, TESTBANK FOR Taxation for Business Entities A
Practical Approach, 2026 Edition Gregory A. Carnes
Notes
1- The file is chapter after chapter.
2- We have shown you few pages sample.
3- The file contains all Appendix and Excel sheet
if it exists.
4- We have all what you need, we make update
at every time. There are many new editions
waiting you.
5- If you think you purchased the wrong file You
can contact us at every time, we can replace it
with true one.
Our email:
,Taxation for Business Entities: A Practical Approach 2026
Test Bank
Chapter 1: Basics of Business Entity Taxation
1) Which of the following correctly lists the four main stages in the lifecycle of a business
entity?
A) Income Recognition – Asset Purchase – Tax Deduction – Closure
B) Startup funding – Business operations – Investment - Termination
C) Formation – Business operations – Distributions to owners – Liquidation or sale
D) Planning – Hiring employees – Paying taxes – Filing closure forms
Answer: C
Explanation: The first stage is the formation of the entity, when the owners contribute cash or
assets to the entity in exchange for an ownership interest such as stock or a partnership interest.
The second stage is the taxation of the operations of the business. The third stage is the
distribution of profits to the owners. The fourth stage is when the entity ends, which can be a
liquidating distribution to the owners or a sale by the owners of the business.
Diff: 1
Learning Objective: LO 1.1
AACSB / AICPA: Analytic / FC: Analysis; PC: None; BB: None
Bloom's: Knowledge
Time on Task: 2 min
2) Which of the following is not a question that arises when a business is formed?
A) What basis does each shareholder have in their stock?
B) What is each shareholder’s realized gain or loss from the transaction?
C) Does the IRS approve of the business?
D) What basis does the corporation have in the assets received?
Answer: C
Explanation: Some of the tax issues that arise when a corporation is formed is: (1) What is each
shareholder’s realized gain or loss from the transaction? (2) Is each shareholder’s realized gain or
loss recognized? (3) Does the corporation recognize any gains or losses? (4) What basis does
each shareholder have in their stock? (5) What basis does the corporation have in the assets
received?. Approval of the business by the IRS is not a tax question that needs to be answered.
Diff: 2
Learning Objective: LO 1.1
AACSB / AICPA: Analytic / FC: Analysis; PC: None; BB: None
Bloom's: Knowledge
Time on Task: 2 min
,3) Why are the topics of income, deductions, and property transactions much shorter in business
entity taxation compared to individual taxation?
A) Business entities are not required to report income or deductions.
B) Business entities follow a completely different tax code from individuals.
C) The fundamental tax rules for income and deductions are generally the same for both
individuals and business entities.
D) Business entities are only taxed on dividends and charitable contributions.
Answer: C
Explanation: The main reason is that the fundamental income tax rules related to income,
deductions, and property transactions for businesses are generally the same rules as those for
individuals.
Diff: 1
Learning Objective: LO 1.1
AACSB / AICPA: Analytic / FC: Analysis; PC: None; BB: None
Bloom's: Application
Time on Task: 2 min
4) Which of the following provides that a business is a distinct entity from its owners?
A) Entity theory
B) Operating distribution
C) Liquidating distribution
D) Business theory
Answer: A
Explanation: The entity theory provides that a business is a distinct entity from its owners.
Diff: 1
Learning Objective: LO 1.1
AACSB / AICPA: Analytic / FC: Analysis; PC: None; BB: None
Bloom's: Knowledge
Time on Task: 2 min
5) Once a business entity generates income,
A) the income is distributed to the owners as an operating distribution.
B) the income is distributed to the owners as a liquidating distribution.
C) the income is distributed to the owners when they request a distribution.
D) the income is owned by the entity.
Answer: D
,Explanation: Under the entity theory, once a business entity has generated income, the income is
owned by the entity. The business owners do not have access to the income until it is distributed
to them. Furthermore, distributions are not automatically made.
Diff: 2
Learning Objective: LO 1.1
AACSB / AICPA: Analytic / FC: Analysis; PC: None; BB: None
Bloom's: Application
Time on Task: 3 min
6) An owner can terminate their interest in a business by
A) receiving an operating distribution.
B) receiving a liquidating distribution
C) selling their interests in the business.
