Business Tax Preparation
Part 2 · 165 study cards · Active recall format
Q1.What three common-law categories are considered when deciding whether a worker is an employee or independent contractor?
Exam wording
behavioral control financial control type of relationship
Q2.Alder receives a valid client check on December 30 but deposits it in January. When is it generally income?
Exam wording
In the year the valid check was received
Q3.Alder uses the accrual method. When is income generally reported?
Exam wording
In the year it is earned
Q4.Alder chooses a 12-month accounting period ending November 30. What type of tax year is this?
Exam wording
A fiscal tax year
Q5.Which form is filed to change the accounting method used for inventory?
Exam wording
Form 3115
Q6.When does a cash-method business generally include an income item?
Exam wording
When it is actually or constructively received during the tax year
Q7.Alder is legally taxed as the seller and collects the state sales tax from buyers. How is the collected tax treated?
Exam wording
Include it in gross receipts
Q8.Alder operates two separate sole-proprietor businesses. How many Schedules C are generally attached?
Exam wording
A separate Schedule C for each business
Q9.Which schedule does sole proprietor Alder generally use to figure business net profit or loss?
Exam wording
Schedule C (Form 1040)
Q10.Must an activity actually earn a profit every year to be treated as a trade or business?
Exam wording
No; an actual annual profit is not required when the activity has a profit motive
Q11.In the Schedule C computation sequence, what must be determined before business expenses are deducted?
Exam wording
Gross profit
Q12.How do the at-risk rules generally limit a taxpayer’s loss from an activity?
Exam wording
The loss is limited to the taxpayer’s amount at risk in the activity
Q13.What is the general income treatment when a business debt is canceled and no exception or exclusion applies?
Exam wording
Include the canceled debt in income
Q14.How is net self-rental income treated when property is rented to a trade or business in which the taxpayer materially participated?
Exam wording
As nonpassive income
Q15.What system supplies the principal business activity codes used in the Form 1120-S instructions?
Exam wording
The North American Industry Classification System
Q16.How are net receipts on a business income statement computed in the cited gross-profit illustration?
Exam wording
Gross receipts minus returns and allowances
Q17.Which practice helps prevent commingling business and personal funds?
Exam wording
Keep a separate business bank account and use a proper invoicing system
Q18.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.
Exam wording
0.5
Q19.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?
Exam wording
Schedule C
Q20.Alder is evaluating a trade-or-business cost. What threshold must it meet to be deductible?
Exam wording
It must be ordinary and necessary
Q21.Alder is present at an ordinary business meal that is not lavish or extravagant. What percentage is generally deductible?
Exam wording
50%
Q22.Which travel costs fall within the federal tax definition of business travel expenses?
Exam wording
Ordinary and necessary costs of traveling away from home for a business, profession, or job
Q23.What standard mileage rate applies to business use of a car for 2025?
Exam wording
70 cents per mile
Q24.What is the general deduction rule for premiums on qualifying insurance related to a business?
Exam wording
The premiums are generally deductible
Q25.What happens to the home-office exclusive-use test when the same area is used for both business and personal purposes?
Exam wording
The area generally fails the exclusive-use test
Q26.What records must a business traveler retain for away-from-home travel?
Exam wording
Records of all travel expenses and employer advances received
Q27.For a business expense to be deductible, it must be both:
Exam wording
“Ordinary” and “necessary.”
Q28.In order for a business to deduct meal expenses, which of the following is correct?
Exam wording
The meal is an ordinary and necessary business expense.
Q29.When Alder pays an employee wages over $200,000 in the calendar year, what additional withholding generally begins?
Exam wording
0.9% Additional Medicare Tax
Q30.Alder averaged 52 full-time employees including full-time equivalents in the prior year. How is it generally classified for employer shared-responsibility purposes?
Exam wording
An applicable large employer
Q31.For FUTA purposes, what federal wage base generally applies to each Alder employee?
Exam wording
The first $7,000 of wages
Q32.Alder gives an employee a $10 gift card. Can it be excluded as a de minimis fringe benefit?
Exam wording
No, gift cards are cash equivalents and are not de minimis
Q33.Which information return reports employee wages, tips, other compensation, and withheld payroll taxes?
Exam wording
Form W-2
Q34.How does the IRS define an "applicable large employer," for the purposes of the employer shared responsibility provisions?
