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FL Tax Law Specialist study materials
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FL Tax Law Specialist practice questions

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Question 1Federal Individual Income Tax - Income, Deductions, Credits, and Filing Status

For the 2024 tax year, a single taxpayer under age 65 with no special circumstances must file a federal return once gross income reaches which threshold?

  1. $29,200
  2. $16,100
  3. $14,600 Correct answer.
  4. $1,300

Explanation

The standard deduction for a single filer in 2024 is $14,600, and a taxpayer with only that standard deduction must file when gross income equals or exceeds it. The other figures apply to different filing statuses or to dependents with unearned income.

Question 2Federal Individual Income Tax - Income, Deductions, Credits, and Filing Status

A taxpayer's spouse died in 2022, and the taxpayer has not remarried and maintains a home for a dependent child. Which filing status is available for the 2024 return?

  1. Single
  2. Head of household
  3. Qualifying surviving spouse Correct answer.
  4. Married filing jointly

Explanation

A qualifying surviving spouse may use that status for the two tax years following the year of the spouse's death, provided the taxpayer maintains a household for a dependent child and has not remarried. The death year 2022 makes 2023 and 2024 the two eligible years.

Question 3Federal Individual Income Tax - Income, Deductions, Credits, and Filing Status

Which item of income is excluded from gross income under the Internal Revenue Code?

  1. Wages earned from part-time employment
  2. Rental income from a duplex
  3. Compensation received for physical injuries Correct answer.
  4. Interest credited to a savings account

Explanation

Damages received on account of personal physical injury or physical sickness are excluded from gross income under section 104. Wages, interest, and rents are all includible items that must be reported.

Question 4Federal Individual Income Tax - Income, Deductions, Credits, and Filing Status

A taxpayer sells stock held for 14 months at a gain. How is the gain characterized for federal income tax purposes?

  1. Long-term capital gain Correct answer.
  2. Ordinary income
  3. Tax-exempt income
  4. Short-term capital gain

Explanation

A capital asset held for more than one year produces long-term capital gain, which is taxed at preferential rates. The holding period begins the day after acquisition and ends on the sale date.

Question 5Federal Individual Income Tax - Income, Deductions, Credits, and Filing Status

A self-employed taxpayer reports $80,000 of net profit on Schedule C. What is the deductible portion of self-employment tax for income tax purposes?

  1. One-half of the self-employment tax computed on the net profit Correct answer.
  2. Nothing, because self-employment tax is not deductible
  3. One-quarter of the self-employment tax computed on the net profit
  4. The entire self-employment tax computed on the net profit

Explanation

A self-employed individual may deduct one-half of the self-employment tax as an adjustment to gross income. The deduction reflects the employer-equivalent share of the tax.

Question 6Federal Individual Income Tax - Income, Deductions, Credits, and Filing Status

Which expense is deductible as an itemized medical expense on Schedule A?

  1. Cosmetic surgery for appearance
  2. Vitamins taken for general health
  3. Gym membership dues
  4. Prescription eyeglasses Correct answer.

Explanation

Prescription eyeglasses are prescribed medical care and qualify as a deductible medical expense, subject to the 7.5 percent of AGI floor. Purely cosmetic procedures, general health memberships, and routine supplements generally do not qualify.

Question 7Federal Individual Income Tax - Income, Deductions, Credits, and Filing Status

A taxpayer pays $9,000 of state income tax and $7,000 of local property tax in 2024. Assuming no other itemized deductions, what amount may be claimed for state and local taxes?

  1. $10,000 Correct answer.
  2. $16,000
  3. $7,000
  4. $9,000

Explanation

The deduction for state and local income, sales, and property taxes is capped at $10,000 for a single filer. Since the combined $16,000 exceeds the cap, only $10,000 is deductible.

Question 8Federal Individual Income Tax - Income, Deductions, Credits, and Filing Status

A taxpayer pays $4,000 of mortgage interest on acquisition debt secured by a principal residence. How is this reported?

  1. As an itemized deduction on Schedule A Correct answer.
  2. As an adjustment to gross income on Schedule 1
  3. As a business expense on Schedule C
  4. As a refundable credit

Explanation

Qualified residence interest on acquisition indebtedness is an itemized deduction reported on Schedule A. It is not an above-the-line adjustment, a business expense, or a credit.

