TAX FINAL EXAM QUESTIONS WITH
CORRECT ANSWERS 2026
Which of the following is not a required conduct for a preparer of an income tax return, under
AICPA Tax Standards?
a. Abide by the tax Code and legally minimize the taxpayer's tax liability.
b. Verify that the information the client provides is correct.
c. Notify the client if the preparer becomes aware of an error in a tax return.
d. Inform the taxpayer about how to correct the situation of the taxpayer's failure to file an
income tax return. - CORRECT ANSWER -b. Verify that the information the client provides is
correct.
Data, Inc., purchased and placed in service a $5,000 computer on August 24, year 3. This is the
only asset purchase during the year. Code § 179 expensing and bonus depreciation were not
elected. The computer was sold during year 5. Using the excerpt of the MACRS half-year
convention table below, what is the MACRS depreciation in year 5 for the computer?
RecoveryPeriod-5Year-7Year-10Year
1-20% -14.29%-10%
2-32%-24.49%-18%
3-19.2%-17.49%-14.4%
a. $360
b. $437
c. $480
d. $960 - CORRECT ANSWER -c. $480
Sam rents his second home. During the current year, he reported a $40,000 net loss from the
rental. Assume Sam actively participates in the rental activity, and no phaseout limitations apply.
What is the greatest amount of the rental loss that Sam can deduct against ordinary income in the
current year?
,a. $0
b. $5,000
c. $25,000
d. $40,000 - CORRECT ANSWER -c. $25,000
Which of the following types of entities is entitled to the net operating loss deduction?
a. Partnerships
b. S corporations
c. C corporations
d. Not-for-profit organizations - CORRECT ANSWER -c. C corporations
Marsha and Brad, married taxpayers filing jointly, had the following transactions during year 9:
Gain on sale of stock purchased in year 1 and sold in June, year 9=$3,000
Ordinary income from employers=80,000
Loss on sale of stock purchased in January, year 9 and sold in March, year=920,000
What is the amount of the capital loss carryover to year 10?
a. $0
b. $20,000
c. $14,000
d. $17,000 - CORRECT ANSWER -c. $14,000
Hunter has a loss of $50,000 from his landscaping business in 2023. He reports the loss on
Schedule C of his Form 1040. After deducting the loss against his other sources of income, he
has a remaining business loss of $10,000. What are Hunter's options regarding the remaining
$10,000 business loss?
a. He can carry the loss back five years and forward 20 years.
b. He can carry the loss back two years and forward 20 years.
c. He cannot carry the loss back, but he can carry it forward indefinitely.
, d. He can carry the loss back five years and forward indefinitely. - CORRECT ANSWER -c. He
cannot carry the loss back, but he can carry it forward indefinitely.
Michael owns a rental house that generated a $10,000 loss this year. Michael manages the rental
property but does not meet the standards for material participation. Michael is a college professor
and has wages of $60,000 and $5,000 in dividend income. How is the $10,000 rental real estate
loss treated on Michael's tax return?
a. $5,000 of the loss is deductible against the passive dividend income.
b. The rental loss is not deductible because Michael does not have any passive income.
c. $10,000 loss is not deductible because Michael does not materially participate in the rental
activity.
d. $10,000 loss is deductible under the rental real estate exception because Michael actively
participates in the rental activity. - CORRECT ANSWER -d. $10,000 loss is deductible under the
rental real estate exception because Michael actively participates in the rental activity.
On January 1, year 1, Bridgett loaned her nephew $6,000 at 1% interest to help him pay for some
unexpected personal expenses. Her nephew repaid the loan with interest on December 31, year 1.
The current applicable federal rate (AFR) is 2.5%. What amount must Bridgett include in her
year 1 taxable interest income?
a. $0
b. $60
c. $90
d. $150 - CORRECT ANSWER -b. $60
Bravo Co. acquired and placed in service $3,160,000 in machinery and equipment throughout the
2024 tax year. Bravo did not acquire any other depreciable assets during 2024. Assuming the §
179 taxable income limit does not apply, what is the maximum § 179 expense that Bravo Co. can
elect and deduct in 2024?
a. $110,000
b. $1,110,000
c. $1,220,000
CORRECT ANSWERS 2026
Which of the following is not a required conduct for a preparer of an income tax return, under
AICPA Tax Standards?
a. Abide by the tax Code and legally minimize the taxpayer's tax liability.
b. Verify that the information the client provides is correct.
c. Notify the client if the preparer becomes aware of an error in a tax return.
d. Inform the taxpayer about how to correct the situation of the taxpayer's failure to file an
income tax return. - CORRECT ANSWER -b. Verify that the information the client provides is
correct.
