BUSINESS - IRS SAMPLE QUESTIONS

Question 1

Generally, if you are required to account for inventories you must include which of the following:

(A) IRS interest and penalties
(B) Raw materials
(C) Donations of items to charity
(D) Supplies that are not physically part of the item intended for sale

Answer 1

(B) Raw materials

Question 2

Direct Sellers must report all income they receive on which Form or Schedule?

(A) Schedule E
(B) Schedule 1 line 21
(C) Form 1040 line 1
(D) Schedule C

Answer 2

D. Schedule C

Question 3

If a corporation allows earnings to accumulate beyond the reasonable needs of the business, it may be subject to
an accumulated earnings tax of:

(A) 10%
(B) 15%
(C) 20%
(D) 25%

Answer 3

C. 20%

References: IRC § 531; IRS Pub 542, Pg. 17

Question 4

What is the maximum number of shareholders a corporation may have to be eligible to elect to be treated as an S corporation?

(A) 25
(B) 50
(C) 100
(D) 200

Answer 4

(C) 100

References: IRC §1361(b)(1)(A); IRS, Instructions for Form 2553, Pg. 1

Question 5

Which of the following will disqualify a corporation from electing S corporation status?

(A) 75 shareholders

(B) Voting and non-voting stock

(C) A non-resident alien stockholder

(D) An employee stock option plan shareholder

Answer 5

(C) A non-resident alien stockholder

References: IRS, Instructions for Form 2553, Pg. 1; IRC §1361(b)(1)(C)

Question 6

An S corporation stockholders’ basis is generally increased by:

(A) Distributions
(B) Nontaxable discharge of indebtedness
(C) Separately stated loss items
(D) Taxable income

Answer 6

(D) Taxable income

References: IRC §108 (d)(7), 26 U.S.C. §§ 1367(a) and 1366; Treasury Regulations § 1.1366-1(a)(2)(viii)

Question 7

Cancellation of Debt (COD) income for a Sub-Chapter S Corporation:

(A) Flows to shareholder if income is excluded by the S corporation
(B) Is recognized as income to an S Corporation regardless of the extent of corporate insolvency
(C) Is not excluded from gross income to the S Corporation when granted in Chapter 11 reorganizations
(D) Gives rise to income which flows to shareholders if the income is not excluded by the S Corporation

Answer 7

(D) Gives rise to income which flows to shareholders if the income is not excluded by the S Corporation

References: Income from Discharge of Indebtedness, IRC §§ 108(a)(1) and 108(d)(7)

Question 8

All of the following are true regarding cancellation of debt income for S corporations EXCEPT:

(A) The canceled amount is considered gross income on Form 1120S
(B) The amount of canceled debt excluded from income will increase the basis of the shareholders’ stock
(C) The pro rata share of the canceled debt income will pass through to the shareholders
(D) Canceled debt income may be excluded to the amount of insolvency of the S corporation

Answer 8

(B) The amount of canceled debt excluded from income will increase the basis of the shareholders’ stock

References: IRC §§ 108(d)(7)(A), 61(a)(12), 1366(a), and 1367(a)(1); Reg. 1.108-7(d); Form 1120S Instructions, pg. 13

Question 9

All of the following would be included in the gross receipts of a business for a tax year EXCEPT:

(A) Sales made but income not collected during the tax year for a business using an accrual accounting method
(B) Sales taxes collected by a business using the cash accounting method
(C) The fair market value of property the business received in exchange for a good or service bartered
(D) Lease bonus and lease cancellation payments received from a lessee renting personal property or real estate
from the taxpayer

Answer 9

(B) Sales taxes collected by a business using the cash accounting method

References: Publication 334, Chap 5, pgs. 20-27; Gross Income Defined, IRC § 61

Question 10

Which of the following would generally be reported as other income on a Form 1040 Schedule C?

(A) Proceeds from international sales
(B) Bad debts recovered
(C) Sales tax collected
(D) Income from bartering activities

Answer 10

(B) Bad debts recovered

References: IRS, Instructions for Schedule C (Form 1040), Pg. C-6; Pub. 535, pgs. 40-42 (2018)

Question 11

If a company is an accrual taxpayer, what is the amount of gross receipts reported on the taxpayer’s Form 1040
Schedule C based on the information below?

Service income $25,000
Gain on the sale of an asset $1,500
Interest on accounts receivable $3,000

(A)$25,000
(B)$26,500
(C)$28,000
(D) $29,500

Answer 11

(C)$28,000

References: IRS, Tax Guide for Small Business Publication 334, Chap 5, pgs. 20-27; Instructions for Schedule C (Form
1040), Pg. C-5

Question 12

Under the updated capitalization and repair rules, amounts paid for which of the following activities generally
are not required to be capitalized unless an election is made to treat them as capital expenditures?

