Mock Exam

Question 1

With the help of a medical practice broker, Kaplan Podiatry, Inc. purchased Coastal Podiatry. The goodwill and “going concern value” associated with the business purchase totaled $179,000. Over what number of years must the goodwill and “going concern value” be amortized by Kaplan Podiatry, Inc.?

A. 20 years
B. 5 years
C. 10 years
D. 15 years

Answer 1

15 years. Goodwill and going-concern are both section 197 intangible assets that must be amortized over 15 years (180 months).

Question 2

Jeffrey is a sole proprietor who owns a small farm. He reports his income and loss on Schedule F. He does not have any employees. Which of the following expenses would be allowed on Schedule F as a business expense?

A. Health savings account deduction.
B. Premiums paid for medical insurance.
C. Self-employment tax deduction.
D. Depreciation expense

Answer 2

Correct Answer Explanation for D:

Depreciation is an allowable business expense on Schedule F and Schedule C. The other deductions listed are allowed only as adjustments to income on Schedule 1 of Form 1040.

Question 3

Alain is a full-time life insurance salesman. He is classified as a statutory employee and receives $90,000 in wages during the year. He has no other income for the year. Does Alain qualify for the QBI deduction?

A. There is not enough information to answer.
B. Yes, Alain qualifies for the QBI deduction, because he is a statutory employee.
C. No, he does not qualify because wages do not qualify as QBI.
D. Alain may qualify for the QBI deduction only if he sets up an LLC for his insurance activities.

Answer 3

Correct Answer Explanation for B:

Alain qualifies for the QBI deduction because he is a statutory employee. Generally, wages are not considered QBI, but performance of services as a statutory employee are considered QBI and are eligible for the QBI deduction to the extent that all other requirements of Section 199A are satisfied.

Payments made to statutory employees, as defined in section 3121(d)(3), are excluded from the definition of wages considered income from the trade or business of performing services as an employee under Treasury Regulation section 1.199A-5(d)(1).

Question 4

Aaron is a self-employed rancher who files on Schedule F. How would he calculate his self-employment (SE) tax for the year?

A. Qualified farmers and fishermen do not pay self-employment tax on their earnings
B. Aaron would calculate his SE tax on Schedule SE and attach it to his Form 1040correct
C. Aaron would calculate his SE tax directly on Schedule F
D. Aaron would calculate his SE tax on page 1 of Form 1040

Answer 4

Correct Answer Explanation for B:

Aaron would calculate his self-employment tax on Schedule SE, and attach it to his Form 1040. Self-employment tax is generally calculated on Schedule SE, regardless of whether a self-employed taxpayer files Schedule C or Schedule F.

Question 5

Jane Johnson died two years ago. Jane was a well-known author, and her books continue to generate revenue after her death. Her estate is currently going through its period of administration. In 2023, the Estate of Jane Johnson realized $30,000 of business income from the sale of Jane’s books. The estate has two beneficiaries, Jane’s sons, Bradley and Nestor. The executor of the estate is Jane’s trusted attorney. The executor distributed $10,000 of the business income to Nestor, and $20,000 to Jane’s other son, Bradley, based on their relative share of the estate as heirs. The allowable depreciation on the estate’s business property is $3,000 in 2023. Ignoring any other deductions or items of income, how should the depreciation be allocated to the beneficiaries?

A. The estate and beneficiaries cannot take depreciation deductions until all the assets are distributed.
B. Nestor can take a depreciation deduction of $1,000; Bradley can take a deduction of $2,000.
C. Neither beneficiary can take a deduction for depreciation, but the estate can take a depreciation deduction on Form 1041.
D. The depreciation must be divided equally between the beneficiaries. Nestor can take a depreciation deduction of $1,500, and Bradley can take a deduction of $1,500.

Answer 5

Correct Answer Explanation for B:

Nestor can take a depreciation deduction of $1,000 [($10,000 distribution ÷ $30,000) × $3,000], and Bradley can take a deduction of $2,000 [($20,000 distribution ÷ $30,000) × $3,000]. Just like individuals, trusts and estates can have income from a trade or business, even after the original owner of the business has died. The allowable deductions for depreciation and depletion that accrue after the decedent’s death must be apportioned between the estate and the beneficiaries, depending on the income of the estate allocable to each. In this case, the depreciation deduction would be allocatable ratably to Jane’s beneficiaries based on the income that is apportioned to each of her sons (question based on an example from Publication 559).

Question 6

Question ID: EA2 M2 035 (Topic: EA Part 2 Mock Exams)
Which of the following businesses would NOT be potentially subject to the Uniform Capitalization Rules, regardless of gross receipts?

A. A realty business that acquires land for resale.
B. A farming business that raises beef cattle for resale.
C. A business that produces inventory for sale to customers.
D. Creative expenses incurred by a self-employed writer

Answer 6

Correct Answer Explanation for D:

Qualified creative expenses incurred as a freelance (self-employed) writer, photographer, or artist are not subject to the Uniform Capitalization Rules, regardless of the business’ gross receipts threshold. A business must use the uniform capitalization rules if it:

Produces (or manufactures) real or tangible personal property for use in the business or activity.
Produces (or manufactures) real or tangible personal property for sale to customers.
Acquires property (inventory) for resale.
For the purposes of this rule, “tangible personal property” includes films, sound recordings, videotapes, books, or similar property (see IRS Publication 551, Basis of Assets, for more information).

Question 7

Question ID: EA2 M2 025 (Topic: EA Part 2 Mock Exams)
Karen is a professional bookkeeper. She forms an LLC during the year, Karen’s Books and Beyond, LLC. Karen elects to have her LLC taxed as an S corporation. She is the only owner of the entity. What is the correct procedure for making this election?

A. The LLC must file Form 2553
B. The LLC must file both Form 8832 and Form 1120S
C. The LLC must file Form 8832
D. The LLC must file Form 1120S and elect S corporation status with its first tax return

Answer 7

Correct Answer Explanation for A:

If Karen wants her LLC to be classified as an S corporation, the LLC must file Form 2553, Election by a Small Business Corporation. This form is used instead of Form 8832 when an LLC makes the election to be taxed as an S corporation. Form 2553 must be signed and dated by a corporate officer (in this case, Karen). If Form 2553 is not signed, it won’t be considered timely-filed.

Question 8

Question ID: EA2 M2 023 (Topic: EA Part 2 Mock Exams)
Sophia and Logan formed the Econix Corporation in 2023. As part of the capitalization of the newly-formed corporation, Sophia contributed $500,000 of cash, and Logan contributed land and a building with a fair market value of $700,000 and an adjusted basis of $450,000. Logan received $200,000 of cash from the corporation when the land and building were contributed. Sophia and Logan each receive 50% of the corporate stock after these contributions. What is the tax basis of the land and building to Econix Corporation?

A. $250,000
B. $500,000
C. $650,000
D. $700,000

Answer 8

Correct Answer Explanation for C:

Econix Corporation’s basis in the land and building is $650,000. The contributing shareholder’s basis in the property was $450,000, and any gain that is recognized by Logan must be added to the corporation’s basis. Since Logan received cash in this transaction, he has to calculate gain. Logan’s recognized gain is the lesser of: (1) his realized gain or (2) the boot received in the transaction. Logan’s realized gain is $250,000 ($700,000 FMV - $450,000 basis). The boot he received was $200,000 in cash. Therefore, the gain recognized by Logan is $200,000, and the corporation’s basis in the property is $650,000 ($450,000 carryover basis + the $200,000 income recognized by Logan).

Question 9

Question ID: EA2 M2 047 (Topic: EA Part 2 Mock Exams)
The computation of recapture amounts is not necessary when the business use percentage of section 179 or listed property exceeds what threshold?

A. 10%
B. 25%
C. 50%
D. 45%

Answer 9

Correct Answer Explanation for C:

The computation of recapture amounts is not necessary when the business use percentage of section 179 or listed property exceeds 50% (for more information, see IRS Instructions for Form 4797).

Question 10

Question ID: EA2 M2 045 (Topic: EA Part 2 Mock Exams)
Which of the following assets would not be classified as a section 197 asset?

A. Franchise rights
B. Goodwill
C. Workforce in place
D. Partnership interest

Answer 10

Correct Answer Explanation for D:

A partnership interest is not a section 197 asset. Section 197 assets are intangible assets used in a trade or business. Section 197 assets include: goodwill, going concern value, workforce in place, patents, copyrights, franchises, trademarks, and trade names

Question 11

Question ID: EA2 M2 059 (Topic: EA Part 2 Mock Exams)
What is the deadline to file Form 5500, Annual Return/Report of Employee Benefit Plan?

