Business Entities
Part 2 · 143 study cards · Active recall format
Q1.Alder, a sole proprietor, has $425 of net self-employment earnings. What is generally required?
Exam wording
Pay SE tax and file Schedule SE
Q2.Alder, a sole proprietor, expects to owe $1,200 including SE tax. What is generally required?
Exam wording
Make estimated tax payments
Q3.What is the general SE tax rate on Alder’s net earnings for the covered year?
Exam wording
15.3%
Q4.When must a sole proprietor obtain an EIN for federal tax identification?
Exam wording
When the proprietor pays wages to employees or files pension or excise tax returns
Q5.What is the default federal income-tax classification of an individually owned domestic single-member LLC?
Exam wording
Sole proprietorship unless corporate treatment is elected
Q6.Which of the following entities can be treated as "disregarded entities?"
Exam wording
Single member LLC
Q7.At what net earnings threshold is a self-employed individual required to pay self-employment tax?
Exam wording
400
Q8.Willard is the single owner of an LLC that provides party planning services. Absent any elections, how will Willard’s LLC be treated for federal tax purposes?
Exam wording
Disregarded entity
Q9.Ethel owns a single-member LLC that holds a residential rental property. She is not a real estate professional and has not made an election for her LLC to be taxed as a corporation. How should she report the income from her LLC?
Exam wording
Schedule E, Form 1040.
Q10.Future Capital, Inc. is a C corporation. Which of the following business activities would automatically classify this corporation as a PSC, or a "Personal Services Corporation"?
Exam wording
Engineering
Q11.Alder Partnership pays a partner a fixed amount regardless of partnership income. What type of payment is it?
Exam wording
A guaranteed payment
Q12.Alder contributes property for a partnership interest. What is the usual recognition result?
Exam wording
Neither partner nor partnership recognizes gain or loss
Q13.What is the general Form 1065 due-date rule stated for a partnership tax year?
Exam wording
The 15th day of the third month after the tax year ends
Q14.What threshold rule governs whether a partnership may elect out of the centralized partnership audit regime for a tax year?
Exam wording
The partnership must be an eligible partnership for that tax year
Q15.Which of the following partnerships is AUTOMATICALLY required to file its return electronically?
Exam wording
A partnership with 101 partners.
Q16.Andrew and Camille are married and file separate tax returns (MFS). They own a restaurant together and share profits and losses equally. Their business is not an LLC. They would like to make a Qualified Joint Venture election. Based on these facts, how would their business be classified for IRS purposes?
Exam wording
As a partnership.
Q17.At the partnership level, how are guaranteed payments reported on Form 1065?
Exam wording
As a business expense.
Q18.Guaranteed payments are made to partners and are determined without regard to the partnership’s income. When are guaranteed payments included in an individual partner’s taxable income?
Exam wording
Guaranteed payments are included in income in the partner's tax year in which the partnership's tax year ends.
Q19.When a partner contributes property to a partnership, the partnership’s basis in the contributed property is generally:
Exam wording
Is generally the same as the adjusted basis of the partner.
Q20.Premiums for health insurance paid by a partnership on behalf of a partner are treated as guaranteed payments. The partnership can deduct the payments as a:
Exam wording
Business expense.
Q21.No partner or related person bears an economic risk of loss for a Alder Partnership liability. How is it classified?
Exam wording
A nonrecourse liability
Q22.When distributed partnership debt has an issue price above its fair market value, how may the excess affect the partner?
Exam wording
The partner may have canceled-debt income
Q23.A partnership liability is considered a nonrecourse liability if:
Exam wording
No partner has an economic risk of loss for that liability.
Q24.Which of the following statements about partnerships is not correct?
Exam wording
A partnership distribution must be taken into account in determining the partner’s distributive share of the partnership’s income or loss.
Q25.A limited partner generally has no obligation to contribute: ___________________.
Exam wording
Additional capital to the partnership.
Q26.A partner's basis is increased by which of the following items?
Exam wording
A partner's distributive share of nontaxable partnership income.