(A) Repair and maintenance that does not improve a unit of tangible property

(B) Adapting a unit of property to a new or different use

(C) Materially enlarging a unit of property

(D) Replacing a major component or substantial structural part of a unit of property

Answer 12

(A) Repair and maintenance that does not improve a unit of tangible property

References: IRC § 263; Treas. Reg. § 1.263(a)-3(n)

Question 13

The computation of recapture amounts is not necessary when the business use percentage of Section 179 or
listed property exceeds:

(A) 10%
(B) 25%
(C) 45%
(D) 50%

Answer 13

(D) 50%

References: IRC § 280F(b)(2) and (3); Treas. Reg. § 1.179-1(e)(1) and (2); Publication 946, pgs. 22-23, and 55;
Instructions for Form 4797

Question 14

If a corporation makes a below-market loan to a shareholder, the corporation generally is deemed to make a
payment to the shareholder for federal tax purposes. This deemed payment is treated as a(n):

(A) Gift
(B) Dividend
(C) A payment of compensation
(D) Honorarium

Answer 14

(B) Dividend

References: Below Market Loans, IRC § 7872(c)(1)(C); Publication 535, pg. 17

Question 15

A corporation makes a Federal rate as of the day the loan is made$100,000 term loan to a shareholder. The stated principal amount of the loan is payable in ten years. The test rate used to determine if the loan is a below-market loan is the:

(A) Short-term applicable Federal rate as of the day the loan is made
(B) Mid-term applicable Federal rate as of the day the loan is made
(C) Long-term applicable Federal rate as of the day the loan is made
(D) Adjusted applicable Federal rate as of the day the loan is made

Answer 15

(C) Long-term applicable Federal rate as of the day the loan is made

References: Treatment of loans with below market interest rates: IRC §§ 1274(d) and 7872(f); Publication 535, pg.
17.

Question 16

All of the following are true regarding Income in Respect of a Decedent (IRD) EXCEPT:

(A) IRD is income the decedent would have received had death not occurred that wasn’t properly included in the
decedent’s final return

(B) The character of the IRD remains the same as it would have been to the decedent had they not passed

(C) If an individual receives IRD and includes it on their return, they are not allowed a deduction for the estate
tax attributable to the item of IRD as reported on Form 706

(D) IRD must be included as income on either the decedent’s estate return, if the estate receives it, or the
beneficiary, if the right to income is passed directly to the beneficiary and the beneficiary receives it, or any
person to whom the estate properly distributes the right to receive it

Answer 16

(C) If an individual receives IRD and includes it on their return, they are not allowed a deduction for the estate
tax attributable to the item of IRD as reported on Form 706

References: IRC, § 691(a)(1), (3), and (c); IRS, Survivors, Executors and Administrators, Publication 559 Pgs. 9-10, 12

Question 17

All of the following returns would include income in respect of a decedent EXCEPT:

(A) The final Form 1040 for the decedent

(B) The decedent’s estate, Form 1041, if the decedent’s estate receives right to the income

(C) The Form 1040 of any person to whom the decedent’s estate properly distributes the income
**
(D) The beneficiary’s Form 1040, if the right to income arising out of the decedent’s death is passed directly to the
beneficiary and is never acquired by the decedent’s estate

Answer 17

(A) The final Form 1040 for the decedent

References: IRC §691(a)(1); Publication 559; Survivors, Executors and Administrators, pg. 10.

Question 18

A paycheck issued after the date of death to a taxpayer for work performed prior to death is considered:

(A) Non-taxable income

(B) Income in respect of a decedent

(C) Excess compensation

(D) Deferred income

Answer 18

(B) Income in respect of a decedent

References: Pub 559, Survivors, Executors, and Administrators Pg. 10; IRC §691(a)(1

Question 19

What is the tax consequence of a taxpayer receiving the wages that were due to a decedent at the time of their death?

(A) There is no tax consequence. Inheritances are not taxable

(B) The income is considered a long-term capital gain because it was inherited

(C) The income is considered ordinary income just as it would have been considered for the decedent

(D) The income is considered a short-term capital gain if it is paid out within one year of the decedent’s death

Answer 19

(C) The income is considered ordinary income just as it would have been considered for the decedent

References: IRS, Publication 559 Survivors, Executors, and Administrators Pg. 10; IRC § 691(a)(3); Treas. Reg. §
1.691(a)-3(a)

Question 20

An organization may qualify under Section 501(c)(3) if it is organized exclusively for which of the following
purposes?

(A) Charitable

(B) Business

(C) Political action

(D) Persona

Answer 20

(A) Charitable

References: IRC §501(c)(3); Treas. Reg. § 1.501(c)(3)-1(d)(1)(i ).

Question 21

Generally, if you are required to account for inventories you must include which of the following:

(A) IRS interest and penalties

(B) Raw materials

(C) Donations of items to charity

(D) Supplies that are not physically part of the item intended for sale

Answer 21

(B) Raw materials

Question 22

Direct Sellers must report all income they receive on which Form or Schedule?

(A) Schedule E

(B) Schedule 1 line 21

(C) Form 1040 line 1

(D) Schedule C

Answer 22

(D) Schedule C