D) Either B or C
Answer: D
Explanation: Owners can completely terminate their interests in a business by receiving a
liquidating distribution or selling their ownership interests.
Diff: 1
Learning Objective: LO 1.1
AACSB / AICPA: Analytic / FC: Analysis; PC: None; BB: None
Bloom's: Knowledge
Time on Task: 2 min
7) Which of the following statements is correct?
A) A gain, loss, or neither will result when a liquidating distribution is made.
B) A gain or loss will result when a liquidating distribution is made.
C) A gain will result when a liquidating distribution is made.
D) A loss will result when a liquidating distribution is made.
Answer: A
Explanation: One of the tax issues that must be addressed when liquidating distributions are
made is whether there is a gain or loss. There may be a gain, loss, or the distribution may be
equal to the basis, resulting in no gain or loss.
Diff: 2
Learning Objective: LO 1.1
AACSB / AICPA: Analytic / FC: Analysis; PC: None; BB: None
Bloom's: Application
Time on Task: 3 min
8) Which of the following is not a separate business entity?
,A) Corporation
B) Sole proprietorship
C) Limited liability partnership
D) Business trust
Answer: B
Explanation: All of the following are separate legal entities: corporation, general partnership,
limited partnership, limited liability partnership, limited liability company, and business trust. A
sole proprietorship is not a separate business entity
Diff: 1
Learning Objective: LO 1.1
AACSB / AICPA: Analytic / FC: Analysis; PC: None; BB: None
Bloom's: Knowledge
Time on Task: 2 min
9) Which of the following statements accurately compares general partnerships, limited
partnerships, and limited liability partnerships?
A) All partners of each type of partnership are liable for damages committed by other partners.
B) All partnerships must have at least one general partner and one limited partner.
C) All partnerships must have one or more owners.
D) All partners of each type of partnership share profits, losses, and liquidation proceeds.
Answer: D
Explanation: All partners, regardless of the partnership entity type, share profits, losses, and
liquidation proceeds. Only limited partnerships have both general and limited partners. Partners
have limited liability in limited partnerships and limited liability partnerships, but not in general
partnerships. All partnerships must have two or more owners.
Diff: 2
Learning Objective: LO 1.1
AACSB / AICPA: Analytic / FC: Analysis; PC: None; BB: None
Bloom's: Application
Time on Task: 4 min
10) Which of the following best describes a corporation?
A) A business that shares liability with its owners
B) A legal entity formed by a partnership agreement
C) A business that has met state requirements to become a distinct legal entity
D) A business structure that does not require state filing
Answer: C
Explanation: A corporation is a business that has met a state’s requirements to organize
as a legal entity that is distinct from its owners. In most states, the owners file articles of
,incorporation with the state and elect a board of directors.
Diff: 1
Learning Objective: LO 1.1
AACSB / AICPA: Analytic / FC: Analysis; PC: None; BB: None
Bloom's: Knowledge
Time on Task: 2 min
11) A business for which two or more taxpayers own and operate the business, and there is at
least one general partner and one limited partner, is a:
A) General partnership
B) Limited partnership
C) Limited liability partnership
D) Limited liability company
Answer: B
Explanation: A limited partnership is a business for which two or more taxpayers agree to own
and operate the business, and to share profits, losses, and liquidation proceeds.
Diff: 1
Learning Objective: LO 1.1
AACSB / AICPA: Analytic / FC: Analysis; PC: None; BB: None
Bloom's: Knowledge
Time on Task: 2 min
12) To create a corporation, the owners must
A) risk their personal assets to the creditors of the corporation.
B) loan the corporation money.
C) elect a board of directors.
D) determine general vs. limited ownership status.
Answer: C
Explanation: In most states, the owners file articles of incorporation with the state and elect a
board of directors.
Diff: 2
Learning Objective: LO 1.1
AACSB / AICPA: Analytic / FC: Analysis; PC: None; BB: None
Bloom's: Comprehension
Time on Task: 2 min
13) Which of the following is not a characteristic of a limited liability company?
A) Owners are known as members.
B) Professional service providers are required to organize as an LLC.
C) Articles of organization are filed to establish the entity.
,D) All owners have limited liability.
