US Corporate & Business Tax

Why B? And why not the others?

Correct answer: B. A flat 21% rate applied to all of the corporation's taxable income, regardless of how much or how little it earns

The Tax Cuts and Jobs Act repealed the old graduated corporate rate schedule for tax years beginning after December 31, 2017, replacing it with a single flat 21% rate under IRC Section 11(b) that applies to all of a C corporation's taxable income from the first dollar, with no brackets and no distinction based on income level; this remains the applicable rate for the 2025 tax year. The option describing a graduated structure from 15% to 39% accurately reflects the pre-2018 law, including its old bubble-rate mechanism, but that structure no longer exists. The option describing a flat 15% rate on only the first $50,000 wrongly imports the bottom bracket of the old graduated system into a single-bracket framing, when the current law has no brackets at all. The option describing a flat 35% rate matches the top rate under the old law before the Tax Cuts and Jobs Act took effect, not the rate in force for 2025.

Source: IRC Section 11(b), as amended by the Tax Cuts and Jobs Act of 2017 (Pub. L. 115-97)

Why D? And why not the others?

Correct answer: D. One of the corporation's shareholders is a domestic partnership holding its shares on behalf of several individual partners

IRC Section 1361(b)(1)(B) limits eligible S corporation shareholders to individuals, estates, and certain qualifying trusts; partnerships and corporations are not eligible shareholders even when they hold shares merely as a pass-through vehicle for otherwise-eligible individuals, so a domestic partnership appearing on the shareholder list disqualifies the corporation from S status. The option describing 85 individual shareholders does not disqualify the corporation, since Section 1361(b)(1)(A) caps eligible shareholders at 100 and 85 is comfortably under that limit. The option describing identical distribution and liquidation rights despite differing voting rights does not disqualify the corporation either, because Treasury regulations under Section 1361 treat differences in voting rights alone as not creating a second class of stock, so the one-class-of-stock requirement is still satisfied. The option describing a qualified subchapter S trust that made a valid election also does not disqualify the corporation, since such a trust is expressly treated as an eligible shareholder once the election is properly made.

Source: IRC Section 1361(b) and (c); Treas. Reg. Section 1.1361-1(l) (one class of stock)

Why A? And why not the others?

Correct answer: A. $50,000

IRC Section 1244(b) caps the amount of loss on qualifying small business stock that an individual may treat as an ordinary loss in a single year at $50,000, or $100,000 for spouses filing a joint return; any loss beyond that annual cap is treated as an ordinary capital loss subject to the usual capital loss limitations, regardless of how large the total loss is. The option stating $100,000 gives the joint-return figure, which does not apply to a single filer in this fact pattern. The option stating $250,000 confuses the annual ordinary-loss cap with a different number entirely: Section 1244(c)(3) separately requires that the corporation not have received more than $1,000,000 in aggregate money and property for its stock to qualify as a small business corporation in the first place, a test about the issuer's capitalization rather than about the amount of loss an investor may deduct. The option claiming there is no dollar cap ignores that the $50,000/$100,000 ceiling is a defining, mandatory feature of Section 1244 regardless of whether the issuing corporation met the small business corporation requirements.

Source: IRC Section 1244(b) and (c)(3)

Why C? And why not the others?

Correct answer: C. 50%, the general rate that applies because Corporation X's 10% stake falls below the 20%-owned-corporation threshold

IRC Section 243(a)(1) sets the general dividends-received deduction rate at 50% for dividends from a domestic corporation in which the recipient owns less than 20% of the stock; the rate rises to 65% under Section 243(c) once the recipient's ownership reaches the 20%-owned-corporation threshold, and to 100% under Section 243(a)(3) only for qualifying dividends between members of the same affiliated group. Because Corporation X owns just 10% of Corporation Y and the two are not affiliated, the general 50% rate applies. The option stating 100% wrongly assumes every domestic-to-domestic dividend qualifies for full deduction, when the 100% rate is reserved for the affiliated-group case that does not exist here. The option stating 65% applies the 20%-owned-corporation rate to a shareholder that owns only half of that 20% threshold. The option stating 0% is wrong because the dividends-received deduction is a general mechanism available to ordinary C corporation shareholders receiving domestic dividends, not a special benefit limited to insurers.

Source: IRC Section 243(a) and (c)

Why A? And why not the others?