Question 9Federal Individual Income Tax - Income, Deductions, Credits, and Filing Status

A single taxpayer with modified AGI of $60,000 contributes $5,000 to a traditional IRA and is not covered by a workplace plan. What is the deductible amount?

  1. $0
  2. $3,500
  3. $2,500
  4. $5,000 Correct answer.

Explanation

When neither the taxpayer nor the spouse is covered by an employer plan, the traditional IRA contribution is fully deductible up to the annual limit regardless of income. The $5,000 contribution is therefore fully deductible.

Question 10Federal Individual Income Tax - Income, Deductions, Credits, and Filing Status

A taxpayer claims a child as a qualifying child for the child tax credit. What is the maximum credit per qualifying child for 2024?

  1. $2,000 Correct answer.
  2. $500
  3. $3,600
  4. $1,000

Explanation

The child tax credit is up to $2,000 per qualifying child under age 17 for 2024, with a portion potentially refundable. The $500 figure is the credit for other dependents.

Question 11Federal Individual Income Tax - Income, Deductions, Credits, and Filing Status

A taxpayer pays $3,000 of qualified tuition for a dependent's first year of college. Which credit is available?

  1. Earned Income Credit
  2. Child and Dependent Care Credit
  3. American Opportunity Credit Correct answer.
  4. Lifetime Learning Credit

Explanation

The American Opportunity Credit applies to the first four years of post-secondary education and can reach $2,500 per student. The Lifetime Learning Credit is an alternative but is not limited to the first four years.

Question 12Federal Individual Income Tax - Income, Deductions, Credits, and Filing Status

Which taxpayer qualifies for head of household filing status?

  1. A married taxpayer whose spouse lived in the home all year
  2. An unmarried taxpayer who pays more than half the cost of maintaining a home for a dependent parent Correct answer.
  3. An unmarried taxpayer who pays less than half the cost of maintaining the home
  4. An unmarried taxpayer who lives alone with no dependents

Explanation

Head of household requires an unmarried or considered-unmarried taxpayer who furnishes more than half the cost of maintaining a household for a qualifying person. A dependent parent satisfies the qualifying person test even if the parent lives elsewhere.

Question 13Federal Individual Income Tax - Income, Deductions, Credits, and Filing Status

A taxpayer receives $12,000 of Social Security benefits and has provisional income below the base amount. How are the benefits taxed?

  1. The full amount of the benefits is included
  2. Up to 50 percent of the benefits are included
  3. None of the benefits are included in gross income Correct answer.
  4. Up to 85 percent of the benefits are included

Explanation

When provisional income falls below the base amount of $25,000 for a single filer, none of the Social Security benefits are taxable. The 50 and 85 percent tiers apply only as provisional income rises above the thresholds.

Question 14Federal Individual Income Tax - Income, Deductions, Credits, and Filing Status

A taxpayer sells a principal residence owned and used for five of the last five years at a $300,000 gain. What amount may be excluded if single?

  1. $250,000 Correct answer.
  2. $0
  3. $500,000
  4. $300,000

Explanation

A single taxpayer may exclude up to $250,000 of gain on the sale of a principal residence used as such for two of the five years before sale. The remaining $50,000 is taxable.

Question 15Federal Individual Income Tax - Income, Deductions, Credits, and Filing Status

A taxpayer maintains a home office used exclusively and regularly as the principal place of business. How is the deduction claimed?

  1. As a business expense on Schedule C, limited to gross income from the business Correct answer.
  2. As a nonrefundable credit
  3. As an adjustment to gross income on Schedule 1
  4. As an itemized deduction on Schedule A with no limit

Explanation

A self-employed taxpayer deducts home office expenses on Schedule C, but the deduction cannot create or increase a loss from the business. Unused amounts may carry forward.

Question 16Federal Individual Income Tax - Income, Deductions, Credits, and Filing Status

A taxpayer with $50,000 of AGI donates $10,000 cash to a qualified public charity. What is the maximum charitable deduction allowed for the year?

  1. $5,000
  2. $15,000
  3. $10,000 Correct answer.
  4. $30,000

Explanation

Cash contributions to public charities are generally deductible up to 60 percent of AGI, which here equals $30,000. The $10,000 contribution is therefore fully deductible.