Answer: B
Explanation: Articles of organization must be filed with the state in which the LLC is legally
organized. Owners of an LLC are known as members. All members have limited liability. Many
states do not allow professional service providers such as accountants and attorneys to organize
as an LLC.
Diff: 2
Learning Objective: LO 1.1
AACSB / AICPA: Analytic / FC: Analysis; PC: None; BB: None
Bloom's: Comprehension
Time on Task: 3 min
14) Which entity type holds the rights to an individual’s stake or interest in a business?
A) Business trust
B) Corporation
C) General partnership
D) Limited liability company
Answer: A
Explanation: A business trust is a legal entity that holds the rights to an individual’s stake or
interest in a business.
Diff: 1
Learning Objective: LO 1.1
AACSB / AICPA: Analytic / FC: Analysis; PC: None; BB: None
Bloom's: Knowledge
Time on Task: 1 min
15) What federal tax form is used when a corporation has not elected to be taxed as an S
corporation?
A) Form 1041
B) Form 1065
C) Form 1120
D) Form 1120-S
Answer: C
Explanation: A corporation that does not elect S status is a C corporation and files Form 1120.
Diff: 1
Learning Objective: LO 1.1
AACSB / AICPA: Analytic / FC: Analysis; PC: None; BB: None
Bloom's: Knowledge
Time on Task: 1 min
,16) Which of the following is not a business tax form?
A) Form 990
B) Form 1040
C) Form 1065
D) Form 1120
Answer: B
Explanation: All are forms used by entities except Form 1040, which is the tax form used by
individuals.
Diff: 2
Learning Objective: LO 1.1
AACSB / AICPA: Analytic / FC: Analysis; PC: None; BB: None
Bloom's: Analysis
Time on Task: 2 min
17) Corporate tax returns are due ________.
A) two and one-half months after the end of the year
B) three and one-half months after the end of the year
C) A or B, depending on the entity’s year-end
D) None of the above
Answer: C
Explanation: Corporate tax returns (other than those with a June 30 year-end) are due three and
one-half months after the end of the tax year. Corporate tax returns with a June 30 year-end are
due two and one-half months after the end of the year
Diff: 1
Learning Objective: LO 1.2
AACSB / AICPA: Analytic / FC: Analysis; PC: None; BB: None
Bloom's: Knowledge
Time on Task: 2 min
18) A request for extension filed on Form 7004 allows a taxpayer six additional months to
________.
A) pay the tax liability and file the return
B) pay the tax liability or file the return
C) file the return
D) pay the tax liability
Answer: C
Explanation: The extension of time is only to file the return. The entity must pay the taxes due
, for the year by the original due date or the IRS will assess a late payment penalty. This provides
taxpayers with more time to finalize their return for filing, but they do need to estimate their
liability for the year to ensure they have paid the appropriate amount the original due date.
Diff: 1
Learning Objective: LO 1.2
AACSB / AICPA: Analytic / FC: Analysis; PC: None; BB: None
Bloom's: Knowledge
Time on Task: 2 min
19) In the prior year, ABC Company reported gross income of $200,000 on its tax return. It
failed to include $10,000 of taxable income related to an accounting error. What is the applicable
statute of limitations?
A) 2 years
B) 3 years
C) 6 years
D) Never expires
Answer: B
Explanation: If a return is filed and less than 25% of gross income is understated on the original
tax return, the statute of limitations is three years from the later of the due date of the return or
the date the return was filed. ABC’s understatement = $10,000/$200,000 = 5%. Since 5% is less
than 25%, the statute of limitations is three (3) years.
Diff: 2
Learning Objective: LO 1.2
AACSB / AICPA: Analytic / FC: Analysis; PC: None; BB: None
Bloom's: Application
Time on Task: 3 min
20) In the prior year, XYZ, Inc. reported gross income of $200,000 on its tax return. XYZ
deducted nondeductible expenses in the amount of $54,000 in error. XYZ did not fraudulently
make the error. What is the applicable statute of limitations?
A) 2 years
B) 3 years
C) 6 years
D) Never expires
Answer: C
Explanation: If a return is filed and more than 25% of gross income is understated on the original
tax return, the statute of limitations is six years from the later of the due date of the return or the
date the return was filed. XYZ's understatement = $54,000/$200,000 = 27%. Since 27% is more
than 25%, the statute of limitations is six (6) years.
