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CPA Tcp

CPA Tcp Practice Test: Practice Test 8

Practice Test 8 for CPA Tcp: real questions and explanations from the Varsity Tutors practice-test pool.

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Question 1 of 25

A two-owner business (50/50) needs to decide between an S corporation and a partnership structure. Which statement correctly describes a key difference?

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Question 1

A two-owner business (50/50) needs to decide between an S corporation and a partnership structure. Which statement correctly describes a key difference?

  1. A partnership allows special allocations (disproportionate sharing of income, loss, and cash flows among partners with substantial economic effect), while an S corporation requires all items to be allocated pro-rata to shares outstanding. (correct answer)
  2. An S corporation can have multiple classes of stock with different economic rights.
  3. A partnership cannot distribute property tax-free while an S corporation can.
  4. An S corporation allows foreign national co-owners while a partnership does not.

Explanation: The key structural difference is allocation flexibility - partnerships allow special allocations while S corps require pro-rata allocation by shares. Answer A is correct. S corps can only have one class of stock (B). Partnerships can distribute property tax-free (C). S corps cannot have foreign national shareholders (D).

Question 2

A C corporation that has historically paid no dividends and consistently absorbs all profits through compensation to shareholder-employees is most at risk for:

  1. The IRS recharacterizing a portion of compensation as constructive dividends - the lack of dividend history combined with high compensation is evidence that compensation is being used as a substitute for dividends. (correct answer)
  2. The accumulated earnings tax based on excessive retained earnings.
  3. The personal holding company tax if income is predominantly from passive sources.
  4. Criminal prosecution for tax evasion.

Explanation: Using all-compensation/no-dividend policy to avoid double taxation is the classic IRS target - compensation may be recharacterized as dividends to prevent deductibility. Answer A is correct. The AET (B) applies to accumulated retained earnings, but the scenario shows no retained earnings. PHC tax (C) relates to passive income. Criminal prosecution (D) requires fraudulent intent.

Question 3

A taxpayer who filed an amended return claiming a refund has not received a response from the IRS after 6 months. The taxpayer's option is to:

  1. File a suit for refund in U.S. District Court or the Court of Federal Claims after waiting at least 6 months from filing the refund claim - no Tax Court jurisdiction exists for refund suits. (correct answer)
  2. File another amended return to re-claim the refund.
  3. Petition the U.S. Tax Court for the refund.
  4. File a complaint with the Treasury Inspector General.

Explanation: After 6 months without IRS action, the taxpayer may file suit in District Court or Court of Federal Claims for a refund. Tax Court lacks jurisdiction over refund suits (C). Answer A is correct. Filing another 1040-X (B) doesn't accelerate the process. TIGTA complaints (D) are for misconduct, not refund disputes.

Question 4

A taxpayer whose income consists primarily of capital gains realized in December may benefit from:

  1. Filing for an extension to delay payment of the tax.
  2. Paying all estimated taxes in January of the following year.
  3. Using equal installment payments throughout the year even though no income was earned until December.
  4. Using the annualized income installment method, which would allow lower or zero payments for the first three quarters and a larger fourth-quarter payment reflecting the December income. (correct answer)

Explanation: The annualized income installment method matches payments to actual income earned - for income concentrated in December, payments in earlier quarters would be minimal and the fourth-quarter payment would capture the actual tax. Answer D is correct. Extensions don't extend payment (A). January payments (B) would be late. Equal installments (C) would result in overpayment in early quarters.

Question 5

Which of the following income items is EXCLUDED from the definition of UBTI for exempt organizations?

  1. Income from regularly operating a retail gift shop selling items unrelated to the exempt purpose.
  2. Income from operating a parking lot open to the general public.
  3. Income from licensing the organization's name to commercial enterprises.
  4. Passive investment income such as dividends, interest, annuities, royalties, rents from real property, and capital gains from investment property - these are specifically excluded from UBTI by statute. (correct answer)

Explanation: Passive investment income (dividends, interest, annuities, royalties, rents from real property) is excluded from UBTI. Answer D is correct. Gift shop (A), parking lots (B), and name licensing (C) can constitute UBTI.