Question 17Federal Individual Income Tax - Income, Deductions, Credits, and Filing Status

Which filing status allows a married taxpayer to be treated as unmarried for the entire year because the spouse did not live in the home during the last six months?

  1. Married filing separately
  2. Qualifying surviving spouse
  3. Single
  4. Head of household Correct answer.

Explanation

A married taxpayer who lived apart from the spouse for the last six months of the year, maintains a home for a dependent, and meets the other tests is treated as unmarried and may file as head of household. This is often called the abandoned spouse rule.

Question 18Federal Individual Income Tax - Income, Deductions, Credits, and Filing Status

A taxpayer's dependent child earned $8,000 of wages and has no unearned income. What is the child's standard deduction for 2024?

  1. $1,300
  2. $14,600
  3. $0
  4. $8,000 Correct answer.

Explanation

For a dependent with only earned income, the standard deduction is the greater of $1,300 or earned income plus $450, capped at the single standard deduction. Here earned income of $8,000 produces a standard deduction of $8,000.

Question 19Federal Individual Income Tax - Income, Deductions, Credits, and Filing Status

How are alimony payments made under a divorce decree executed in 2019 treated for the payer?

  1. Deductible as a business expense
  2. Deductible as an itemized deduction
  3. Deductible as an adjustment to gross income
  4. Not deductible by the payer Correct answer.

Explanation

The Tax Cuts and Jobs Act repealed the alimony deduction and inclusion rules for divorce instruments executed after 2018. Payments under a 2019 decree are therefore neither deductible by the payer nor includible by the recipient.

Question 20Federal Individual Income Tax - Income, Deductions, Credits, and Filing Status

A taxpayer has $5,000 of gambling winnings and $7,000 of gambling losses. How are these reported?

  1. $2,000 net loss deducted on Schedule C
  2. $5,000 of winnings in income and $5,000 of losses as an itemized deduction Correct answer.
  3. $5,000 of winnings in income with no loss deduction
  4. $7,000 of losses deducted against other income

Explanation

Gambling winnings must be reported in full, and losses are deductible only as an itemized deduction and only to the extent of winnings. The taxpayer therefore reports $5,000 of income and deducts $5,000 of losses.

Question 21Federal Individual Income Tax - Income, Deductions, Credits, and Filing Status

A taxpayer receives a $2,000 state income tax refund in 2024 after itemizing in 2023 and fully deducting the state tax paid. How is the refund treated?

  1. Included in income to the extent the prior deduction reduced tax Correct answer.
  2. Treated as a nontaxable gift
  3. Excluded entirely as a recovery
  4. Treated as a capital gain

Explanation

Under the tax benefit rule, a refund of state tax is included in income to the extent the prior deduction produced a tax benefit. Because the taxpayer itemized and fully deducted the tax, the refund is taxable.

Question 22Federal Individual Income Tax - Income, Deductions, Credits, and Filing Status

Which taxpayer may claim the Earned Income Tax Credit?

  1. A taxpayer with only dividend income
  2. A taxpayer with no earned income
  3. A taxpayer claimed as a dependent
  4. A taxpayer with earned income and investment income below the annual limit Correct answer.

Explanation

The Earned Income Tax Credit requires earned income and limits disqualified investment income to a threshold amount. It is refundable and is not available to those claimed as dependents.

Question 23Federal Individual Income Tax - Income, Deductions, Credits, and Filing Status

A taxpayer contributes $7,000 to a Roth IRA in 2024. How is the contribution treated?

  1. Deductible, with taxable distributions
  2. Not deductible, with qualified distributions tax-free Correct answer.
  3. Not deductible, with all distributions taxable
  4. Deductible, with tax-free distributions

Explanation

Roth IRA contributions are made with after-tax dollars and are not deductible. Qualified distributions, including earnings, are tax-free when the five-year and age tests are met.

Question 24Federal Individual Income Tax - Income, Deductions, Credits, and Filing Status

A taxpayer paid $2,000 of student loan interest in 2024 and has AGI of $70,000. What is the treatment?

  1. Not deductible at any income level
  2. Claimed as a refundable credit
  3. Deducted as an itemized deduction
  4. Deducted as an adjustment to gross income, up to $2,500 Correct answer.

