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Free Questions › CPA › Tax Compliance and Planning
Free CPA Tax Compliance and Planning Practice Questions & Answers
400 exam-style Tax Compliance and Planning questions. Pick your answer, hit Check answer, and see the worked solution — free to start, no signup.
100% free · No login to startQuestion 121
A charitably-inclined retiree with a $75,000 RMD and $50,000 of intended giving should:
Select an option first.
Correct answer: A — Use a $50,000 QCD — satisfying part of the RMD with income that NEVER enters AGI
Explanation: The QCD satisfies $50,000 of the RMD WITHOUT the income entering AGI at all — protecting against IRMAA, the tax torpedo and the medical floor. Taking the RMD and donating cash instead would RAISE AGI by $75,000 and the offsetting deduction may be worthless if they take the standard deduction.
Question 122
The same retiree ALSO has appreciated stock and wants to give more. The optimal split is:
Select an option first.
Correct answer: C — QCD from the IRA (up to the limit, keeping income out of AGI) AND appreciated STOCK for the remainder (FMV deduction, gain never taxed)
Explanation: STACK BOTH. The QCD keeps IRA income OUT of AGI (a benefit unavailable any other way, and capped annually). APPRECIATED STOCK gives an FMV deduction AND permanently avoids the built-in gain. Each tool does something the other cannot — use both.
Question 123
A taxpayer exercises an ISO with a $500,000 bargain element, incurring $130,000 of AMT. The stock then falls to near zero. They:
Select an option first.
Correct answer: C — OWE the AMT on income they NEVER RECEIVED — though an AMT CREDIT may be recoverable slowly in future years
Explanation: THE CLASSIC ISO DISASTER. The AMT is owed on a $500,000 PHANTOM gain, on stock now worth nothing. An AMT CREDIT may be recovered in future years — but slowly, and only against regular tax. The lesson: consider a SAME-DAY SALE (a disqualifying disposition), or exercise EARLY when the spread is small.
Question 124
The taxpayer could have avoided this by:
Select an option first.
Correct answer: C — A DISQUALIFYING DISPOSITION (same-day sale) — converting the bargain element to ORDINARY income but ELIMINATING the AMT and the stock-price risk
Explanation: A SAME-DAY SALE converts the bargain element to ORDINARY income (taxed at up to 37%) but REMOVES the AMT adjustment AND the risk of holding a collapsing stock. Paying ordinary rates on a REALISED gain beats paying AMT on a PHANTOM one. Sometimes the 'suboptimal' tax treatment is the right answer.
Question 125
A founder receives restricted stock worth $10,000 at grant, vesting in 4 years when it will be worth $5m. WITHOUT an 83(b) election, at vesting they recognise:
Select an option first.
Correct answer: B — $5,000,000 of ORDINARY income at vesting — and the appreciation is taxed at ordinary rates, not capital
Explanation: WITHOUT an 83(b), the founder is taxed at VESTING on the then-FMV: $5,000,000 of ORDINARY income (up to 37%), with no cash to pay it. WITH an 83(b), they would have paid tax on $10,000 at grant, and the entire $4,990,000 of appreciation would be CAPITAL GAIN — and the §1202 clock would have started at grant.
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Question 126
The 83(b) election in that case would have cost (at 37%):
Select an option first.
Correct answer: C — $3,700 — 37% x the $10,000 grant value, an almost trivial cost for an enormous benefit
Explanation: The 83(b) costs $10,000 × 37% = $3,700. It converts $4,990,000 of ORDINARY income (37% ≈ $1.85m) into CAPITAL GAIN (23.8% ≈ $1.19m) — saving roughly $660,000, and potentially far more if §1202 applies. A $3,700 bet with a seven-figure payoff. And it must be filed within 30 DAYS.
Question 127
A high-income pass-through owner in a state with a 9% income tax faces a capped SALT deduction. A PTET election:
Select an option first.
Correct answer: D — Moves the state tax payment to the ENTITY, where it is FULLY DEDUCTIBLE as a business expense — bypassing the individual cap
Explanation: THE PTET WORKAROUND. Paid personally, the 9% state tax may deliver NO federal benefit (the SALT cap). Paid by the ENTITY, it is a fully deductible BUSINESS EXPENSE, reducing federal taxable income. On $1m of income, that is $90,000 of newly-deductible expense — worth ~$33,000 federally. The IRS has blessed it, and it is close to free money.
Question 128
A taxpayer expects rates to RISE sharply. Regarding a large equipment purchase, they should consider:
Select an option first.
Correct answer: D — ELECTING OUT of bonus depreciation — spreading the deductions into future, HIGHER-rate years where each is worth more
Explanation: COUNTERINTUITIVE BUT CORRECT. A deduction's value = deduction × MARGINAL RATE. If rates will RISE, the deduction is worth MORE later. Electing OUT of bonus spreads it into high-rate years. This must be weighed against the time value of money — but 'always take the deduction now' is not a rule, it is a default.