Exam wording
An applicable large employer is an employer with an average of at least 50 full-time employees
Q35.Middle-Kauffman Company gave all its employees holiday gifts in December. Which of the following gifts would be taxable to the employee as compensation?
Exam wording
A gift card valued at $25.
Q36.Budget Systems, Inc. is struggling to pay its bills. The company’s controller, Jessa, decides to pay off creditors by using amounts withheld from the employees’ paychecks for income taxes and Social Security taxes, rather than depositing them as required with the federal government. Jessa is not an owner or shareholder of the company, but she is a company officer. Jessa may be subject to which of the following penalties?
Exam wording
Trust fund recovery penalty
Q37.Alder has an unused general business credit. What is the general carry period?
Exam wording
Back 1 year and forward 20 years
Q38.How long may the remaining NOL described for Alder generally be carried forward?
Exam wording
Indefinitely until used up
Q39.What event underlies a business bad-debt loss?
Exam wording
A business-connected debt becomes partly or totally worthless
Q40.What is the general QBI classification of a specified service trade or business before a taxable-income exception is considered?
Exam wording
It is generally excluded from qualified-trade-or-business status
Q41.Where does Form 3800 direct a taxpayer to report a current-year business credit?
Exam wording
On the applicable lines and columns of Part III
Q42.The Village Kitchen is a restaurant business with ten servers, who are all tipped employees. Which of the following credits would the Village Kitchen be eligible for, with regard to Social Security and Medicare taxes paid on employee’s tips?
Exam wording
Credit for Employer Social Security and Medicare Taxes Paid on Certain Employee Tips.
Q43.How long can a business carry forward its unused General Business Credit (GBC)?
Exam wording
20 years
Q44.Which of the following activities can qualify a taxpayer as a real estate professional?
Exam wording
Property management
Q45.Alder pays a local assessment for road paving that increases the value of business property. What is the basis effect?
Exam wording
Increase the property basis
Q46.What depreciation basis applies when personal-use property is converted to rental use?
Exam wording
The lesser of adjusted basis or fair market value on the conversion date
Q47.How are repair or maintenance costs generally treated when they do not improve the business property?
Exam wording
They are not depreciated
Q48.If a business incurs a casualty loss on business property, what is the maximum amount that can be deducted?
Exam wording
The adjusted basis of the property
Q49.The uniform capitalization rules will apply in all of the following situations except?
Exam wording
A business with $30 million or less average annual gross receipts.
Q50.Which of the following items INCREASE the basis of property?
Exam wording
The cost of extending utility service lines to the property
Q51.What type of property would NOT be classified as Section 1231 property?
Exam wording
Business inventory
Q52.Alder buys qualifying off-the-shelf computer software. For which deduction can it be qualifying property?
Exam wording
Section 179
Q53.Alder acquired and placed qualifying property in service after January 19, 2025. What special depreciation percentage can generally apply?
Exam wording
100%
Q54.Which statement applies when Alder buys business land?
Exam wording
Land itself cannot be depreciated
Q55.What planning choice does section 179 provide for qualifying property?
Exam wording
Elect a current section 179 deduction instead of recovering the cost through depreciation
Q56.Which of the following types of property is generally used for entertainment, recreation, or amusement and therefore classified as "listed property?"
Exam wording
Photographic equipment
Q57.Which statement is correct regarding 100% bonus depreciation for 2025?
Exam wording
Certain qualified property acquired and placed in service after January 19, 2025, can qualify for 100% bonus depreciation.
Q58.Alder holds goods primarily for sale to customers in the ordinary course of business. How are they classified for the cited disposition rule?
Exam wording
As noncapital assets
Q59.Alder transfers depreciable business property for $20,000 with a $10,000 adjusted basis. The resulting $10,000 taxable gain is depreciation recapture. How is it reported?
Exam wording
As ordinary income from depreciation
Q60.Alder makes a qualifying installment sale. When may gain generally be reported?
Exam wording
As payments or payment-equivalent debt relief are received
Q61.For a qualifying like-kind analysis, how may exchanged properties differ while remaining like kind?
Exam wording
They may differ in grade or quality but must be of the same nature or character
Q62.What is usually included in the cost basis of business equipment you buy?
