IFA Taxation & Compliance 3 — Questions and Answers
Question 1: Under the passive activity rules of IRC Section 469, which type of income can passive activity losses offset without limitation?
- Passive income only (Correct answer)
- Ordinary income only
- Portfolio income only
- Both ordinary and portfolio income
Correct answer: Passive income only
Passive activity losses can only offset passive activity income; they cannot be used to offset active or portfolio income.
Question 2: A corporation pays a dividend to its domestic corporate shareholder. What is the dividends-received deduction (DRD) percentage if the shareholder owns 25% of the distributing corporation?
- 65% (Correct answer)
- 50%
- 80%
- 100%
Correct answer: 65%
When a corporate shareholder owns at least 20% but less than 80% of the distributing corporation, the DRD is 65% of the dividends received.
Question 3: Which method of accounting must be used by C corporations (other than qualified personal service corporations) with average annual gross receipts exceeding $27 million (indexed)?
- Accrual method (Correct answer)
- Cash method
- Hybrid method
- Either cash or accrual
Correct answer: Accrual method
C corporations with average annual gross receipts exceeding the threshold must use the accrual method of accounting under IRC Section 448.
Question 4: What is the maximum Section 179 expensing deduction for 2024 before phase-out begins?
- $1,220,000 (Correct answer)
- $1,050,000
- $1,160,000
- $500,000
Correct answer: $1,220,000
For 2024, the Section 179 deduction limit is $1,220,000, which begins to phase out when total property placed in service exceeds $3,050,000.
Question 5: A taxpayer sells a capital asset held for 14 months at a gain. Which tax rate applies to the net long-term capital gain for a taxpayer in the 32% ordinary income bracket?
- 15% (Correct answer)
- 20%
- 25%
- 32%
Correct answer: 15%
Taxpayers in ordinary income tax brackets above 15% but below the highest bracket pay 15% on net long-term capital gains; the 20% rate applies only in the top bracket.
Question 6: Which IRS form must a tax-exempt organization file annually to maintain its exempt status, reporting revenues, expenses, and activities?
- Form 990 (Correct answer)
- Form 1120
- Form 1065
- Form 5500
Correct answer: Form 990
Tax-exempt organizations generally must file Form 990 annually to maintain transparency and compliance with IRC Section 501 requirements.
Question 7: An S corporation has accumulated earnings and profits (E&P) from prior C corporation years. A distribution in excess of AAA is taxed to shareholders as:
- A dividend to the extent of E&P (Correct answer)
- A tax-free return of basis
- Capital gain
- Ordinary income from services
Correct answer: A dividend to the extent of E&P
S corporation distributions exceeding Accumulated Adjustments Account (AAA) are treated as dividends to the extent of any accumulated C corporation E&P.
IFA Taxation & Compliance 3
Under the passive activity rules of IRC Section 469, which type of income can passive activity losses offset without limitation?