Q27.Faille Fisheries, LLC is a calendar year, cash-basis partnership that is closing down. When a partnership is discontinuing operations and winding down its business affairs, when does its tax year officially end?
Exam wording
The partnership's tax year ends on the date of termination.
Q28.A partner who sells a partnership interest at a gain has to report all the gain in the year of the sale unless the sale is treated as:
Exam wording
An installment sale.
Q29.When property is distributed by a partnership to a partner, the distributee partner's holding period for property: ___________________.
Exam wording
Includes the period the property was held by the partnership.
Q30.For purposes of determining a partner's distributive share, a partnership interest purchased by one family member from another family member is considered:
Exam wording
A gift from the seller.
Q31.Alder Corporation files late with unpaid tax. What is the general late-filing rate and maximum?
Exam wording
5% per month or part, up to 25%
Q32.Alder Corporation expects $700 of estimated tax for the year. What is generally required?
Exam wording
Make installment payments of estimated tax
Q33.At what rate does Alder Corporation generally figure its federal income tax?
Exam wording
21% of taxable income
Q34.Which form does a corporation generally use to determine applicable-corporation status and calculate CAMT?
Exam wording
Form 4626
Q35.To what should Schedule L shareholder loans generally reconcile for an S corporation?
Exam wording
The sum of the shareholder-loan amounts on Schedules K-1
Q36.Which book-tax reconciliation schedule must an S corporation with at least $10 million of total assets at year-end file instead of Schedule M-1?
Exam wording
Schedule M-3 (Form 1120-S)
Q37.What makes a loan to or from an owner a below-market loan for the cited corporate rule?
Exam wording
No interest or interest below the applicable federal rate
Q38.A corporation must make estimated tax payments if it expects its tax due to be _____ or more during the taxable year.
Exam wording
500
Q39.If an individual taxpayer transfers money or property to a corporation in exchange for stock in that corporation, and immediately afterward the person is in control of the corporation, the exchange is usually ____________.
Exam wording
Not taxable.
Q40.A C corporation generally must make estimated payments throughout the year. For a calendar-year corporation, when are estimated tax payments normally due?
Exam wording
April 15, June 15, September 15, and December 15.
Q41.Hartford Bioresources, Inc. is a cash-basis, fiscal-year C corporation. Its tax year ends June 30. When are the installment payments for Hartford Bioresources’ estimated tax payments due?
Exam wording
Installment payments are due on October 15, December 15, March 15, and June 15.
Q42.Every business entity must figure taxable income for an annual accounting period called a: __________.
Exam wording
Tax year.
Q43.Alder transfers property for corporate stock and controls the corporation immediately afterward. What is the usual result?
Exam wording
The exchange is not taxable
Q44.What voting-power threshold generally establishes control for Alder’s property-for-stock exchange?
Exam wording
At least 80%
Q45.Subject to applicable limits, what dividends-received deduction percentage generally applies when a corporation owns less than 20% of the distributing domestic corporation?
Exam wording
50%
Q46.How does a service provider generally treat corporate stock received for services?
Exam wording
Include the value of the stock in income
Q47.What can happen when a transferor receives money or other property in addition to corporate stock in an otherwise nontaxable exchange?
Exam wording
The transferor may have to recognize gain
Q48.What is the general section 351 treatment when the corporation assumes the transferor’s liabilities?
Exam wording
The assumption generally is not treated as money or other property received
Q49.Which additional schedule generally applies to a corporation that is a member of a controlled group?
Exam wording
Schedule O (Form 1120)
Q50.Which of the following individuals is not considered a related party with regard to the rules for the disposition of assets?
Exam wording
Step-brother
Q51.When can a C corporation that uses the accrual method of accounting deduct business expenses and interest owed to a related person or related entity that uses the cash method of accounting?
Exam wording
When the corporation makes the related payment and the amount is included in the related person’s income.
Q52.How does shareholder Alder generally report a corporate distribution from current or accumulated earnings and profits?
