Tax 655 Final Exam Practice Test Questions and Answers
Master the complexities of advanced taxation with this expertly crafted TAX 655 Final Exam Practice Test. Whether you’re preparing for your final assessment or aiming to solidify your understanding of federal tax law, this comprehensive resource covers essential topics with clarity and precision. Each question is designed to reflect real exam scenarios, challenging you to apply tax rules to business, individual, and partnership tax situations.
This practice exam includes scenario-based and problem-solving questions across a wide range of topics, including income recognition, deductions, depreciation, corporate and partnership taxation, tax credits, and capital gains treatment. Each question is accompanied by a well-explained answer to ensure you not only know the right choice but understand the reasoning behind it.
Key highlights of this exam prep tool:
200+ carefully written multiple-choice questions
Covers all core topics typically tested in a TAX 655 final exam
Scenario-based problems that mirror real-world tax planning situations
Detailed answer explanations to help reinforce your understanding
Ideal for accounting majors, MBA students, and tax professionals in training
Perfect for students in graduate-level tax courses, this exam prep tool helps build exam confidence, sharpen critical thinking, and prepare you for success in both academic and professional settings.
Sample Questions and Answers
Which of the following is not a requirement to qualify for the Section 179 expense deduction?
A. The property must be tangible, depreciable, and used in trade or business
B. The total cost of the property placed in service must not exceed the annual threshold
C. The property must be acquired from a related party
D. The taxpayer must have taxable income
Answer: C
Explanation: Section 179 excludes property acquired from related parties. This prevents manipulation of depreciation deductions through internal sales.
Which tax form must a partnership file annually?
A. Form 1040
B. Form 1065
C. Form 1120
D. Form 941
Answer: B
Explanation: Partnerships file Form 1065 to report income, deductions, gains, and losses. They pass through income to partners, who report it on their individual returns.
A corporation has gross receipts averaging $28 million over the past three years. Which inventory accounting method is it generally not allowed to use?
A. FIFO
B. Specific Identification
C. LIFO
D. Cash method
Answer: D
Explanation: Under the Tax Cuts and Jobs Act, businesses with gross receipts under $27 million (2025 indexed amount) may use the cash method. This corporation exceeds that threshold.
Which item is not included in gross income under IRC §61?
A. Alimony received (post-2018 divorce)
B. Life insurance proceeds due to death
C. Interest from corporate bonds
D. Prizes and awards
Answer: B
Explanation: Life insurance proceeds paid upon death are excluded from gross income per IRC §101.
A C corporation distributes appreciated property to a shareholder. What is the tax consequence?
A. No gain or loss is recognized
B. The shareholder recognizes capital gain only
C. The corporation recognizes gain as if it sold the property
D. Only the basis is transferred to the shareholder
Answer: C
Explanation: Under IRC §311(b), when a corporation distributes appreciated property, it must recognize gain as if it sold the property at fair market value.
Under the Accrual Method, when is income generally recognized?
A. When earned, regardless of when received
B. When received in cash
C. When expenses are paid
D. When related party confirms the transaction
Answer: A
Explanation: Accrual method requires income recognition when all events have occurred to fix the right to receive, and the amount can be determined with reasonable accuracy.
What is the maximum capital loss deduction against ordinary income for individuals?
A. $0
B. $1,500
C. $3,000
D. Unlimited
Answer: C
Explanation: Individuals may deduct up to $3,000 of net capital losses against ordinary income per year ($1,500 if married filing separately).
Which of the following is a “below-market loan” subject to imputed interest rules?
A. Employer advances $9,000 interest-free to an employee
B. A $25,000 loan at market interest
C. A bank loan with 5% interest
D. A gift loan of $110,000 to a child
Answer: D
Explanation: Gift loans over $10,000 are subject to imputed interest under IRC §7872. Exceptions exist for loans under $100,000 with limited income.
Bonus depreciation currently allows businesses to depreciate what percentage of qualified property?
A. 50%
B. 100%
C. 80%
D. 0%
Answer: C
Explanation: As of 2025, bonus depreciation phases down to 80% (from 100% in 2022), per the TCJA phase-out schedule.
