Welcome to Part 2 of CPA TCP – Tax Compliance & Planning Practice MCQs.
In this section, we cover MCQs 51–100, focusing on taxation of business entities, partnerships, trusts, estates, compliance rules, and tax planning strategies. Each question includes detailed answers and explanations, ensuring clarity and concept-building.
These MCQs are crafted for candidates sitting for the 2025 CPA Exam in the USA, Canada, UK, Australia, and beyond, aiming to give you a competitive edge.
CPA TCP MCQs – Part 2 (51–100)
Q51. Which of the following entities is required to file Form 1120?
A) Partnership
B) S Corporation
C) C Corporation
D) Sole Proprietorship
Answer: C) C Corporation
Explanation: Form 1120 is the U.S. Corporation Income Tax Return filed by C Corporations. Partnerships file Form 1065, S Corporations file Form 1120-S, and sole proprietors report business income on Schedule C of Form 1040.
Q52. Which tax concept prevents double taxation of corporate dividends?
A) Dividend exclusion
B) Foreign tax credit
C) Qualified dividend reduced rates
D) Net operating loss carryforward
Answer: C) Qualified dividend reduced rates
Explanation: To mitigate double taxation, qualified dividends received by individuals are taxed at preferential rates (0%, 15%, or 20%), instead of being taxed as ordinary income.
Q53. The maximum number of shareholders allowed for an S Corporation is:
A) 50
B) 75
C) 100
D) 150
Answer: C) 100
Explanation: An S Corporation may have a maximum of 100 shareholders, all of whom must generally be U.S. individuals, certain trusts, or estates.
Q54. Which of the following taxes is imposed under the Alternative Minimum Tax (AMT)?
A) Excise tax
B) Minimum tax on corporations
C) Payroll tax
D) Franchise tax
Answer: B) Minimum tax on corporations
Explanation: The AMT ensures that corporations and high-income individuals pay a minimum amount of tax by disallowing certain deductions and credits.
Q55. Which form is used by partnerships to report income?
A) 1120
B) 1120-S
C) 1065
D) 1041
Answer: C) 1065
Explanation: Partnerships report their income on Form 1065, U.S. Return of Partnership Income. Income and deductions pass through to partners on Schedule K-1.
Q56. Which entity is subject to double taxation?
A) Sole Proprietorship
B) Partnership
C) S Corporation
D) C Corporation
Answer: D) C Corporation
Explanation: C Corporations face double taxation: once at the corporate level on profits, and again at the shareholder level when dividends are distributed.
Q57. A taxpayer can deduct charitable contributions by a corporation up to what percentage of taxable income?
A) 10%
B) 15%
C) 20%
D) 25%
Answer: A) 10%
Explanation: Corporations can deduct charitable contributions up to 10% of taxable income before NOL, special deductions, and dividends-received deduction.
Q58. Which IRS form is used to report fiduciary income for estates and trusts?
A) 1041
B) 1120
C) 1065
D) 1099
Answer: A) 1041
Explanation: Estates and trusts must file Form 1041 (U.S. Income Tax Return for Estates and Trusts) to report income, deductions, and distributions to beneficiaries.
Q59. Which of the following is NOT a requirement for S Corporation election?
A) Must be a domestic corporation
B) Can have foreign shareholders
C) Cannot have more than 100 shareholders
D) Can issue only one class of stock
Answer: B) Can have foreign shareholders
Explanation: S Corporations cannot have nonresident alien shareholders; all shareholders must be U.S. persons.
Q60. Which tax credit is specifically designed to encourage businesses to engage in research and innovation?
A) Foreign tax credit
B) R&D credit
C) Investment credit
D) Education credit
Answer: B) R&D credit
Explanation: The Research & Development (R&D) tax credit incentivizes businesses to increase spending on research activities in the U.S.
Q61. What is the due date for filing individual tax returns (Form 1040) in the U.S.?
