P2-U03 · PART 2 · SOURCE CYCLE 2026-2027
Business Income
How to complete this unit
This unit uses 21 source-gated recall cards and 21 admissible practice questions. Complete the sequence in order; the unreleased wiki prose remains outside the learner path.
- 1 · LearnBuild the rule
Answer each recall prompt before opening it. Then learn the exact rule, test the controlling facts through four quick challenges, explore common questions, and finish with one own-words teach-back.
- 2 · ApplyUse it in context
Complete at least 20 mapped questions over two sessions. Review the explanation even when the answer is correct.
- 3 · ProveTest readiness
Use the Part 2 mock under time pressure. Return here for every flagged or missed concept before the next attempt.
Verified recall questions
Only cards whose complete question and answer were checked against exact primary-authority evidence appear here. Stable unit ownership gathers this lesson across 1 textbook collection.
Q1.Alder is legally taxed as the seller and collects the state sales tax from buyers. How is the collected tax treated?
Include it in gross receipts
Q2.Alder operates two separate sole-proprietor businesses. How many Schedules C are generally attached?
A separate Schedule C for each business
Q3.Which schedule does sole proprietor Alder generally use to figure business net profit or loss?
Schedule C (Form 1040)
Q4.Must an activity actually earn a profit every year to be treated as a trade or business?
No; an actual annual profit is not required when the activity has a profit motive
Q5.In the Schedule C computation sequence, what must be determined before business expenses are deducted?
Gross profit
Q6.How do the at-risk rules generally limit a taxpayer’s loss from an activity?
The loss is limited to the taxpayer’s amount at risk in the activity
Q7.What is the general income treatment when a business debt is canceled and no exception or exclusion applies?
Include the canceled debt in income
Q8.How is net self-rental income treated when property is rented to a trade or business in which the taxpayer materially participated?
As nonpassive income
Q9.What system supplies the principal business activity codes used in the Form 1120-S instructions?
The North American Industry Classification System
Q10.How are net receipts on a business income statement computed in the cited gross-profit illustration?
Gross receipts minus returns and allowances
Q11.Which practice helps prevent commingling business and personal funds?
Keep a separate business bank account and use a proper invoicing system
Q12.A closely-held corporation can qualify as a “real estate professional” if more than _________ of the gross receipts for its tax year came from real property trades or businesses in which it materially participated.
0.5
Q13.Anthony is a real estate developer and the sole owner of Land Development Associates, LLC. He purchases large tracts of land and subdivides them for resale. Land Development Associates, LLC is a single-owner disregarded entity. What form should Anthony use to report income from his real estate development business?
Schedule C
Q14.Is the rental of real estate generally considered a passive activity?
Yes, unless the taxpayer qualifies as a real estate professional.
Q15.Palm Apartments LLC, a cash-basis multi-member LLC, owns a residential rental complex with 10 units. On December 31, 2025, one tenant, Chae-Yeong, pays two months of rent in advance (for January and February of the following year), because she is leaving town on an extended vacation. When are these advance rental payments taxable to Palm Apartments?
In the year received.
Q16.Which of the following statements is true regarding income from a canceled debt for a business?
A business does not have to recognize canceled debt income to the extent that the payment of the debt would have led to a business deduction.
Q17.Which of the following activities are subject to passive activity limits on the deductibility of losses?
Rental real estate activities
Q18.Nickel Tools, Inc. rents large tools and machinery for use in construction projects. The company always charges a refundable security deposit and a nonrefundable cleaning deposit when someone rents a machine. Nickel Tools received the following amounts during the current tax year: • Rental income: $500,000 • Refundable security deposits: $40,050 • Cleaning deposits: $10,500 What amount should be included in the corporation's gross income?
$510,500
Q19.Which of the following transactions generates taxable business income?
A barter exchange of services between two sole proprietors.
Q20.Ginny has several sources of income during the year. Which of the following would be considered "passive activity" income?
Income from a limited partnership in which she does not materially participate.
Q21.What type of services would typically lead to a rental activity being reported on Schedule C instead of Schedule E?
Daily maid service
Ready to move on?
- ▸ Explain at least 80% of these 21 rules without opening the answer, twice on different days.
- ▸ Score 80% across 20 or more mapped questions over two sessions, not one memorized round.
- ▸ Complete a timed Part 2 mock and return to this unit if its concepts remain flagged or missed.
Use these checks to choose your next study action. They do not predict a PSI scaled score.