Free IRS Enrolled Agent SEE Part 2 (Businesses) Business Tax Preparation Practice Questions
Business Tax Preparation covers business gross income and exclusions, ordinary and necessary expenses under §162, depreciation and §179 / §168(k) bonus, business credits (R&D, work opportunity, energy), §1245 / §1250 recapture, NOL carryovers, and analysis of books and records to reconstruct a return.
Sample Questions
Question 1
Easy
What is the purpose of Schedule M-1 on Form 1120?
Solution
Schedule M-1 reconciles net income (loss) per books to taxable income before NOL and special deductions (Form 1120 Schedule M-1 instructions). Common reconciling items include federal income tax expense, tax-exempt interest, the 50% nondeductible meals portion, depreciation differences, and excess §162(m) compensation. Schedule M-2 reconciles retained earnings; Schedule M-3 is the expanded book-tax reconciliation for large corporations.
Question 2
Medium
Which of the following correctly states the time limits for a deferred §1031 like-kind exchange?
Solution
IRC §1031(a)(3) and Treas. Reg. §1.1031(k)-1 require the taxpayer to identify replacement property in writing within 45 days, and to receive replacement property within the earlier of 180 days or the due date (with extensions) of the return for the year of the transfer.
Question 3
Hard
Under the tangible property regulations, which of the following expenditures must be capitalized as an improvement to a unit of property?
Solution
Treas. Reg. §1.263(a)-3(d) requires capitalization of amounts that result in a betterment, restoration, or adaptation. Replacing a major component or substantial structural part of a unit of property is a restoration under §1.263(a)-3(k)(1)(vi). The roof is a major component of the building structure, so a complete roof replacement is a textbook restoration that must be capitalized.