Exam wording
Cost generally includes the purchase price plus amounts paid for items such as freight, installation, and testing.
Q63.How do capital improvements and depreciation change adjusted basis?
Exam wording
Improvements increase basis. Depreciation deductions reduce basis.
Q64.How much section 1245 gain is treated as ordinary income on disposition?
Exam wording
The lesser of depreciation/amortization allowed or allowable and the gain realized on the disposition.
Q65.Under the MACRS half-year convention, when is property treated as placed in service?
Exam wording
On the midpoint of the tax year it is placed in service.
Q66.What MACRS recovery period generally applies to computers and peripheral equipment?
Exam wording
5 years.
Q67.What is the section 179 deduction?
Exam wording
An election to deduct all or part of the cost of certain qualifying property, up to a limit, in the year you place the property in service.
Q68.A business must adopt its first tax year by:
Exam wording
The due date (not including extensions) for filing a return.
Q69.Raymond operates a retail clothing store using the accrual method and reports income on Schedule C, Net Profit or Loss from Business. He also runs a lawn care service that he operates only in the summer months. Which of the following statements is correct?
Exam wording
The lawn care business may use either the cash or accrual method, so long as both businesses have separate and distinct books and records.
Q70.Which of the following entities cannot use the cash method of accounting?
Exam wording
A tax shelter with average gross receipts of $2.5 million.
Q71.When a business is subject to the uniform capitalization rules, all of the following costs must be included in inventory except:
Exam wording
The cost of shipping a finished product to a customer.
Q72.Which of the following date ranges would be a permissible fiscal tax year?
Exam wording
July 1, 2025, to June 30, 2026
Q73.Harvest Haven Grocers, Inc. is a C Corporation. The corporation would like to request a change in its overall accounting method. Which form must the corporation file in order to request this change?
Exam wording
Form 3115
Q74.Penny operates a custom dress shop as a sole proprietor. She incurred the following expenses during the taxable year: Beginning Inventory Raw Materials: $5,000 Beginning Inventory Finished Dresses: $10,000 Ending Inventory Raw Materials: $6,250 Ending Inventory Finished Dresses: $4,700 Materials purchased: $17,500 Additional fabric used in finished dresses: $2,350 Advertising: $12,000 Freight-in on fabric: $300 Freight-out on Sale of Finished Dresses: $475 Calculate her cost of goods sold.
Exam wording
$24,200
Q75.Softie Sleeper, Inc., a mattress manufacturer, had the following expenses during the tax year: Beginning inventory: $80,000 Ending inventory: 52,500 Raw materials purchased: 12,000 Manufacturing costs: 80,000 Freight-in costs: 550 Freight-out to customers: 750 Calculate Softie Sleeper's cost of goods sold (COGS) for the year:
Exam wording
$120,050
Q76.Vargas Surgical Group, Inc., a C corporation, was organized on May 1, 2025. It elected the calendar year as its tax year. When is the first tax return due for Vargas Surgical for this short tax year?
Exam wording
April 15, 2026
Q77.When determining whether or not a business can use the cash method, normally how many years are used to determine average annual gross receipts?
Exam wording
Three years.
Q78.Is the rental of real estate generally considered a passive activity?
Exam wording
Yes, unless the taxpayer qualifies as a real estate professional.
Q79.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?
Exam wording
In the year received.
Q80.Which of the following statements is true regarding income from a canceled debt for a business?
Exam wording
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.
Q81.Which of the following activities are subject to passive activity limits on the deductibility of losses?
Exam wording
Rental real estate activities
Q82.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?
Exam wording
$510,500
Q83.Which of the following transactions generates taxable business income?
Exam wording
A barter exchange of services between two sole proprietors.
Q84.Ginny has several sources of income during the year. Which of the following would be considered "passive activity" income?
Exam wording
Income from a limited partnership in which she does not materially participate.
Q85.What type of services would typically lead to a rental activity being reported on Schedule C instead of Schedule E?
Exam wording
Daily maid service
Q86.Discount Dollar, Inc. is a discount chain of retailers located in Washington. The business pays a combined 8.25% sales tax to local and state taxing authorities when a customer purchases its merchandise. Washington imposes sales tax on the buyer of the goods. How should Discount Dollar treat the sales tax it collects from its customers?