Question 129
The same taxpayer expects rates to FALL. They should:
Select an option first.
Correct answer: B — TAKE MAXIMUM bonus depreciation NOW — the deduction is worth more at today's HIGHER rate, and the time value of money reinforces it
Explanation: With rates FALLING, both effects point the SAME way: take the deduction NOW, at the higher rate, and enjoy the time value. This is the case where 'accelerate everything' IS right. The general principle is to take the deduction in the year it is worth MOST — which requires knowing which way rates are going.
Question 130
A taxpayer has a $200,000 capital loss carryforward and expects a $1m business sale gain next year. They should:
Select an option first.
Correct answer: D — RECOGNISE the gain and USE the carryforward — and consider whether accelerating other income into the same year adds further benefit
Explanation: The carryforward SHELTERS $200,000 of the gain. The planning question is whether to structure the sale to MAXIMISE use of expiring or wasting attributes — and whether an INSTALLMENT SALE (spreading the gain) would actually be WORSE, by leaving the carryforward stranded and pushing income into unsheltered years.
Question 131
The C corporation's defining tax feature is:
Select an option first.
Correct answer: A — DOUBLE TAXATION — 21% at the corporate level, then again on dividends
Explanation: DOUBLE TAXATION defines the C corporation: 21% corporate, then dividend tax at the shareholder level. The offsetting advantages: a flat low rate on RETAINED earnings, §1202 QSBS potential, unlimited shareholders and classes, and deductible fringe benefits.
Question 132
A C corporation is MOST attractive when the business:
Select an option first.
Correct answer: B — RETAINS earnings to fund growth — the 21% rate applies, and the second layer is deferred
Explanation: The C corporation's advantage is on RETAINED earnings: a flat 21% with the second layer DEFERRED until distribution. If profits are fully distributed, double taxation bites immediately and a pass-through is usually better. If the company reinvests everything — and especially if §1202 QSBS is in play — the C corp can win decisively.
Question 133
A pass-through entity's principal advantage is:
Select an option first.
Correct answer: A — ONE layer of tax, and LOSSES flow through to owners
Explanation: Pass-throughs (partnerships, S corporations, LLCs) have ONE layer of tax, and LOSSES FLOW THROUGH to owners — potentially deductible against other income. This makes them ideal for start-ups expected to generate early losses. They also qualify for the §199A QBI deduction, which C corporations do not.
Question 134
A start-up expected to generate LOSSES for several years favours:
Select an option first.
Correct answer: A — A PASS-THROUGH — the losses flow through to owners immediately, rather than being trapped as an NOL
Explanation: C corporation losses are TRAPPED at the entity level as an NOL (usable only against future corporate income, capped at 80%). PASS-THROUGH losses FLOW OUT to owners now — potentially offsetting other income immediately. That is a real time-value advantage for a loss-making start-up.
Question 135
An S corporation's principal advantage over a partnership is:
Select an option first.
Correct answer: B — The distributive share is NOT subject to SELF-EMPLOYMENT tax — only the W-2 salary is
Explanation: The S corporation's headline advantage: the DISTRIBUTIVE SHARE escapes SELF-EMPLOYMENT tax. Only the shareholder-employee's W-2 SALARY bears FICA. A general partner, by contrast, pays SE tax on their entire distributive share. This is the entire salary-vs-distribution strategy.
Question 136
The IRS constraint on the S corporation salary strategy is:
Select an option first.
Correct answer: A — REASONABLE COMPENSATION — an artificially low salary invites recharacterisation of distributions as wages
Explanation: REASONABLE COMPENSATION is the battleground. Pay too little salary and the IRS recharacterises distributions as WAGES, with back payroll taxes, interest and penalties. 'Reasonable' depends on duties, experience, comparable salaries and time devoted — and it must be defensible.
Question 137
A PARTNERSHIP'S principal advantage over an S corporation is:
Select an option first.
Correct answer: A — FLEXIBILITY — special allocations with substantial economic effect, and DEBT creates outside BASIS
Explanation: TWO major partnership advantages: (1) SPECIAL ALLOCATIONS (with substantial economic effect) — impossible in an S corporation, which must allocate strictly per share, per day; and (2) partnership DEBT increases OUTSIDE BASIS, permitting more loss deduction. S corporation shareholders get NO basis from entity debt.
Question 138
An S corporation shareholder's basis includes:
Select an option first.
Correct answer: B — Stock basis plus DIRECT loans from the shareholder to the corporation only
Explanation: S corporation basis = STOCK + DIRECT SHAREHOLDER LOANS. Entity-level debt owed to third parties creates NO basis — even if the shareholder GUARANTEES it. PARTNERS, by contrast, DO get basis from partnership debt. This is the sharpest structural contrast in entity choice.
Question 139
A shareholder GUARANTEEING an S corporation's bank loan creates:
Select an option first.