Question 6

Evan is unmarried and has one child, Maya (age 10). Maya lived with Evan for 190 nights and with her other parent for 175 nights in 2025; Evan paid more than half the cost of keeping up his home. Evan signed Form 8332 releasing the child dependency claim to the other parent for 2025. Which filing status provides the best tax advantage for Evan?

  1. Head of household (because Evan released the dependency claim)
  2. Single
  3. Married filing jointly
  4. Head of household (because Maya lived with Evan more than half the year) (correct answer)

Explanation: The tax concept being tested is head of household eligibility when releasing the dependency exemption via Form 8332. Evan is unmarried, with Maya living 190 nights (more than half the year) with him, paying over half home costs, but releasing the dependency claim. Head of household aligns with IRS guidelines because it requires a qualifying child based on tests (residence, support), not actually claiming the dependent, allowing the status despite Form 8332. Head of household due to release is incorrect as release doesn't grant status; single is wrong since qualifying child tests are met; married filing jointly is unavailable as unmarried. Confirm qualifying person tests independently of dependency claim. CPAs recommend head of household for its tax benefits when residence and support criteria apply, even without claiming the dependent.

Question 7

A sole proprietor sells their business for 500,000.Theassetsincludeinventory(500,000. The assets include inventory (500,000.Theassetsincludeinventory(80,000 FMV, 60,000basis),equipment(60,000 basis), equipment (60,000basis),equipment(120,000 FMV, 40,000adjustedbasiswith40,000 adjusted basis with 40,000adjustedbasiswith60,000 of accumulated depreciation), goodwill (200,000FMV,200,000 FMV, 200,000FMV,0 basis), and a non-compete covenant (100,000FMV,100,000 FMV, 100,000FMV,0 basis). The tax consequences include:

  1. All gain taxed at long-term capital gains rates since the business was held more than one year.
  2. All gain taxed as ordinary income since the business is being sold.
  3. Capital gain on the goodwill and ordinary income on the non-compete covenant only.
  4. Ordinary income on inventory (20,000),Section1245recaptureonequipment(20,000), Section 1245 recapture on equipment (20,000),Section1245recaptureonequipment(60,000 of ordinary income equal to the accumulated depreciation, which is less than the total gain of 80,000),long−termcapitalgainonremainingequipmentappreciation(80,000), long-term capital gain on remaining equipment appreciation (80,000),long−termcapitalgainonremainingequipmentappreciation(20,000), and capital gain on goodwill ($200,000) - the non-compete is typically ordinary income. (correct answer)

Explanation: Business asset sales are taxed asset-by-asset. Inventory gain = 80K−80K - 80K−60K = 20Kordinaryincome.Equipment:FMV20K ordinary income. Equipment: FMV 20Kordinaryincome.Equipment:FMV120K - adjusted basis 40K=40K = 40K=80K total gain; Section 1245 recapture = 60K(theaccumulateddepreciation,whichisfullywithinthe60K (the accumulated depreciation, which is fully within the 60K(theaccumulateddepreciation,whichisfullywithinthe80K gain) as ordinary income; remaining 20Kislong−termcapitalgain.Goodwill:20K is long-term capital gain. Goodwill: 20Kislong−termcapitalgain.Goodwill:200K - 0basis=0 basis = 0basis=200K capital gain. Non-compete covenants generate ordinary income. Answer D is correct. Not all gain is capital (A) or ordinary (B). Multiple asset classes generate different character income (C).

Question 8

Upon complete termination of a partnership, each partner is treated as receiving:

  1. Cash equal to the FMV of their share of partnership net assets.
  2. A proportionate share of all partnership property, requiring recognition of all unrealized appreciation.
  3. A liquidating distribution of their share of partnership property - generally nontaxable at the time of distribution, with the partners taking carryover or allocated bases in the distributed assets. (correct answer)
  4. A deemed sale of their partnership interest at fair market value.