Exam wording
Exclude from its gross receipts and deductible expenses the sales taxes it collects and remits them to local and state taxing authorities.
Q87.Which of the following expenses is generally 50% deductible for a business in 2025?
Exam wording
Snacks provided to employees in the breakroom
Q88.In 2025, Etsuko, a self-employed realtor, traveled to a business convention by ferry and incurred the following expenses: • Convention entrance fee: $200 - Ferry ticket: $100 • Meals at a restaurant: $80 • Hotel room: $90 • Computer game purchased during the convention: $50 How much is deductible as a current business expense on her Schedule C?
Exam wording
$430
Q89.Which of the following costs qualify as business start-up costs?
Exam wording
A survey of potential markets.
Q90.On February 1, 2025, Landon rented a storage unit to store equipment and supplies for his landscaping business. Landon is offered a discount if he pays 36 months of the lease upfront, which is $2,520 for a three-year lease. What is the allowable deduction for leasing the storage unit on his Schedule C in 2025?
Exam wording
$770
Q91.Davina is a sole proprietor who owns a public relations business. She has a nine-year-old son she claims as a dependent. In 2025, she paid $7,400 for health insurance premiums for herself and her son, who is her dependent. She reported a net profit of $43,000 on her Schedule C for the year. Which of the following statements is correct?
Exam wording
She can deduct 100% of the health insurance premiums as an adjustment to income.
Q92.Darnell is a self-employed realtor who reports his income and loss on Schedule C. He pays his own health insurance premiums. Which of the following would limit the deduction for health insurance premiums?
Exam wording
His deduction is limited to the net profit from his business.
Q93.A company organizes a business trip for its employees. Which of the following expenses is fully deductible as a business expense?
Exam wording
Hotel accommodation for the employees
Q94.Darren is a self-employed plumber who files a Schedule C. In 2025, he pays the following fines and penalties. Which of these are deductible as a business expense?
Exam wording
Penalties paid for breaking a maintenance contract after one of his clients took him to court.
Q95.Gabriella has a home office she uses exclusively for her transcriptionist business. The office measures 30 × 15, or 450 square feet. She wants to use the simplified home office method. She does not own her home; she rents from a landlord. What is the maximum she can deduct on her Schedule C if she uses the simplified method?
Exam wording
$1,500
Q96.Quentin requested a $100,000 business loan to purchase a machine for his business. The machine cost $90,000. The rest of the money went into Quentin's bank account, and he purchased a jet ski with the money later in the year. However, the entire loan was secured by his business assets. Which of the following statements is correct?
Exam wording
Only the amount of interest allocable to the purchase of the business machine is deductible.
Q97.Garrett operates his printing business out of a rented business office. He does not have a home office. He uses his own truck to deliver completed print jobs to his customers. Which of the following statements is correct?
Exam wording
Garrett can deduct the cost of round-trip transportation between customers and his shop.
Q98.Savannah is a self-employed tax preparer who reports income and loss on Schedule C. She goes to a continuing education seminar out-of-state and incurs the following expenses: Tax seminar: $400 Train ticket: $35 Restaurant meal expense: $20 Taxi fare to the restaurant: $13 Movie ticket after the webinar: $9 What is her deductible expense for this event?
Exam wording
$458
Q99.What must a business do if it pays a non-corporate independent contractor over $600 during the year?
Exam wording
File Form 1099-NEC to report payments to the contractor.
Q100.Debbie works full-time as an ambulance technician and receives fringe benefits from her employer. The fringe benefit that must be included in her wages and reported on Form W-2 is:
Exam wording
Employer-paid premiums on group-term life insurance coverage in excess of $50,000.
Q101.Which of the following benefits must be included in an employee's income?
Exam wording
A holiday gift of a $25 gas card.
Q102.Kirby Equipment, Inc. is an engine repair company located in Texas. Kirby Equipment has 200 full-time employees and offers a cafeteria plan. John Kirby is a 100% shareholder and the president of the company. John Kirby earns a salary of $290,000 a year and is automatically classified as a highly compensated employee as well as a key employee. Which of John Kirby's following relatives would not be classified automatically as key employees?
Exam wording
Quincy, who is John Kirby's cousin. He earns $40,000 working full-time for the company.