Explanation

Student loan interest is deductible as an adjustment to gross income, up to $2,500, subject to a phase-out at higher income. At $70,000 of AGI a single filer remains under the phase-out range.

Question 25Federal Individual Income Tax - Income, Deductions, Credits, and Filing Status

A taxpayer sells a collectible held for three years at a $10,000 gain. What rate applies to the gain?

  1. 20 percent
  2. 28 percent Correct answer.
  3. 15 percent
  4. 0 percent

Explanation

Gains on collectibles such as art and antiques are taxed at a maximum rate of 28 percent when held long term. The lower preferential rates for other capital assets do not apply.

Question 26Federal Individual Income Tax - Income, Deductions, Credits, and Filing Status

A taxpayer is a U.S. citizen who lived and worked abroad for the entire 2024 tax year, meeting the physical presence test and the bona fide residence test. Which filing status is available to an unmarried taxpayer in this situation?

  1. Married filing separately, because foreign residence changes marital status
  2. Qualifying surviving spouse, because residence abroad extends the joint return period
  3. Head of household, because living abroad is treated as maintaining a household
  4. Single, with the foreign earned income exclusion claimed on Form 2555 Correct answer.

Explanation

An unmarried taxpayer who satisfies the foreign earned income requirements still files as single; the exclusion is claimed on Form 2555 and does not alter filing status. Head of household requires a qualifying person and more than half the cost of maintaining a household for that person.

Question 27Federal Individual Income Tax - Income, Deductions, Credits, and Filing Status

A taxpayer's employer reimbursed $4,000 of moving expenses in 2024 under an accountable plan, and the taxpayer is an active-duty member of the Armed Forces whose permanent change of station was ordered by the military. How is the reimbursement treated?

  1. Included in gross income because moving expense reimbursements were repealed for all taxpayers
  2. Excluded from gross income because it is a qualified military move under an accountable plan Correct answer.
  3. Included in gross income but offset by an above-the-line moving expense deduction
  4. Excluded only if the taxpayer itemizes moving expenses on Schedule A

Explanation

The suspension of the moving expense deduction and exclusion does not apply to active-duty Armed Forces members moving under military orders, so a qualified reimbursement under an accountable plan is excluded. The exclusion applies only to the extent the expenses would otherwise be deductible.

Question 28Federal Individual Income Tax - Income, Deductions, Credits, and Filing Status

A taxpayer received a $1,500 state income tax refund in 2024 relating to 2023, when the taxpayer claimed the standard deduction. How is the refund reported on the 2024 return?

  1. Reported as a capital gain on Schedule D
  2. Excluded from income because the prior-year tax produced no federal benefit Correct answer.
  3. Reported as ordinary income on Schedule 1 in full
  4. Reported as other income only if the taxpayer itemizes in 2024

Explanation

The state tax refund is taxable only to the extent the prior-year deduction produced a federal tax benefit. Because the taxpayer claimed the standard deduction in 2023, no state tax was actually deducted, so the refund is excluded.

Question 29Federal Individual Income Tax - Income, Deductions, Credits, and Filing Status

A taxpayer, age 55, withdraws $10,000 from a traditional IRA in 2024 and uses it to pay qualified higher education expenses for a dependent. Which treatment applies?

  1. The 10% additional tax is waived, but ordinary income tax is still due on the distribution Correct answer.
  2. The distribution is entirely tax-free because it is for education
  3. The distribution is taxed at capital gains rates
  4. The distribution is tax-free but the 10% additional tax applies

Explanation

Qualified higher education expenses are an exception to the 10% additional tax on early distributions from an IRA, but the distribution remains includible in gross income. The exception eliminates only the penalty, not the ordinary income tax.

Question 30Federal Individual Income Tax - Income, Deductions, Credits, and Filing Status

A taxpayer has $30,000 of net self-employment earnings and no other income. What is the correct treatment of the self-employment tax attributable to those earnings?

  1. The self-employment tax is deductible only if the taxpayer itemizes
  2. No deduction is allowed for self-employment tax
  3. The full self-employment tax is deductible as an itemized deduction
  4. One-half of the self-employment tax is deductible as an above-the-line adjustment to income Correct answer.