Exam wording
As a dividend
Q53.Alder Corporation pays an employee-shareholder an unreasonably high salary. How may the excessive portion be treated?
Exam wording
As a distribution to the shareholder-employee
Q54.How does a corporation generally measure gain or loss on a liquidating distribution of assets?
Exam wording
As though it sold the assets to the distributee at fair market value
Q55.What can result when a corporation accumulates earnings beyond the reasonable needs of its business?
Exam wording
It may owe a 20% accumulated earnings tax
Q56.Sunburst Products, Inc. is a cash-basis C corporation. During the year, the corporation pays $2,000,000 in salary to Carey, its sole employee-shareholder. The following year, Sunburst Products Inc. is audited by the IRS, and Carey’s salary is deemed to be excessive. In this case, the excessive part of the salary will normally be treated as a:
Exam wording
Constructive distribution
Q57.Distributions of stock dividends are generally tax-free to shareholders except when:
Exam wording
Some shareholders can receive cash or other property, and other shareholders receive stock.
Q58.All of the following statements are correct about a corporation’s accumulated earnings and profit except:
Exam wording
Accumulated E&P distributed to a shareholder is taxable as capital gains.
Q59.Alder S corporation pays its officer-shareholder for services. To the extent the payment is reasonable compensation, how must it be treated?
Exam wording
As wages
Q60.Which entity-year does Form 1120-S cover under its filing instructions?
Exam wording
A domestic corporation or other eligible entity for a year covered by an effective S election
Q61.Which election form must an eligible corporation file or attach before filing Form 1120-S?
Exam wording
Form 2553
Q62.How are section 1366(a)(1) items from an S corporation activity presented on its attached activity statement?
Exam wording
They are detailed as separately stated items using the Schedule K-1 box numbers
Q63.Does an S corporation shareholder generally wait for a cash distribution before including a distributive share of income?
Exam wording
No; the shareholder includes the share whether or not it is distributed
Q64.What is the stock-basis effect of an S corporation income item governed by section 1367(a)(1)(A)?
Exam wording
Increase the shareholder’s stock basis by the item
Q65.What shareholder consent is required to revoke an S election?
Exam wording
Consent from holders of more than 50% of issued and outstanding shares, including nonvoting shares
Q66.Which form is referenced for an S corporation debt discharge arising in title 11 bankruptcy or insolvency?
Exam wording
Form 982
Q67.Which statement best describes the IRS’s enforcement approach regarding S corporation "reasonable compensation?"
Exam wording
The IRS requires reasonable compensation to employee-shareholders to be paid
Q68.An individual who owns a business that fails to pay required payroll taxes to the IRS may be subject to:
Exam wording
Trust fund recovery penalty.
Q69.Jianguo is self-employed and has a home-based business selling used video games and comic books online. He has a profit motive in his activity. His gross sales were $29,000 for the year, and his expenses total $9,500. Which schedule should Jianguo complete to report his income and expenses?
Exam wording
Schedule C.
Q70.Which of the following is considered a drawback of a C corporation?
Exam wording
Its profits are potentially subject to double taxation.
Q71.Federal law requires businesses to provide a Form 1099-NEC for each independent contractor paid at least ____ for services in 2025.
Exam wording
$600
Q72.All of the statements are correct about the following business entities except:
Exam wording
S corporations may have an unlimited number of shareholders.
Q73.Ellsworth is a full-time life insurance salesman and a statutory employee. He receives a Form W-2 for his earnings. How should he report his income?
Exam wording
On Schedule C, not subject to self-employment tax.
Q74.Hongwei is a sole proprietor with no employees. Hongwei uses his Social Security number to run his business and also to file information returns. In which scenario would he be required to obtain an EIN for his sole proprietorship?
Exam wording
If he is required to file excise tax returns.
Q75.Which of the following entities generally does not require an EIN?
Exam wording
A sole proprietorship with no employees.
Q76.The IRS evaluates all of the following characteristics to assess the relationship between a business and its workers except:
Exam wording
Income level.