Q103.All of the following are excludable from an employee's wages and deductible by the employer except:
Exam wording
Employer-provided vehicles that employees use for commuting purposes.
Q104.Renee is a full-time employee of Ingenious Engineering, Inc., which offers educational reimbursement to employees through an education assistance program (EAP). In 2025, she takes four graduate college courses and has $5,900 in tuition expenses and $300 in expenses for required books. Ingenious Engineering reimburses Renee for all the expenses. How should this reimbursement be treated?
Exam wording
The first $5,250 of the educational expenses is excluded from Renee's wages as a qualified fringe benefit, and the remaining amount is taxable as wage income to her.
Q105.Zenith Advisors, LLC provides the following benefits to its employees. Which of these is fully taxable to the employee?
Exam wording
Membership at a local fitness club with an annual value of $595.
Q106.Superior Foods, Inc. reimburses employees for their business-related expenses. Which of the following is taxable to the employee?
Exam wording
Qualified bicycle commuting reimbursement of $20 per month.
Q107.Heart Ambulance Services provides meals and lodging for ten paramedics at the workplace as a condition of employment because they are not allowed to leave the premises when they are on a shift. The employees eat and sleep on the premises for free. Which of the following statements is correct?
Exam wording
The meals and lodging are not taxable to the employee. The employer can deduct 50% of the meal expense, and 100% of the lodging.
Q108.Encore Delivery Services is having cash-flow difficulties, so it transfers a pickup truck to Bonnie, an employee, in lieu of wages. The company owes Bonnie $7,000 of wages at the time of the transfer. At the time of the transfer, the truck had a fair market value of $7,000 and an adjusted basis to Encore Delivery of $5,500. How should the company report this transaction?
Exam wording
Wage expense of $7,000; gain of $1,500.
Q109.All of the following are fringe benefits that may be excluded from an employee's pay except:
Exam wording
$25 gift card for the holidays.
Q110.If an employer offers moving expense reimbursements as an enticement for new employees, how should these reimbursements be treated, for tax purposes?
Exam wording
Moving expense reimbursements are taxable as wages to the employee, and deductible to the employer.
Q111.An employer can generally deduct the cost of which of the following fringe benefits provided to an employee?
Exam wording
Educational assistance.
Q112.How are excess business losses treated in the following year?
Exam wording
They are carried forward and treated as a net operating loss.
Q113.Satsuki owns a small retail shop as a sole proprietorship. The shop has a net business loss of $7,000 in 2025. The business has always had profits in prior years. She has no other income for the year. How should the net operating loss be treated for tax purposes?
Exam wording
No carryback, carryforward indefinitely.
Q114.The Work Opportunity Tax Credit provides a credit for businesses that:
Exam wording
Hire unemployed veterans and other individuals from targeted groups.
Q115.Which of the following business activities does NOT qualify for the 199A Qualified Business Deduction?
Exam wording
Rental activity that is not a §162 trade or business.
Q116.The Disabled Access Credit conforms to the applicable standards of the:
Exam wording
Americans with Disabilities Act.
Q117.Which of the following is NOT considered a "Specified Service Trade or Business" for the purposes of calculating the 199A Qualified Business Income Deduction?
Exam wording
Architect.
Q118.Which of the following businesses are permitted to carryback their net operating losses?
Exam wording
Farming business
Q119.Which of the following is not part of the Investment Credit in 2025?
Exam wording
Credit for Small Employer Pension Plan Startup Costs.
Q120.Suncoast Management, Inc. is a C Corporation that qualified for several business credits in 2025. After applying the credits, its taxable income was reduced to zero, so the business could not use all of its business credits in the current tax year. What is the carryover period for the GBC?
Exam wording
The GBC may be carried back one year and carried forward for 20 years.
Q121.Aroma Candles, Inc. is a candle-making company. In 2025, Aroma Candles renovated their retail shop to comply with the Americans with Disabilities Act, adding a wheelchair ramp to their main entrance. Aroma Candles had gross receipts of $750,000 and spent $15,000 on disabled access upgrades during the year. What is Aroma Candles' current-year Disabled Access Credit?
Exam wording
$5,000
Q122.The 199A QBI deduction applies to which of the following types of income?
Exam wording
Domestic business income
Q123.Which of the following business types cannot generate qualified business income for the purposes of the 199A QBI deduction?
