IRS Business Taxation 3 — Questions and Answers
Question 1: Under the at-risk rules, a partner can only deduct losses up to the amount the partner has at risk. Which of the following increases a partner's at-risk amount?
- The partner's share of nonrecourse liabilities secured by real property
- Cash contributions to the partnership (Correct answer)
- The partner's share of partnership liabilities for which no partner bears economic risk of loss
- Distributions received from the partnership
Correct answer: Cash contributions to the partnership
Cash contributions increase a partner's at-risk amount, while certain nonrecourse liabilities and distributions decrease or do not increase it.
Question 2: What form does a partnership use to report its income, deductions, and credits to the IRS?
- Form 1120
- Form 1065 (Correct answer)
- Form 1120-S
- Schedule C of Form 1040
Correct answer: Form 1065
Partnerships file Form 1065 (U.S. Return of Partnership Income) as an information return, with each partner receiving a Schedule K-1.
Question 3: A business owner drives 12,000 business miles and 3,000 personal miles in their vehicle. Using the standard mileage rate, which miles are deductible?
- All 15,000 miles
- Only the 3,000 personal miles
- Only the 12,000 business miles (Correct answer)
- The miles must be prorated based on total vehicle cost
Correct answer: Only the 12,000 business miles
Only the 12,000 business miles are deductible using the standard mileage rate; personal use miles are never deductible.
Question 4: Which of the following entities is subject to the accumulated earnings tax?
- S corporations
- Partnerships
- C corporations that accumulate earnings beyond reasonable business needs (Correct answer)
- Sole proprietorships
Correct answer: C corporations that accumulate earnings beyond reasonable business needs
The accumulated earnings tax applies to C corporations that retain earnings in excess of reasonable business needs to avoid shareholder-level dividend taxation.
Question 5: A calendar-year C corporation must file its annual tax return by which deadline (without extension)?
- March 15
- April 15
- April 15 (3½ months after year-end) (Correct answer)
- March 15 (2½ months after year-end)
Correct answer: April 15 (3½ months after year-end)
C corporations with a December 31 year-end must file Form 1120 by April 15 (the 15th day of the 4th month after the tax year ends).
Question 6: What is the purpose of a Schedule K-1 issued by an S corporation?
- To report the corporation's total tax liability
- To report each shareholder's pro-rata share of income, deductions, and credits (Correct answer)
- To calculate the corporation's estimated tax payments
- To report employee wages paid by the S corporation
Correct answer: To report each shareholder's pro-rata share of income, deductions, and credits
Schedule K-1 (Form 1120-S) is provided to each shareholder and reports their allocable share of the S corporation's income, losses, deductions, and credits.
Question 7: Under IRC §1231, when a business sells depreciable property used in a trade or business held more than one year at a gain, how is the gain generally treated?
- As ordinary income
- As short-term capital gain
- As long-term capital gain (subject to depreciation recapture rules) (Correct answer)
- As a tax-free exchange
Correct answer: As long-term capital gain (subject to depreciation recapture rules)
Section 1231 gains are generally treated as long-term capital gains, but depreciation recapture under §1245 or §1250 may convert some or all of the gain to ordinary income.
IRS Business Taxation 3
Under the at-risk rules, a partner can only deduct losses up to the amount the partner has at risk.
Which of the following increases a partner's at-risk amount?