Explanation

A self-employed taxpayer may deduct one-half of the self-employment tax as an adjustment to gross income, reflecting the employer-equivalent share. The deduction is claimed on Schedule 1 and is available whether or not the taxpayer itemizes.

Question 31Federal Individual Income Tax - Income, Deductions, Credits, and Filing Status

A taxpayer received $50,000 of unemployment compensation and $20,000 of wages in 2024. How is the unemployment compensation treated?

  1. Fully includible in gross income as ordinary income Correct answer.
  2. Taxed at long-term capital gains rates
  3. Included only to the extent it exceeds the standard deduction
  4. Excluded from gross income because it is a government benefit

Explanation

Unemployment compensation is includible in gross income and reported on Schedule 1; the temporary exclusion enacted for certain years has expired. It is ordinary income, not capital gain.

Question 32Federal Individual Income Tax - Income, Deductions, Credits, and Filing Status

A taxpayer received a $25,000 gift from a parent and $3,000 of interest from a savings account. What amount is included in the taxpayer's gross income?

  1. $0
  2. $25,000
  3. $3,000 Correct answer.
  4. $28,000

Explanation

Gifts are excluded from the recipient's gross income, while interest earned on a savings account is taxable. Only the $3,000 of interest is included.

Question 33Federal Individual Income Tax - Income, Deductions, Credits, and Filing Status

A taxpayer paid $6,000 of qualified adoption expenses in 2024 to adopt a U.S. child who is not a child with special needs, and the adoption was finalized in 2024. What credit may the taxpayer claim?

  1. A deduction rather than a credit for adoption expenses
  2. A refundable credit equal to the full amount paid
  3. A credit only if the child is a child with special needs
  4. A nonrefundable credit up to the dollar limitation, phased out at higher modified AGI Correct answer.

Explanation

The adoption credit is nonrefundable and limited to the statutory maximum per child, reduced ratably when modified AGI exceeds the phaseout threshold. For a child without special needs, the credit is allowed in the year the adoption becomes final.

Question 34Federal Individual Income Tax - Income, Deductions, Credits, and Filing Status

A taxpayer has $12,000 of qualified dependent care expenses for two children and earned income of $40,000. What is the maximum amount of expenses on which the child and dependent care credit may be based?

  1. $12,000
  2. $6,000 Correct answer.
  3. $3,000
  4. $8,000

Explanation

The credit is computed on the lesser of actual expenses, earned income, or the statutory cap, which is $6,000 for two or more qualifying persons. The applicable percentage then reduces the credit based on AGI.

Question 35Federal Individual Income Tax - Income, Deductions, Credits, and Filing Status

A taxpayer's employer paid $8,000 of premiums for employer-provided group-term life insurance coverage of $150,000. How is the cost of coverage above $50,000 treated?

  1. Deductible by the employee as an itemized expense
  2. Included in the employee's gross income based on the IRS uniform premium table Correct answer.
  3. Included only if the employee names a beneficiary other than a spouse
  4. Excluded entirely because group-term life insurance is always tax-free

Explanation

Employer-paid group-term life insurance is excluded up to $50,000 of coverage; the cost of coverage above that amount, determined under the IRS uniform premium table, is includible in gross income. The amount is reported as wages on Form W-2.

Question 36Federal Individual Income Tax - Income, Deductions, Credits, and Filing Status

A taxpayer received $10,000 of workers' compensation benefits and $5,000 of compensatory damages for a physical personal injury, neither of which was previously deducted. What amount is included in gross income?

  1. $10,000
  2. $0 Correct answer.
  3. $5,000
  4. $15,000

Explanation

Workers' compensation benefits are excluded from gross income, and compensatory damages for a physical personal injury are excluded as well. Neither amount is taxable on these facts.

Question 37Federal Individual Income Tax - Income, Deductions, Credits, and Filing Status

A taxpayer who is self-employed paid $5,000 of health insurance premiums for coverage of the taxpayer, spouse, and dependents and had $60,000 of net self-employment income. How is the premium treated?