Which of the following is not a deductible business expense?
A. Advertising
B. Bribes
C. Salaries
D. Rent
Answer: B
Explanation: Bribes are explicitly non-deductible under IRC §162(c).
An individual sells a primary residence and realizes a gain of $400,000. The taxpayer is single. What amount is excluded from income?
A. $0
B. $250,000
C. $400,000
D. $100,000
Answer: B
Explanation: A single filer can exclude up to $250,000 of gain on the sale of a primary residence under IRC §121, provided ownership and use tests are met.
What is the alternative minimum tax (AMT) primarily designed to do?
A. Encourage itemized deductions
B. Limit the standard deduction
C. Ensure high-income taxpayers pay a minimum tax
D. Replace self-employment tax
Answer: C
Explanation: AMT aims to prevent high-income taxpayers from avoiding tax through excessive deductions or preferences.
Which of the following is not a tax credit?
A. Child Tax Credit
B. Earned Income Tax Credit
C. Lifetime Learning Credit
D. Mortgage Interest Deduction
Answer: D
Explanation: The mortgage interest deduction is a deduction, not a credit.
A sole proprietor contributes $60,000 to a SEP IRA. What is the maximum deductible contribution?
A. $60,000
B. 100% of net income
C. 25% of net income, capped at IRS limit
D. $6,000
Answer: C
Explanation: SEP IRAs allow up to 25% of compensation, capped annually (e.g., $69,000 in 2024). The deduction cannot exceed that amount.
Which entity structure is subject to double taxation?
A. Sole proprietorship
B. S Corporation
C. C Corporation
D. Partnership
Answer: C
Explanation: C Corporations pay tax on earnings, and shareholders are taxed again on dividends—this is double taxation.
Which is a pass-through entity for tax purposes?
A. C Corporation
B. S Corporation
C. LLC taxed as a C Corp
D. Public company
Answer: B
Explanation: S Corporations pass income, deductions, and credits to shareholders’ personal returns, avoiding corporate tax.
What is the purpose of the Step-Up in Basis rule at death?
A. To increase estate taxes
B. To eliminate transfer taxes
C. To reduce capital gain on inherited property
D. To defer depreciation
Answer: C
Explanation: The step-up in basis aligns the beneficiary’s basis with the FMV at date of death, often reducing future capital gains.
Which of the following is not subject to self-employment tax?
A. Net earnings from sole proprietorship
B. Distributions from S corporation
C. Freelance income
D. Partnership guaranteed payments
Answer: B
Explanation: S corporation distributions are not subject to self-employment tax, unlike wages or guaranteed payments.
Which schedule is used to report itemized deductions?
A. Schedule C
B. Schedule A
C. Schedule D
D. Schedule B
Answer: B
Explanation: Schedule A is used for itemized deductions, including medical expenses, mortgage interest, and state/local taxes.
What is the due date for filing Form 1120 (C Corporation) without extension?
A. March 15
B. April 15
C. June 15
D. September 15
Answer: B
Explanation: Form 1120 is due by the 15th day of the 4th month after the end of the tax year—April 15 for calendar year taxpayers.
Which of the following is not considered “earned income”?
A. Wages
B. Tips
C. Interest income
D. Net self-employment income
Answer: C
Explanation: Interest income is passive/unearned income and not subject to earned income tax credits or self-employment tax.
What is the main advantage of a Roth IRA?
A. Contributions are deductible
B. Earnings are taxed annually
C. Distributions are tax-free in retirement
D. Unlimited contributions allowed
Answer: C
Explanation: Roth IRA distributions are tax-free after age 59½ if the account is held for 5+ years.
Which is a pre-tax retirement contribution?
A. Roth 401(k)
B. Traditional 401(k)
C. Taxable brokerage account
D. HSA withdrawal
Answer: B
Explanation: Contributions to traditional 401(k)s are made pre-tax and grow tax-deferred.
What is the maximum Section 179 deduction for 2025 (subject to phase-out)?