Q77.Sunset Funeral Services, Inc. provides burial and funerary services to its customers. Thomas recently paid $12,000 in cash to Sunset Funeral Services for payment of a burial insurance policy. What form is Sunset Funeral Services required to file for this transaction?
Exam wording
Form 8300
Q78.In which of the following instances is a partnership not required to obtain a new EIN?
Exam wording
The partnership adds additional business locations.
Q79.How is a limited liability company (LLC) formed?
Exam wording
Under state law by filing articles of organization.
Q80.What is the purpose of Schedule K-1 in a partnership tax return?
Exam wording
It is used to report a partner's distributive share of taxable income or loss.
Q81.Which of the following is NOT a separately stated item on a partnership tax return?
Exam wording
Cost of goods sold.
Q82.Johnathan, Robin, Shante, and Theresa form an equal partnership. Each partner contributes $10,000 and receives an equal ownership interest in the partnership (25%). Under the partnership agreement, they share partnership profits and losses equally. The partnership borrows $135,000 and purchases business equipment using a business line of credit. All of the partners except for Theresa personally guarantee the loan. What is each partner's basis after this transaction?
Exam wording
Theresa's basis is $10,000, and the other partners each have a basis of $55,000.
Q83.Hialeah and Vincent come together to form Burrows Law Firm, LLP. Each contributes $20,000 during the initial formation of the partnership. Their partnership agreement states that Hialeah will receive 35% of the distributive income, and Vincent will receive 65%, because Vincent has more years of litigation experience. In 2025, the partnership has net ordinary income of $200,000. What is each partner's distributive share of the partnership profits?
Exam wording
Hialeah: $70,000, Vincent: $130,000
Q84.Tasty Sandwiches, LLC operates as an accrual-based business; it is taxed as a partnership and files Form 1065. In addition to receipts from sandwich and beverage sales of $250,000, the LLC has the following items of income and expenses for the year: Wages paid to employees: $50,000 Insurance expense: $5,000 Charitable contributions: $2,000 Business Licenses: $5,000 Rental income from the rental of an office above the shop: $25,000 Guaranteed payments to Elvis, the shop’s founder: $75,000 What is the ordinary business income that Tasty Sandwiches should report on its Form 1065?
Exam wording
$115,000
Q85.Lucy and Jessica are equal (50%) partners in a pizzeria restaurant. At the beginning of the year, the business purchases a new $30,000 pizza oven. They want to take the section 179 deduction for the full cost of the oven. The partnership's ordinary income before the section 179 deduction is $25,000. There were no other qualifying section 179 purchases during the year. What is the amount of section 179 deduction that Lucy can potentially deduct on her individual tax return?
Exam wording
$12,500
Q86.The Western Ridge Partnership generated income and expenses as stated below. What is the amount of ordinary business income that Western Ridge should report for the year on its Form 1065? • Employee wages: $15,000 • Rental real estate income: $20,000 • Charitable contributions: $500 • Cost of goods sold: $10,000 • Income from sales: $75,000
Exam wording
$50,000
Q87.Masha and Delma form M&D Partnership. Masha contributes $16,000 cash, and Delma contributes engineering equipment with a fair market value of $15,000 and an adjusted basis of $6,000. What amount should Delma report as a gain as a result of this transaction?
Exam wording
$0
Q88.Drayton Valley Farms, LLC is taxed as a partnership. Kateri contributes farmland to Drayton Valley Farms in exchange for a 40% ownership interest. The farmland has a fair market value of $70,000, an adjusted basis of $40,000, and a related mortgage of $10,000 that Drayton Valley Farms assumes. What is Kateri's basis in her LLC interest after the contribution of the land?
Exam wording
$34,000
Q89.Xavier is a 10% partner in Hartville Partnership. According to the partnership agreement, Xavier is entitled to a fixed annual guaranteed payment of $5,000. During the year, the Hartville Partnership has $55,000 of net ordinary income before deducting the guaranteed payment. How much partnership income should Xavier report on his individual return for this year?
