Sample Questions
Question 1
Easy
FUTA tax generally applies to:
Solution
C is correct. The federal unemployment (FUTA) tax applies to the first $7,000 of wages paid to each employee during the calendar year. The federal base is separate from the social security wage base and from each state's unemployment wage base, which is often higher. See Publication 15 (2025), Federal Unemployment (FUTA) Tax, and Instructions for Form 940 (2025).
Question 2
Medium
A C corporation's net capital loss deducted on its books is:
Solution
A is correct. A corporation can deduct capital losses only to the extent of capital gains, so a net capital loss deducted for book purposes is added back on Schedule M-1 as the excess of capital losses over capital gains. The unused loss is generally carried back 3 years and forward 5 years as a short-term capital loss. The $3,000 ordinary-income offset and the indefinite carryforward apply to individuals, not corporations. See Publication 542, Capital Losses, and Instructions for Form 1120 (2025), Schedule M-1.
Question 3
Hard
On a C corporation's Schedule M-1, an item subtracted from net income per books is:
Solution
A is correct. Schedule M-1 starts with net income per books. It subtracts income recorded on the books that is not included on the return (line 7) and deductions on the return not charged against book income (line 8). The undistributed increase in a policy's cash value is booked as income but is not taxable while it stays inside the policy (IRC §72), so it is subtracted on line 7. The premiums on the same policy go the other way. They are not deductible when the corporation is directly or indirectly a beneficiary (IRC §264(a)(1)), so the book expense is added back on line 5. Book bad debt expense above the debts actually charged off is also added back on line 5, because only specific charge-offs are deductible (IRC §166). Rent received in advance is taxable when received (Treas. Reg. §1.61-8(b)), so the amount the books defer is added on line 4 as income subject to tax not recorded on books; it is subtracted on line 7 in the later year the books recognize it. See Publication 542, Income and Deductions, and Instructions for Form 1120 (2025), Schedule M-1.