A. The fifteenth day of the fifth month after the end of the plan year.
B. The fifteenth day of the seventh month after the end of the plan year.
C. The last day of the seventh month after the end of the plan year.
D. The fifteenth day of the fourth month after the end of the plan year.

Answer 11

Correct Answer Explanation for C:

The deadline to file Form 5500, Annual Return/Report of Employee Benefit Plan, is the last day of the seventh month after the end of the plan year. So, for example, a calendar-year retirement plan would be required to file on July 31.

Question 12

Question ID: EA2 M2 089 (Topic: EA Part 2 Mock Exams)
Family Focus Charities is a 501(c)(3) exempt entity that is organized as a C corporation. Which form should be used to request an extension of time to file?

A. Form 4868
B. Form 7004
C. Form 8868
D. Form 990-N

Answer 12

Correct Answer Explanation for C:

Exempt entities, regardless of their entity type, would use Form 8868, Application for Automatic Extension of Time to File an Exempt Organization Return, to request an automatic extension of time to file.

Note: An exempt entity can be organized as a corporation for legal purposes, but for IRS purposes, it is treated as an exempt entity and should always file its annual tax return on Form 990, Return of Organization Exempt from Income Tax.

Question 13

68. Question ID: EA2 M2 004 (Topic: EA Part 2 Mock Exams)
    Which of the following businesses, if operated as a sole proprietorship, would be classified as a “Specified Service Trade or Business” for the purposes of determining eligibility for the section 199A tax deduction for Qualified Business Income?

A. Farming business
B. Accounting Firm.
C. Licensed realtor.
D. Engineering Firm.

Answer 13

Correct Answer Explanation for B:

The 199A QBI deduction permits owners of eligible businesses to deduct up to 20% of their qualified business income from taxable income. However, if the business is a “specified service business,” the deduction is phased out based on the owner’s pre-QBI deduction taxable income and potentially based on the amount of wages and qualifying property of the business. For the purposes of the Section 199A tax deduction, a “Specified Service Trade or Business” (SSTB) would include:

Health services (including doctors, dentists, physical therapists, and veterinarians),
Legal services (lawyers, mediators, and paralegals),
Accounting (CPA firms, tax preparation firms, and bookkeepers),
Actuarial science,
Performing arts (including musicians, entertainers, actors, and singers),
Consulting (includes professional advisors and lobbyists),
Athletics (including athletes, team managers, and coaches),
Financial services (including financial advisors, investment bankers, etc.),
Brokerage services (including stock brokers) or;
Endorsement of products or services.
Engineering and architectural services were initially included in this list when the TCJA was originally introduced and was pending legislation, but Congress removed those fields in the final version of the TCJA. Real estate brokers, hotel/motel operators, property managers, and bankers are also excluded from the definition of a “Specified Service Business.”

Question 14

Question ID: EA2 M2 085 (Topic: EA Part 2 Mock Exams)
Hunt Manufacturing, Inc. offers a high deductible health plan (HDHP) to all its employees. The plan is coupled with a Health Savings Account (HSA). Hunt Manufacturing sets up an HSA for every qualified employee. Contributions to the employee’s HSA may be made by ______________.

A. By the employee, the employer, or any other person
B. The employer only
C. Only the employee or the employer
D. The employee only

Answer 14

Correct Answer Explanation for A:

A high deductible health plan (HDHP) can be combined with a health savings account (HSA) as part of an employer’s benefits package. Even if set up by an employer, an HSA account is owned and controlled by the employee. Contributions may be made by the employee, the employer, or any other person. Amounts in an HSA may be accumulated over the years or distributed on a tax-free basis to pay for qualified medical expenses.

Question 15

Question ID: EA2 M2 030 (Topic: EA Part 2 Mock Exams)
Chateau Winery, Inc. is a cash basis C corporation. The business made regular estimated payments throughout the year based on its current-year tax liability. On November 16, 2023, the company suffers a financial loss when a bad storm destroys one of its vineyards. After this event, Chateau Winery expects to have a loss for the year, and it could really use the overpaid taxes in December to defray disaster recovery costs. How can the corporation obtain a quick refund of its overpaid estimated taxes?

A. The business can file Form 4466, to obtain a refund of its overpayment of estimated tax.
B. The business must file its corporate return (Form 1120) to receive a refund.
C. The business can contact EFTPS and request a refund of its estimated tax.
D. The business can file Form 843 to claim a refund or request an abatement of certain taxes.

Answer 15

Correct Answer Explanation for A:

Chateau Winery, Inc. does not have to wait until it files its tax return to request a refund of its overpaid estimated tax. The business can file Form 4466, Corporation Application for Quick Refund of Overpayment of Estimated Tax. A corporation that has overpaid its estimated tax may apply for a quick refund if the overpayment is at least 10% of its expected income tax liability and at least $500.

Question 16

Question ID: EA2 M2 018 (Topic: EA Part 2 Mock Exams)
Bobby and Sienna are married. Both are self-employed and run their own businesses. Each is enrolled in a self-only HDHP (high deductible health plan). Can Bobby and Sienna set up a joint HSA, even though they have separate businesses?

A. They cannot set up a joint HSA.
B. They can set up a joint HSA, but only if they file jointly
C. They can set up a joint HSA, whether they file jointly or separately
D. They can set up a joint HSA if they designate the HSA as a “family plan.”

Answer 16

Correct Answer Explanation for A:

Bobby and Sienna cannot set up a joint HSA. An HSA is owned by one person, so spouses cannot have a joint HSA. Each spouse who is an eligible individual must open a separate HSA.

Note: One spouse can potentially have family coverage under a high deductible health plan (HDHP), and the funds in the HSA can be used for medical expenses for the HSA owner’s spouse and any dependents, but each HSA can only have one owner.

Question 17

Question ID: EA2 M2 016 (Topic: EA Part 2 Mock Exams)
Worldwide Trucking, Inc. is a transportation business that pays fuel excise taxes. How should these taxes be treated for IRS purposes?

A. Excise taxes are not a deductible business expense
B. Excise taxes may be deductible to corporations, but not to individual taxpayers
C. Excise taxes may be currently deductible or subject to capitalization
D. Excise taxes must be capitalized

Answer 17

Correct Answer Explanation for C:

The federal government levies an excise tax on various motor fuels. Excise taxes may be deductible currently or as the item is used, or may be subject to capitalization. Excise taxes are often paid when purchases are made on a specific item, such as gasoline, or activity, such as highway usage by trucks. When paid in connection with the purchase of a particular item, an excise tax is considered part of the cost of that item. Therefore, it may be deductible currently or as the item is used, or be subject to capitalization, such as when the item is used in manufacturing inventory. When a business collects excise taxes, it serves solely as a collection agent for the government, and the amounts collected are passed through without any effects on business revenue or profits. Excise taxes are reported on Form 720, Quarterly Federal Excise Tax Return, which is filed by businesses on a quarterly basis.

Question 18

Question ID: EA2 M2 097 (Topic: EA Part 2 Mock Exams)
Which of the following employers are not required to file a Form 941 on a quarterly basis?

A. Sole-proprietors with fewer than five employees
B. Employers of farm employees
C. Governmental entities
D. Exempt entities with employees

Answer 18

Correct Answer Explanation for B:

Employers of farm employees do not usually file Form 941. Agricultural employers generally file Form 943, Employer’s Annual Federal Tax Return for Agricultural Employees, instead. Most employers who have employees are required to file a Form 941 on a quarterly basis to report wages paid and payroll taxes withheld. However, special rules apply to some employers.

Seasonal employers do not have to file a Form 941 for quarters in which they have no tax liability because they have paid no wages.
Employers of household employees do not usually file Form 941. See Publication 926 and Schedule H (Form 1040) for more information.
Employers of farm employees do not usually file Form 941.

Question 19

Question ID: EA2 M2 046 (Topic: EA Part 2 Mock Exams)
How many years should an employer keep employment tax records, such as copies of Forms W-2?

A. Three years
B. Six years
C. One year
D. Four years

Answer 19

Correct Answer Explanation for D:

The IRS advises employers to keep all employment tax records for at least four years. These records should be available for IRS review

Question 20

Question ID: EA2 M2 095 (Topic: EA Part 2 Mock Exams)
Peachtree Farms purchased a parcel of farmland during the year. How long should the business retain records relating to the purchase of the land?