Exam wording
$10,000
Q90.Austin is a general partner in the Kerner Partnership. During the year, Austin personally assumes $100,000 of the partnership's liabilities. Which of the following statements regarding partnership liabilities is correct?
Exam wording
The assumption of partnership debt by Austin increases his basis.
Q91.Willem and Aletta form Humboldt Fine Spirits, an equal partnership. They each contribute $20,000 cash to the partnership to get the business going. Under their partnership agreement, they share all partnership profits and losses equally. They borrow $60,000 and purchase depreciable business equipment. However, Willem has poor credit, so Aletta is the only signer on the loan. Aletta is the only one required to pay the creditor if the partnership defaults, so she has an economic risk of loss related to the loan. The payments on the loan are made from the partnership bank account. What is Aletta's basis in the partnership, and what is Willem's basis?
Exam wording
Aletta: $80,000, Willem: $20,000.
Q92.If a partnership requests additional time to file its return, how long will the filing deadline be extended?
Exam wording
Six months.
Q93.An individual partner who receives income from a partnership must report their share of partnership income on which form?
Exam wording
Schedule E of Form 1040.
Q94.When payments are made by a partnership to partners without regard to partnership income, these payments are called:
Exam wording
Guaranteed payments.
Q95.What is the latest that a partnership agreement can be modified, and its terms be applicable to the partnership tax return during a taxable year?
Exam wording
No later than the partnership return due date (without extensions).
Q96.Jeffrey is a 25% partner in Sunnybrook Farms, LLC, which is taxed as a partnership. The adjusted basis of Jeffrey's partnership interest is $10,000. He receives a distribution of $4,000 cash and a horse trailer that has an adjusted basis to Sunnybrook Farms of $9,000 and a fair market value of $12,000. This was not a liquidating distribution. What is Jeffrey's basis in the horse trailer?
Exam wording
$6,000
Q97.Adrian is a 50% partner in Sonic Innovations, a general partnership. The adjusted basis of Adrian's partnership interest is $17,500 at the beginning of the year. He received a current distribution of $9,000 cash and a piece of land with an adjusted basis of $2,500 to the partnership and a fair market value of $4,000. There was no other activity during the year from the partnership. What is the gain to be recognized at the time of these distributions?
Exam wording
$0
Q98.Alfonso and Jingling are equal partners in the Bantam Partnership. In 2025, the partnership dissolves. Alfonso is insolvent, and Jingling becomes responsible for paying a portion of Alfonso's delinquent partnership debts. Jingling ends up paying a portion of Alfonso's debt with her own savings. Which of the following statements is correct?
Exam wording
Jingling can take a bad debt deduction for any amount that she must pay that is not her share of the partnership debt.
Q99.Shannon is a 10% partner in the Blue Canyon Partnership. Under the terms of a partnership agreement, she is entitled to a fixed guaranteed payment of $10,000 without regard to the income of the partnership. Her distributive share of the partnership income is 10%. Blue Canyon has $200,000 of ordinary income after deducting Shannon's guaranteed payment. How much ordinary income from the partnership would Shannon report on her individual tax return?
Exam wording
$30,000
Q100.William owns a 75% capital interest in the Bella Vista Partnership. William's wife, Veronica, is a 51% owner in the Sutter Creek Partnership. William and Veronica file separate tax returns and keep all their books and records separate. Bella Vista Partnership sells Sutter Creek Partnership a factory machine for $7,600. Bella Vista's basis in the machinery is $10,000. What is Bella Vista Partnership's deductible loss?
Exam wording
$0
Q101.Shihan is a 10% partner in NexGen Solutions, LLC, which is taxed as a partnership. The adjusted basis of Shihan's partnership interest is $24,000. She receives a current distribution of $9,000 cash and computer machinery that has an adjusted basis of $1,000 and a fair market value of $7,000. How much gain should Shihan recognize on this distribution?
Exam wording
$0
Q102.What is a liquidating distribution?
Exam wording
A liquidating distribution terminates a partner's entire interest in the partnership.
