable income.
     D) Operating costs are treated as pre-tax savings and are not deducted from taxable income.

 

 

253. What is the tax treatment of a partner who receives a guaranteed payment from the partnership?
     A) The guaranteed payment is treated as taxable income to the partnership only.
     B) The guaranteed payment is treated as a distribution and is not taxable.
     C) The guaranteed payment is treated as taxable income to the partner, subject to self-employment tax.
     D) The guaranteed payment is not taxed until the partner sells their interest in the partnership.

 

254. How does a C corporation handle the taxation of its dividends?
     A) The corporation is taxed on dividends at the shareholder’s individual tax rate.
     B) The corporation does not pay taxes on dividends, but shareholders pay taxes on them.
     C) Dividends are not taxable for the corporation but are taxed at a lower rate for the shareholders.
     D) The corporation’s dividends are tax-free for shareholders, but the corporation pays a separate dividend tax.

 

255. Which of the following is true regarding the taxation of a trust or estate?
     A) Trusts and estates are taxed the same as individuals.
     B) Trusts and estates pay corporate tax rates on their income.
     C) Income earned by a trust or estate is taxed only to the beneficiaries.
     D) Trusts and estates pay no taxes on income they generate.

 

256. How are capital losses treated for an individual taxpayer?
     A) Capital losses can only offset ordinary income and are subject to a $1,500 limit.
     B) Capital losses are limited to offsetting capital gains, but any excess losses are not deductible.
     C) Capital losses can offset ordinary income up to $3,000, with any excess carried forward to future years.
     D) Capital losses are fully deductible against ordinary income with no limits.

 

257. When is a corporation required to file its tax return, assuming it follows a calendar year?
     A) A corporation must file its tax return by January 31st.
     B) A corporation must file its tax return by April 15th.
     C) A corporation must file its tax return by the 15th day of the fourth month following the end of its tax year.
     D) A corporation does not have a filing deadline and can file at any time during the year.

 

258. If a partnership distributes cash to a partner, how is this treated for tax purposes?
     A) The partner is taxed on the distribution as ordinary income.
     B) The distribution is treated as a return of capital and is not taxable to the partner unless it exceeds their basis in the partnership.
     C) The partnership must pay tax on the distribution, and the partner is not taxed.
     D) The partner is taxed on the distribution at the corporate tax rate.

 

259. Which of the following is true regarding the taxation of a sole proprietorship?
     A) A sole proprietorship is taxed as a separate entity and must file its own tax return.
     B) A sole proprietorship’s income and expenses are reported on the owner’s individual tax return.
     C) A sole proprietorship must pay taxes on its income at the corporate tax rate.
     D) A sole proprietorship is not required to file a tax return.

 

260. What tax benefit does an employer receive from providing health insurance benefits to employees?
     A) The employer receives a tax deduction for the cost of health insurance premiums paid on behalf of employees.
     B) The employer must pay taxes on the health insurance benefits provided to employees.
     C) The employer is not allowed to provide health insurance benefits to employees for tax purposes.
     D) The employer can deduct the health insurance premiums only if the employee is self-employed.

 

261. How does an LLC taxed as a partnership handle self-employment taxes?
     A) The LLC pays self-employment tax on all its income.
     B) Members of the LLC who actively participate in the business may be subject to self-employment tax on their share of the income.
     C) LLC members do not pay self-employment tax on any income from the LLC.
     D) LLC members are taxed as employees and not subject to self-employment tax.

 

262. What is the main advantage of tax-deferred retirement accounts like IRAs or 401(k)s?
     A) Contributions to tax-deferred retirement accounts are taxed at the time they are made.
     B) Contributions to tax-deferred retirement accounts are taxed when they are withdrawn in retirement.
     C) Investment income in tax-deferred retirement accounts is taxed annually, but contributions are tax-free.
     D) Contributions and earnings in tax-deferred retirement accounts are taxed as capital gains.

 

263. When can a business deduct expenses for meals provided to employees?
     A) The business can deduct 100% of the cost of employee meals if provided on a business trip.
     B) The business can deduct 50% of meals that are directly related to the business operations.
     C) The business cannot deduct any meals provided to employees.
     D) The business can deduct 100% of meals provided during company holidays.

 

264. Which of the following describes the tax treatment of a tax-exempt organization’s investment income?
     A) All investment income earned by tax-exempt organizations is subject to income tax.
     B) Tax-exempt organizations are exempt from paying tax on investment income, but only if it is related to their exempt purpose.
     C) Tax-exempt organizations must pay tax on all investment income at the corporate tax rate.
     D) Tax-exempt organizations are required to pay tax on investment income earned from unrelated business activities.

 

265. How is income from a rental property treated for tax purposes if the property is used both for business and personal purposes?
     A) The income is not taxable as long as the property is used for business purposes.
     B) The income is subject to tax, but the expenses are deductible only if the property is used primarily for business.
     C) The rental income is tax-free if used personally for more than 14 days during the year.
     D) The rental income is taxable, and expenses can be allocated between personal and business use.

 

266. When can a business expense be deducted?
     A) A business expense can be deducted when it is incurred, regardless of when it is paid.
     B) A business expense can be deducted only when it is paid in cash.
     C) A business expense can be deducted when the payment is made, or if it relates to an accrual basis taxpayer, when it is accrued.
     D) A business expense is not deductible if it is incurred before the business is operational.