A. Until the statute of limitations expires for the year in which the farm disposes of the property
B. For three years from the date of purchase
C. For six years from the date of purchase
D. At least two years after the year in which the business disposes of the property

Answer 20

Correct Answer Explanation for A:

Peachtree Farms should keep records relating to property until the statute of limitations expires for the year in which the business disposes of the property. The records must enable the taxpayer to determine the basis or adjusted basis of the land in order to determine gain or loss when the property is sold. For example, the records should show the purchase price, settlement or closing costs, and the cost of any later improvements to the property.

Question 21

Question ID: EA2 M2 093 (Topic: EA Part 2 Mock Exams)
Which of the following types of income would NOT be included on Form 941, Employer’s Quarterly Federal Tax Return?

A. Additional Medicare Tax withheld from employees’ pay
B. Backup withholding on an employee’s pension
C. Federal income tax withheld from regular wages
D. The employee’s share of Social Security and Medicare taxes

Answer 21

Correct Answer Explanation for B:

Employers would not use Form 941 to report backup withholding or income tax withholding on non-payroll payments (such as pensions, annuities, and gambling winnings). Employers should use Form 941 to report the following amounts:

Wages paid to employees.
Tips employees reported to the employer.
Federal income tax withheld.
Both the employer and the employee’s share of Social Security and Medicare taxes.
Additional Medicare Tax withheld from employees’ pay.
Current quarter’s adjustments to Social Security and Medicare taxes for fractions of cents, sick pay, tips, and group-term life insurance.
Qualified small business payroll tax credit for increasing research activities.
Employers should instead report these types of withholding on Form 945, Annual Return of Withheld Federal Income Tax.

Question 22

Question ID: EA2 M2 040 (Topic: EA Part 2 Mock Exams)
Windsor Windows, Inc. is a calendar-year C corporation that sells window coverings and draperies. Windsor has a net short-term capital gain of $3,000 and a net long-term capital loss of $11,000. What is the proper treatment of these transactions?

A. The short-term gain offsets some of the long-term loss, leaving a net capital loss of $8,000. The corporation treats this $8,000 as a short-term loss when carried back or forward.
B. Windsor has a net long-term capital loss of $11,000. Any gains would be ordinary income.
C. Windsor has a net short-term capital gain of $3,000. The losses are not deductible by the corporation, but they can be passed through to the shareholders.
D. The short-term gain offsets some of the long-term loss, leaving a net capital loss of $8,000. The loss can be claimed against ordinary income.

Answer 22

Correct Answer Explanation for A:

The short-term gain offsets some of the long-term loss, leaving a net capital loss of $8,000. Windsor Windows, Inc. must treat this $8,000 loss as a short-term loss when carried back or carried forward. The capital losses cannot be claimed against ordinary corporate income.

Note: C corporations must generally carryback a net capital loss three years and carryforward up to a maximum of five years. The carryback (for almost all situations) is mandatory (IRC Section 1212(a)(1)). If any capital loss carryforward remains after carrying the loss forward for five years, it is lost.

Question 23

Question ID: EA2 M2 032 (Topic: EA Part 2 Mock Exams)
Donna transfers a parcel of land worth $145,000 with an adjusted basis of $100,000 and renders web design services valued at $15,000 to Hubbel Group, Inc. in exchange for stock valued at $160,000. Right after the transfer, Donna owns 90% of the outstanding stock in Hubbel Group Inc. What is the taxable effect of this transaction on Donna?

A. Donna recognizes $30,000 of ordinary income.
B. Donna recognizes $15,000 of ordinary income and $15,000 of capital gain income.
C. Donna recognizes $15,000 of ordinary income.
D. Donna does not recognize gain or loss.

Answer 23

Donna must recognize ordinary income of $15,000 as payment for services she rendered to the corporation. If a taxpayer transfers property (or money and property) to a corporation in exchange for stock in that corporation, and immediately afterwards is in control of the corporation, the exchange is usually not taxable under IRC section 351. To be “in control” of a corporation, the transferor must own, immediately after the transfer, at least 80% of the total combined voting power of all classes of stock. However, this nonrecognition treatment does not include services rendered to the issuing corporation. The value of stock received for services is income to the recipient.

Question 24

The section 199A deduction is based on a percentage of Qualified Business Income (QBI). Which of the following types of income is considered “Qualified Business Income”?

A. Gains from foreign currency transactions
B. Rental income from a trade or business activity
C. Guaranteed payments to a partner
D. Short-term capital gains

Answer 24

Correct Answer Explanation for B:

Qualified Business Income includes only income from a U.S. trade or business. Rental income will qualify as QBI if it is received from a related trade or business, or if the rental activity itself rises to the level of a “trade or business.” Income from foreign currency transactions is not “Qualified Business Income” for the purposes of calculating the QBI deduction. In order for a business owner to claim the QBI deduction, the business must operate as a pass-through entity, and also have qualifying income. QBI does not include:

Capital gains or losses.
Dividends or interest.
Annuity payments.
Gains from foreign currency transactions.
Reasonable compensation paid to owners.
Guaranteed payments for services paid to business partners.

Question 25

Question ID: EA2 M3 092 (Topic: EA Part 2 Mock Exams)
Sherman operates Kroger Farms, LLC as a sole proprietorship and has the following income and expenses in 2023:

Sales of grain and produce $2,000,000
Sales of market livestock raised on the farm $200,000
Crop insurance proceeds $150,000
Rental income from land (based on production of sharecropper-tenant) $100,000
Proceeds from the sale of used farm machinery $24,000
Car and truck expenses ($100,000)
Depreciation expense ($700,000)
Fertilizer and other supplies ($500,000)
Contribution to SEP-IRA ($25,000)
Utilities on the farm ($200,000)
Repairs to farming equipment ($100,000)
Based on the information above, what amount of net farm profit (or loss) should be reported on Sherman’s Schedule F?

A. $820,000
B. $750,000
C. $850,000
D. $874,000

Answer 25

Correct Answer Explanation for B:

With the exception of the rental income, the proceeds from the used machinery sale, and the SEP-IRA contribution, all of the items listed above are reportable on Schedule F, resulting in a net farm profit of $750,000.

Sales of grain and produce $2,000,000
Sales of market livestock raised on the farm 200,000
Crop insurance proceeds 150,000
Rental income from land NO
Proceeds from the sale of used farm machinery NO
Car and truck expenses (100,000)
Depreciation expense (700,000)
Fertilizer and other supplies (500,000)
Contribution to SEP-IRA NO
Utilities on the farm (200,000)
Repairs to farming equipment (100,000)
Net Farm Profits: $750,000
Gross income from farming activity includes income from sales of farm products, including livestock raised for sale or purchased for resale. Rent received for the use of farmland is generally rental income, not farm income, and since the rent is based on the productivity of the tenant farmer, it is reported on Form 4835, Farm Rental Income and Expenses. Sales of land, depreciable machinery and equipment, and livestock held for draft, breeding, sport, or dairy purposes are reported on Form 4797, Sales of Business Property. In the case of a sole proprietorship or partnership, if the owners of the business contribute to their own retirement accounts, they must take the deduction as an adjustment to income on Form 1040.

Question 26

Question ID: EA2 M3 032 (Topic: EA Part 2 Mock Exams)
Which of the following statements regarding distributions from trusts and estates is incorrect?

A. Distributable net income (DNI) represents taxable net income before the income distribution deduction.
B. Beneficiaries must report taxable distributions in the year they are distributed.
C. The income distribution deduction is limited to DNI.
D. The amounts taxable to beneficiaries are reported to them on Schedules K-1.

Answer 26

Correct Answer Explanation for B:

A beneficiary of a simple trust or an estate that is required to distribute all its income currently must generally report his share of the income required to be distributed currently, whether or not the distribution was received. If the income required to be distributed currently to all beneficiaries exceeds the trust or estate’s DNI, each beneficiary must report his proportionate share of the DNI. The determination of whether trust income is required to be distributed currently depends on the terms of the trust instrument and applicable local law. A beneficiary of a complex trust or an estate that is not required to distribute all its income currently must report the sum of:

The amount of the income required to be distributed currently (whether or not actually distributed), or if the income required to be distributed currently to all beneficiaries exceeds DNI (without taking into account the charitable deduction), his proportionate share of DNI, and
All other amounts properly paid, credited, or required to be distributed, or if the sum of the income required to be distributed currently and other amounts properly paid, credited, or required to be distributed to all beneficiaries exceeds the DNI, his proportionate share of the excess of DNI over the income required to be distributed currently.