Explanation: Partnership termination results in liquidating distributions to partners - generally nontaxable with basis assigned to distributed property per the liquidating distribution rules. Answer C is correct. FMV cash (A) would be a sale. Proportionate share with gain recognition (B) is not the general rule. Deemed FMV sale (D) is not the termination treatment.

Question 9

A 501(c)(3) hospital is considering operating a for-profit fitness center open to the general public (not limited to patients). This activity:

  1. Is exempt from UBTI since hospitals have broad health-related exemptions.
  2. Is automatically related to the hospital's charitable health mission.
  3. Creates unlimited UBTI since any fitness center revenue is taxable.
  4. Likely generates UBTI since the fitness center is a regularly carried on trade or business not substantially related to the hospital's exempt health mission - unless the primary clientele are patients and health mission is demonstrated. (correct answer)

Explanation: A public fitness center operated by a hospital is a classic UBTI scenario - it's a commercial activity not substantially related to the hospital's charitable health purpose. Answer D is correct. Broad health exemptions don't cover commercial fitness centers (A). Fitness for the general public doesn't automatically relate to health mission (B). UBTI depends on the facts (C).

Question 10

A Section 751(b) 'disproportionate distribution' occurs when:

  1. A partner receives more cash than their ownership percentage would suggest.
  2. A distribution causes a partner to receive more or less of their share of hot assets (unrealized receivables and substantially appreciated inventory) relative to their overall interest, triggering ordinary income treatment for the hot asset portion. (correct answer)
  3. The partnership distributes property worth more than the partner's outside basis.
  4. A distribution is not proportional to the partners' original cash contributions.

Explanation: Section 751(b) applies when a distribution is disproportionate in relation to a partner's share of hot assets - the partner is treated as having sold their interest in hot assets to the extent they receive less than their pro-rata share. Answer B is correct. Cash proportionality (A) is not the Section 751(b) trigger. Basis comparisons (C) relate to gain recognition rules. Original contribution ratios (D) are not the Section 751(b) standard.

Question 11

A taxpayer who owes self-employment tax must file Schedule SE when:

  1. Net self-employment income exceeds $25,000.
  2. Net self-employment income is $400 or more. (correct answer)
  3. Gross self-employment income exceeds $600.
  4. Self-employment income exceeds the Social Security wage base.

Explanation: Schedule SE is required when net self-employment income is 400ormore−thisisthefilingthresholdfortheSEtax.AnswerBiscorrect.400 or more - this is the filing threshold for the SE tax. Answer B is correct. 400ormore−thisisthefilingthresholdfortheSEtax.AnswerBiscorrect.25,000 (A) is not a standard threshold. $600 (C) is a 1099 reporting threshold, not an SE filing threshold. Filing is required below the SS wage base (D).

Question 12

The IRS's First Time Abate (FTA) administrative waiver allows penalty relief when:

  1. The taxpayer has a clean compliance history for the prior 3 years - no penalties (other than estimated tax) assessed in the 3 years before the penalty year - and the taxpayer is otherwise compliant. (correct answer)
  2. The taxpayer files a late return for the first time ever in their tax history.
  3. The taxpayer is a first-time business filer.
  4. The taxpayer requests abatement within 30 days of the penalty notice.

Explanation: FTA requires a clean compliance history for the 3 years preceding the penalty year - no relevant penalties assessed during that period. Answer A is correct. FTA is based on 3-year history, not literal first-time filing (B, C). There is no 30-day request requirement for FTA (D).

Question 13

For U.S. federal income tax purposes, a U.S. citizen living abroad is:

  1. Taxed only on U.S.-source income.
  2. Not subject to U.S. tax if they have been abroad for more than one year.
  3. Subject to U.S. tax on worldwide income regardless of where they live - U.S. citizens are taxed on a citizenship basis, not a residency basis. (correct answer)
  4. Subject to U.S. tax only if they maintain a U.S. domicile.

Explanation: The U.S. taxes its citizens on worldwide income regardless of residency - citizenship-based taxation. Answer C is correct. Citizens abroad pay tax on worldwide, not just U.S.-source income (A). No one-year rule exempts citizens (B). Domicile is irrelevant for citizenship-based taxation (D).