 

 

267. What is the maximum amount of capital gains that can be excluded from taxation under the home sale exclusion?
     A) $50,000 for single filers and $100,000 for married couples filing jointly.
     B) $100,000 for single filers and $250,000 for married couples filing jointly.
     C) $250,000 for single filers and $500,000 for married couples filing jointly.
     D) $500,000 for both single filers and married couples filing jointly.

 

268. In which of the following situations is a taxpayer subject to self-employment tax?
     A) The taxpayer is a sole proprietor and earns income from their business.
     B) The taxpayer works as an independent contractor but receives a Form W-2 from a client.
     C) The taxpayer is a corporate employee and earns wages.
     D) The taxpayer is retired and receives dividend income.

 

269. What is the tax treatment of a nonqualified deferred compensation plan for an employee?
     A) The employee is taxed when the compensation is earned, not when it is paid.
     B) The employee is taxed when the compensation is paid, not when it is earned.
     C) The employee is taxed on the compensation both when it is earned and when it is paid.
     D) The employer is taxed on the deferred compensation, and the employee is not taxed until withdrawal.

 

270. Which of the following is a tax consequence for a business that contributes to an employee’s qualified retirement plan?
     A) The business can deduct the contributions as a business expense, reducing taxable income.
     B) The contributions are considered taxable income to the employee at the time of the contribution.
     C) The contributions are not tax-deductible for the business.
     D) The employee must pay income tax on the contributions immediately.

 

271. What happens when a corporation makes a charitable contribution to a qualified organization?
     A) The corporation can deduct the contribution as an expense, reducing its taxable income.
     B) The corporation must pay tax on the contribution and cannot deduct it.
     C) The corporation receives a tax credit for the contribution, reducing its tax liability.
     D) The contribution is taxable to the corporation, but it can deduct the amount in a future year.

 

272. How are interest payments on a loan for business property treated for tax purposes?
     A) Interest payments on business property loans are not deductible.
     B) Interest payments on business property loans are deductible as a business expense.
     C) Interest payments on business property loans are taxed as income to the borrower.
     D) Interest payments on business property loans can only be deducted if the property is used for rental purposes.

 

273. How does a tax-deferred 1031 exchange work for business property?
     A) The exchange allows a taxpayer to defer taxes on the sale of business property by reinvesting the proceeds into like-kind property.
     B) The exchange allows the taxpayer to defer taxes only if the property is a personal residence.
     C) The exchange requires the taxpayer to pay taxes immediately but allows deductions for reinvestment in property.
     D) The exchange does not apply to business property, only to real estate transactions.

 

274. What is the tax treatment of a corporation’s loss on the sale of an asset to a shareholder?
     A) The loss is deductible as a business expense, and the shareholder must pay tax on the sale.
     B) The loss is not deductible because the transaction is considered a related-party transaction.
     C) The loss is fully deductible, and no tax is owed by the shareholder.
     D) The loss can be deducted by the shareholder as a capital loss.

 

275. How does a tax credit differ from a tax deduction?
     A) A tax credit reduces the amount of taxable income, while a tax deduction reduces the tax liability.
     B) A tax deduction reduces taxable income, and a tax credit directly reduces tax liability.
     C) A tax deduction and a tax credit both reduce the amount of taxable income.
     D) A tax credit is refundable, while a tax deduction is non-refundable.

 

276. Which of the following is a common business tax deduction for a self-employed individual?
     A) Deduction for personal living expenses.
     B) Deduction for medical insurance premiums.
     C) Deduction for charitable contributions to individuals.
     D) Deduction for wages paid to family members.

 

277. What is the tax impact of selling a rental property at a gain for an individual taxpayer?
     A) The gain is subject to ordinary income tax rates.
     B) The gain is subject to long-term capital gains tax if the property was held for over a year.
     C) The gain is tax-free for the taxpayer.
     D) The gain is subject to the self-employment tax.

 

278. How does the tax treatment of a corporation’s retained earnings differ from that of distributed earnings?
     A) Retained earnings are taxed at the individual shareholder level, while distributed earnings are taxed at the corporate level.
     B) Both retained earnings and distributed earnings are taxed at the corporate tax rate.
     C) Retained earnings are not taxed, while distributed earnings are taxed at the individual shareholder level.
     D) Retained earnings are tax-free, while distributed earnings are taxed as capital gains.

 

279. How does a corporation deduct the cost of inventory for tax purposes?
     A) The corporation can only deduct the cost of inventory when the inventory is sold.
     B) The corporation can deduct the cost of inventory when it is purchased.
     C) The corporation deducts the cost of inventory when it is produced or manufactured.
     D) The corporation can deduct the cost of inventory immediately after purchase or production.

 

280. What is the maximum amount of income that an individual taxpayer can exclude from taxation when selling their principal residence?
     A) $100,000 for single filers and $200,000 for married couples filing jointly.
     B) $250,000 for single filers and $500,000 for married couples filing jointly.
     C) $500,000 for both single filers and married couples filing jointly.
     D) $1,000,000 for single filers and $2,000,000 for married couples filing jointly.

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