Question 27

Question ID: EA2 M3 089 (Topic: EA Part 2 Mock Exams)
Which of the following assets is not eligible for the section 179 deduction?

A. Off-the-shelf computer software
B. Qualified improvement property
C. Livestock
D. Inventory

Answer 27

Correct Answer Explanation for D:

Inventory is not eligible for the section 179 deduction. The other assets listed all qualify for section 179 accelerated depreciation.

Question 28

Question ID: EA2 M3 013 (Topic: EA Part 2 Mock Exams)
Which of the following events may cause an automatic termination of an S election?

A. The S corporation has C corporation earnings and profits, and it has passive investment income that exceeds 25% of its gross receipts for three consecutive tax years.
B. One shareholder dies and the shares are now owned by the deceased shareholder’s estate.
C. Due to stock sales, the number of shareholders reaches 100.
D. An exempt entity is gifted 5% of the shares from an individual shareholder.

Answer 28

Correct Answer Explanation for A:

An S corporation that was previously a C corporation and has accumulated earnings and profits cannot have passive investment income that exceeds 25% of its gross receipts for three consecutive tax years without putting its status as an S corporation in jeopardy. An S corporation may have a shareholder that is an estate, and some exempt entities (notably 501(c)(3) charities) may own stock in an S corporation. An S corporation can have up to 100 shareholders. Note that some combination of shareholders can potentially be counted as one shareholder for purposes of the 100-shareholder limit for S corporations if they meet certain family relationships to each other. For example, a husband and wife can be treated as a single shareholder.

Question 29

Question ID: EA2 M3 100 (Topic: EA Part 2 Mock Exams)
Unlike limited partners, general partners have __________ for a partnership’s debt obligations.

A. Legal absolution
B. Nonrecourse liability
C. Joint and several liability
D. Limited responsibility

Answer 29

Correct Answer Explanation for C:

Unlike limited partners, general partners have joint and several liability in a partnership’s debt obligations. Limited partners are only liable up to the amount of their investment.

Question 30

Question ID: EA2 M3 070 (Topic: EA Part 2 Mock Exams)
Omicron Energy, Inc. has $260,000 of current and accumulated earnings and profits. Omicron Energy had no accumulated earnings and profits at the beginning of the year. The company distributes a parcel of land with a fair market value of $200,000 and a basis of $90,000 to Aldo, an 80% shareholder. This is not a liquidating distribution. How much gain (or loss) would the corporation have in this transaction, and how much dividend income would Aldo report on his individual return?

A. Omicron Energy: $110,000 gain; Aldo: $200,000 dividend
B. Omicron Energy: $200,000 gain; Aldo: $110,000 dividend
C. Omicron Energy: $110,000 gain. Aldo: $90,000 dividend
D. Omicron Energy: $200,000 gain. Aldo: $170,000 dividend

Answer 30

Correct Answer Explanation for A:

Omicron Energy, Inc. would report a $110,000 gain ($200,000 FMV - $90,000 basis). Aldo would report a $200,000 dividend (the fair market value of the property) as the $200,000 figure is less than his $208,000 share of the corporation’s earnings and profits. All distributions of appreciated property trigger gain recognition for the corporation. The distribution to the shareholder is treated as a sale, and gain is reported on the transaction by the corporation. However, a corporation would not recognize a loss on the distribution of property.

Question 31

Question ID: EA2 M3 040 (Topic: EA Part 2 Mock Exams)
Ten years ago, Tensor Mining, Inc. purchased a plot of undeveloped land for $90,000. On January 5, 2023, the land was condemned by the federal government for development of a new highway. The company attempted to fight the condemnation, but they lost their case in court. On December 19, 2023, Tensor Mining, Inc. received a $160,000 condemnation award for the land, which was the fair market value of the land when it was condemned by the government. On February 10, 2024, the company purchases replacement land for $80,000. The rest of the condemnation award was used to purchase inventory. How much gain, if any, should Tensor Mining, Inc. recognize on this event?

A. $10,000
B. $0
C. $70,000
D. $160,000

Answer 31

Correct Answer Explanation for C:

Tensor Mining must recognize a gain of $70,000 ($160,000 - $90,000), because only $80,000 of the $160,000 condemnation award was reinvested in “like” property. If property is condemned (or disposed of under the threat of condemnation), gain or loss is figured by comparing the adjusted basis of the condemned property with the net condemnation award. Gain is recognizable to the extent of the lesser of the amount above or the portion of the award that was not reinvested by the time-frame requirements for involuntary conversions. Since the corporation did not use the entire condemnation award to repurchase similar property, then a portion of the gain must be recognized. The fact that the company purchased inventory is irrelevant.

Question 32

Question ID: EA2 M3 061 (Topic: EA Part 2 Mock Exams)
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?

A. Guaranteed payments are included in a partner’s income in the year they are distributed.
B. Guaranteed payments are taxable when declared by the partnership.
C. Guaranteed payments are not included in a partner’s income.
D. Guaranteed payments are included in income in the partner’s tax year in which the partnership’s tax year ends.

Answer 32

Correct Answer Explanation for D:

Guaranteed payments are included in income in the partner’s tax year in which the partnership’s tax year ends. For example, for a fiscal-year partnership that ends on July 31, 2023, a calendar year partner would have to report all the guaranteed payments on their 2023 tax return, even if they received some (or all) of the guaranteed payments in the prior year.

Question 33

Question ID: EA2 M3 015 (Topic: EA Part 2 Mock Exams)
Bunter Energy Inc. is a cash-basis C Corporation. Bunter Energy does not have an applicable financial statement. The company purchases six laptop computers in 2023. The company paid $2,000 each for a total cost of $12,000, and these amounts are substantiated with an invoice. The company has a written accounting procedure in place to expense the cost of tangible property. How should this purchase be treated for tax purposes?

A. Bunter Energy Inc. can deduct each computer as an expense if the company makes the de minimis safe harbor election.
B. Bunter Energy Inc. can deduct each computer as an expense without any required election.
C. Bunter Energy, Inc. is required to capitalize and depreciate the computers under MACRS.
D. Bunter Energy, Inc. is required to capitalize and depreciate the computers under the straight-line method.

Answer 33

Correct Answer Explanation for A:

Bunter Energy Inc. may treat each computer as an expense and deduct the cost in the current year if the company elects the de minimis safe harbor on its tax return.[1] Businesses may elect to apply a de minimis safe harbor to amounts paid to acquire or produce tangible property used in a trade or business. To make this election, a statement must be attached to the return for the tax year when qualifying assets were purchased. The de minimis safe harbor election does not include amounts paid for inventory or land.

[1] IRS Notice 2015-82 states that for businesses without an applicable financial statement (or AFS), the de minimis safe harbor threshold is $2,500 for the business to deduct certain tangible property as an expense (rather than depreciate the property). Businesses that issue an applicable financial statement (those that are audited, are required to be issued to the U.S. Securities and Exchange Commission, or another federal or state government agency) may use the same de minimis safe harbor procedure to deduct amounts up to $5,000 per invoice or item. A written accounting policy is required for taxpayers with an applicable financial statement.

Question 34

Question ID: EA2 M3 072 (Topic: EA Part 2 Mock Exams)
Marley decides to invest in Radford Power, Inc., a cash-basis C corporation, as a new shareholder. In exchange for 70% of the corporation’s total stock, he exchanges a business building with an adjusted basis to him of $360,000 and a fair market value of $700,000. Based on this information, what is Marley’s stock basis and his recognized gain on the exchange?

A. Marley’s Stock Basis: $340,000, Recognized Gain: $360,000
B. Marley’s Stock Basis: $700,000, Recognized Gain: $238,000
C. Marley’s Stock Basis: $700,000, Recognized Gain: $340,000
D. Marley’s Stock Basis: $360,000, Recognized Gain: $0

Answer 34

Correct Answer Explanation for C:

Transferring property (not cash) to a corporation in exchange for stock can be a taxable event. Since Marley is not “in control” of the corporation after the exchange, he must treat the exchange as a sale. For Section 351 purposes, “control” means ownership of at least 80% of the total stock. Since this transaction does not qualify for Section 351 nonrecognition treatment, Marley must recognize a gain on the transfer, which is treated as a sale. Marley’s gain is $340,000 ($700,000 FMV - $360,000 basis). Marley’s basis in his stock is $700,000 after the exchange.