Question 14

A domestic corporation's taxable income is calculated beginning with gross income and then:

  1. Subtracting allowable deductions, including the dividends received deduction, net operating loss deduction, and other business deductions. (correct answer)
  2. Adding back all book-to-tax differences to reconcile to financial statement income.
  3. Applying the effective tax rate used for financial reporting purposes.
  4. Subtracting only cash expenses actually paid during the tax year.

Explanation: Corporate taxable income = gross income minus allowable deductions, including special corporate deductions like the DRD and NOL deduction. Answer A is correct. Book-to-tax adjustments (B) are part of the return but not how taxable income is 'calculated.' Financial statement rates (C) are for GAAP purposes. Only cash expenses (D) describes cash method, not the general rule.

Question 15

A CPA learns from a client that a business associate of the client (not a CPA client) has been committing tax fraud. Under professional standards, the CPA:

  1. Must report the fraud to the IRS to fulfill their duty as a tax professional.
  2. Must report the fraud to local law enforcement.
  3. Must advise the client to report the fraud or the CPA will do so.
  4. Has no obligation to report the fraud - the CPA's duty of confidentiality to their client and the fact that the fraudulent party is not their client means the CPA should not unilaterally disclose information learned in the course of the engagement. (correct answer)

Explanation: The CPA's professional obligations run to their own clients - information about third-party fraud learned in an engagement is confidential and generally may not be disclosed without client consent. Answer D is correct. No duty to report third-party fraud to IRS (A). No duty to report to law enforcement (B). The CPA cannot threaten the client to report (C).

Question 16

In 2025, Devon (age 55, single) took a $10,000 distribution from a traditional IRA (no basis) to buy a first home. What is the tax treatment of the retirement distribution?

  1. The 10,000isincludibleingrossincome,butthe1010,000 is includible in gross income, but the 10% additional tax does not apply because up to 10,000isincludibleingrossincome,butthe1010,000 may qualify for the first-time homebuyer exception. (correct answer)
  2. The $10,000 is excluded from gross income because first-time homebuyer IRA distributions are tax-free.
  3. The $10,000 is includible in gross income and subject to the 10% additional tax because the first-time homebuyer exception applies only to Roth IRAs.
  4. Only 5,000isincludibleingrossincomebecausetheother5,000 is includible in gross income because the other 5,000isincludibleingrossincomebecausetheother5,000 is excluded under the first-time homebuyer rule.

Explanation: This question tests the first-time homebuyer exception to the IRA early distribution penalty. Devon, age 55, distributed 10,000fromatraditionalIRAforafirsthome.Theamountisincludiblebutpenalty−exemptupto10,000 from a traditional IRA for a first home. The amount is includible but penalty-exempt up to 10,000fromatraditionalIRAforafirsthome.Theamountisincludiblebutpenalty−exemptupto10,000 lifetime under IRC Section 72(t)(2)(F). Choice B is incorrect because distributions are taxable, and Choice C is wrong as the exception applies to traditional IRAs. Choice D is incorrect because there is no $5,000 exclusion from income. Use the exception sparingly due to the lifetime limit. Save in Roth IRAs for home purchases as contributions can be withdrawn tax-free anytime.

Question 17

A taxpayer has no prior-year tax liability (prior-year tax was $0). The prior-year safe harbor for estimated taxes:

  1. Results in no required estimated payments - provided the prior year covered a full 12-month period and the taxpayer was a U.S. citizen or resident for the entire prior year: 100% of 0prioryeartax=0 prior year tax = 0prioryeartax=0 required. (correct answer)
  2. Still requires estimated payments of $1,000 as a minimum.
  3. Does not apply - taxpayers with zero prior-year liability must use the 90% of current year safe harbor.
  4. Requires estimated payments based on the current year projected income.