Exam wording
C Corporation
Q124.Which of the following credits is a valuable credit for businesses such as restaurants, barber shops, hair salons, spas, and other service establishments?
Exam wording
Credit for Employer Social Security and Medicare Taxes on Employee Tips
Q125.Which form is used to figure the excess business loss that is reported on a taxpayer's return?
Exam wording
Form 461
Q126.Arvin purchases 50 shares of Shopper's Paradise, Inc. stock for $3,500 on January 1, 2025. He pays a broker's fee of $100. On March 30, 2025, he receives an additional 40 shares of Shopper's Paradise, Inc. stock as a nontaxable stock dividend. On December 31, 2025, the company declares a two-for-one stock split, doubling the number of his shares. Calculate the total basis of Arvin's stock and his per-share basis at the end of the year:
Exam wording
Stock basis: $3,600; per-share basis: $20
Q127.All of the following items decrease the basis of property except:
Exam wording
The cost of defending a title.
Q128.Alexander is having financial difficulties, so he sells his duplex to Yoshiko, a real estate investor, who plans to use it as a rental property. Alexander was liable for $5,000 in delinquent real estate taxes on the property, which Yoshiko agrees to pay. How should Yoshiko treat this transaction on her business tax return?
Exam wording
Yoshiko cannot deduct these taxes as an expense; she must add them to the property's basis.
Q129.Granbury Crime-Scene Clean-Up, LLC is a biohazard cleaning service. The company purchases three large biohazard storage drums at a price of $3,400 each. The total invoice cost was $10,200. The drums were used to clean up a biohazard waste site and all of them were disposed of afterwards in an incinerator the same week, as required by local law. Granbury Crime-Scene Clean-up does not have Applicable Financial Statements. Under the tangible property regulations, how should the purchase of these drums be treated?
Exam wording
Can deduct the entire expense during the current tax year.
Q130.Pinter Manufacturing, Inc. does not have qualifying financial statements. Under the de minimis expensing safe harbor rule, Pinter Manufacturing can deduct items that cost up to ____ per invoice or item.
Exam wording
$2,500
Q131.Funhouse Catering, Inc. purchases a small warehouse and its underlying land for its catering business, but it is in such bad condition that the company decides to demolish it and build a new one. The demolition costs $5,600. How must Funhouse Catering report this cost on its corporate tax return?
Exam wording
The demolition cost is added to the basis of the land.
Q132.Juicy Burgers, Inc. is a popular restaurant. During the year, Juicy Burgers repaired a water leak in their kitchen roof. No structural changes were made. The repair cost $4,000. Juicy Burgers owns the building. How should this cost be treated on the business' tax return?
Exam wording
The full amount (\$4,000) can be deducted as a repair.
Q133.Action Law Group, Inc. provides legal services to Silver-Nuggets Pawn Shop. Silver-Nuggets Pawn then becomes insolvent and has trouble paying its bills. In lieu of payment, Action Law Group accepts a set of gold coins with a fair market value of $5,000 and an electric scooter with a fair market value of $2,000 and an adjusted basis of $1,000. What amount of business income must Action Law Group report for this transaction?
Exam wording
$7,000
Q134.Under the tangible property regulations, what are the three categories for determining what constitutes an "improvement" to a property, rather than a repair?
Exam wording
Betterment, restoration, or adaptation.
Q135.Which of the following types of property can be depreciated?
Exam wording
Office building used by a business
Q136.If a business elects section 179 and does not elect-out of bonus depreciation in the same year, bonus depreciation is taken:
Exam wording
After a section 179 deduction is taken.
Q137.What is the Modified Accelerated Cost Recovery System (MACRS)?
Exam wording
The current tax depreciation system in the United States.
Q138.Zehra is a licensed family therapist who works out of her home. She purchases a new computer for $1,100. She uses the computer 75% for her business and 25% for personal purposes. Ignoring any income limitations, what is Zehra's section 179 deduction?
Exam wording
$825
Q139.Hamid owns a construction company. He purchases used construction equipment from his grandfather and places it in service in 2025 as part of a bona fide business transaction. The equipment costs $10,500. Which of the following statements is correct?
Exam wording
Hamid can claim regular MACRS depreciation on the equipment.
