TAX 4001 FINAL EXAM QUESTIONS
WITH VERIFIED ANSWERS. A+ GRADE
2025/2026.
Which of the following amounts are not subject to self-employment tax? - ANS Limited
partner's share of partnership income
Mrs. Brinkley transferred business property (FMV $340,200; adjusted tax basis $111,700) to
M&W Incorporated in exchange for a 36% interest in M&W Partnership. Determine Mrs.
Brinkley's realized and recognized gain on the exchange and the tax basis in her partnership
interest. - ANS No gain recognized; $111,700 basis in property
"Little Magician" is the name of a painting created by artist Lion-o Messy. The owner recently
recognized a $43,500 gain on sale of the figurine. Which of the following statements is false? -
ANS If a commercial art gallery that had held Little Magician in its inventory was the seller,
the gain is ordinary.
If a private collector who purchased Little Magician from an art gallery was the seller, the gain is
capital gain.
None of these choices are false.
If Lion-o was the seller, the gain is ordinary.
Answer: none of these choices are false
Sandy, Sue, and Shane plan to open Friends, an upscale restaurant. They project that the
business will incur a $90,000 operating loss in Year 1, and $75,000 of profit in Year 2. Which of
1 @COPYRIGHT 2025/2026 ALLRIGHTS RESERVED
,the following statements is true? - ANS If the business is a C corporation, it will owe income
tax in Year 2.
Which of the following is a capital asset? - ANS Supplies used in a business
None of these choices are correct
Business inventory
Land used in a business
Answer is none of these are correct
Fleet, Incorporated owns 85% of the stock of Pete, Incorporated and 35% of the stock of Zete,
Incorporated and 90% of the stock of Bete, Incorporated Bete owns 5% of the stock of Pete and
5% of the stock of Zete. Zete owns 10% of the stock of Bete. The remaining stock of Pete and
Zete is owned by unrelated individuals. Which of the following statements is correct? -
ANS Fleet, Pete, and Bete are an affiliated group.
Cactus Company is a calendar year S corporation with the following current year information:
Operating loss$ (120,000)
Liabilities:
Notes payable, City Bank20,000
Notes payable, Jake Crow20,000
On January 1, John James bought 50% of Cactus Company stock for $30,000. How much of the
operating loss may John deduct on his Form 1040? Assume the excess business loss limitation
does not apply. - ANS $30,000
In its first taxable year, Platform, Incorporated generated a $100,000 net operating loss and
made a $10,000 cash donation to a local charity. In its second year, Platform generated
$350,000 operating income and made a $20,000 donation to the same charity. Compute
Platform's taxable income for its second year. Assume neither year is 2020. - ANS $225,000
2 @COPYRIGHT 2025/2026 ALLRIGHTS RESERVED
, Cramer Corporation and Mr. Chips formed a partnership in which Cramer is the general partner
and Mr. Chips is a limited partner. Cramer contributed $500,000 cash, and Mr. Chips
contributed a building with a $500,000 FMV and $300,000 tax basis. The partnership
immediately borrowed $700,000 of recourse debt. What is Cramer's tax basis in its partnership
interest? - ANS $1,200,000
Mr. and Mrs. Anderson file a joint return. They provide more than 50% of the financial support
for their two children, Dana, age 26, and John, age 17. Both children live in the Andersons'
home. Dana earned $7,100 from a part-time job, while John earned no income this year. Which
of the following statements is true? - ANS Dana is neither a qualifying child nor a qualifying
relative of the Andersons.
Kelly operates a sole proprietorship with qualified business income of $920,000. Her business
paid W-2 wages of $250,000 and owns depreciable tangible property with an unadjusted basis
of $410,000. Compute Kelly's allowable QBI deduction before the taxable income limitation. -
ANS $125,000
Which of the following statements about the inclusion of boot in a nontaxable exchange is
false? - ANS the receipt of the boot is triggers recognition of realized gain to the payer
Alice is an unmarried individual. She has $182,340 taxable income in 2021. Compute Alice's
regular tax liability if she files as a single taxpayer and if she files as a head of household. -
ANS Single $39,175 HOH $37,725
Brace, Incorporated owns 90% of West common stock. This year, Brace generated $50,000
operating income and received $10,000 dividends from West. Brace's taxable income is: -
ANS $50,000
Which of the following statements concerning partnerships is false? - ANS A partner is taxed
annually on only that portion of a partnership's taxable income that is actually distributed.
B&I Incorporated sold a commercial office building used in the corporate business for $862,000.
B&I purchased the building in 2011 for a cost of $700,000 and had deducted $167,200 MACRS
depreciation through date of sale. B&I should characterize the $329,200 gain recognized on sale
as: - ANS Capital gain
3 @COPYRIGHT 2025/2026 ALLRIGHTS RESERVED
WITH VERIFIED ANSWERS. A+ GRADE
2025/2026.
