Free BTC Practice Questions

Question 1

In December 2026, a cash-method apartment owner collects two payments for a lease beginning in January 2027. The damage deposit must be returned if the tenant meets the lease conditions. A separate payment labeled a 'rent deposit' is irrevocably designated as the final month's rent. Neither payment has been applied to damage or unpaid rent during 2026. How should the owner treat these receipts on the 2026 federal income tax return?

Accepted Answer

Exclude the refundable damage deposit; include the payment designated as final-month rent.

Answer

Exclude both until the tenant moves in and occupancy begins.

Answer

Include both receipts because the cash method taxes all business cash collections.

Answer

Include the damage deposit now; defer final-month rent until that month.

Question 2

An S corporation allocates an ordinary business loss to its sole shareholder for 2026. After all other basis adjustments, her stock basis is zero before applying the loss, and she has made no direct loans to the corporation. She personally guaranteed its bank loan, but the corporation has made every payment and she has paid nothing under the guarantee. Considering only the shareholder basis limitation, which conclusion follows?

Accepted Answer

The loss is suspended; the unpaid guarantee supplies no basis.

Answer

The guarantee creates debt basis because it exposes her personal assets to collection by the bank.

Answer

Her ownership share of the bank loan increases stock basis, as a liability share would in a partnership.

Answer

The loan supplies loss basis because its proceeds financed the corporation's deductible operating expenses.

Question 3

An established manufacturer records the following events for a new production machine:
December 12, 2026: purchase price paid in full.
December 18, 2026: machine delivered, but installation incomplete.
December 27, 2026: installation and testing finished; machine ready and available for production.
January 9, 2027: first customer order produced.
Which event establishes when the machine was placed in service for federal depreciation?

Accepted Answer

December 27, when the machine was ready for production.

Answer

December 12, when the purchase price was paid.

Answer

December 18, when it took possession of the machine.

Answer

January 9, when the machine first produced a customer's order.

Question 4

Falcon Tools, a calendar-year C corporation, has profitable manufacturing operations but realizes a net capital loss from investment stock in 2026. It has no capital gains in 2026 or in any of the preceding three tax years, and no special ordinary-loss provision applies. The controller wants to use the loss against current operating income. What treatment is available?

Accepted Answer

Carry the loss forward for up to five years for use against capital gains.

Answer

Deduct $3,000 now and carry the remainder forward indefinitely.

Answer

Carry the loss forward indefinitely as an ordinary net operating loss.

Answer

Deduct it all against manufacturing profit because corporate capital gains have no special tax rate.

Question 5

Priya begins 2026 with a $24,000 outside basis in an operating partnership; that amount already includes her $12,000 share of partnership liabilities. During the year, she is allocated $9,000 of ordinary income and receives a $7,000 cash distribution. Her share of partnership liabilities falls to $6,000. There are no other basis adjustments. What tax basis should she carry forward in her partnership interest?

Accepted Answer

$20,000

Answer

$14,000

Answer

$26,000

Answer

$32,000

Question 6

On day 40 after transferring investment real estate in a deferred Section 1031 exchange, an owner discovers that no replacement property has been formally identified. A qualified intermediary holds the sale proceeds. The owner has selected one eligible property, but the lender will not decide on financing until day 52. No disaster postponement applies. Which action preserves the possibility of tax-deferred exchange treatment?

Accepted Answer

Send the required written identification to the intermediary before the 45-day period ends.

Answer

Wait for financing and identify the property at closing, provided closing occurs within 180 days.

Answer

Extend the tax return deadline to postpone identification until financing is approved.

Answer

Cancel the exchange because financing was not committed before day 40.

Question 7

A corporation is measuring an uncertain tax benefit for its 2026 U.S. GAAP financial statements. The position has already met ASC 740's technical-merits recognition threshold. Its settlement analysis permits only these four benefit amounts and gives the cumulative probability of sustaining AT LEAST each amount:
$120,000: 30%
$90,000: 65%
$60,000: 85%
$0: 100%
What tax benefit should be recognized, excluding interest and penalties?

Accepted Answer

$90,000

Answer

$0

Answer

$120,000

Answer

$79,500

Question 8

Two unrelated individuals own a domestic LLC that operates a consulting business. Neither Form 8832 nor Form 2553 has been filed. The LLC earns a profit in 2026 but retains all its cash for expansion. The owners assume that limited liability means the LLC must pay corporate income tax. Which federal reporting treatment should replace that assumption?

Accepted Answer

Form 1065; both members report their distributive shares of the profit, even though the LLC retains its cash.

Answer

Form 1120; state-law limited liability makes the LLC a corporate taxpayer.

Answer

Form 1120-S; two individual owners satisfy the ownership requirements without needing a separate election.

Answer

Form 1065; the members need not report their shares until the LLC distributes the cash retained for expansion.

Question 9

Morgan has held C corporation stock as an investment for five years. In 2026, she receives a $64,000 nonliquidating cash distribution, the corporation's only distribution that year. The corporation has $24,000 of current earnings and profits, no accumulated earnings and profits, and no other relevant adjustments. Morgan's stock basis immediately before the payment is $25,000. How is the distribution divided for federal income tax purposes?

Accepted Answer

$24,000 dividend; $25,000 return of capital; $15,000 long-term capital gain.

Answer

$24,000 dividend; $40,000 return of capital; no capital gain until the shares are sold.

Answer

$39,000 dividend; $25,000 return of capital; no separately reportable capital gain.

Answer

$64,000 dividend; no return of capital; stock basis remains available for a later sale.

Question 10

A sole proprietor works 280 operating hours in her retail store's first year. Its paid manager works 240 hours; the only other worker contributes 160 hours. None of the owner's hours are investor activities. She regards the store as passive because she worked fewer than 500 hours. Is that classification correct?

Accepted Answer

Nonpassive: she exceeded 100 hours and no other individual worked more.

Answer

Passive: participation did not exceed 500 hours.

Answer

Passive: the compensated manager prevents material participation by the owner.

Answer

Nonpassive: sole ownership and authority to approve expenses suffice, without regard to participation hours.

Free BTC Practice Questions

Domain 1: Business Income, Deductions, and Accounting Methods

Question 1

Question 2

Domain 2: Property Acquisition and Cost Recovery

Question 3

Domain 3: Business Entities Overview

Question 4

Domain 4: Corporate Operations

Question 5

Domain 5: Accounting for Income Taxes

Question 6

Domain 6: Corporate Taxation: Nonliquidating Distributions

Question 7

Domain 7: Corporate Formation, Reorganization, and Liquidation

Question 8

Domain 9: Property Dispositions

Question 9

Domain 11: S Corporations

Question 10

The rest of the BTC blueprint

That's 10 of 1,030