Free CPA TCP (Tax Compliance & Planning) Practice Questions

A is correct. Form 1120-S (U.S. Income Tax Return for an S Corporation) is filed by domestic corporations that have made a valid S election by filing Form 2553 under IRC Section 1362. The election must be in effect for the tax year. A C corporation that has not filed Form 2553 files Form 1120, not Form 1120-S, regardless of its number of shareholders. A single-member LLC taxed as a disregarded entity reports on the owner's return (Schedule C if the owner is an individual). A publicly traded partnership generally files Form 1065 and is taxed as a corporation under Section 7704.

B is correct. Under IRC Section 125, a cafeteria plan allows employees to choose between cash (taxable salary) and qualified benefits on a pre-tax basis. Qualified benefits that can be offered include health insurance premiums, dental and vision coverage, dependent care assistance (up to 5,000 per year under Section 129), health FSA contributions (up to 3,300 for 2025), adoption assistance, and certain other benefits. Cash bonuses are not qualified benefits. Long-term disability insurance premiums can be paid through a cafeteria plan, but including them pre-tax means the benefits would be taxable when received. Qualified retirement plan contributions (401(k) deferrals) are handled separately under Section 401(k), not through Section 125. The cafeteria plan rules specify which benefits qualify; the employer cannot include any benefit it chooses.

C is correct. Adjusted basis = \$240,000 \minus \$160,000 = \$80,000. Total gain = \$275,000 \minus \$80,000 = \$195,000. Under Section 1245, gain is recaptured as ordinary income to the extent of accumulated depreciation. Ordinary income recapture = lesser of depreciation (\$160,000) or total gain (\$195,000) = \$160,000. The remaining gain of \$195,000 \minus \$160,000 = \$35,000 is treated as Section 1231 gain, which is taxed at long-term capital gains rates if net Section 1231 gains exceed losses for the year.
Choice A is incorrect because \$195,000 ordinary income treats the entire gain as recapture, but Section 1245 recapture is limited to the depreciation taken (\$160,000).
Choice B is incorrect because it reverses the ordinary and capital amounts; the depreciation recapture portion (\$160,000) is ordinary, not the residual.
Choice D is incorrect because it classifies all gain as Section 1231 and ignores the mandatory depreciation recapture under Section 1245.