A) March 31
B) April 15
C) May 15
D) June 30
Answer: B) April 15
Explanation: Individual tax returns (Form 1040) are generally due on April 15. If it falls on a weekend or holiday, the deadline moves to the next business day.
Q62. Which entity type avoids federal income tax at the entity level, with income passing through to owners?
A) Sole Proprietorship
B) C Corporation
C) S Corporation
D) Partnership
Answer: D) Partnership
Explanation: Partnerships are pass-through entities, meaning profits and losses flow directly to partners and are reported on their individual tax returns.
Q63. The maximum long-term capital gains tax rate for individuals is:
A) 15%
B) 20%
C) 25%
D) 28%
Answer: B) 20%
Explanation: High-income taxpayers may face a maximum 20% long-term capital gains tax rate, plus a possible 3.8% net investment income tax.
Q64. Which IRS form reports wages and salary income to employees?
A) 1040
B) 1099
C) W-2
D) 941
Answer: C) W-2
Explanation: Employers use Form W-2 to report wages, salaries, and tax withholdings paid to employees.
Q65. Which tax principle states that taxpayers should pay taxes based on their ability to pay?
A) Matching principle
B) Progressive taxation
C) Tax neutrality
D) Consumption tax
Answer: B) Progressive taxation
Explanation: The progressive tax system is based on the “ability-to-pay” principle, taxing higher incomes at higher rates.
Q66. Which of the following is NOT deductible as a business expense?
A) Advertising expenses
B) Political contributions
C) Employee salaries
D) Rent payments
Answer: B) Political contributions
Explanation: Political contributions and lobbying expenses are not deductible under federal tax law.
Q67. Which tax credit is refundable?
A) Lifetime Learning Credit
B) Child Tax Credit (partially refundable)
C) Foreign Tax Credit
D) Research Credit
Answer: B) Child Tax Credit (partially refundable)
Explanation: The Child Tax Credit (CTC) is partially refundable, allowing taxpayers to receive a refund even if they owe no tax.
Q68. Which tax form reports self-employment income?
A) Schedule A
B) Schedule C
C) Schedule E
D) Schedule F
Answer: B) Schedule C
Explanation: Sole proprietors report business income and expenses on Schedule C, attached to Form 1040.
Q69. Which entity type is subject to self-employment tax on distributive share of income?
A) C Corporation shareholder
B) S Corporation shareholder
C) General partner in a partnership
D) Limited partner in a partnership
Answer: C) General partner in a partnership
Explanation: General partners must pay self-employment tax on their share of partnership earnings. Limited partners generally do not.
Q70. Which tax principle allows recovery of the cost of a capital asset over its useful life?
A) Amortization
B) Depreciation
C) Matching principle
D) Deduction principle
Answer: B) Depreciation
Explanation: Depreciation allows taxpayers to deduct the cost of tangible assets (e.g., machinery) over their useful life.
Q71. Which of the following is an example of a regressive tax?
A) Federal income tax
B) Sales tax
C) Estate tax
D) Gift tax
Answer: B) Sales tax
Explanation: Sales tax is regressive since it takes a larger percentage of income from lower-income individuals compared to higher-income earners.
Q72. Which IRS form reports estimated quarterly tax payments by individuals?
A) 1040-ES
B) 941
C) W-4
D) 1099-INT
Answer: A) 1040-ES
Explanation: Individuals use Form 1040-ES to pay estimated quarterly income taxes.
Q73. Which penalty applies for failure to file a tax return?
A) 0.5% per month
B) 5% per month
C) 10% flat penalty
D) 25% flat penalty
Answer: B) 5% per month
Explanation: The failure-to-file penalty is generally 5% of unpaid tax per month, up to a maximum of 25%.
Q74. Which expense is deductible for adjusted gross income (above the line)?
A) Charitable contributions
B) Mortgage interest
C) Student loan interest
D) Medical expenses
Answer: C) Student loan interest
Explanation: Student loan interest is an “above-the-line” deduction, reducing AGI even if the taxpayer does not itemize.