A. $500,000
B. $1,000,000
C. $1,220,000
D. $1,300,000
Answer: C
Explanation: For 2025, the Section 179 deduction limit is $1,220,000 (indexed for inflation).
What triggers the kiddie tax?
A. Earned income over $12,950
B. Unearned income for children under 19 (or full-time students under 24) over threshold
C. Any income earned by minors
D. Parents filing jointly
Answer: B
Explanation: The kiddie tax applies to unearned income of children over $2,500 (2025 threshold), taxed at parental rates.
A 1031 like-kind exchange allows for:
A. Immediate tax-free gain
B. Complete gain exclusion
C. Tax deferral on real property exchanges
D. Recognition of capital losses
Answer: C
Explanation: Like-kind exchanges allow deferral—not exclusion—of gain on qualified real property used in business/investment.
Which of the following expenses is capitalized, not deducted?
A. Rent
B. Repairs
C. Inventory purchase
D. Utilities
Answer: C
Explanation: Inventory purchases are capitalized and expensed as sold (Cost of Goods Sold).
Which code section covers gross income?
A. §199A
B. §61
C. §179
D. §1231
Answer: B
Explanation: IRC §61 defines gross income broadly, including all income from whatever source derived.
What is the current top individual marginal tax rate for 2025?
A. 35%
B. 37%
C. 39.6%
D. 40%
Answer: B
Explanation: For 2025, the top marginal rate remains 37% under the TCJA provisions (unless Congress changes it).
Which of the following is a nonrefundable tax credit?
A. Earned Income Credit
B. Child and Dependent Care Credit
C. Premium Tax Credit
D. American Opportunity Credit (partial)
Answer: B
Explanation: The Child and Dependent Care Credit is nonrefundable—meaning it can reduce tax to zero but not beyond.
Scenario: Amanda is a sole proprietor who purchased office equipment for $12,000 in 2025. She elects Section 179 to expense the full amount. Her business has $10,000 of net income before depreciation.
What is the allowable Section 179 deduction?
A. $12,000
B. $10,000
C. $2,000
D. $0
Answer: B
Explanation: Section 179 is limited to the amount of taxable income from the business. Amanda may deduct only $10,000, the rest can be carried forward.
Scenario: James, age 45, withdraws $20,000 from his traditional IRA in 2025 before reaching age 59½. He does not meet any exception.
What is the penalty in addition to income tax?
A. $0
B. $1,000
C. $2,000
D. $5,000
Answer: C
Explanation: Early IRA withdrawals are subject to a 10% penalty, unless an exception applies. 10% of $20,000 = $2,000.
Scenario: A taxpayer has $100,000 in total income, including $15,000 of net capital loss from stock sales.
What is the maximum capital loss deduction for 2025?
A. $0
B. $3,000
C. $10,000
D. $15,000
Answer: B
Explanation: Only $3,000 of capital loss can be deducted against ordinary income per year; the rest is carried forward.
Olivia pays $20,000 in tuition and $1,500 for books for her dependent child’s college education in 2025.
What is the maximum American Opportunity Credit she can claim?
A. $1,500
B. $2,000
C. $2,500
D. $3,000
Answer: C
Explanation: The AOTC provides a credit of 100% of the first $2,000 and 25% of the next $2,000 in qualified expenses = $2,500 max.
Scenario: Raj sold a rental property for $300,000. His adjusted basis is $200,000. He claimed $30,000 of depreciation during ownership.
How much of the gain is subject to Section 1250 recapture?
A. $100,000
B. $70,000
C. $30,000
D. $0
Answer: C
Explanation: The $30,000 in depreciation is recaptured as unrecaptured Section 1250 gain, taxed up to 25%.
Scenario: Lisa, a single taxpayer, has $230,000 in wages and $15,000 in net investment income.
How much is her net investment income tax (NIIT) liability?
A. $0
B. $190
C. $380
D. $570
Answer: C
Explanation: NIIT = 3.8% of lesser of (MAGI – $200k) or investment income
$230k – $200k = $30k → lesser of $30k or $15k = $15k → 3.8% × $15k = $570