Q140.Hitoshi owns a pizza restaurant by becoming a franchise owner of Papa's Yummy Pizza, a popular Italian food chain. After being in business for six months, Hitoshi purchases new kitchen equipment costing $190,000. He also purchases a new point-of-sale computer system for use in his restaurant at a cost of $15,000. The initial cost of franchise rights, payable to Papa's Yummy Pizza was $25,000. Therefore, Hitoshi has the following outlays for the year: New POS computer system: $15,000 New kitchen equipment: $190,000 Franchise rights: $25,000 Total asset purchases: $230,000 He wants to take section 179 for all his qualifying asset purchases. If his taxable income, before any potential section 179 deduction, is $590,000, what is his allowable section 179 deduction for the year?
Exam wording
$205,000
Q141.On April 1, 2025, Klaus buys a medical office building that he plans to rent out to business tenants. He made several repairs to the building and had it ready for rent on August 1, 2025. He advertised the property in the newspaper but did not get his first tenant until December 1, 2025. The tenant gave Klaus the deposit and signed the lease on January 1, 2026, and finally moved in on that date. Which month can he begin depreciating the property?
Exam wording
August 2025
Q142.Which of the following would not qualify for a depletion deduction?
Exam wording
Dairy farm
Q143.Using MACRS, what is the recovery period for depreciating a commercial office building?
Exam wording
39 years
Q144.Which of the following vehicles is considered "listed property" for tax purposes?
Exam wording
A compact passenger automobile
Q145.Which of the following assets would be amortized?
Exam wording
Patent
Q146.Which of the following types of business property qualifies for the section 179 deduction?
Exam wording
A delivery truck.
Q147.Alessandra is a 1% owner in an oil well. She receives oil and gas royalties during the year from her interest in the activity. She does not work in the business at all; she is merely an investor. The oil company pays her $25,000 in gross royalties during the year. For oil and gas royalty owners, percentage depletion is calculated using a rate of 15% of gross income. The only other income she has for the year is $45,000 in wages. Based on this information, what would Alessandra's depletion deduction be, and how would it be reported?
Exam wording
Depletion deduction of $3,750, reported on Schedule E.
Q148.Edvin is a sole proprietor who buys a new cell phone for $1,720. Based on his phone records, Edvin uses the cell phone 45% for business use and 55% for personal use. Ignoring any income limitations, what is his section 179 deduction?
Exam wording
$0
Q149.Friendship Dentistry, Inc. bought out Cavity Busters Dentistry. The sale included dental supplies, furniture, fixtures, dental equipment, and goodwill of the existing practice. The contract also included a do-not-compete clause. The contract details of the sale are listed below. Contract Purchase Details Dental Supplies: $4,000 Furniture: $16,500 Fixtures: $10,800 Dental equipment: $15,500 Goodwill and customer list: $60,000 A covenant not-to-compete: $40,000 Gross Sales Price: $146,800 Based on this information, what is the total dollar amount of the assets that must be amortized? How long is the required amortization period?
Exam wording
The goodwill and covenant not-to-compete (\$100,000) must be amortized over 15 years.
Q150.What determines the number of years over which the cost of a depreciable asset can be recovered under MACRS?
Exam wording
The asset's class
Q151.Guthrie Construction, Inc. is a calendar-year, accrual-basis corporation that specializes in constructing office buildings. Guthrie Construction purchased a diesel truck on November 1, 2025, that had to be substantially modified for use in the business. Guthrie Construction accepted delivery of the modified truck, and it was available for use on January 10, 2026 (the following year). The truck was first used on a construction site on February 3, 2026. The truck is used \(100\%\) for business. In what month can the company start depreciating the truck?
Exam wording
January 2026
Q152.Gilbert is a self-employed farmer who purchases several assets during the year to use for his farming business. Which of the following assets is Gilbert not allowed to depreciate?
Exam wording
Farmland
Q153.Which of the following assets is eligible for Bonus Depreciation?
Exam wording
Qualified film production property
Q154.Robstown Ranch, LLC purchased an industrial harvester for $100,000 many years ago. The harvester eventually breaks down over many years of use, and the business sells the used harvester for scrap in 2025 for $7,000. Robstown Ranch had depreciated the asset down to $10,000, its remaining basis. It sold no other business property in the preceding five years. What is the gain or loss on this equipment?