Question 35

Question ID: EA2 M3 088 (Topic: EA Part 2 Mock Exams)
Which of the following entities is NOT subject to the passive activity loss rules?

A. A trustwrong
B. A closely held corporation
C. A partnership
D. An estate

Answer 35

Correct Answer Explanation for C:

Partnerships are not subject to the passive loss limitation rules. However, the passive activity rules are applied at the partner level. Entities subject to the passive activity loss rules are:

Individual taxpayers.
Estates and Trusts.
Closely held C corporations (passive losses may offset active income, but not portfolio income).
Personal Service Corporations.
Partnerships and S corporations are not subject to the passive loss rules, but the individual partners and shareholders of these entities may be subject to the passive loss limitation rules on their distributive shares. In general, aggregate losses from passive activities are allowed only to the extent of aggregate income from passive activities. Suspended passive activity losses would become deductible in the year of disposal of the entire interest of the passive activity (for example, if an individual has suspended passive losses from an investment asset and then sells the investment, the suspended losses would be recognized upon the disposition of the asset).

Question 36

Question ID: EA2 M3 099 (Topic: EA Part 2 Mock Exams)
Sarsen Tree Farms is a timber farm. The business purchased a number of assets in 2023. Which of the following is not a §1231 asset for the business (assuming all assets are held more than one year)?

A. Permanent land improvementswrong
B. Purchase of land for growing timber
C. Machinery and equipment used to process cut trees
D. Lumber inventory

Answer 36

Correct Answer Explanation for D:

Inventory is not a §1231 asset. Examples of §1231 assets include: land, buildings, land improvements, and equipment and machinery held more than one year. Land improvements are also §1231 assets and depreciable. Examples of land improvements include: fences, roads, and land drainage and irrigation systems.

Question 37

Question ID: EA2 M3 053 (Topic: EA Part 2 Mock Exams)
What tax returns, if any, is First Community Church required to file?

Paid $40,000 of wages to three part-time church employees.
Received $800 of unrelated business income from Christmas bingo.
Received $300,000 of donations from parishioners.

A. First Community Church must file payroll tax returns and Form 990-T
B. First Community Church must file payroll tax returns
C. A church is not required to file a tax return
D. First Community Church must file Form 990, Form 941, and Form 990-T

Answer 37

Correct Answer Explanation for B:

First Community Church must file payroll tax returns. Unlike most tax-exempt entities that are required to file Form 990, religious organizations (churches, synagogues, mosques, etc.) are generally not required to file an information return to report their income and loss. Churches are also exempt from payment of federal income tax, and therefore, they are not required to file an application for exemption with the IRS, but many churches still seek a formal exemption. Federal law imposes several reporting requirements on exempt organizations, but the main reporting requirements for churches have to do with employment taxes (if they pay employees) and unrelated business income tax, or UBIT. An exempt organization that has $1,000 or more of gross income from an unrelated business must file Form 990–T. Since First Community Church does not have $1,000 of unrelated business income, it is not required to file Form 990-T, but it is still required to file employment tax returns (the Form 941 series) because it pays employee wages.

Question 38

Question ID: EA2 M3 085 (Topic: EA Part 2 Mock Exams)
Marion died before filing his tax return. His adult daughter, Liana, is her father’s personal representative and his only heir. Marion’s estate did not have a filing requirement, but Liana files the final Form 1040 for her father because he earned wages before he died. His final return shows a $4,000 refund due. What form should be attached to her father’s final return to ensure that this refund is issued to Liana?

A. Form 1041
B. Form 1310
C. Form 706
D. Form 2848

Answer 38

Correct Answer Explanation for B:

Form 1310, Statement of Person Claiming Refund Due a Deceased Taxpayer, can be used by a personal representative, surviving spouse, or a claimant for the estate of the deceased to request a federal tax refund on behalf of a deceased taxpayer.

Question 39

Question ID: EA2 M3 066 (Topic: EA Part 2 Mock Exams)
Rodd is a professional securities broker/dealer. His business, Riverside Brokerage, Inc. is organized as an S corporation. Rodd is the sole shareholder in the S corporation. He is unmarried and files as Single. In 2023, Rodd’s taxable income, before any potential QBI deduction, is $268,000. Is he eligible for the 199A 20% deduction for Qualified Business Income (QBI)?

A. He is eligible for a partial deduction
B. Yes, he is eligible
C. No, he is not eligible
D. Not enough information to answer

Answer 39

Correct Answer Explanation for C:

Rodd is not eligible for the 199A deduction for Qualified Business Income (QBI). As a professional securities dealer, Rodd’s business, Riverside Brokerage, would be considered a “Specified Service Trade or Business,” (or SSTB) and therefore subject to a taxable income limitation. For an SSTB, the QBI deduction begins to phase out for single filers at an income of $182,101 and phases out completely at $232,100 in 2023. Since Rodd’s taxable income exceeds this phase-out threshold, he is not eligible for the deduction. The following are examples of SSTBs:

Legal professionals (including lawyers, paralegals, and mediators).
Healthcare providers (including veterinarians and nurses).
Professional athletes, coaches, umpires, team managers, etc.
Accountants (including CPAs, enrolled agents, and bookkeepers).
Financial service providers.
Actuarial science.
Brokerage services, such as professional stockbrokers and securities dealers (does not include real estate brokers).
Performing artists (including professional singers, musicians, and actors).
An SSTB also includes a business where the principal asset of the business is the “reputation or skill” of one or more of its employee or owners. The IRS interpreted this rather narrowly, as a trade or business in which a person receives fees, compensation, or other income for endorsing products or services, (such as celebrity endorsements).

Question 40

Question ID: EA2 M3 074 (Topic: EA Part 2 Mock Exams)
Which of the following is not a shareholder loss limitation for an S corporation?

A. Casualty loss limitation
B. Debt basis limitation
C. At-risk limitation
D. Passive activity loss limitation

Answer 40

Correct Answer Explanation for A:

There is no such thing as a “casualty loss limitation.” There are four shareholder loss limitations:

Stock and debt basis limitation.
At-risk limitation.
Passive activity loss limitation.
Excessive business loss limitation.
The fact that a shareholder receives a Schedule K-1 reflecting a loss does not mean that the shareholder is automatically entitled to claim that loss. If a shareholder of an S corporation is allocated an item of loss or deduction, the shareholder must have adequate stock and/or debt basis to claim the loss. Even if a shareholder has adequate stock and/or debt basis to claim an S corporation loss, he must also consider the at-risk and passive activity loss limitations and therefore still may not be able to claim the loss. Furthermore, an S corporation would also be limited to the $250,000 ($500,000 if MFJ) limitation on pass-through entity losses for the year. Note that S corporation shareholders only receive debt basis for loans made directly from the particular shareholder to the corporation.

Question 41

Question ID: EA2 M3 060 (Topic: EA Part 2 Mock Exams)
DeLuca Properties, Inc. is a C corporation that initiates a like-kind exchange of an office building. DeLuca Properties must identify the property to be received within how many days after the date the company transfers the property given up in the exchange?

A. 45 days
B. 60 days
C. 30 days
D. 180 days

Answer 41

Correct Answer Explanation for A:

DeLuca Properties, Inc. has 45 days to identify the property or properties it wishes to purchase during the exchange. A section 1031 exchange allows for the deferral of income on the exchange of business or investment real estate. The process is subject to strict deadlines. In a section 1031 exchange, the property to be received must be identified in writing (or actually received) within 45 days after the date of transfer of the property given up. Further, the replacement property in a deferred exchange must be received by the earlier of:

The 180th day after the date on which the property given up was transferred, or
The due date, including extensions, of the tax return for the year in which the transfer of that property occurs.
Note: The 45-day deadline cannot be changed or extended by the taxpayer. The deadline is based on calendar days; there are no exceptions for weekends or holidays, although the IRS may make exceptions in the case of presidentially declared disasters.

Question 42

Question ID: EA2 M3 055 (Topic: EA Part 2 Mock Exams)
Surry Foods, Inc. is a fiscal year C corporation that reports income and loss on the accrual basis. Which of the following is required for the company to deduct an expense?