Explanation: Under Section 6654(e)(2), if the prior year's tax was 0,theprior−yearsafeharborisfullymetwithnoestimatedpayments−butthisexceptionappliesonlyiftheprioryearwasafull12−monthperiodandthetaxpayerwasaU.S.citizenorresidentthroughoutthatprioryear.Ifeitherconditionisnotmet,thetaxpayercannotrelyonthezero−prior−yearexceptionandmustusethe900, the prior-year safe harbor is fully met with no estimated payments - but this exception applies only if the prior year was a full 12-month period and the taxpayer was a U.S. citizen or resident throughout that prior year. If either condition is not met, the taxpayer cannot rely on the zero-prior-year exception and must use the 90% current-year safe harbor. Answer A is correct with those qualifiers. No minimum 0,theprior−yearsafeharborisfullymetwithnoestimatedpayments−butthisexceptionappliesonlyiftheprioryearwasafull12−monthperiodandthetaxpayerwasaU.S.citizenorresidentthroughoutthatprioryear.Ifeitherconditionisnotmet,thetaxpayercannotrelyonthezero−prior−yearexceptionandmustusethe901,000 is required under the prior-year safe harbor when prior-year tax was zero (B). The prior-year safe harbor remains available with a zero result (C). Current-year projections are not required under this safe harbor (D).

Question 18

A partnership has a Section 754 election in effect. A partner sells their partnership interest for 80,000whentheiroutsidebasisis80,000 when their outside basis is 80,000whentheiroutsidebasisis50,000. The transferee partner's beginning outside basis is $80,000. The Section 743(b) basis adjustment:

  1. Adjusts the inside basis of all partnership assets by $30,000.
  2. Is allocated only to depreciable assets owned by the partnership.
  3. Reduces the transferee's outside basis to match the partnership's inside basis.
  4. Adjusts the inside basis of partnership assets by $30,000 (the excess of outside basis over the transferee's share of inside basis), allocated to specific assets in proportion to the unrealized appreciation in each asset. (correct answer)

Explanation: When a Section 754 election is in effect, a Section 743(b) basis adjustment equals the difference between the transferee's outside basis and the transferee's proportionate share of the partnership's inside basis. In this case, the selling partner's outside basis of 50,000equalsthetransferee′sshareofinsidebasis(thefactsconfirmthesellingpartner′soutsidebasistrackstheinsidebasisallocabletothatinterest),sotheadjustment=50,000 equals the transferee's share of inside basis (the facts confirm the selling partner's outside basis tracks the inside basis allocable to that interest), so the adjustment = 50,000equalsthetransferee′sshareofinsidebasis(thefactsconfirmthesellingpartner′soutsidebasistrackstheinsidebasisallocabletothatinterest),sotheadjustment=80,000 (transferee's outside basis) - 50,000(transferee′sshareofinsidebasis)=50,000 (transferee's share of inside basis) = 50,000(transferee′sshareofinsidebasis)=30,000. The adjustment is allocated to specific partnership assets with unrealized appreciation. Answer D is correct. The adjustment is not applied equally to all partnership assets (A). It is not limited to depreciable assets (B). A Section 743(b) adjustment modifies the inside basis of specific assets for the transferee partner only - it does not reduce the transferee's outside basis (C).

Question 19

A partnership has recourse liabilities of 60,000.Apartnerbearstheeconomicriskoflossfor60,000. A partner bears the economic risk of loss for 60,000.Apartnerbearstheeconomicriskoflossfor20,000 of those liabilities. How much do the recourse liabilities increase the partner's outside basis?

  1. $60,000 - the partner's share of all partnership liabilities.
  2. $20,000 - the amount of recourse liability for which the partner bears the economic risk of loss. (correct answer)
  3. $0 - recourse liabilities do not affect outside basis.
  4. $30,000 - 50% of the recourse liabilities under the equal allocation rule.

Explanation: Recourse liabilities are allocated to partners based on who bears the economic risk of loss for those liabilities. The partner's basis increases by $20,000 - their share of the recourse debt. Answer B is correct. Basis is not increased by liabilities beyond the partner's risk (A). Recourse liabilities do affect basis (C). Equal allocation (D) applies only if no partner bears risk of loss.

