IRS Enrolled Agent Exam (SEE) — All Questions

A general partnership reports its income to the IRS by:

• a.Paying entity-level income tax on Form 1120
• b.Reporting all income on the managing partner's Schedule C
• c.Filing an information return (Form 1065) and issuing Schedule K-1s to partners✓
• d.Not filing any federal return

A partnership is a pass-through entity that files an information return, Form 1065, and issues each partner a Schedule K-1 reporting their share of income and deductions. The partners, not the partnership, pay the tax on that income.

Which entity's profits are subject to double taxation?

• a.A C corporation✓
• b.An S corporation
• c.A general partnership
• d.A sole proprietorship

A C corporation pays tax at the entity level, and when after-tax profits are distributed as dividends, shareholders are taxed again, producing double taxation. Pass-through entities (S corporations, partnerships, sole proprietorships) are generally taxed only once, at the owner level.

Under the accrual method of accounting, income is generally recognized when:

• a.Cash is actually received
• b.It is earned, under the all-events test✓
• c.The tax return is filed
• d.The customer's check clears the bank

Under the accrual method, income is reported when earned (when all events fixing the right to receive it have occurred and the amount can be determined) and expenses when incurred. The cash method, by contrast, recognizes income when actually or constructively received.

The standard system used to depreciate most tangible business property placed in service today is:

• a.Straight-line over the property's entire physical life
• b.The cash method
• c.Amortization over 15 years for all assets
• d.The Modified Accelerated Cost Recovery System (MACRS)✓

MACRS is the standard depreciation system for most tangible business property, assigning assets to recovery classes with prescribed methods and periods. Provisions such as Section 179 expensing and bonus depreciation can accelerate the write-off within limits.

A sole proprietor reports the net profit or loss from the business on:

• a.A separate corporate return, Form 1120
• b.Form 1065 with Schedule K-1
• c.Schedule C, filed with the owner's individual Form 1040✓
• d.Form 941

A sole proprietorship is not a separate taxpayer; the owner reports business net profit or loss on Schedule C, which is filed with the individual Form 1040. The profit is also generally subject to self-employment tax.

An employer's obligations for employee wages include:

• a.Withholding income and FICA taxes, paying the matching employer FICA share, and remitting FUTA✓
• b.Withholding only federal income tax and nothing else
• c.Paying the entire Social Security tax with no employee share
• d.Issuing a Schedule K-1 to each employee

Employers must withhold income tax and the employee share of Social Security and Medicare (FICA), pay the matching employer FICA share, and remit federal unemployment (FUTA) tax, reporting on returns such as Form 941 and Forms W-2. Employees receive a W-2, not a K-1.

To be deductible, a business expense generally must be:

• a.Capital in nature and depreciated over 39 years
• b.Ordinary and necessary for the business✓
• c.Personal to the owner
• d.Paid in cash only

A deductible business expense must be ordinary (common and accepted in the trade) and necessary (helpful and appropriate). Personal expenses are not deductible, and capital expenditures must be recovered through depreciation rather than deducted immediately.