A. Surry Foods must have received a bill and paid it before the end of its fiscal year.
B. Surry Foods must receive an invoice or other bill for an expense in order to deduct it.
C. Surry Foods must first pay the expense in order to deduct it.
D. Surry Foods must meet the “all events” test and have economic performance in order to deduct the expense.

Answer 42

Correct Answer Explanation for D:

Since Surry Foods, Inc. operates on the accrual basis, it must meet the “all events test” and economic performance must have occurred before deducting the expense. Surry Foods is not required to pay the expense first. Under the accrual method of accounting, transactions are accrued as they occur, regardless of when the cash (or another form of payment) is paid or received.

Question 43

Question ID: EA2 M3 057 (Topic: EA Part 2 Mock Exams)
Halima is a 40% partner in the Vansant Partnership. Under the partnership agreement, Halima is to receive 40% of the partnership’s income, but never less than $15,000 a year. The partnership’s income for 2023 was $30,000 before considering Halima’s minimum guarantee amount. What amount can the Vansant Partnership deduct as a guaranteed payment, and what amount of income is Halima required to report on her individual tax return?

A. Partnership: $15,000 Halima: $15,000
B. Partnership: $3,000 Halima: $15,000
C. Partnership: $12,000 Halima: $18,000
D. Partnership: $15,000 Halima: $27,000

Answer 43

Correct Answer Explanation for B:

Halima is entitled to a $15,000 guaranteed payment every year, so she must report the $15,000 guaranteed payment as income. She is a 40% partner, so she would normally be entitled to 40% of the partnership’s income every year ($30,000 × 40% = $12,000). Since $12,000 is less than the guaranteed payment, the partnership would deduct $3,000 as a guaranteed payment to Halima ($15,000 - $12,000). Any guaranteed payments made are treated as business expenses by the partnership and are deductible on Form 1065.

Question 44

Question ID: EA2 M3 084 (Topic: EA Part 2 Mock Exams)
Greta is a U.S. citizen. Her grandfather, Armand, is a German citizen and a majority shareholder in a shoe manufacturing corporation in Germany called Birkenshoes. In 2023, Armand gifts a portion of his stock in Birkenshoes directly to his daughter, Greta. For federal tax purposes, Birkenshoes is considered a controlled foreign corporation (CFC). What percentage of stock ownership would force Greta to file a Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations?

A. 5% stock ownership
B. 50% (or greater) stock ownership
C. 10% stock ownership
D. 80% (or greater) stock ownership

Answer 44

Correct Answer Explanation for C:

If Greta owns more than 10% of the stock in a controlled foreign corporation (CFC), she is required to file Form 5471, Information Return of U.S. Persons With Respect To Certain Foreign Corporations. A U.S. shareholder that owns at least 10% of a controlled foreign corporation (CFC) is required to file Form 5471 annually. A CFC is a foreign corporation that is owned more than 50% by U.S. shareholders.

Question 45

Question ID: EA2 M3 049 (Topic: EA Part 2 Mock Exams)
Suzette is a general partner in the Winchester Partnership. Suzette receives a distribution of a parcel of land from the partnership that has a fair market value of $180,000 and a basis to the partnership of $40,000. Her outside basis in the Winchester Partnership was $33,000 prior to the distribution of the land. How will this distribution impact Suzette?

A. She must recognize a capital gain of $7,000, and her basis in the land is $40,000.
B. She must recognize a capital gain of $7,000, and her basis in the land is $50,000.
C. She must reduce her partnership basis to zero, and her basis in the land is $180,000.
D. She must reduce her partnership basis to zero, and her basis in the land is $33,000.

Answer 45

Correct Answer Explanation for D:

Suzette must reduce her basis in the partnership interest to zero. She will have a $33,000 basis in the land. A partner cannot have a negative partnership basis; so instead, her basis in the land is reduced from $40,000 to $33,000. She does not recognize any income from this transaction and will defer any gain on the land until she sells it. Note that if Suzette had received cash instead of property, she would have been forced to recognize a gain of $7,000.

Question 46

Question ID: EA2 M1 092 (Topic: EA Part 2 Mock Exams)
Tri-Star Electronics, Inc. is a new C corporation with two equal shareholders, Kayla and Jamar. The corporation reports income and loss on a calendar-year basis. Kayla’s stock basis at the beginning of the year is $50,000. Tri-Star Electronics has no accumulated earnings and profits at the beginning of the year, and has $64,000 of current earnings and profits. The corporation allocates its profits based on stock ownership. On December 31, Tri-Star Electronics distributes $40,000 to each shareholder. How much gain (or loss) must Kayla recognize on this distribution, and what is her ending stock basis?

A. Income: $32,000 dividend, Ending stock basis: $10,000
B. Income: $40,000 dividend, Ending stock basis: $10,000
C. Income: $32,000 dividend, Ending stock basis: $42,000
D. Income: $40,000 dividend, Ending stock basis: $50,000

Answer 46

Correct Answer Explanation for C:

The amount of current earnings and profits that is allocated to Kayla is $32,000 ($64,000 earnings × 50% stock ownership). Kayla must report dividend income of $32,000. The remaining amount of the distribution ($40,000 - $32,000 = $8,000) is treated as a return of capital and reduces Kayla’s stock basis to $42,000 ($50,000 - $8,000). Corporate distributions are treated as dividends to the extent of the shareholder’s share of corporate earnings and profits.

Question 47

Question ID: EA2 M1 068 (Topic: EA Part 2 Mock Exams)
Harlowton Energy, Inc. is an S corporation. During the year, Harlowton Energy’s S election was revoked, and the corporation reverted back to a C corporation. How long must Harlowton Energy normally wait before electing S status again?

A. One year
B. Two years
C. Five years
D. Ten years

Answer 47

Correct Answer Explanation for C:

A corporation whose S election is revoked or terminated must generally wait five years (60 months) before making an S election again. There are exceptions that allow for entities to elect S-status earlier than the mandatory five-year waiting period, but only with IRS consent.

Question 48

Question ID: EA2 M1 057 (Topic: EA Part 2 Mock Exams)
Bria paid $30,000 to acquire a 30% stake in the Harvest Bagels, a general partnership she formed with two of her friends. Harvest Bagels is a calendar-year, cash-basis partnership. Bria is a general partner whose 30% stake allows her to share in capital and profits according to her ownership percentage. In its first year, Harvest Bagels earns ordinary income of $40,000. All of the profits were reinvested in the business, so no cash distributions are made to any of the partners during the year. How much income should Bria report on her return, and what is her partnership basis at the end of the year?

A. Income: $10,000, Bria’s Year-End Basis: $36,000
B. Income: $0, Bria’s Year-End Basis: $42,000
C. Income: $12,000, Bria’s Year-End Basis: $42,000
D. Income: $0, Bria’s Year-End Basis: $30,000

Answer 48

Correct Answer Explanation for C:

Even though no distributions were made during the year, Bria is required to report her share of the partnership’s income. The income is allocated based on her partnership interest, so the answer is calculated as follows: (30% × $40,000 partnership income) = $12,000 of ordinary income to Bria, which increases her partnership basis. Since no distributions were made, her year-end basis is as follows: ($30,000 starting basis + $12,000 income) = $42,000.

Question 49

Question ID: EA2 M1 001 (Topic: EA Part 2 Mock Exams)
Golden Glades, Inc. is an accrual-based C corporation. Golden Glades, Inc. realized net income of $300,000 for book purposes in 2023. Included in book net income are the following:

Federal income taxes $4,000
Excess of capital losses over capital gains 10,000
Tax-exempt interest income 5,000
What is Golden Glades, Inc.’s taxable income?

A. $280,000
B. $304,000
C. $290,000
D. $309,000

Answer 49

Correct Answer Explanation for D:

Golden Glades, Inc.’s taxable income is determined as follows:

Net income per books $300,000
Plus, federal income tax expense per books $4,000
Plus, excess of capital losses over capital gains $10,000
Minus the tax-exempt interest income ($5,000)
Taxable income $309,000
Capital losses are only deductible up to the amount of capital gains for a C Corporation, so the excess of capital losses over capital gains must be added back in to calculate taxable income.

of capital losses over capital gains must be added back in to calculate taxable income.

Question 50

Question ID: EA2 M1 062 (Topic: EA Part 2 Mock Exams)
Which of the following items would not be considered inventory for a farming business?

A. Purchased farm products held for sale.
B. Supplies acquired for sale or that become a physical part of items held for sale.
C. Harvested crops in storage.
D. Livestock held for draft, breeding, sporting, or dairy purposes.

