Free SEE-2 practice questions

Marlowe Fabrication LLC, a calendar-year business, buys and places in service a single new metal lathe (7-year MACRS property) for 100,000 dollars on 3 March 2024. It is the only asset bought that year, so the mid-quarter convention does not apply. The firm elects out of both Section 179 and bonus depreciation and uses the standard 200 percent declining balance method with the half-year convention. What is its first-year MACRS depreciation deduction on the lathe?

• A14,290 dollars, using the 14.29 percent first-year rate that the MACRS table sets for 7-year recovery property under the half-year convention.check_circle Correct
• B20,000 dollars, using the 20.00 percent first-year rate that applies to 5-year recovery property under the half-year convention.
• C7,145 dollars, by taking the 14.29 percent 7-year rate and then halving it again because the asset was held for only part of the year.
• D28,580 dollars, by applying the 200 percent declining balance rate of two divided by seven to the full 100,000 dollar basis with no convention adjustment.

Why A is correct: A metal lathe is 7-year MACRS property, and the half-year-convention table gives a 14.29 percent first-year rate, so 100,000 multiplied by 14.29 percent equals 14,290 dollars.

Why B is wrong: Applying the 5-year first-year rate of 20 percent is a common slip when the recovery period is misread, but a metal lathe is 7-year property, so the correct first-year rate is 14.29 percent, not 20 percent.

Why C is wrong: Halving the table percentage is tempting if the candidate thinks the half-year convention must be applied on top of the rate, but the published 14.29 percent rate already builds in the half-year convention, so applying a second half is double-counting.

Why D is wrong: Computing two divided by seven of basis (28.58 percent) looks like the declining balance method, but it ignores the half-year convention that halves the first-year deduction, which the 14.29 percent table rate already reflects.

Cedarpoint Joinery Inc, a calendar-year C corporation, places in service 3,300,000 dollars of qualifying new Section 179 property during 2024 and has taxable income from the business well above any expense it could claim. For 2024 the Section 179 dollar limit is 1,220,000 dollars and the investment phase-out begins once qualifying property placed in service exceeds 3,050,000 dollars. What is the maximum Section 179 deduction Cedarpoint may elect for 2024?

• A1,220,000 dollars, because taxable income exceeds the limit and the firm therefore takes the full indexed dollar cap with no reduction.
• B970,000 dollars, because the limit is reduced by the 250,000 dollars of qualifying property placed in service above the 3,050,000 dollar phase-out threshold.check_circle Correct
• C0 dollars, because total qualifying property of 3,300,000 dollars exceeds the 3,050,000 dollar threshold, which disqualifies the corporation from any Section 179 election.
• D1,205,000 dollars, by reducing the 1,220,000 dollar limit by 15,000 dollars representing 6 percent of the property placed in service over the threshold.

Why A is wrong: Taking the full 1,220,000 dollar cap ignores the investment-based phase-out, which reduces the limit dollar for dollar once property placed in service passes 3,050,000 dollars, so the full cap is not available here.

Why B is correct: Property of 3,300,000 dollars exceeds the 3,050,000 dollar threshold by 250,000 dollars, and the 1,220,000 dollar limit drops dollar for dollar by that excess, giving 1,220,000 minus 250,000, or 970,000 dollars.

Why C is wrong: Treating the threshold as a hard cliff is a common error, but crossing it only reduces the limit by the excess; the deduction reaches zero only when the excess equals or passes the dollar limit, which it does not here.

Why D is wrong: Reducing the limit by a percentage of the excess misstates the rule, which subtracts the full excess amount dollar for dollar, not a fraction of it, so 970,000 dollars is correct rather than 1,205,000 dollars.

Brightwater Logistics LLC, a calendar-year partnership, buys a new 5-year MACRS delivery van for 80,000 dollars and places it in service on 12 June 2024. The partnership makes no Section 179 election but claims the bonus depreciation allowed for property placed in service in 2024, then computes regular MACRS on the remaining basis using the 20.00 percent first-year rate for 5-year property. The 2024 bonus rate is 60 percent. What is the total first-year depreciation deduction on the van?