  1. Deductible only as an itemized medical expense
  2. Deductible as an above-the-line adjustment limited to earned income from the business Correct answer.
  3. Deductible in full regardless of whether the taxpayer had a profit
  4. Nondeductible because the taxpayer does not itemize

Explanation

A self-employed taxpayer may deduct health insurance premiums for the taxpayer, spouse, and dependents as an adjustment to income, but the deduction cannot exceed earned income from the trade or business. It is unavailable for any month the taxpayer was eligible for an employer-subsidized plan.

Question 38Federal Individual Income Tax - Income, Deductions, Credits, and Filing Status

A taxpayer sold stock held for two years at a $15,000 gain and has no other capital transactions. The taxpayer's taxable income places them in the 24% ordinary bracket. What rate applies to the gain?

  1. 0%
  2. 28%
  3. 15% Correct answer.
  4. 24%

Explanation

A long-term capital gain from stock held more than one year is taxed at the preferential rate that applies to the taxpayer's bracket; for taxable income in the middle brackets the rate is 15%. The 24% ordinary rate does not apply to the long-term gain.

Question 39Federal Individual Income Tax - Income, Deductions, Credits, and Filing Status

A taxpayer sold a rental property held for six years at a $40,000 gain, including $25,000 of depreciation taken. How is the gain taxed?

  1. The entire $40,000 is taxed at 15%
  2. The $25,000 of depreciation is excluded from income
  3. The entire $40,000 is taxed at ordinary rates
  4. The $25,000 of unrecaptured depreciation is taxed at up to 25%, and the remaining gain at long-term capital gains rates Correct answer.

Explanation

Gain on the sale of depreciable real property is split: unrecaptured Section 1250 gain is taxed at a maximum rate of 25%, while the remaining long-term gain qualifies for the regular long-term capital gains rates. Depreciation taken reduces basis and is therefore included in the gain.

Question 40Federal Individual Income Tax - Income, Deductions, Credits, and Filing Status

A taxpayer made a $2,000 contribution to a health savings account in 2024 while covered by a qualifying high-deductible health plan and used $1,200 for qualified medical expenses. How is the account treated?

  1. The contribution is treated as a medical itemized deduction
  2. The distribution is taxable because it exceeds the contribution
  3. The contribution is deductible above the line, and the qualified distribution is tax-free Correct answer.
  4. The contribution is deductible only if the taxpayer itemizes

Explanation

HSA contributions within the statutory limit are deductible as an adjustment to income when made by the account holder, and distributions for qualified medical expenses are excluded from income. The account holder need not itemize to claim the deduction.

Question 41Federal Business and Entity Taxation - Sole Proprietorships, Partnerships, and Corporations

A single-member LLC that has not elected corporate status is treated for federal income tax purposes as which of the following?

  1. A trust filing Form 1041
  2. A disregarded entity whose activity is reported by its owner Correct answer.
  3. A C corporation filing Form 1120
  4. A partnership filing Form 1065

Explanation

Under the default classification regulations, an eligible entity with a single owner is disregarded as separate from its owner unless it elects otherwise. Its income and deductions therefore flow onto the owner's return, typically Schedule C for a business.

Question 42Federal Business and Entity Taxation - Sole Proprietorships, Partnerships, and Corporations

A sole proprietor reports the net profit from a Schedule C business on which form and in which capacity?

  1. Schedule E, as rental real estate income
  2. Form 1120, as corporate taxable income
  3. Form 1065, as ordinary business income
  4. Schedule C, with the net profit carried to Schedule 1 of Form 1040 Correct answer.

Explanation

A sole proprietor's trade or business income is computed on Schedule C and the net result is carried to Schedule 1 (Form 1040) as additional income. The proprietor then pays both income tax and self-employment tax on the net earnings.

Question 43Federal Business and Entity Taxation - Sole Proprietorships, Partnerships, and Corporations

A partnership with two equal general partners earns $200,000 of ordinary business income and makes no special allocations. How much income does each partner report on their individual return?

  1. $200,000 each, because partners report the entity's total income
  2. $0 each, because the partnership pays the tax at the entity level
  3. $100,000 each, characterized as ordinary income Correct answer.
  4. $100,000 each, taxed as capital gain

Explanation

A partnership is a pass-through entity that generally pays no entity-level income tax; each partner reports their distributive share. With equal interests and no special allocations, each partner includes $100,000 of ordinary business income.