Q103.Marty is permanently retiring from the Lakeway Partnership this year. His adjusted basis in the partnership is $50,000. He receives a final distribution of $65,000 cash. Lakeway Partnership has no section 751 "hot assets." How would Marty report this transaction on his personal income tax return?
Exam wording
$15,000 capital gain.
Q104.Merryn, a 5% partner in the Stonefield Partnership, receives distributions of $1,000 of cash and a computer worth $2,000, in which Stonefield has a basis of $1,500. Merryn's outside basis at the time of the distributions is $20,000. Stonefield Partnership has assets of $40,000 and no outstanding liabilities. The distributions are made at the end of the year, after partnership income (loss) has been recorded. How much gain should Merryn recognize on the distributions, and what is her basis in the property received?
Exam wording
She recognizes no gain on the property received. Her basis in the property received is $1,500.
Q105.Two partnerships, Cybernet Technologies, LLC and EdTech, LLP are planning to transact business with one another. The two partnerships are owned by various members of the same family. Which of the following individuals is not considered a related party for the purposes of the related party transaction rules?
Exam wording
Uncle
Q106.What are the two types of partnership distributions?
Exam wording
Liquidating and current.
Q107.Hillside Associates is a C corporation. At the end of the year, Hillside Associates, Inc. had $1 million in gross receipts and $6 million in assets. Which of these schedules is the corporation required to file?
Exam wording
Schedule L and Schedule M-1.
Q108.Shrill Media, Inc. has net "book income" of $3 million in calendar year 2025. What is its net taxable income if it also has the following activity? Federal income tax expense: ($1,500,000) Business meals: ($200,000) Tax-exempt interest income: $100,000 Capital losses from the sale of stock: ($47,000) Capital gains from the sale of cryptocurrency: $18,000
Exam wording
$4,529,000
Q109.The accumulated earnings tax is levied at a rate of ____ on accumulated taxable income.
Exam wording
20%
Q110.Lorraine and Marcus, a married couple, each transfer machinery with a basis of $10,000 to a corporation in exchange for stock with a fair market value of $30,000. The total stock received by them represents 75% of the corporation's stock. The other 25% of the corporation's stock is owned by Annie, an unrelated person. The taxable consequences are:
Exam wording
Lorraine and Marcus each must recognize a gain of $20,000.
Q111.Hilltop Honey, Inc. is a small C corporation that produces organic honey and beeswax candles. In 2025, Hilltop Honey had $245,000 in gross receipts from the sale of their products. The company's total assets at the end of the year were $95,000. Which of these schedules is the Hilltop Honey required to file?
Exam wording
None of these schedules.
Q112.Seymour, a licensed CPA, transfers computer equipment worth $43,000 and renders accounting services valued at $6,000 to Cramer Industries, Inc. in exchange for stock valued at $49,000. Right after the exchange, Seymour owns 81% of the outstanding corporate stock. How much income, if any, must Seymour recognize in this transaction?
Exam wording
$6,000
Q113.Osvaldo transfers real estate with a basis of $40,000 and an FMV of $90,000 to the Steele Corporation in return for 80% of the stock in the corporation. Just before the transfer, Osvaldo obtains a $10,000 equity loan secured by the real estate and uses all the loan proceeds to buy a new motorcycle for himself. Along with the real estate, the equity loan is transferred to the Steele Corporation. What are the tax consequences of this action to the shareholder, Osvaldo?
Exam wording
Osvaldo has to report a $10,000 gain on the transfer.
Q114.Which of these domestic business entities will not be automatically taxed as a corporation?
Exam wording
A single-member limited liability company (LLC) owned by an individual.
Q115.Coldspring Aviation, Inc. operates on a fiscal year that ends June 30, 2025. Not counting extensions, what is the normal due date for its corporate tax return (Form 1120)?
Exam wording
September 15
Q116.Which of the following forms can a corporation use to apply for a refund of overpaid tax?
Exam wording
Form 1139
Q117.To be eligible for section 351 nonrecognition treatment, immediately after the exchange, a taxpayer must own at least ____ of the total combined voting power of all classes of stock entitled to vote and at least ____ of the outstanding shares of each class of nonvoting stock.