• A48,000 dollars, taking only the 60 percent bonus allowance on the 80,000 dollar basis and stopping there.
• B64,000 dollars, by applying an 80 percent bonus rate to the 80,000 dollar basis as the allowance for property placed in service in 2024.
• C54,400 dollars, by taking 60 percent bonus of 48,000 dollars plus 20 percent of the remaining 32,000 dollar basis, which is 6,400 dollars.check_circle Correct
• D16,000 dollars, by taking 20 percent MACRS on the full 80,000 dollar basis and adding no bonus depreciation.

Why A is wrong: Stopping at the 48,000 dollar bonus amount is tempting, but after bonus the taxpayer still applies regular MACRS to the remaining 32,000 dollar basis, which adds a further deduction the candidate has omitted.

Why B is wrong: Using an 80 percent bonus rate reflects the 2023 percentage, not 2024; the bonus rate steps down to 60 percent for property placed in service in 2024, so 64,000 dollars overstates the deduction.

Why C is correct: Bonus depreciation of 60 percent on 80,000 dollars is 48,000 dollars, leaving a 32,000 dollar basis on which the 20 percent first-year MACRS rate gives 6,400 dollars, for a total of 54,400 dollars.

Why D is wrong: Computing 20 percent MACRS on the whole basis ignores the bonus election the partnership made, which is claimed first and reduces basis before regular MACRS, so 16,000 dollars understates the first-year deduction.

Halverson Tooling Inc, a newly formed calendar-year C corporation, receives a building from its sole shareholder in exchange for all of its stock in a transaction that qualifies for control under Section 351. The shareholder's adjusted basis in the building is 200,000 dollars and its fair market value is 350,000 dollars. To equalise the deal the corporation also pays the shareholder 60,000 dollars in cash, and the shareholder receives no liabilities relief. How much gain must the shareholder recognise on this exchange?

• A0 dollars, because a transfer of property solely to a controlled corporation under Section 351 is fully tax-free to the transferring shareholder regardless of any cash received.
• B150,000 dollars, because the entire built-in gain in the building of 350,000 dollars minus 200,000 dollars must be recognised once any cash boot is received.
• C60,000 dollars, because gain is recognised to the extent of the 60,000 dollars of cash boot received, which is less than the 150,000 dollar realised gain.check_circle Correct
• D90,000 dollars, being the 150,000 dollar realised gain reduced by the 60,000 dollars of cash boot that the shareholder received in the exchange.

Why A is wrong: It is tempting to treat Section 351 as completely tax-free, but nonrecognition does not extend to boot; cash received is boot that triggers recognised gain, so the answer is not zero.

Why B is wrong: Receiving boot does not strip away all nonrecognition; recognised gain is capped at the boot received, not the full 150,000 dollar realised gain, so this overstates the taxable amount.

Why C is correct: Realised gain is 350,000 minus 200,000, or 150,000 dollars, and Section 351(b) recognises gain equal to the lesser of the boot received (60,000 dollars) or the realised gain, so 60,000 dollars is recognised.

Why D is wrong: Subtracting the boot from the realised gain inverts the rule; Section 351(b) recognises gain equal to the boot itself, not the realised gain net of boot, so 90,000 dollars is the wrong figure.

Brackenmoor Logistics Inc, a calendar-year C corporation, is formed when Priya transfers equipment with an adjusted basis of 80,000 dollars and a fair market value of 130,000 dollars solely in exchange for all of the corporation's stock plus 25,000 dollars in cash. The transfer meets the Section 351 control requirement, and Priya recognises gain to the extent of the cash boot. What is Priya's adjusted basis in the Brackenmoor stock she receives?

• A130,000 dollars, equal to the fair market value of the equipment she transferred to the corporation in exchange for the stock and cash.
• B105,000 dollars, being the 80,000 dollar carryover basis increased by the 25,000 dollars of cash boot Priya received in the exchange.
• C55,000 dollars, being the 80,000 dollar carryover basis reduced by the 25,000 dollars of cash boot Priya received, with no addition for recognised gain.
• D80,000 dollars, equal to the transferred equipment's adjusted basis carried over without any adjustment for the cash boot or the recognised gain.check_circle Correct

Why A is wrong: Using fair market value as the stock basis ignores the substituted-basis rule of Section 358; the shareholder carries over her old basis with adjustments, so 130,000 dollars is incorrect.