Q75. Which tax credit helps offset the cost of higher education tuition?
A) Hope Credit
B) American Opportunity Credit
C) Earned Income Credit
D) Child and Dependent Care Credit
Answer: B) American Opportunity Credit
Explanation: The American Opportunity Credit (AOC) provides up to $2,500 per student for qualified tuition and expenses.
Q76. Which of the following is NOT subject to self-employment tax?
A) Freelance income
B) Sole proprietorship income
C) Partnership income (general partner)
D) Dividends from stocks
Answer: D) Dividends from stocks
Explanation: Dividends are investment income and are not subject to self-employment tax.
Q77. Which form is used by employers to report annual federal unemployment taxes?
A) 940
B) 941
C) W-2
D) 1099
Answer: A) 940
Explanation: Form 940 is used to report FUTA (Federal Unemployment Tax Act) taxes.
Q78. Which IRS section governs like-kind exchanges (property swaps)?
A) Section 351
B) Section 721
C) Section 1031
D) Section 179
Answer: C) Section 1031
Explanation: Section 1031 permits tax deferral on exchanges of like-kind property held for investment or business use.
Q79. What is the standard deduction for a single taxpayer (2024)?
A) $10,000
B) $12,950
C) $13,850
D) $15,000
Answer: C) $13,850
Explanation: For 2024, the standard deduction is $13,850 for single filers.
Q80. Which of the following is subject to gift tax?
A) $10,000 gift to spouse
B) $20,000 gift to friend
C) $15,000 annual gift to child
D) $5,000 charitable donation
Answer: B) $20,000 gift to friend
Explanation: Gifts above the annual exclusion ($17,000 in 2023–24) are subject to gift tax. Spousal and charitable gifts are generally exempt.
Q81. Which tax form reports dividend income?
A) 1099-INT
B) 1099-DIV
C) W-2
D) 1040-ES
Answer: B) 1099-DIV
Explanation: Form 1099-DIV reports dividends and distributions to taxpayers.
Q82. Which tax principle ensures taxpayers in similar situations pay similar amounts?
A) Equity principle
B) Horizontal equity
C) Vertical equity
D) Consumption tax
Answer: B) Horizontal equity
Explanation: Horizontal equity states that taxpayers with similar income should pay similar taxes.
Q83. Which tax return is filed by tax-exempt organizations?
A) 990
B) 1120
C) 1041
D) 1065
Answer: A) 990
Explanation: Nonprofit and tax-exempt organizations must file Form 990 to maintain tax-exempt status.
Q84. Which income is excluded from gross income?
A) Alimony received (post-2018)
B) Child support
C) Gambling winnings
D) Interest income
Answer: B) Child support
Explanation: Child support is not taxable and is excluded from gross income.
Q85. Which penalty applies for failure to pay taxes?
A) 0.5% per month
B) 5% per month
C) 10% flat penalty
D) 25% flat penalty
Answer: A) 0.5% per month
Explanation: The failure-to-pay penalty is generally 0.5% of unpaid tax per month, up to 25%.
Q86. Which type of income is subject to passive activity rules?
A) Salary income
B) Dividend income
C) Rental real estate income
D) Business income (self-employment)
Answer: C) Rental real estate income
Explanation: Passive activity rules apply primarily to rental real estate and businesses in which the taxpayer does not materially participate.
Q87. Which of the following can be depreciated?
A) Land
B) Buildings
C) Stocks
D) Bonds
Answer: B) Buildings
Explanation: Buildings and other tangible assets can be depreciated. Land cannot be depreciated.
Q88. Which IRS section allows small businesses to expense equipment immediately?
A) Section 351
B) Section 721
C) Section 1031
D) Section 179
Answer: D) Section 179
Explanation: Section 179 permits businesses to deduct the full purchase price of qualifying equipment in the year of purchase.