Correct answer: A. A separate 20% tax on accumulated taxable income, imposed in addition to the corporation's regular Section 11 income tax

IRC Section 531 imposes the accumulated earnings tax at a flat 20% rate on a corporation's accumulated taxable income, as defined in Section 535, when the corporation is formed or availed of to shelter shareholders from individual-level tax on dividends by unreasonably accumulating earnings; this tax is additional to, not a substitute for, the corporation's regular Section 11 income tax liability, functioning as a penalty tax layered on top of ordinary corporate taxation. The option describing the 20% tax as replacing the regular corporate tax gets the relationship backwards; the corporation still owes its full Section 11 tax in addition to the accumulated earnings tax. The option describing a graduated 10%-to-37% rate invents an individual-style bracket structure that has no basis in Section 531, which imposes a single flat rate. The option describing a 15% rate confuses the accumulated earnings tax with the separate and unrelated corporate alternative minimum tax on adjusted financial statement income, which has its own distinct base, rate, and large-corporation applicability trigger.

Source: IRC Section 531 and Section 535

Why B? And why not the others?

Correct answer: B. Carry it forward indefinitely, but the deduction in any future year is limited to 80% of that year's taxable income computed before the net operating loss deduction

For net operating losses arising in tax years beginning after December 31, 2017, the Tax Cuts and Jobs Act amended IRC Section 172 to eliminate the general two-year carryback (aside from narrow farming and certain insurance-company exceptions), allow the loss to be carried forward indefinitely, and cap the deduction in any carryforward year at 80% of that year's taxable income computed without regard to the net operating loss deduction itself. The option describing a two-year carryback to 2023 and 2024 describes the pre-2018 rule that Section 172 no longer applies to a 2025 loss outside the narrow statutory exceptions. The option allowing a full 100%-of-income offset correctly notes that the carryforward period is unlimited in duration but wrongly ignores the 80% cap that applies to post-2017 losses. The option limiting use of the loss to the current year alone ignores that indefinite carryforward is exactly what current law permits; the loss is not forfeited simply because it is not fully used in its origin year.

Source: IRC Section 172, as amended by the Tax Cuts and Jobs Act of 2017 (Pub. L. 115-97)

Why D? And why not the others?

Correct answer: D. Basis limitation first, then the at-risk limitation under IRC Section 465, then the passive activity limitation under IRC Section 469; a loss disallowed at an earlier stage never reaches the later test

The established ordering rule requires that a partner's or shareholder's basis limitation be applied first, since a loss cannot be deducted beyond available basis in the first place; the at-risk rules under IRC Section 465 are then applied to whatever loss survives the basis limitation, disallowing any amount exceeding the taxpayer's economic exposure to the activity; and finally the passive activity loss rules under IRC Section 469 are applied only to the portion of the loss that has cleared both the basis and at-risk hurdles. A loss stopped at an earlier stage is suspended there and never reaches a later test. The option placing the passive activity limitation first inverts this sequence and supplies a rationale, that more recently enacted rules take precedence, that plays no role in how these provisions actually interact. The option placing the at-risk limitation first correctly emphasizes economic exposure but wrongly places it ahead of the basis test, which must be satisfied before at-risk rules are even relevant. The option treating all three tests as simultaneous, taxpayer-elected alternatives misdescribes a strictly sequential and mandatory framework as if it offered a choice.

Source: IRC Section 465; IRC Section 469; IRS Publication 925, Passive Activity and At-Risk Rules

Why C? And why not the others?

Correct answer: C. 100%, because the One Big Beautiful Bill Act permanently restored full expensing for qualified property acquired after January 19, 2025, repealing the prior phase-down for such property

The One Big Beautiful Bill Act amended IRC Section 168(k) to permanently reinstate 100% bonus depreciation, with no future scheduled phase-down, for qualified property acquired after January 19, 2025; equipment acquired and placed in service in March 2025 satisfies that acquisition-date test and therefore qualifies for full first-year expensing of its cost. The option stating 40% reflects the rate that the original Tax Cuts and Jobs Act phase-down schedule had scheduled for property placed in service during 2025, stepping down twenty percentage points per year from 100% in 2022, a schedule the new law repealed for property acquired after its January 19, 2025 cutoff. The options stating 60% and 80% each state rates from that same repealed phase-down schedule, but for earlier placed-in-service years, 2024 and 2023 respectively, neither of which governs equipment acquired after the new law's effective date.

Source: IRC Section 168(k), as amended by the One Big Beautiful Bill Act, Pub. L. 119-21 (2025)

Why B? And why not the others?