Exam wording
80% and 80%
Q118.Which of the following statements is correct about a controlled group of corporations?
Exam wording
All of the above.
Q119.In 2025, Reliable Motors, Inc. made cash contributions totaling $20,000 to qualified charitable organizations. Due to income limitations, Reliable Motors could deduct only $15,000 of the contributions on its corporate return. Which of the following correctly states the treatment of the excess $5,000 of charitable contributions?
Exam wording
The excess contributions can be carried forward for 5 years. They cannot be carried back.
Q120.Pacific Holdings, Inc. is a cash-basis C corporation. In 2025, the corporation sold various capital assets. The company has a net short-term capital gain of $23,000 from the sale of stock, and a net long-term capital loss of ($29,000) from the sale of cryptocurrency. How should these capital gains and losses be treated?
Exam wording
The corporation can carry back the $6,000 net capital loss to a prior year, where it may be deducted against capital gains in those years.
Q121.During 2025, Nashville Apparel Inc., a domestic C corporation, had the following income, expenses, and deductions: Gross receipts $105,000 Net capital gains from the sale of cryptocurrency $10,000 Business expenses (not including charitable contributions) $65,000 Cash charitable contributions $30,000 All the contributions were made to qualifying 501(c)(3) charities. What is the amount of Nashville Apparel's allowable charitable contribution deduction in 2025?
Exam wording
$5,000
Q122.Milieu Capital, Inc. owns 25% of Wilson Fine Foods, Inc. In 2025, Milieu Capital received $10,000 of dividends from Wilson's Fine Foods. Assuming no other limitations apply, Milieu Capital's dividends received deduction is:
Exam wording
$6,500
Q123.Which of the following is characteristic of a "closely held" corporation?
Exam wording
A corporation with a small number of shareholders and no public market for its stock.
Q124.Freshfields Farms, Inc. is a calendar-year C corporation. It is a qualified farming business. The company had a small NOL of $1,000 in 2025. The business does not wish to carryback its losses, because the cost of filing the forms with the company's accountant would exceed the benefit. Which of the following statements is correct?
Exam wording
Freshfields can forgo the 2-year carryback period and elect to carryforward the entire loss.
Q125.When are stock distributions deductible by a corporation?
Exam wording
Stock distributions are not deductible by the corporation.
Q126.Ten years ago, Yamato purchased 100 shares of Rock Star Music, Inc. for $10 per share. In 2025 Rock Star Music, Inc. completely liquidated and distributed $20,000 to Yamato in exchange for all of his stock. Yamato must report this distribution as:
Exam wording
$19,000 of long-term capital gain.
Q127.Abdullah is a 20% shareholder of Langley Corporation. The corporation distributes $75,000 of cash and a delivery truck to Abdullah. The truck has a $40,000 adjusted basis and a $60,000 FMV. What gain or loss, if any, must Langley Corporation recognize on this distribution?
Exam wording
$20,000 gain.
Q128.Midwestern Grain, Inc. distributes an industrial compressor with an adjusted basis of $1,000 and a fair market value of $4,000 subject to a liability of $6,000 to Benjamin, a 5% shareholder. Benjamin personally assumes the $6,000 loan. What is the gain or loss, if any, Midwestern Grain must recognize as a result of the distribution?
Exam wording
$5,000 gain.
Q129.Distributions of stock rights or stock options are generally tax-free to shareholders. Which scenario would cause a distribution of stock rights to be taxable to a shareholder?
Exam wording
If a shareholder has a choice to receive cash instead of stock rights.
Q130.Cambrian Insurance, Inc. is a C corporation that is planning to permanently shut down its operations. Which form must be filed with the IRS within 30 days after the corporation adopts a plan to dissolve?
Exam wording
Form 966
Q131.Masami owns 800 shares of Techbomb Software, Inc. Masami purchased the shares five years ago, and her basis in the stock is $20,000. Techbomb Software completely liquidates on November 30, 2025, and distributes $56,000 in two liquidating payments to Masami. She received $16,000 on December 30, 2025, and $40,000 on January 27, 2026. How much gain or loss does Masami recognize in 2025 and 2026?