Question 20

A single taxpayer has \155,000ofwages,of wages,ofwages,$1,000oftaxableinterest,of taxable interest,oftaxableinterest,$2,000ofqualifieddividends,andof qualified dividends, andofqualifieddividends,and$8,000oflong−termcapitalgains.Thetaxpayeritemizesof long-term capital gains. The taxpayer itemizesoflong−termcapitalgains.Thetaxpayeritemizes$12,000$ of SALT and has no other AMT adjustments. Under IRC §56, which adjustment is required for AMT calculation?

  1. Add back \12,000$ of SALT because it is not deductible in computing AMTI (correct answer)
  2. Add back \8,000$ of long-term capital gains because AMT disallows preferential rates
  3. Subtract \2,000$ of qualified dividends because dividends are excluded from AMTI
  4. Add back \1,000$ of taxable interest because interest is a preference item

Explanation: The tax concept being tested is the AMT add-back for state and local taxes (SALT) under IRC §56(b)(1)(A)(ii), disallowing their deduction in AMTI. Key financial details feature 12,000inSALTastheprimaryadjustmentitem,withmodestincomelevelsstillwarrantingAMTreview.Thecorrectadjustmentaddsbackthe12,000 in SALT as the primary adjustment item, with modest income levels still warranting AMT review. The correct adjustment adds back the 12,000inSALTastheprimaryadjustmentitem,withmodestincomelevelsstillwarrantingAMTreview.Thecorrectadjustmentaddsbackthe12,000 SALT because it is not deductible for AMT purposes. Choice B is incorrect as long-term capital gains are not added back but taxed at preferential rates per IRC §55(b)(3); Choice C is wrong because qualified dividends are included in AMTI without subtraction; Choice D is erroneous since taxable interest is part of AMTI without being a preference item requiring add-back. To determine AMT exposure, add disallowed deductions like SALT to regular taxable income. Calculate AMTI, subtract the exemption, and apply AMT rates to evaluate excess over regular tax.

Question 21

A married couple filing jointly plans to sell shares of a publicly traded stock to fund a real estate down payment. They purchased the shares for 50,000andcansellthemtodayfor50,000 and can sell them today for 50,000andcansellthemtodayfor92,000. If they sell now, the holding period is 10 months; if they wait 3 more months, the holding period will exceed one year. Their other income places them in the 32% ordinary bracket, and they prefer minimizing federal tax on the sale. What is the tax consequence of realizing a short-term capital gain in this scenario?

  1. The $42,000 gain is a short-term capital gain taxed at ordinary income rates in the year of sale. (correct answer)
  2. The $42,000 gain is a long-term capital gain taxed at preferential long-term capital gain rates in the year of sale.
  3. The $42,000 gain is deferred and not taxable until the couple purchases replacement stock within 60 days.
  4. The $42,000 gain is treated as qualified dividend income and taxed at the qualified dividend rate in the year of sale.

Explanation: The tax concept being tested is the distinction between short-term and long-term capital gains taxation under IRC Section 1222. The key facts are the 10-month holding period, making the gain short-term, and the couple's 32% ordinary income bracket. Choice A is correct because short-term capital gains (assets held one year or less) are taxed at ordinary income rates per IRC Section 1, aligning with tax planning to minimize taxes by potentially waiting for long-term treatment. Choice B is incorrect as the gain does not qualify for long-term preferential rates under IRC Section 1(h) due to the short holding period; Choice C is wrong because there is no deferral provision for stock sales with replacement under IRC Section 1031, which applies to like-kind exchanges of real property. Choice D is incorrect as capital gains are not recharacterized as qualified dividend income under IRC Section 1(h)(11). A transferable framework involves calculating holding periods to determine short-term versus long-term status and estimating tax brackets to decide optimal sale timing. Always compare after-tax proceeds of immediate sales versus deferral, factoring in opportunity costs and market risks.

Question 22

In 2025, Keenan, a single filer, had 9,000ofnetrentalincome,9,000 of net rental income, 9,000ofnetrentalincome,800 of interest from municipal bonds, and $500 of lottery winnings. Which of the following items should be included in Keenan’s gross income under IRS rules?