Exam wording
$3,000 ordinary loss
Q155.On January 10, 2025, an office building owned by Pagoda Manufacturing burns down. The property had an adjusted basis of $190,000, and Pagoda Manufacturing receives an insurance reimbursement of $340,000. Pagoda Manufacturing buys another office property for $295,000 on November 8, 2025. What is the company's reportable gain as a result of this transaction?
Exam wording
$45,000
Q156.Which of the following is not section 1245 property?
Exam wording
Office building.
Q157.Which of the following property types qualifies for section 1031 like-kind exchange?
Exam wording
Undeveloped land held for investment.
Q158.Turley Accountancy, LLP exchanges an office building with an adjusted basis of $125,000 for a strip mall building. The fair market value of the office building is $519,000. The fair market value of the strip mall is $525,000. Turley Accountancy pays an additional $4,000 to the seller to complete the exchange. After the exchange is completed, what is Turley Accountancy's basis in the strip mall?
Exam wording
$129,000
Q159.Jennifer operates Wavy Hair Salon, a sole proprietorship. In 2025, she sells all of her old salon chairs for $3,500 in order to buy new ones. She had purchased the chairs seven years ago for $15,000, and they were fully depreciated. Therefore, her basis in the chairs is zero at the time of the sale. How should she report this transaction?
Exam wording
She reports a gain of $3,500 on Form 4797. The entire $3,500 is treated as depreciation recapture, which is subject to ordinary income tax rates.
Q160.Silas operates an auto salvage yard as a sole proprietorship. During the year, Silas sold heavy equipment that was used in the business for $100,000. The original cost of the equipment was $120,000, and Silas had claimed depreciation deductions totaling $47,000. Based on the information provided, what is the nature and amount of taxable income that will result from the sale of the equipment?
Exam wording
Ordinary income of $27,000.
Q161.Eastwood Auto Painting, LLC, which is taxed as a partnership, does custom auto painting. The business owns a classic automobile, which was originally purchased for $20,000. It uses the automobile exclusively in its showroom to display its paint designs to potential customers. The car is only used as a showpiece and is not considered inventory. The automobile had been depreciated by $12,000, so the partnership's adjusted basis in it was $8,000 in 2025. A local museum asks to purchase the car in 2025, and Eastwood Auto Painting agrees to the sale, selling the car to the museum for $25,000. What is the nature of the tax treatment resulting from this sale?
Exam wording
Ordinary income of $12,000 and a Section 1231 gain of $5,000.
Q162.Deluxe Airlines, Inc. is a private jet charter service. In the prior year (2024), Deluxe Airlines sold a used jet at a $50,000 loss. The jet was used in business operations for several years, so it was a section 1231 business asset. In 2025, Deluxe Airlines sold another used jet and had a $90,000 section 1231 gain. Applying the 5-year lookback rule, how much of the gain from the sale in 2025 would be classified as ordinary, and how much would be capital gain?
Exam wording
$50,000 of the gain would be ordinary, and $40,000 would be long-term capital gain.
Q163.Sadie owns a small fitness gym as a sole proprietor. She sells some used fitness machines during the year for $65,000. She had purchased the equipment for $90,000 several years ago. She has taken $50,000 of depreciation deductions, and a section 179 deduction of $10,000. How should Sadie report the sale of these business assets?
Exam wording
Ordinary income of $35,000.
Q164.Sergio owns several residential rental properties. He is not a real estate professional. He trades a condo in Mississippi (adjusted basis $30,000, FMV $50,000) for a duplex in Nevada (FMV $75,000). The Nevada duplex is more valuable than the Mississippi property, so Sergio has to pay an additional $19,000 cash to the seller in order to close the sale. This is a qualified 1031 exchange. What is Sergio's basis in the Nevada duplex after the exchange?
Exam wording
$49,000
Q165.Tabitha and Tanner are siblings who complete a section 1031 exchange on January 21, 2025, properly exchanging two residential rentals. On June 29, 2025, Tabitha dies, and her rental property is inherited by her husband, who sells it a month later. Tabitha's husband will file a joint return with his late wife Tabitha, in 2025, the year of her death. Which of the following statements is correct?
Exam wording
This section 1031 exchange is still valid for both parties in the exchange.
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