Q89. Which of the following is taxed at ordinary income tax rates?
A) Qualified dividends
B) Long-term capital gains
C) Short-term capital gains
D) Tax-exempt bond interest
Answer: C) Short-term capital gains
Explanation: Short-term capital gains (held ≤ 1 year) are taxed at ordinary income rates.
Q90. Which tax form reports interest income?
A) 1099-INT
B) 1099-DIV
C) W-2
D) 1040-ES
Answer: A) 1099-INT
Explanation: Form 1099-INT is used by banks and other institutions to report interest income paid to taxpayers.
Q91. Which tax is imposed under the Affordable Care Act (ACA)?
A) Self-employment tax
B) Medicare surtax on investment income
C) Excise tax on imports
D) Payroll tax
Answer: B) Medicare surtax on investment income
Explanation: The ACA introduced a 3.8% Net Investment Income Tax on high-income taxpayers.
Q92. Which income is excluded from gross income?
A) Gambling winnings
B) Social Security benefits (partially taxable)
C) Inheritance received
D) Unemployment compensation
Answer: C) Inheritance received
Explanation: Inheritance is excluded from gross income, though estate tax may apply to the estate.
Q93. Which IRS form is filed for gift tax?
A) 709
B) 706
C) 1040
D) 1120
Answer: A) 709
Explanation: Form 709 is used to report taxable gifts for federal gift tax purposes.
Q94. Which type of trust is revocable by the grantor?
A) Testamentary trust
B) Revocable living trust
C) Charitable trust
D) Irrevocable trust
Answer: B) Revocable living trust
Explanation: A revocable living trust allows the grantor to modify or revoke the trust during their lifetime.
Q95. Which tax deduction is available only if the taxpayer itemizes?
A) Student loan interest
B) Standard deduction
C) Mortgage interest
D) Educator expenses
Answer: C) Mortgage interest
Explanation: Mortgage interest is deductible only if the taxpayer itemizes deductions instead of taking the standard deduction.
Q96. Which entity is required to pay estimated taxes?
A) Sole proprietors
B) Corporations
C) Partners in partnerships
D) All of the above
Answer: D) All of the above
Explanation: Sole proprietors, corporations, and partners must make quarterly estimated tax payments if they expect to owe tax of $1,000 or more.
Q97. Which tax principle ensures a tax system is easy to administer and comply with?
A) Simplicity
B) Neutrality
C) Equity
D) Progressivity
Answer: A) Simplicity
Explanation: The principle of simplicity ensures the tax system is straightforward, reducing compliance costs.
Q98. Which item is NOT included in gross income?
A) Lottery winnings
B) Life insurance proceeds
C) Business income
D) Rental income
Answer: B) Life insurance proceeds
Explanation: Life insurance proceeds paid due to the death of the insured are generally excluded from gross income.
Q99. Which of the following is an example of an excise tax?
A) Income tax
B) Payroll tax
C) Gasoline tax
D) Sales tax
Answer: C) Gasoline tax
Explanation: Excise taxes are levied on specific goods or activities, such as gasoline, tobacco, or alcohol.
Q100. Which tax principle states taxes should minimize interference with economic decisions?
A) Neutrality
B) Progressivity
C) Simplicity
D) Equity
Answer: A) Neutrality
Explanation: The principle of neutrality means taxes should not distort economic behavior, such as investment or consumption choices.
👉 Next Steps:
- Previous Part: Part 1 (01-50)
- Next Part: Part 3 (101-150)
- Next Part: Part 4 (151-200)
- Explore our CPA FAR, REG , AUD , BAR, & ISC Master Sets
This concludes CPA TCP Part 2 (MCQs 51–100). By now, you should have improved your grasp of business taxation, compliance issues, and tax planning applications.
👉 Up next: CPA TCP Part 3 (MCQs 101–150), where we’ll move into more complex tax case studies and advanced compliance scenarios.
Keep practicing consistently – it’s the surest path to CPA exam success.