Why B is wrong: Adding the boot to basis runs the adjustment the wrong way; boot received reduces the substituted basis rather than increasing it, so 105,000 dollars overstates the stock basis.

Why C is wrong: Subtracting the boot but omitting the recognised gain is a frequent slip; Section 358 also adds back the gain recognised, so the correct basis is 80,000 dollars, not 55,000 dollars.

Why D is correct: Section 358 starts with the 80,000 dollar carryover basis, subtracts the 25,000 dollar boot received and adds the 25,000 dollar gain recognised, and the offsetting adjustments leave the stock basis at 80,000 dollars.

Fennimore Holdings Inc, a calendar-year C corporation, owns 30 percent of the stock of an unrelated domestic taxable corporation and receives 100,000 dollars of dividends from that company during 2024. Fennimore has ample taxable income, so the taxable-income limitation on the deduction does not apply. Applying the dividends-received deduction rules based on Fennimore's ownership percentage, how much may Fennimore deduct for these dividends?

• A65,000 dollars, applying the 65 percent dividends-received deduction that applies when ownership is at least 20 percent but less than 80 percent.check_circle Correct
• B50,000 dollars, applying the 50 percent dividends-received deduction that is available when the recipient owns less than 20 percent of the paying corporation.
• C100,000 dollars, applying the 100 percent dividends-received deduction that removes the full amount of dividends received from an affiliated payer.
• D30,000 dollars, applying a deduction percentage equal to Fennimore's 30 percent ownership stake in the dividend-paying corporation.

Why A is correct: Ownership of 30 percent falls in the 20 to under 80 percent tier, which carries a 65 percent deduction, so 100,000 multiplied by 65 percent equals 65,000 dollars.

Why B is wrong: The 50 percent tier applies only to ownership below 20 percent; Fennimore owns 30 percent, which falls in the next tier, so the 50 percent rate and 50,000 dollar figure are too low.

Why C is wrong: The 100 percent deduction is reserved for dividends from corporations that are at least 80 percent owned and members of an affiliated group; 30 percent ownership does not qualify, so the full 100,000 dollars is not deductible.

Why D is wrong: Setting the deduction percentage equal to the ownership percentage misreads the rule; the deduction uses fixed statutory tiers of 50, 65 and 100 percent, not the exact ownership share, so 30,000 dollars is wrong.

Brightwater Community Arts, a newly formed nonstock nonprofit corporation, plans to operate solely to teach free painting and music classes to disadvantaged children. Its founders want federal recognition of exemption under Section 501(c)(3) so that donors can deduct contributions. The organisation is not a church, not a school, and expects annual gross receipts well above 50,000 dollars. Its lawyer asks which application the organisation must file with the IRS to obtain a determination letter recognising its exempt status. Which form should Brightwater file?

• AForm 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code, the full application used by organisations that are not eligible for the streamlined version.check_circle Correct
• BForm 1024, Application for Recognition of Exemption Under Section 501(a) or Section 521, the application used by charitable organisations seeking 501(c)(3) status.
• CForm 1023-EZ, Streamlined Application for Recognition of Exemption Under Section 501(c)(3), which any organisation may use regardless of its expected gross receipts.
• DForm 8976, Notice of Intent to Operate Under Section 501(c)(4), filed electronically to notify the IRS that the organisation is operating as a charity.

Why A is correct: A 501(c)(3) organisation generally seeks recognition by filing Form 1023, and because Brightwater expects gross receipts above the streamlined eligibility ceiling it must use the full Form 1023 rather than the short-form alternative, making this the correct application.

Why B is wrong: Form 1024 is used by organisations seeking exemption under most other paragraphs of Section 501(c), such as 501(c)(4) or 501(c)(6), not by 501(c)(3) charities, so naming it here applies the wrong application form.