Data, Inc., purchased and placed in service a $5,000 computer on August 24, year 3. This is the
only asset purchase during the year. Code § 179 expensing and bonus depreciation were not
elected. The computer was sold during year 5. Using the excerpt of the MACRS half-year
convention table below, what is the MACRS depreciation in year 5 for the computer?
RecoveryPeriod-5Year-7Year-10Year
1-20% -14.29%-10%
2-32%-24.49%-18%
3-19.2%-17.49%-14.4%
a. $360
b. $437
c. $480
d. $960 - CORRECT ANSWER -c. $480
Sam rents his second home. During the current year, he reported a $40,000 net loss from the
rental. Assume Sam actively participates in the rental activity, and no phaseout limitations apply.
What is the greatest amount of the rental loss that Sam can deduct against ordinary income in the
current year?
,a. $0
b. $5,000
c. $25,000
d. $40,000 - CORRECT ANSWER -c. $25,000
Which of the following types of entities is entitled to the net operating loss deduction?
a. Partnerships
b. S corporations
c. C corporations
d. Not-for-profit organizations - CORRECT ANSWER -c. C corporations
Marsha and Brad, married taxpayers filing jointly, had the following transactions during year 9:
Gain on sale of stock purchased in year 1 and sold in June, year 9=$3,000
Ordinary income from employers=80,000
Loss on sale of stock purchased in January, year 9 and sold in March, year=920,000
What is the amount of the capital loss carryover to year 10?
a. $0
b. $20,000
c. $14,000
d. $17,000 - CORRECT ANSWER -c. $14,000
Hunter has a loss of $50,000 from his landscaping business in 2023. He reports the loss on
Schedule C of his Form 1040. After deducting the loss against his other sources of income, he
has a remaining business loss of $10,000. What are Hunter's options regarding the remaining
$10,000 business loss?
a. He can carry the loss back five years and forward 20 years.
b. He can carry the loss back two years and forward 20 years.
c. He cannot carry the loss back, but he can carry it forward indefinitely.
, d. He can carry the loss back five years and forward indefinitely. - CORRECT ANSWER -c. He
cannot carry the loss back, but he can carry it forward indefinitely.
Michael owns a rental house that generated a $10,000 loss this year. Michael manages the rental
property but does not meet the standards for material participation. Michael is a college professor
and has wages of $60,000 and $5,000 in dividend income. How is the $10,000 rental real estate
loss treated on Michael's tax return?
a. $5,000 of the loss is deductible against the passive dividend income.
b. The rental loss is not deductible because Michael does not have any passive income.
c. $10,000 loss is not deductible because Michael does not materially participate in the rental
activity.
d. $10,000 loss is deductible under the rental real estate exception because Michael actively
participates in the rental activity. - CORRECT ANSWER -d. $10,000 loss is deductible under the
rental real estate exception because Michael actively participates in the rental activity.
On January 1, year 1, Bridgett loaned her nephew $6,000 at 1% interest to help him pay for some
unexpected personal expenses. Her nephew repaid the loan with interest on December 31, year 1.
The current applicable federal rate (AFR) is 2.5%. What amount must Bridgett include in her
year 1 taxable interest income?
a. $0
b. $60
c. $90
d. $150 - CORRECT ANSWER -b. $60
Bravo Co. acquired and placed in service $3,160,000 in machinery and equipment throughout the
2024 tax year. Bravo did not acquire any other depreciable assets during 2024. Assuming the §
179 taxable income limit does not apply, what is the maximum § 179 expense that Bravo Co. can
elect and deduct in 2024?
a. $110,000
b. $1,110,000
c. $1,220,000