Diff: 2
Practical Approach, 2026 Edition Gregory A. Carnes
Notes
1- The file is chapter after chapter.
2- We have shown you few pages sample.
3- The file contains all Appendix and Excel sheet
if it exists.
4- We have all what you need, we make update
at every time. There are many new editions
waiting you.
5- If you think you purchased the wrong file You
can contact us at every time, we can replace it
with true one.
Our email:
,Taxation for Business Entities: A Practical Approach 2026
Test Bank
Chapter 1: Basics of Business Entity Taxation
1) Which of the following correctly lists the four main stages in the lifecycle of a business
entity?
A) Income Recognition – Asset Purchase – Tax Deduction – Closure
B) Startup funding – Business operations – Investment - Termination
C) Formation – Business operations – Distributions to owners – Liquidation or sale
D) Planning – Hiring employees – Paying taxes – Filing closure forms
Answer: C
Explanation: The first stage is the formation of the entity, when the owners contribute cash or
assets to the entity in exchange for an ownership interest such as stock or a partnership interest.
The second stage is the taxation of the operations of the business. The third stage is the
distribution of profits to the owners. The fourth stage is when the entity ends, which can be a
liquidating distribution to the owners or a sale by the owners of the business.
Diff: 1
Learning Objective: LO 1.1
AACSB / AICPA: Analytic / FC: Analysis; PC: None; BB: None
Bloom's: Knowledge
Time on Task: 2 min
2) Which of the following is not a question that arises when a business is formed?
A) What basis does each shareholder have in their stock?
B) What is each shareholder’s realized gain or loss from the transaction?
C) Does the IRS approve of the business?
D) What basis does the corporation have in the assets received?
Answer: C
Explanation: Some of the tax issues that arise when a corporation is formed is: (1) What is each
shareholder’s realized gain or loss from the transaction? (2) Is each shareholder’s realized gain or
loss recognized? (3) Does the corporation recognize any gains or losses? (4) What basis does
each shareholder have in their stock? (5) What basis does the corporation have in the assets
received?. Approval of the business by the IRS is not a tax question that needs to be answered.
Diff: 2
Learning Objective: LO 1.1
AACSB / AICPA: Analytic / FC: Analysis; PC: None; BB: None
Bloom's: Knowledge
Time on Task: 2 min
,3) Why are the topics of income, deductions, and property transactions much shorter in business
entity taxation compared to individual taxation?
A) Business entities are not required to report income or deductions.
B) Business entities follow a completely different tax code from individuals.
C) The fundamental tax rules for income and deductions are generally the same for both
individuals and business entities.
D) Business entities are only taxed on dividends and charitable contributions.
Answer: C
Explanation: The main reason is that the fundamental income tax rules related to income,
deductions, and property transactions for businesses are generally the same rules as those for
individuals.
Diff: 1
Learning Objective: LO 1.1
AACSB / AICPA: Analytic / FC: Analysis; PC: None; BB: None
Bloom's: Application
Time on Task: 2 min
4) Which of the following provides that a business is a distinct entity from its owners?
A) Entity theory
B) Operating distribution
C) Liquidating distribution
D) Business theory
Answer: A
Explanation: The entity theory provides that a business is a distinct entity from its owners.
Diff: 1
Learning Objective: LO 1.1
AACSB / AICPA: Analytic / FC: Analysis; PC: None; BB: None
Bloom's: Knowledge
Time on Task: 2 min
5) Once a business entity generates income,
A) the income is distributed to the owners as an operating distribution.
B) the income is distributed to the owners as a liquidating distribution.
C) the income is distributed to the owners when they request a distribution.
D) the income is owned by the entity.
Answer: D
,Explanation: Under the entity theory, once a business entity has generated income, the income is
owned by the entity. The business owners do not have access to the income until it is distributed
to them. Furthermore, distributions are not automatically made.
Diff: 2
Learning Objective: LO 1.1
AACSB / AICPA: Analytic / FC: Analysis; PC: None; BB: None
Bloom's: Application
Time on Task: 3 min
6) An owner can terminate their interest in a business by
A) receiving an operating distribution.
B) receiving a liquidating distribution
C) selling their interests in the business.
