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Sample Questions
Question 1
Easy
Which of the following entities is required to file Form 1120-S?
Solution
D 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.
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.
Question 2
Medium
In distinguishing AMT exclusion items from deferral items for an individual's minimum tax credit, which statement is *incorrect*?
Solution
A is correct. Personal SALT disallowance is an exclusion item. AMT attributable solely to that source is removed when determining the amount potentially recoverable through the minimum tax credit. ISO exercise involves a deferral item and can support a carryforward, but a subsequent sale does not guarantee full utilization. [IRC 53 minimum-tax-credit exclusion rules](https://www.law.cornell.edu/uscode/text/26/53).
Question 3
Hard
A business sells equipment (Section 1245 property) for $275,000. The equipment was purchased for $240,000, and accumulated depreciation is $160,000. How is the gain characterized?
Solution
D is correct.
Section 1245 recapture: gain up to accumulated depreciation is ordinary income; any remaining gain is Section 1231 gain.
| Item | Amount | Why |
|---|---|---|
| Sale price | $275,000 | Amount realized |
| Adjusted basis | ($80,000) | $240,000 cost \minus $160,000 depreciation |
| Total gain | $195,000 | $275,000 \minus $80,000 |
| Ordinary income recapture | $160,000 | Lesser of depreciation ($160,000) or total gain ($195,000) |
| **Section 1231 gain** | **$35,000** | $195,000 \minus $160,000 remaining |
Section 1231 gain is taxed at long-term capital gains rates if net Section 1231 gains exceed losses for the year.
Section 1245 recapture: gain up to accumulated depreciation is ordinary income; any remaining gain is Section 1231 gain.
| Item | Amount | Why |
|---|---|---|
| Sale price | $275,000 | Amount realized |
| Adjusted basis | ($80,000) | $240,000 cost \minus $160,000 depreciation |
| Total gain | $195,000 | $275,000 \minus $80,000 |
| Ordinary income recapture | $160,000 | Lesser of depreciation ($160,000) or total gain ($195,000) |
| **Section 1231 gain** | **$35,000** | $195,000 \minus $160,000 remaining |
Section 1231 gain is taxed at long-term capital gains rates if net Section 1231 gains exceed losses for the year.
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