Answer 50

Correct Answer Explanation for D:

Livestock held for draft, breeding, sporting, or dairy purposes are generally depreciated and treated as assets to the business. Livestock held for sale to customers is typically called “market livestock” and would be treated as inventory. Farm inventory includes all items held for sale or for use as feed, seed, and harvested crops held for sale to customers. It also includes supplies that become a physical part of items held for sale, such as packaging, labels, etc.

Question 51

Question ID: EA2 M1 082 (Topic: EA Part 2 Mock Exams)
Schein Accountancy, LLP has two general partners that manage the day-to-day operations. Schein Accountancy also has two employees, a receptionist and a paid intern. Which of the following taxes would not be applicable to Schein Accountancy?

A. Excise taxes
B. Federal unemployment (FUTA) tax
C. Social Security and Medicare taxes (for employees’ wages)
D. Federal income tax

Answer 51

Correct Answer Explanation for D:

Schein Accountancy, LLP will not owe income tax, because it is a pass-through entity. A partnership does not pay income tax. However, a partnership can still be liable for other taxes, such as employment taxes (FUTA, Social Security, Medicare taxes) and excise taxes.

Question 52

Question ID: EA2 M1 046 (Topic: EA Part 2 Mock Exams)
Kyle transfers a large tract of unimproved land to Alpine Investments, Inc. in exchange for stock. Immediately after the transfer, Kyle has majority control of the corporation and owns 85% of the outstanding stock. The remaining 15% is owned by another stockholder who is unrelated to Kyle. Alpine Investments, Inc. is a C corporation as well as an investment company. Is this a qualified section 351 exchange, or is the transfer a taxable event?

A. No, it is not a qualified 351 exchange because Kyle does not own 90% of the outstanding stock.
B. No, it is not a qualified 351 exchange because Alpine Investments, Inc. is an investment company.
C. No, it is not a qualified 351 exchange because Kyle does not own 100% of the outstanding stock.
D. Yes, this is a qualified section 351 exchange. The exchange is not a taxable event.

Answer 52

Correct Answer Explanation for B:

The transfer is not a qualified 351 exchange because Alpine Investments, Inc. is an investment company. In an eligible section 351 exchange, no gain or loss is recognized provided:

The transferor receives only stock in exchange for property (or money), and
The transferor is in control of the corporation immediately after the transfer. This means at least 80% of the voting stock and at least 80% of all other classes of stock of the corporation.
However, section 351 does not apply when:

The corporation is an investment company.
The transferor transfers property during a bankruptcy in exchange for stock used to pay creditors.
The stock received in exchange for the corporation’s debt (other than a security) or for interest on the corporation’s debt (including a security) that accrued while the transferor held the debt.

Question 53

Question ID: EA2 M1 085 (Topic: EA Part 2 Mock Exams)
Hesperia Health, Inc. offers many types of fringe benefits to its employees. Which of the following benefits would not be deductible by the corporation in 2023?

A. Employer-provided transit passes
B. Educational assistance program
C. Term-life insurance coverage provided to an employee
D. Health insurance provided to an employee

Answer 53

Correct Answer Explanation for A:

The Tax Cuts and Jobs Act eliminated business deductions for the cost of providing qualified employee transportation fringe benefits, such as transit passes, qualified parking, light-rail passes, etc., unless the expenses are necessary for an employee’s safety. Transportation benefits are still non-taxable to the employee, but the business can no longer deduct them, unless the amount is included in the employee’s W-2 income as wages. This is true even if the business has an accountable plan.

Question 54

Question ID: EA2 M1 054 (Topic: EA Part 2 Mock Exams)
Apple Valley Partnership has two general partners, Douglas and Craig, who share income and losses equally. Apple Valley had $110,000 of net ordinary income during the year. Craig received a cash distribution of $31,000 on September 12, 2023. Douglas received a cash distribution of $42,000 on October 1, 2023. Apple Valley is a cash-basis, calendar-year partnership. How much taxable income will Apple Valley report on Craig’s Schedule K-1 and on Douglas’s Schedule K-1?

A. Craig: $55,000; Douglas: $55,000
B. Craig: $79,000; Douglas: $68,000
C. Craig: $31,000; Douglas: $42,000
D. Craig: $24,000; Douglas: $13,000

Answer 54

Correct Answer Explanation for A:

Douglas and Craig share income and loss equally, and they are required to report their share of partnership income, regardless of whether it is distributed. Therefore, each partner will report $55,000 ($110,000 × 50%) of taxable income from the partnership. An individual partner must report his “allocable share” of partnership income on his own tax return (Form 1040, Schedule E). The partner’s allocable share of partnership income is reported to each partner on Schedule K-1.

Question 55

Question ID: EA2 M1 099 (Topic: EA Part 2 Mock Exams)
Tenant Industries, Inc. is a C corporation with 50 employees. In addition to Social Security and Medicare tax, what other type of employment tax would Tenant Industries be required to pay on the wages it pays to its employees?

A. Federal income tax.
B. Additional Medicare tax.
C. Accumulated earnings tax.
D. Federal unemployment tax.

Answer 55

Correct Answer Explanation for D:

Most employers pay both Federal unemployment taxes (FUTA) as well as state unemployment taxes. The FUTA tax rate is 6.0%. The tax applies to the first $7,000 a business pays to each employee as wages during the year. The $7,000 is often referred to as the “FUTA wage base.” Only the employer pays FUTA tax, it is never imposed on the employee.

Question 56

Question ID: EA2 M1 063 (Topic: EA Part 2 Mock Exams)
Which of the following is eligible to be a “disregarded entity” for federal tax purposes?

A. A corporation that is exempt from tax under Section 501(c)(3).
B. A corporation that elected S corporation status.
C. A limited liability partnership (LLP).
D. A single-member limited liability company (LLC).

Answer 56

Correct Answer Explanation for D:

A disregarded entity is a single-member limited liability company (SMLLC) that is disregarded for federal tax purposes. A domestic LLC with one member as an individual will be treated as a sole proprietorship, or “disregarded” as being separate from its owner for income tax purposes (but is still considered a separate entity for purposes of employment tax and certain excise taxes). An individual owner of a single-member LLC is subject to the tax on net earnings from self-employment in the same manner as a sole proprietorship. Furthermore, a domestic SMLLC with a sole corporate member will have its activities reported on the corporate member’s own tax return.

Question 57

Question ID: EA2 M1 052 (Topic: EA Part 2 Mock Exams)
Zach is a sole proprietor whose business office was damaged by flooding. The adjusted basis of the assets damaged was $200,000, which included machinery and equipment that was completely destroyed in the flood. He received an insurance reimbursement of $140,000 and reinvested the entire amount plus $60,000 of additional funds to repair his damaged office and replace equipment. How should he report his casualty loss?

A. Report a loss of $60,000 directly on Schedule C under “other expenses.”
B. Report a loss of $60,000 on Schedule D.
C. Report a loss of $60,000 on Form 4684
D. Report a loss of $59,000 on Schedule A.

Answer 57

Correct Answer Explanation for C:

Zach should report a loss of $60,000 on Form 4684. Deductible losses related to business and income-producing property are reported on Form 4684, Casualties and Thefts, and on Form 4797, Sales of Business Property. Losses from a business casualty are fully deductible. His loss deduction is reduced by the amount of his insurance reimbursement.

Question 58

Question ID: EA2 M1 030 (Topic: EA Part 2 Mock Exams)
Jimmy is a driver for a popular rideshare service, Lite-Car Rideshare. He starts working for the company in August 2023. He is classified as an independent contractor and files Schedule C. Jimmy uses his own car to work for the rideshare service and tracks his business mileage using an application on his cellphone. Between the months of August and December 2023, he put a total of 16,600 miles on his car, 10,800 of which were for Lite-Car Rideshare. He decides to take the standard mileage rate. What is his deduction for mileage on Schedule C?

A. $10,000
B. $7,074
C. $10,375
D. $6,750

Answer 58

Correct Answer Explanation for B:

For tax year 2023, the standard mileage rate for business miles driven are 65.5 cents per mile. Based on the question, Jimmy incurred 10,800 business miles × 65.5¢ standard mileage rate = $7,074 mileage deduction.

