Certified Public Accountant Taxation — Individual & Corporate 2 — Questions and Answers
Question 1: What is the holding period required for long-term capital gains treatment on the sale of a capital asset?
- 6 months
- More than 12 months (Correct answer)
- 24 months
- 36 months
Correct answer: More than 12 months
A capital asset must be held for more than 12 months to qualify for long-term capital gains treatment and its preferential tax rates.
Question 2: Which of the following is NOT a requirement for a business to be classified as an S corporation for tax purposes?
- Have no more than 100 shareholders
- Be a domestic corporation
- Have only one class of stock
- Have at least two classes of shareholders (Correct answer)
Correct answer: Have at least two classes of shareholders
S corporations must have only one class of stock; having two classes of shareholders (which implies a second class of stock) would disqualify a company from S corporation status.
Question 3: What is the primary advantage of a Roth IRA compared to a traditional IRA?
- Contributions are tax-deductible in the current year
- Qualified distributions in retirement are tax-free (Correct answer)
- Higher annual contribution limits
- No income limits for contributions
Correct answer: Qualified distributions in retirement are tax-free
Roth IRA contributions are made with after-tax dollars, so qualified withdrawals in retirement are completely tax-free, including all earnings.
Question 4: Under the federal tax code, which method of accounting must a C corporation with average annual gross receipts over $30 million generally use?
- Cash method
- Accrual method (Correct answer)
- Hybrid method
- Installment method
Correct answer: Accrual method
C corporations (other than farming businesses and qualified personal service corporations) with average annual gross receipts over $30 million (2024 threshold) must use the accrual method.
Question 5: What is the 'wash sale' rule under IRC Section 1091?
- Gains on securities held less than 30 days are ordinary income
- A loss on a security sale is disallowed if substantially identical securities are purchased within 30 days before or after the sale (Correct answer)
- Short sales must be reported as capital transactions
- Securities received as compensation must be held 2 years for capital gain treatment
Correct answer: A loss on a security sale is disallowed if substantially identical securities are purchased within 30 days before or after the sale
The wash sale rule disallows a capital loss deduction if the taxpayer buys substantially identical securities within the 30-day window before or after the sale creating the loss.
Question 6: Which type of entity avoids double taxation by passing income, deductions, and credits directly to its owners' individual tax returns?
- C corporation
- S corporation (Correct answer)
- Real Estate Investment Trust (REIT)
- Both B and S corp are wrong
Correct answer: S corporation
S corporations are pass-through entities that avoid double taxation because income is not taxed at the corporate level but flows through to shareholders' individual returns.
Certified Public Accountant Taxation — Individual & Corporate 2
What is the holding period required for long-term capital gains treatment on the sale of a capital asset?