Why C is wrong: Form 1023-EZ is restricted to small organisations that meet the eligibility limits, including projected annual gross receipts of 50,000 dollars or less; Brightwater expects more, so it is not eligible for the streamlined form.

Why D is wrong: Form 8976 is the notice a 501(c)(4) social welfare organisation files, not a recognition application for a 501(c)(3) charity, so it neither recognises exemption nor applies to Brightwater's charitable purpose.

Maplehurst Literacy Trust is a Section 501(c)(3) public charity, not a private foundation and not a church, that reports on a calendar year. For 2024 its gross receipts were 180,000 dollars and its total assets at year end were 95,000 dollars. The trust is not part of a group return. Its treasurer wants to file the correct annual information return in the 990 series for 2024, choosing the simplest version the rules permit. Which annual return should Maplehurst file for 2024?

• AForm 990-N (e-Postcard), because an organisation with gross receipts of 200,000 dollars or less may always satisfy its annual filing duty with the electronic notice.
• BForm 990-EZ, Short Form Return of Organization Exempt From Income Tax, because its gross receipts are under 200,000 dollars and its total assets are under 500,000 dollars.check_circle Correct
• CForm 990, Return of Organization Exempt From Income Tax, the full return, because every public charity with gross receipts above 50,000 dollars must file the complete version.
• DForm 990-PF, Return of Private Foundation, because all charitable trusts described in Section 501(c)(3) must file the private foundation return each year.

Why A is wrong: Form 990-N is reserved for small organisations whose gross receipts are normally 50,000 dollars or less; Maplehurst's 180,000 dollars far exceeds that, so the e-Postcard does not satisfy its filing duty.

Why B is correct: An organisation may file the short Form 990-EZ when its gross receipts are under 200,000 dollars and its total assets are under 500,000 dollars; Maplehurst meets both tests, so the EZ is the simplest permitted return.

Why C is wrong: Crossing 50,000 dollars only ends e-Postcard eligibility; it does not force the full Form 990, because organisations under the EZ ceilings may still use the short form, so the full return is not required here.

Why D is wrong: Form 990-PF is filed only by private foundations; Maplehurst is a public charity, so it does not file the private foundation return regardless of its being organised as a trust.

Cinderford Historical Society is a Section 501(c)(3) public charity reporting on a calendar year. In addition to its exempt museum activities it runs a coffee shop open to the general public that is staffed by paid employees and operated to make a profit, with no link to its educational mission. For 2024 the coffee shop produced 30,000 dollars of gross income and 18,000 dollars of directly connected expenses. The society has no other unrelated activity and no net operating loss carryover. After applying the specific deduction allowed against unrelated business taxable income, what amount of unrelated business taxable income does the coffee shop generate for 2024?

• A12,000 dollars, treating the full 30,000 dollars of gross income less the 18,000 dollars of directly connected expenses as unrelated business taxable income with no further deduction.
• B29,000 dollars, being the 30,000 dollars of gross income reduced only by the 1,000 dollar specific deduction, because expenses of an unrelated activity are not deductible.
• C11,000 dollars, being the 30,000 dollars of gross income reduced by the 18,000 dollars of directly connected expenses and then by the 1,000 dollar specific deduction.check_circle Correct
• D0 dollars, because the coffee shop's gross income is below the 50,000 dollar gross receipts threshold under which unrelated activities are exempt from the tax.

Why A is wrong: This stops at net profit and forgets the 1,000 dollar specific deduction that every organisation may subtract in computing unrelated business taxable income, so it overstates the taxable amount by 1,000 dollars.

Why B is wrong: Expenses directly connected with the unrelated trade or business are deductible in computing the tax; ignoring the 18,000 dollars of such expenses wrongly inflates the taxable income to 29,000 dollars.

Why C is correct: Unrelated business taxable income equals gross unrelated income less directly connected expenses less the 1,000 dollar specific deduction, so 30,000 minus 18,000 minus 1,000 leaves 11,000 dollars, the correct figure.

Why D is wrong: There is no 50,000 dollar exemption from the unrelated business income tax; that figure belongs to the Form 990-N filing test, so concluding no tax applies confuses an information-return threshold with the UBIT rules.