IRS Business Taxation 2 — Questions and Answers
Question 1: A corporation uses the accrual method of accounting. When can it deduct a business expense?
- When the check is written
- When all events have occurred that fix the liability and the amount can be determined with reasonable accuracy (Correct answer)
- When the expense is approved by management
- When the expense is paid in cash
Correct answer: When all events have occurred that fix the liability and the amount can be determined with reasonable accuracy
Under the accrual method, a deduction is allowable when the all-events test is met and economic performance has occurred.
Question 2: Which of the following is NOT a qualifying expense for the Section 179 deduction?
- Computer equipment
- Office furniture
- Inventory held for sale (Correct answer)
- Machinery used in manufacturing
Correct answer: Inventory held for sale
Inventory held for sale is specifically excluded from Section 179 expensing, which applies to depreciable business property.
Question 3: An S corporation has a net loss for the year. How is this loss treated by a shareholder?
- It is carried forward at the corporate level only
- It passes through to shareholders and is deductible up to their basis in stock and debt (Correct answer)
- It is permanently lost and cannot be deducted
- It is automatically deductible against the shareholder's W-2 wages
Correct answer: It passes through to shareholders and is deductible up to their basis in stock and debt
S corporation losses pass through to shareholders but are limited to each shareholder's adjusted basis in stock and any debt owed by the corporation to the shareholder.
Question 4: What is the corporate tax rate for C corporations under current law?
- 21% (Correct answer)
- 25%
- 28%
- 35%
Correct answer: 21%
The Tax Cuts and Jobs Act of 2017 established a flat 21% corporate income tax rate for C corporations.
Question 5: A partnership purchases land for $200,000. The land is distributed to a partner when its FMV is $250,000. What is the partner's basis in the land?
- $250,000 (FMV at distribution)
- $200,000 (partnership's original cost)
- The partnership's adjusted basis in the land at time of distribution (Correct answer)
- $0, as distributed property takes a zero basis
Correct answer: The partnership's adjusted basis in the land at time of distribution
Under IRC §732, a partner's basis in distributed property equals the partnership's adjusted basis in that property, not its fair market value.
Question 6: Which depreciation method generally produces the largest deduction in the first year for 5-year MACRS property?
- Straight-line
- 200% declining balance (Correct answer)
- 150% declining balance
- Units of production
Correct answer: 200% declining balance
The 200% declining balance method (double declining balance) produces the highest first-year depreciation for MACRS 5-year property before switching to straight-line.
Question 7: A C corporation pays a dividend to its individual shareholders. How is this dividend taxed at the individual level?
- It is tax-free because the corporation already paid tax on the income
- It is taxed as ordinary income at regular rates
- It is taxed as a qualified dividend at preferential capital gains rates (Correct answer)
- It is only taxable if the dividend exceeds the shareholder's basis
Correct answer: It is taxed as a qualified dividend at preferential capital gains rates
Qualified dividends received by individual shareholders from domestic C corporations are generally taxed at the preferential long-term capital gains rates (0%, 15%, or 20%).
IRS Business Taxation 2
A corporation uses the accrual method of accounting.
When can it deduct a business expense?