IAB Taxation & Compliance 5 — Questions and Answers
Question 1: A partnership with two equal partners earns $200,000 net income. How is this income taxed?
- The partnership pays tax at 21% on $200,000
- Each partner reports $100,000 on their individual return (Correct answer)
- Only the managing partner pays tax on the full amount
- The partnership pays tax only on distributed amounts
Correct answer: Each partner reports $100,000 on their individual return
Partnerships are pass-through entities; each partner reports their allocable share of income on their individual tax return regardless of actual distributions.
Question 2: Which concept requires businesses to apply the same accounting methods from period to period?
- Materiality
- Consistency (Correct answer)
- Conservatism
- Going concern
Correct answer: Consistency
The consistency principle requires applying the same accounting methods across periods to ensure comparability of financial statements.
Question 3: A taxpayer receives a 1099-NEC showing $3,500 from a client. This income is reported on:
- Form W-2
- Schedule C of Form 1040 (Correct answer)
- Form 1120
- Schedule E of Form 1040
Correct answer: Schedule C of Form 1040
Self-employment income reported on 1099-NEC is reported on Schedule C (Profit or Loss from Business) of Form 1040.
Question 4: The backup withholding rate applied when a payee fails to provide a valid TIN is:
- 10%
- 24% (Correct answer)
- 28%
- 37%
Correct answer: 24%
Backup withholding is withheld at a flat 24% rate when payees fail to provide a correct taxpayer identification number.
Question 5: A business gifts a client a $75 bottle of wine. How much of this gift is tax-deductible?
- $0
- $25 (Correct answer)
- $50
- $75
Correct answer: $25
Business gifts are deductible only up to $25 per recipient per year under IRC Section 274(b), regardless of the actual cost.
Question 6: Which IRS filing requirement applies when an employer pays a contractor $700 during the tax year?
- No reporting required since amount is under $1,000
- File Form 1099-NEC since payment exceeds $600 (Correct answer)
- File Form W-2 since the contractor is a paid worker
- File Form 941 quarterly
Correct answer: File Form 1099-NEC since payment exceeds $600
Businesses must file Form 1099-NEC for each non-employee paid $600 or more during the tax year for services rendered.
Question 7: Under the wash sale rule, a loss on the sale of securities is disallowed if the same or substantially identical securities are purchased within:
- 15 days before or after the sale
- 30 days before or after the sale (Correct answer)
- 60 days before or after the sale
- 90 days before or after the sale
Correct answer: 30 days before or after the sale
The wash sale rule disallows a loss if substantially identical securities are bought within 30 days before or after the sale.
IAB Taxation & Compliance 5
A partnership with two equal partners earns $200,000 net income.
How is this income taxed?