Question 59

Question ID: EA2 M1 019 (Topic: EA Part 2 Mock Exams)
Lance is a medical doctor and the sole shareholder of Estyle Aesthetics, Inc., a plastic surgery clinic organized as a C corporation. For 2023 Lance received $185,000 in wages from the clinic, which is reasonable compensation for a plastic surgeon in his area. Another $350,000 in wages was paid to the clinic’s other employees. After deducting expenses, Estyle Aesthetics, Inc. has $90,000 of income from operations, and an additional $80,000 of long-term capital gain, resulting in taxable income of $170,000. Based on this information, what is Estyle Aesthetics’ section 199A qualified business income (QBI) deduction?

A. $34,000
B. $0
C. $18,000
D. $14,000

Answer 59

Correct Answer Explanation for B:

Estyle Aesthetics, Inc. is not entitled to a QBI deduction because it is a C corporation. C corporations can neither claim a section 199A deduction nor can their shareholders claim any 199A deduction from any income attributable to the corporation. Despite the fact that he is an owner, Lance is also not entitled to a section 199A deduction from this business. The section 199A deduction is only available to the owner(s) of the following businesses:

Individual owners of sole proprietorships, rental properties, S corporations, or partnerships, and
Trusts and estates that own an interest in the businesses listed above.
Note: Income earned in a C corporation is not eligible for the section 199A deduction. The deduction is only available to owners of pass-through entities. Pass-through entities include sole proprietorships, partnerships, trusts, estates, and S corporations, but not C corporations.

Question 60

Question ID: EA2 M1 033 (Topic: EA Part 2 Mock Exams)
Which of the following would make a corporation ineligible to elect S corporation status?

A. The corporation has both voting and nonvoting stock.
B. One shareholder is a partnership.
C. One shareholder is a bankruptcy estate.wrong
D. The corporation has 100 shareholders.

Answer 60

Correct Answer Explanation for B:

Partnerships and C corporations cannot own stock in an S corporation. Estates, certain trusts, individuals, and some exempt entities (specifically, 501(c)(3) entities) are permitted to own stock in an S corporation. An S corporation can have up to 100 shareholders, and it can have both voting and nonvoting stock, as long as there is only one class of stock for distribution and other economic rights in the corporation.

Question 61

Question ID: EA2 M1 022 (Topic: EA Part 2 Mock Exams)
Which of the following types of trusts generally does not have to file an annual tax return?

A. A qualified disability trust.
B. A revocable grantor trust.
C. An irrevocable trust.
D. A charitable trust that is formed as a private foundation.

Answer 61

Correct Answer Explanation for B:

A revocable grantor trust generally does not require a tax return filing (Form 1041) as long as the grantor is still alive. This is because the grantor maintains ownership of the assets. The income earned by a revocable grantor trust is generally reported on the grantor’s individual Form 1040, not on a separate trust tax return. In general, most irrevocable trusts (including a qualified disability trust) must file an IRS Form 1041. Charitable trusts that are formed as private foundations must file Form 990-PF annually.

Question 62

Question ID: EA2 M1 072 (Topic: EA Part 2 Mock Exams)
Connor died on April 10, 2023, leaving two minor children as his heirs. His estate was valued at $16 million on the date of his death, so an estate tax return must be filed. Which of the following expenses may be claimed as a deduction on the estate tax return?

A. Attorney’s fees for work on behalf of Connor’s estate.
B. Property taxes that accrued after the date of Connor’s death.
C. Daycare expenses incurred after Connor’s death on behalf of his surviving children.
D. Federal estate taxes paid

Answer 62

Correct Answer Explanation for A:

Fees that have been paid to attorneys for work on behalf of the estate (or amounts that can reasonably be expected to be paid) may be claimed as a deduction against the value of the estate on Form 706. Federal estate taxes paid is incorrect, because federal estate taxes are never deductible on the estate tax return. Property taxes that accrued after the date of Connor’s death is incorrect because the deduction for property taxes is limited to the taxes accrued before the date of the decedent’s death (not after). Daycare expenses incurred after Connor’s death on behalf of his surviving children is incorrect, because daycare expenses incurred after Connor’s death would not be deductible as expenses of the estate. The following deductions are allowable from the gross estate:

Marital Deduction: All the property that passes to a surviving spouse (who is a U.S. citizen) is eligible for the marital deduction.
Charitable Deduction: If the decedent leaves property to a qualifying charity, it is deductible from the gross estate.
Unpaid mortgages and outstanding debts.
Administration fees and legal expenses of the estate.
Losses during estate administration.
Funeral expenses of the deceased.

Question 63

Question ID: EA2 M1 036 (Topic: EA Part 2 Mock Exams)
Montana Equine Rescue is a 501(c)(3) exempt entity that is organized as a calendar-year corporation. What is the normal (unextended) due date of Montana Equine Rescue’s tax return, and which form number is it required to file?

A. Form 990, Due Date: April 15
B. Form 1120, Due Date: April 15
C. Form 1120, Due Date: May 15
D. Form 990, Due Date: May 15

Answer 63

Correct Answer Explanation for D:

Montana Equine Rescue must file Form 990 by May 15. The organization may also request an extension by using Form 8868. Even though a charity may be organized as a corporation, it must still file Form 990, not Form 1120. An exempt entity is required to file by the 15th of the fifth month after the end of its taxable year. For calendar-year exempt entities, their return is due May 15. The extended due date is generally November 15 (6 months after the normal due date)

Question 64

Question ID: EA2 M1 095 (Topic: EA Part 2 Mock Exams)
When using taxable income as a starting point, which of the following transactions decreases the amount of a C corporation’s earnings and profits?

A. Long-term contracts reported on the completed contract method.
B. Dividends-received deduction.
C. Mine exploration and development costs deducted currently.
D. Corporate dividends and other distributions to shareholders.

Answer 64

Correct Answer Explanation for D:

Corporate dividends and other distributions to shareholders will decrease E&P. The amount of a C corporation’s earnings and profits determines the tax treatment of corporate distributions to shareholders. The starting point for determining corporate E&P is the corporation’s taxable income. The following transactions increase the amount of E&P:

Long-term contracts reported on the completed contract method.
Intangible drilling costs deducted currently.
Mine exploration and development costs deducted currently.
Dividends-received deduction.
The following transactions reduce the amount of E&P:

Corporate federal income taxes.
Life insurance policy premiums on a corporate officer.
Excess charitable contributions (over the 10% allowable limit).
Expenses relating to tax-exempt income.
Excess of capital losses over capital gains.
Corporate dividends and other distributions to shareholders.

Question 65

Question ID: EA2 M1 039 (Topic: EA Part 2 Mock Exams)
What does an S corporation’s accumulated adjustments account (AAA) include?

A. All items of income and expenses of the S corporation, with the exception of portfolio income (and expenses related to portfolio income).
B. All items of income and expenses of the S corporation.
C. All items of income and expenses of the S corporation, with the exception of tax-exempt income (and expenses related to tax-exempt income).
D. An accounting of each shareholder’s stock basis in the corporation and related adjustments of foreign shareholders.

Answer 65

Correct Answer Explanation for C:

An S corporation’s accumulated adjustment account includes all items of income and expenses with the exception of tax-exempt income (and any expenses related to tax-exempt income).

Question 66

Question ID: EA2 M1 100 (Topic: EA Part 2 Mock Exams)
Pioneer Shoes, Inc. is a shoe manufacturing company that had the following costs during the tax year:

Raw materials purchased $5,400,000
Freight-in charges on raw materials purchased $175,000
Manufacturing wages and benefits $4,025,000
Selling and administrative wages and benefits $500,000
Charitable contributions $45,000
Other direct manufacturing costs $875,000
Administrative office expense $20,000
Costs of shipping finished products to customers $150,00
Pioneer’s inventory (including raw materials, work-in-process, and finished products) was $1,200,000 on January 1, 2023, and $1,575,000 on December 31, 2023. Based on these figures, what was the company’s cost of goods sold for the year?

A. $10,100,000
B. $10,250,000
C. $10,815,000
D. $10,850,000

Answer 66

Correct Answer Explanation for A:

Pioneer’s cost of goods sold is calculated as follows:

Beginning inventory balance $1,200,000
Manufacturing costs
Raw materials purchases 5,400,000
Freight-in charges 175,000
Manufacturing wages and benefits 4,025,000
Other direct manufacturing costs 875,000
Minus the ending inventory balance (1,575,000)
COGS $10,100,000
The other costs outlined in the question are not used in the manufacturing process, and therefore are not included in the calculation of cost of goods sold.