Correct answer: B. A $2,500,000 maximum deduction, phasing out dollar-for-dollar once qualifying property placed in service exceeds a $4,000,000 threshold, and fully phased out at $6,500,000 of such property

The One Big Beautiful Bill Act raised the maximum IRC Section 179 expensing election to $2,500,000 and raised the investment-based phase-out threshold to $4,000,000, both effective for property placed in service in tax years beginning after December 31, 2024; the deduction is reduced dollar-for-dollar once qualifying property placed in service for the year exceeds the $4,000,000 threshold, reaching a full phase-out once such property reaches $6,500,000. The option describing a $1,000,000 deduction and $2,500,000 threshold states the prior, pre-existing Tax Cuts and Jobs Act era limits that the new law superseded rather than left unchanged. The option describing a $500,000 deduction and $2,000,000 threshold describes an older, smaller set of figures that predates the current statutory framework entirely. The option claiming there is no cap at all is wrong because Section 179 retains its own explicit statutory dollar cap and phase-out mechanism, which is separate from, and unaffected by, the unrelated 100% bonus depreciation provision under Section 168(k).

Source: IRC Section 179, as amended by the One Big Beautiful Bill Act, Pub. L. 119-21 (2025)

Why A? And why not the others?

Correct answer: A. 75%, under the tiered exclusion schedule the One Big Beautiful Bill Act introduced, which grants a 50% exclusion at a three-year holding period, 75% at four years, and 100% at five years, for stock acquired after July 4, 2025

For qualified small business stock acquired after July 4, 2025, the One Big Beautiful Bill Act introduced a tiered exclusion under IRC Section 1202: a 50% exclusion of eligible gain at a three-year holding period, 75% at four years, and 100% at five years or more, alongside a raised $75,000,000 aggregate gross assets test and a higher $15,000,000 per-issuer gain cap. An investor who holds the stock for exactly four years therefore excludes 75% of eligible gain, not the full amount. The option claiming 100% wrongly treats the four-year mark as already qualifying for the maximum exclusion, when the schedule specifically reserves the full 100% exclusion for stock held five years or more. The option claiming 0% wrongly assumes no exclusion is available before the five-year mark, missing the entire point of the new tiered structure, which grants meaningful partial exclusions starting at three years. The option claiming the law cut the benefit to a flat 50% has the direction of the change backwards: the new schedule preserves the 100% exclusion for five-year holders and adds more generous partial exclusions at the three- and four-year marks on top of it, rather than reducing anything.

Source: IRC Section 1202, as amended by the One Big Beautiful Bill Act, Pub. L. 119-21 (2025)

Why D? And why not the others?

Correct answer: D. Depreciation, amortization, and depletion are added back to taxable income when computing adjusted taxable income, permanently restoring the more favorable method for tax years beginning after December 31, 2024

The One Big Beautiful Bill Act permanently restored the more favorable method of computing adjusted taxable income under IRC Section 163(j) by reinstating the addback of depreciation, amortization, and depletion for tax years beginning after December 31, 2024, reversing the stricter method that excluded those items and had applied to tax years beginning after December 31, 2021; because adding these items back increases adjusted taxable income, the change generally increases the amount of business interest expense a taxpayer may currently deduct. The option describing continued exclusion of those items describes the stricter, pre-existing method as if it still applied, when the new law specifically reverses it for 2025 and later years. The option claiming the items are removed from the computation altogether mischaracterizes the change; they are deliberately added back, not omitted from the calculation. The option claiming no change was made for years after 2021 gets the timing exactly backwards, since restoring the addback specifically for tax years beginning after December 31, 2024, is the entire point of the amendment.

Source: IRC Section 163(j), as amended by the One Big Beautiful Bill Act, Pub. L. 119-21 (2025)

Why C? And why not the others?

Correct answer: C. Yes, because 2028 falls within the five-year recognition period that began January 1, 2025, the first day of the corporation's first tax year as an S corporation

The recognition period for the built-in gains tax under IRC Section 1374 is the five-year period beginning with the first day of the corporation's first tax year as an S corporation, which here runs from January 1, 2025 through the end of 2029; a sale in 2028 of an asset holding gain that had built up before the conversion falls squarely within that window and triggers the built-in gains tax, computed at the highest corporate rate under Section 11(b), on the recognized built-in gain. The option claiming outright repeal is wrong because the built-in gains tax remains part of current law; only the length of its recognition period has changed over time. The option describing a one-year window invents a recognition period that has never applied under any version of Section 1374. The option describing a ten-year window states the recognition period that applied before the PATH Act permanently shortened it to five years for tax years beginning on or after January 1, 2015, well before this corporation's 2025 conversion.

Source: IRC Section 1374(d)(7), as amended by the Protecting Americans from Tax Hikes (PATH) Act of 2015