D) Either B or C
Answer: D
Explanation: Owners can completely terminate their interests in a business by receiving a
liquidating distribution or selling their ownership interests.
Diff: 1
Learning Objective: LO 1.1
AACSB / AICPA: Analytic / FC: Analysis; PC: None; BB: None
Bloom's: Knowledge
Time on Task: 2 min
7) Which of the following statements is correct?
A) A gain, loss, or neither will result when a liquidating distribution is made.
B) A gain or loss will result when a liquidating distribution is made.
C) A gain will result when a liquidating distribution is made.
D) A loss will result when a liquidating distribution is made.
Answer: A
Explanation: One of the tax issues that must be addressed when liquidating distributions are
made is whether there is a gain or loss. There may be a gain, loss, or the distribution may be
equal to the basis, resulting in no gain or loss.
Diff: 2
Learning Objective: LO 1.1
AACSB / AICPA: Analytic / FC: Analysis; PC: None; BB: None
Bloom's: Application
Time on Task: 3 min
8) Which of the following is not a separate business entity?
,A) Corporation
B) Sole proprietorship
C) Limited liability partnership
D) Business trust
Answer: B
Explanation: All of the following are separate legal entities: corporation, general partnership,
limited partnership, limited liability partnership, limited liability company, and business trust. A
sole proprietorship is not a separate business entity
Diff: 1
Learning Objective: LO 1.1
AACSB / AICPA: Analytic / FC: Analysis; PC: None; BB: None
Bloom's: Knowledge
Time on Task: 2 min
9) Which of the following statements accurately compares general partnerships, limited
partnerships, and limited liability partnerships?
A) All partners of each type of partnership are liable for damages committed by other partners.
B) All partnerships must have at least one general partner and one limited partner.
C) All partnerships must have one or more owners.
D) All partners of each type of partnership share profits, losses, and liquidation proceeds.
Answer: D
Explanation: All partners, regardless of the partnership entity type, share profits, losses, and
liquidation proceeds. Only limited partnerships have both general and limited partners. Partners
have limited liability in limited partnerships and limited liability partnerships, but not in general
partnerships. All partnerships must have two or more owners.
Diff: 2
Learning Objective: LO 1.1
AACSB / AICPA: Analytic / FC: Analysis; PC: None; BB: None
Bloom's: Application
Time on Task: 4 min
10) Which of the following best describes a corporation?
A) A business that shares liability with its owners
B) A legal entity formed by a partnership agreement
C) A business that has met state requirements to become a distinct legal entity
D) A business structure that does not require state filing
Answer: C
Explanation: A corporation is a business that has met a state’s requirements to organize
as a legal entity that is distinct from its owners. In most states, the owners file articles of
,incorporation with the state and elect a board of directors.
Diff: 1
Learning Objective: LO 1.1
AACSB / AICPA: Analytic / FC: Analysis; PC: None; BB: None
Bloom's: Knowledge
Time on Task: 2 min
11) A business for which two or more taxpayers own and operate the business, and there is at
least one general partner and one limited partner, is a:
A) General partnership
B) Limited partnership
C) Limited liability partnership
D) Limited liability company
Answer: B
Explanation: A limited partnership is a business for which two or more taxpayers agree to own
and operate the business, and to share profits, losses, and liquidation proceeds.
Diff: 1
Learning Objective: LO 1.1
AACSB / AICPA: Analytic / FC: Analysis; PC: None; BB: None
Bloom's: Knowledge
Time on Task: 2 min
12) To create a corporation, the owners must
A) risk their personal assets to the creditors of the corporation.
B) loan the corporation money.
C) elect a board of directors.
D) determine general vs. limited ownership status.
Answer: C
Explanation: In most states, the owners file articles of incorporation with the state and elect a
board of directors.
Diff: 2
Learning Objective: LO 1.1
AACSB / AICPA: Analytic / FC: Analysis; PC: None; BB: None
Bloom's: Comprehension
Time on Task: 2 min
13) Which of the following is not a characteristic of a limited liability company?
A) Owners are known as members.
B) Professional service providers are required to organize as an LLC.
C) Articles of organization are filed to establish the entity.
,D) All owners have limited liability.
Answer: B
Explanation: Articles of organization must be filed with the state in which the LLC is legally
organized. Owners of an LLC are known as members. All members have limited liability. Many
states do not allow professional service providers such as accountants and attorneys to organize
as an LLC.
