CTP CTP Business Taxation & Entity Structures 2

Question 1

A sole proprietor reports business income and expenses on which schedule attached to Form 1040?

Accepted Answer

Schedule C

Answer

Schedule C (Profit or Loss from Business) is used by sole proprietors to report business income and expenses on their individual return.

Question 2

For federal tax purposes, how is a multi-member LLC treated by default?

Accepted Answer

As a partnership

Answer

A multi-member LLC is treated as a partnership by default under the check-the-box regulations and files Form 1065.

Question 3

The personal holding company (PHC) tax applies when a corporation meets which two conditions?

Accepted Answer

More than 50% of stock owned by 5 or fewer individuals AND at least 60% of adjusted ordinary gross income is PHC income

Answer

The PHC tax under IRC §541 applies when more than 50% of stock is held by 5 or fewer individuals and at least 60% of adjusted ordinary gross income qualifies as PHC income.

Question 4

When a shareholder's basis in S Corporation stock reaches zero, losses are next applied against:

Accepted Answer

The shareholder's basis in loans made to the corporation

Answer

After stock basis is exhausted, an S Corporation shareholder can deduct losses up to the basis of any direct loans they have made to the corporation.

Question 5

A partnership's guaranteed payment to a partner is:

Accepted Answer

Deductible by the partnership and ordinary income to the recipient partner

Answer

Guaranteed payments are deductible by the partnership under IRC §707(c) and treated as ordinary income (subject to self-employment tax) by the receiving partner.

(CTP) Certified Tax Professional Practice Test

(CTP) Certified Tax Professional Practice Test

CTP CTP Business Taxation & Entity Structures 2