Question 44Federal Business and Entity Taxation - Sole Proprietorships, Partnerships, and Corporations

Which characteristic distinguishes a C corporation from a partnership for federal income tax purposes?

  1. The C corporation must distribute all earnings annually to avoid taxation
  2. The C corporation is a separate taxable entity that pays tax on its own income Correct answer.
  3. The C corporation's shareholders report entity income directly on their returns
  4. The C corporation is exempt from the corporate alternative minimum tax

Explanation

A C corporation is a separate taxable entity that computes and pays federal income tax on its earnings. Shareholders are taxed again on dividends, producing the classic double taxation that pass-through entities avoid.

Question 45Federal Business and Entity Taxation - Sole Proprietorships, Partnerships, and Corporations

A taxpayer operates a sole proprietorship and also has wages from an unrelated employer. Which tax applies to the proprietorship's net earnings?

  1. Self-employment tax on the net earnings, computed on Schedule SE Correct answer.
  2. Federal unemployment tax paid by the proprietor as an employee
  3. FICA withholding collected by the proprietorship from itself
  4. No payroll-type tax, because only employers pay such taxes

Explanation

A sole proprietor is self-employed and owes self-employment tax on net earnings from self-employment, computed on Schedule SE. The proprietorship does not withhold FICA from the owner as though the owner were an employee.

Question 46Federal Business and Entity Taxation - Sole Proprietorships, Partnerships, and Corporations

A partner receives a guaranteed payment for services rendered to the partnership. How is that payment generally treated?

  1. Ordinary income to the partner and a deductible business expense of the partnership Correct answer.
  2. A tax-free return of the partner's capital contribution
  3. A dividend qualifying for the reduced capital gain rates
  4. A distribution that reduces the partner's outside basis but is never income

Explanation

A guaranteed payment is made without regard to partnership income and is ordinary income to the receiving partner. The partnership generally deducts it as a business expense, which reduces the distributive shares of all partners.

Question 47Federal Business and Entity Taxation - Sole Proprietorships, Partnerships, and Corporations

A corporation files Form 1120 and reports taxable income of $60,000. Which rate structure generally applies to this corporation?

  1. Graduated individual rates from 10 to 37 percent
  2. A flat 21 percent corporate rate on taxable income Correct answer.
  3. The 15.3 percent self-employment tax rate
  4. The 15 percent qualified dividend rate

Explanation

Since the 2017 tax revision, C corporations are generally subject to a flat 21 percent federal income tax rate. Individual graduated rates and payroll taxes do not apply at the corporate level.

Question 48Federal Business and Entity Taxation - Sole Proprietorships, Partnerships, and Corporations

Which entity must file an annual information return on Form 1065 even though it generally pays no federal income tax?

  1. A single-member LLC with no election
  2. A domestic partnership Correct answer.
  3. A C corporation
  4. A sole proprietorship

Explanation

A domestic partnership files Form 1065 as an information return and issues Schedules K-1 to its partners. The entity generally pays no income tax, but the filing obligation is mandatory.

Question 49Federal Business and Entity Taxation - Sole Proprietorships, Partnerships, and Corporations

A partnership agreement allocates 90 percent of depreciation deductions to one partner and 90 percent of the related income to the other. Which test most directly determines whether these allocations are respected?

  1. Whether the partnership elected S status
  2. Whether the partners have equal capital accounts
  3. Whether the allocation is approved by the IRS in advance
  4. Whether the allocation has substantial economic effect Correct answer.

Explanation

Section 704(b) respects an allocation only if it has substantial economic effect, meaning it is reflected in the partners' capital accounts and liquidation proceeds and has real economic consequence. Shifting tax items without corresponding economic effect will be reallocated.

Question 50Federal Business and Entity Taxation - Sole Proprietorships, Partnerships, and Corporations

A shareholder receives a distribution from a C corporation that exceeds the corporation's current and accumulated earnings and profits. How is the excess treated?

  1. As a capital contribution increasing basis
  2. As ordinary dividend income in full
  3. As self-employment income to the shareholder
  4. As a nontaxable return of basis, with any remainder taxed as capital gain Correct answer.

Explanation

Distributions are dividends to the extent of earnings and profits. Any excess reduces the shareholder's stock basis, and amounts beyond basis are treated as gain from the sale of the stock.