IRS Business Taxation 5

Question 1

A business pays $50,000 for a 5-year covenant not to compete when acquiring another business. How is this amount treated for tax purposes?

Accepted Answer

Capitalized and amortized over 15 years under IRC §197

Answer

Deducted immediately as a business expense

Answer

Capitalized and amortized over 5 years matching the covenant term

Answer

Non-deductible as a capital expenditure with no recovery

Question 2

Which of the following triggers ordinary income recognition under IRC §1245 depreciation recapture?

Accepted Answer

Sale of depreciable personal property at a gain to the extent of depreciation previously taken

Answer

Sale of land used in a business

Answer

Sale of a capital asset not used in a business

Answer

Casualty loss on business inventory

Question 3

An employer provides an employee with a company car for both business and personal use. How is the personal use value treated?

Accepted Answer

Included in the employee's gross income as a taxable fringe benefit

Answer

Excluded from income as a working condition fringe benefit

Answer

Deductible by the employee on Schedule A

Answer

Excluded if the car is used more than 50% for business

Question 4

What is the tax treatment of organizational costs (e.g., legal fees to incorporate) under IRC §248?

Accepted Answer

Deduct up to $5,000 in the first year; amortize the remainder over 180 months

Answer

Deduct all costs immediately in the year incurred

Answer

Capitalize permanently with no deduction allowed

Answer

Deduct over the life of the corporation as determined by management

Question 5

A partnership makes a guaranteed payment to a partner for services rendered. How is this payment treated by the receiving partner?

Accepted Answer

As ordinary income subject to self-employment tax

Answer

As a capital gain

Answer

As a tax-free return of capital

Answer

As a dividend taxed at preferential rates

Question 6

Under the uniform capitalization rules (UNICAP) of IRC §263A, which businesses are generally required to capitalize direct and indirect costs into inventory?

Accepted Answer

Resellers with average annual gross receipts exceeding $29 million and all producers

Answer

All businesses regardless of size

Answer

Only publicly traded corporations

Answer

Businesses that use the cash method of accounting

Question 7

When a shareholder's S corporation stock basis is reduced to zero by losses, what happens to any additional losses?

Accepted Answer

They reduce the shareholder's basis in any loans made to the S corporation

Answer

They are permanently disallowed

Answer

They are carried back two years and forward 20 years at the corporate level

Answer

They convert to capital losses deductible against capital gains