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

A covenant not to compete acquired in connection with a business acquisition is an IRC §197 intangible and must be amortized over 15 years, regardless of the covenant's actual term.

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

IRC §1245 recaptures depreciation previously deducted on personal property as ordinary income to the extent of the gain, overriding the more favorable §1231 treatment.

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

The fair market value of personal use of an employer-provided vehicle must be included in the employee's gross income as a taxable fringe benefit.

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

Under IRC §248, corporations may immediately deduct up to $5,000 of organizational costs (phased out dollar-for-dollar over $50,000), with remaining costs amortized over 180 months.

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

Guaranteed payments to partners for services are treated as ordinary income to the recipient and are generally subject to self-employment tax.

(IRS) Internal Revenue Service Certified Practice Test

(IRS) Internal Revenue Service Certified Practice Test

IRS Business Taxation 5