Correct answer: B — NO basis — only an ACTUAL, DIRECT loan from the shareholder to the corporation does
Explanation: A GUARANTEE creates NO S corporation basis. If the shareholder wants basis, they must BORROW PERSONALLY and LEND the proceeds to the corporation — creating a genuine direct debt. The extra step is what converts a worthless guarantee into usable basis. This is a real, actionable planning point.
Question 140
§1202 QSBS potentially allows a shareholder to exclude:
Select an option first.
Correct answer: B — Up to 100% of the gain on qualified small business stock — subject to caps and a 5-year holding period
Explanation: §1202 QSBS is potentially the most valuable provision in the Code for a founder — a substantial or complete EXCLUSION of gain. But EVERY condition is a HARD GATE: original-issue C CORPORATION stock; held MORE THAN 5 YEARS; the corporation's gross assets below the ceiling at issuance; and an 80% active business test.
Question 141
§1202 QSBS requires the stock be issued by:
Select an option first.
Correct answer: C — A C CORPORATION — an S corporation or LLC does NOT qualify
Explanation: QSBS requires C CORPORATION stock. This is the single strongest argument for a start-up choosing (or converting to) C corporation status despite double taxation — the potential exclusion can dwarf the cost of the second tax layer. But the 5-year clock starts at ISSUANCE.
Question 142
The §1202 holding period is:
Select an option first.
Correct answer: A — MORE THAN 5 YEARS
Explanation: MORE THAN FIVE YEARS from ISSUANCE. Missing it by a single month destroys the exclusion entirely. This is why the timing of a sale or acquisition — and any conversion to C corporation status — must be planned years in advance.
Question 143
A §351 contribution to a corporation requires the transferors to hold, immediately after:
Select an option first.
Correct answer: A — At least 80% CONTROL of voting stock AND of each other class
Explanation: §351 requires 80% CONTROL immediately after the exchange. Stock issued for SERVICES does NOT count toward control (and produces ordinary income to the recipient). This control requirement is a trap when a new investor joins simultaneously.
Question 144
A §721 contribution to a PARTNERSHIP requires:
Select an option first.
Correct answer: A — NO control test at all — any contribution for a partnership interest is tax-free
Explanation: §721 has NO CONTROL TEST — you can contribute appreciated property for a 1% partnership interest and still defer. This is a significant advantage over §351 and makes partnerships far more flexible for admitting new partners with appreciated property.
Question 145
The DISGUISED SALE rule applies when a partner contributes property and receives cash within:
Select an option first.
Correct answer: D — 2 YEARS — the transaction is PRESUMED to be a taxable sale
Explanation: A contribution of property followed by a distribution of cash within TWO YEARS is PRESUMED to be a disguised SALE, defeating §721 non-recognition. The presumption is rebuttable, but the burden falls on the taxpayer.
Question 146
A C corporation's NOL carryforward is limited to:
Select an option first.
Correct answer: C — 80% of taxable income (post-2017 NOLs), with an INDEFINITE carryforward
Explanation: Post-2017 NOLs: NO carryback, INDEFINITE carryforward, deduction LIMITED TO 80% of taxable income. So a corporation with a large NOL still pays tax on 20% of its income. Pre-2018 NOLs have no 80% cap — the VINTAGE governs.
Question 147
§382 limits NOL use following:
Select an option first.
Correct answer: B — An OWNERSHIP CHANGE — a more than 50-percentage-point shift by 5% shareholders over 3 years
Explanation: §382 caps the ANNUAL use of pre-change NOLs at the loss corporation's EQUITY VALUE × the long-term tax-exempt rate. It is triggered by an OWNERSHIP CHANGE. In practice it can render a large NOL nearly worthless — a critical consideration in valuing and structuring an acquisition of a loss company.
Question 148
The ACCUMULATED EARNINGS TAX penalises a C corporation for:
Select an option first.
Correct answer: A — ACCUMULATING earnings BEYOND the reasonable needs of the business, to avoid shareholder dividend tax
Explanation: The AET (20%) penalises earnings hoarded beyond the REASONABLE NEEDS of the business. The defence is DOCUMENTATION — a written, specific, plausible plan for the accumulated funds (expansion, acquisition, working capital, debt retirement). Vague intentions will not survive scrutiny.
Question 149
The best defence against the accumulated earnings tax is:
Select an option first.
Correct answer: C — DOCUMENTED, SPECIFIC business plans justifying the accumulation as a REASONABLE NEED
Explanation: CONTEMPORANEOUS, SPECIFIC documentation — board minutes, written expansion plans, acquisition targets, capital budgets — is the defence. A specific plan to build a $5m facility justifies accumulating $5m. 'We might need it someday' does not.
Question 150
A PERSONAL HOLDING COMPANY tax requires BOTH:
Select an option first.
Correct answer: D — A stock test AND an income test
Explanation: BOTH: (1) the STOCK test — 5 or fewer individuals own more than 50% of the value in the last half of the year; AND (2) the INCOME test — PHC income (dividends, interest, rents, royalties) is at least 60% of adjusted ordinary gross income. Both must be met. The PHC tax is SELF-ASSESSED; the AET is IRS-asserted.
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