Which of the following amounts are not subject to self-employment tax? - ANS Limited
partner's share of partnership income
Mrs. Brinkley transferred business property (FMV $340,200; adjusted tax basis $111,700) to
M&W Incorporated in exchange for a 36% interest in M&W Partnership. Determine Mrs.
Brinkley's realized and recognized gain on the exchange and the tax basis in her partnership
interest. - ANS No gain recognized; $111,700 basis in property
"Little Magician" is the name of a painting created by artist Lion-o Messy. The owner recently
recognized a $43,500 gain on sale of the figurine. Which of the following statements is false? -
ANS If a commercial art gallery that had held Little Magician in its inventory was the seller,
the gain is ordinary.
If a private collector who purchased Little Magician from an art gallery was the seller, the gain is
capital gain.
None of these choices are false.
If Lion-o was the seller, the gain is ordinary.
Answer: none of these choices are false
Sandy, Sue, and Shane plan to open Friends, an upscale restaurant. They project that the
business will incur a $90,000 operating loss in Year 1, and $75,000 of profit in Year 2. Which of
1 @COPYRIGHT 2025/2026 ALLRIGHTS RESERVED
,the following statements is true? - ANS If the business is a C corporation, it will owe income
tax in Year 2.
Which of the following is a capital asset? - ANS Supplies used in a business
None of these choices are correct
Business inventory
Land used in a business
Answer is none of these are correct
Fleet, Incorporated owns 85% of the stock of Pete, Incorporated and 35% of the stock of Zete,
Incorporated and 90% of the stock of Bete, Incorporated Bete owns 5% of the stock of Pete and
5% of the stock of Zete. Zete owns 10% of the stock of Bete. The remaining stock of Pete and
Zete is owned by unrelated individuals. Which of the following statements is correct? -
ANS Fleet, Pete, and Bete are an affiliated group.
Cactus Company is a calendar year S corporation with the following current year information:
Operating loss$ (120,000)
Liabilities:
Notes payable, City Bank20,000
Notes payable, Jake Crow20,000
On January 1, John James bought 50% of Cactus Company stock for $30,000. How much of the
operating loss may John deduct on his Form 1040? Assume the excess business loss limitation
does not apply. - ANS $30,000
In its first taxable year, Platform, Incorporated generated a $100,000 net operating loss and
made a $10,000 cash donation to a local charity. In its second year, Platform generated
$350,000 operating income and made a $20,000 donation to the same charity. Compute
Platform's taxable income for its second year. Assume neither year is 2020. - ANS $225,000
2 @COPYRIGHT 2025/2026 ALLRIGHTS RESERVED
, Cramer Corporation and Mr. Chips formed a partnership in which Cramer is the general partner
and Mr. Chips is a limited partner. Cramer contributed $500,000 cash, and Mr. Chips
contributed a building with a $500,000 FMV and $300,000 tax basis. The partnership
immediately borrowed $700,000 of recourse debt. What is Cramer's tax basis in its partnership
interest? - ANS $1,200,000
Mr. and Mrs. Anderson file a joint return. They provide more than 50% of the financial support
for their two children, Dana, age 26, and John, age 17. Both children live in the Andersons'
home. Dana earned $7,100 from a part-time job, while John earned no income this year. Which
of the following statements is true? - ANS Dana is neither a qualifying child nor a qualifying
relative of the Andersons.
Kelly operates a sole proprietorship with qualified business income of $920,000. Her business
paid W-2 wages of $250,000 and owns depreciable tangible property with an unadjusted basis
of $410,000. Compute Kelly's allowable QBI deduction before the taxable income limitation. -
ANS $125,000
Which of the following statements about the inclusion of boot in a nontaxable exchange is
false? - ANS the receipt of the boot is triggers recognition of realized gain to the payer
Alice is an unmarried individual. She has $182,340 taxable income in 2021. Compute Alice's
regular tax liability if she files as a single taxpayer and if she files as a head of household. -
ANS Single $39,175 HOH $37,725
Brace, Incorporated owns 90% of West common stock. This year, Brace generated $50,000
operating income and received $10,000 dividends from West. Brace's taxable income is: -
ANS $50,000
Which of the following statements concerning partnerships is false? - ANS A partner is taxed
annually on only that portion of a partnership's taxable income that is actually distributed.
B&I Incorporated sold a commercial office building used in the corporate business for $862,000.
B&I purchased the building in 2011 for a cost of $700,000 and had deducted $167,200 MACRS
depreciation through date of sale. B&I should characterize the $329,200 gain recognized on sale
as: - ANS Capital gain
3 @COPYRIGHT 2025/2026 ALLRIGHTS RESERVED