  1. Rental income, municipal bond interest, and lottery winnings
  2. Municipal bond interest and lottery winnings only
  3. Rental income and municipal bond interest only
  4. Rental income and lottery winnings only (correct answer)

Explanation: Gross income includes rental and lottery winnings per IRC Section 61, excludes municipal interest under IRC Section 103. Keenan had 9,000rental,9,000 rental, 9,000rental,800 municipal, $500 lottery. Answer D is correct: rental and lottery includible, municipal excluded. Choice A includes all; choice B excludes rental; choice C excludes lottery. Classify taxable vs. exempt. Verify with IRC sections.

Question 23

In 2025, Aisha Khan (married filing jointly) sells Stock Z at a $9,000 loss on November 20 (held 2 years). On December 5, she buys substantially identical Stock Z shares. She has no other capital transactions. How should the taxpayer report this transaction on their tax return under the wash sale rules?

  1. Report a $9,000 long-term capital loss on Schedule D because wash sale rules apply only to short-term holdings.
  2. Disallow the $9,000 loss currently and add the disallowed loss to the basis of the replacement shares; report the sale on Form 8949/Schedule D with wash sale adjustment. (correct answer)
  3. Disallow the loss currently and carry it forward as a capital loss carryover without adjusting the basis of the replacement shares.
  4. Recognize the $9,000 loss currently because the repurchase occurred after the sale date, not before it.

Explanation: This question tests the wash sale rule under IRC Section 1091. When Aisha sells Stock Z at a loss and repurchases substantially identical securities within 30 days after the sale, the $9,000 loss is disallowed currently. The disallowed loss is added to the basis of the replacement shares, preserving the economic loss for future recognition. She must report the sale on Form 8949 with code 'W' and show the wash sale adjustment on Schedule D. Option A incorrectly suggests wash sales apply only to short-term holdings, when they apply regardless of holding period. Option C incorrectly treats the loss as a carryover without basis adjustment. Option D misunderstands the 61-day wash sale window (30 days before through 30 days after). When triggering wash sales, track basis adjustments carefully to ensure the economic loss is preserved in the replacement shares.

Question 24

A sole proprietorship technology repair shop hires a technician who is paid $28 per hour, must work in the shop during set hours, is supervised by a manager, and cannot perform services for competitors during employment. The owner is evaluating whether the technician is an employee for payroll tax purposes (FICA, FUTA, SUTA) and which year-end form to issue. What is the correct classification for this worker?

  1. Independent contractor; issue Form 1099-NEC because the technician is paid hourly
  2. Employee; issue Form W-2 and apply required payroll tax withholding and employer payroll taxes (correct answer)
  3. Independent contractor; issue Form W-2 but do not withhold FICA
  4. Employee; issue Form 1099-NEC and pay only SUTA

Explanation: This question tests IRS common-law rules for classifying technicians with set hours, supervision, and non-compete restrictions. The key facts are hourly pay, required shop hours, managerial supervision, and no competitor work, indicating employee status. Choice B is correct under IRS guidelines, requiring Form W-2 and full payroll taxes including FICA, FUTA, SUTA. Choice A is incorrect as hourly pay does not define contractors; control does. Choice C is wrong because contractors get 1099-NEC without FICA withholding, and Choice D is invalid since employees receive W-2, not 1099-NEC. Consider relationship factors like non-competes in classifications. Document with employment agreements to align with tax obligations.

Question 25

Which of the following is a deduction available to C corporations but NOT to individual taxpayers?

  1. The standard deduction.
  2. The dividends received deduction (DRD). (correct answer)
  3. The qualified business income (QBI) deduction.
  4. The home office deduction.

Explanation: The DRD is a deduction unique to corporations, allowing partial exclusion of dividends received from other domestic corporations to reduce double taxation. Answer B is correct. Corporations do not have a standard deduction (A). The QBI deduction is for pass-through entities and individual taxpayers (C). Home office deductions apply to individuals and self-employed persons (D).