Exam wording
No gain or loss in 2025 and a $36,000 gain in 2026.
Q132.Seaboard Trading, Inc. is an S corporation with four shareholders. The corporation has 10,000 shares outstanding. The shareholders have the following ownership: Shareholder: Ownership Jordan: 4,500 shares Mai-Lin: 2,000 shares Simon: 2,000 shares Nora: 1,500 shares Total: 10,000 shares Nora and Jordan wish to terminate the S election, but Mai-Lin and Simon do not. Which of the following statements is correct?
Exam wording
Nora and Jordan have enough stock ownership to terminate the election.
Q133.On January 1, 2025, Gloria, Kristin, and Nancy are all equal shareholders in Fairview Heights Corporation, a calendar-year C corporation that has been in existence for four years. On January 7, 2025, Gloria sells her entire stock interest in the corporation to an unrelated party, Akash. Akash immediately wants to convert the corporation to an S corporation (retroactively) effective January 1, 2025. Whose consent is required for Fairview Heights to convert to S status in 2025?
Exam wording
Gloria must also consent to the election, along with Kristin and Nancy.
Q134.Which of the following events would cause the immediate termination of an S corporation's status?
Exam wording
An S corporation that issues one share of stock to a C corporation.
Q135.What is the tax rate on excess net passive income earned by S corporations?
Exam wording
21%
Q136.S corporations are generally not subject to taxation and are primarily pass-through entities. But in certain cases, S corporations are subject to taxes. Which of the following taxes do not apply to S corporations?
Exam wording
Self-employment tax.
Q137.Omar and Evelyn are shareholders in Centex Inc., an S corporation that has been in existence for three years. Omar owns 65% of the corporate stock, and Evelyn owns the remainder. Omar decides that he wants to convert Centex, Inc. to a C corporation. Which of the following statements is correct regarding the conversion?
Exam wording
Omar may choose to convert to a C corporation because he owns more than 50% of the stock. He does not need Evelyn's consent.
Q138.Which of the following is not a terminating event for an S corporation?
Exam wording
The S corporation has non-voting and voting stock.
Q139.Westland Nursing, Inc. received its corporate charter and was officially formed on November 8, 2025. Westland Nursing would like to make an initial election to become an S corporation, effective from its incorporation date. What is the deadline for the company to file Form 2553?
Exam wording
January 22, 2026
Q140.In which circumstance is a C corporation unable to elect to become an S corporation?
Exam wording
The corporation is incorporated in Canada and operates an import/export business in the U.S.
Q141.What happens to the deduction of a loss on the sale or trade of property between related corporations?
Exam wording
The deduction is disallowed.
Q142.Six years ago, Sabine purchased 100 shares of Vitality Vitamins, Inc. stock for $50 per share. In 2025, the corporation ceased operations and liquidated. After paying its outstanding liabilities, Vitality Vitamins distributed $10,000 of cash and appreciated property worth $90,000 to its shareholders. Sabine's portion of the distributed assets and cash was $12,000. What amount of taxable income must she report from this liquidating distribution?
Exam wording
$7,000 long-term capital gain.
Q143.Jacinta transferred an office building to an S corporation, Nura Biotech, Inc. in exchange for stock, and immediately after the transfer, she owns 90% of the corporation. She received stock with a fair market value of $155,000 plus a cash distribution of $60,000. Nura Biotech also assumed an existing $30,000 mortgage on the building for which Jacinta was personally liable. Her basis in the building was $175,000 immediately before the transfer. Nura Biotech will do business out of the building, so there was a bona fide business purpose for the transfer. What amount of gain must Jacinta recognize, if any?
Exam wording
$60,000
These recall cards are assessment material, so bulk copying and printing are limited. Primary-authority links remain available for verification. General lessons and guides remain selectable for note-taking.
Test yourself with the production-filtered question bank for this topic.
Start Practicing