Diff: 2
Learning Objective: LO 1.1
AACSB / AICPA: Analytic / FC: Analysis; PC: None; BB: None
Bloom's: Comprehension
Time on Task: 3 min
14) Which entity type holds the rights to an individual’s stake or interest in a business?
A) Business trust
B) Corporation
C) General partnership
D) Limited liability company
Answer: A
Explanation: A business trust is a legal entity that holds the rights to an individual’s stake or
interest in a business.
Diff: 1
Learning Objective: LO 1.1
AACSB / AICPA: Analytic / FC: Analysis; PC: None; BB: None
Bloom's: Knowledge
Time on Task: 1 min
15) What federal tax form is used when a corporation has not elected to be taxed as an S
corporation?
A) Form 1041
B) Form 1065
C) Form 1120
D) Form 1120-S
Answer: C
Explanation: A corporation that does not elect S status is a C corporation and files Form 1120.
Diff: 1
Learning Objective: LO 1.1
AACSB / AICPA: Analytic / FC: Analysis; PC: None; BB: None
Bloom's: Knowledge
Time on Task: 1 min
,16) Which of the following is not a business tax form?
A) Form 990
B) Form 1040
C) Form 1065
D) Form 1120
Answer: B
Explanation: All are forms used by entities except Form 1040, which is the tax form used by
individuals.
Diff: 2
Learning Objective: LO 1.1
AACSB / AICPA: Analytic / FC: Analysis; PC: None; BB: None
Bloom's: Analysis
Time on Task: 2 min
17) Corporate tax returns are due ________.
A) two and one-half months after the end of the year
B) three and one-half months after the end of the year
C) A or B, depending on the entity’s year-end
D) None of the above
Answer: C
Explanation: Corporate tax returns (other than those with a June 30 year-end) are due three and
one-half months after the end of the tax year. Corporate tax returns with a June 30 year-end are
due two and one-half months after the end of the year
Diff: 1
Learning Objective: LO 1.2
AACSB / AICPA: Analytic / FC: Analysis; PC: None; BB: None
Bloom's: Knowledge
Time on Task: 2 min
18) A request for extension filed on Form 7004 allows a taxpayer six additional months to
________.
A) pay the tax liability and file the return
B) pay the tax liability or file the return
C) file the return
D) pay the tax liability
Answer: C
Explanation: The extension of time is only to file the return. The entity must pay the taxes due
, for the year by the original due date or the IRS will assess a late payment penalty. This provides
taxpayers with more time to finalize their return for filing, but they do need to estimate their
liability for the year to ensure they have paid the appropriate amount the original due date.
Diff: 1
Learning Objective: LO 1.2
AACSB / AICPA: Analytic / FC: Analysis; PC: None; BB: None
Bloom's: Knowledge
Time on Task: 2 min
19) In the prior year, ABC Company reported gross income of $200,000 on its tax return. It
failed to include $10,000 of taxable income related to an accounting error. What is the applicable
statute of limitations?
A) 2 years
B) 3 years
C) 6 years
D) Never expires
Answer: B
Explanation: If a return is filed and less than 25% of gross income is understated on the original
tax return, the statute of limitations is three years from the later of the due date of the return or
the date the return was filed. ABC’s understatement = $10,000/$200,000 = 5%. Since 5% is less
than 25%, the statute of limitations is three (3) years.
Diff: 2
Learning Objective: LO 1.2
AACSB / AICPA: Analytic / FC: Analysis; PC: None; BB: None
Bloom's: Application
Time on Task: 3 min
20) In the prior year, XYZ, Inc. reported gross income of $200,000 on its tax return. XYZ
deducted nondeductible expenses in the amount of $54,000 in error. XYZ did not fraudulently
make the error. What is the applicable statute of limitations?
A) 2 years
B) 3 years
C) 6 years
D) Never expires
Answer: C
Explanation: If a return is filed and more than 25% of gross income is understated on the original
tax return, the statute of limitations is six years from the later of the due date of the return or the
date the return was filed. XYZ's understatement = $54,000/$200,000 = 27%. Since 27% is more
than 25%, the statute of limitations is six (6) years.
Diff: 2
