Free ATA Practice Questions

Question 1

Elena begins 2026 with $24,000 of stock basis and $7,000 of basis in a bona fide loan she made directly to her S corporation. During the year, she contributes $6,000, receives a $10,000 nondividend cash distribution, and is allocated a $38,000 ordinary loss. She also guarantees an $80,000 corporate bank loan but pays nothing under the guarantee. There are no other basis adjustments or suspended losses, and no limitation other than basis applies. How much of the loss may Elena deduct for 2026?

Accepted Answer

$27,000

Answer

$20,000

Answer

$37,000

Answer

$38,000

Question 2

At a wholesaler's annual lending review, the current ratio has risen from 1.9 to 2.5, but the quick ratio has fallen from 1.15 to 0.65. Current liabilities are unchanged, prepaid expenses are negligible, and the inventory-aging report shows a sharp increase in slow-moving goods. The owner calls the higher current ratio proof that short-term finances have improved. What is the strongest interpretation of the combined evidence?

Accepted Answer

Inventory accumulation is masking weaker coverage by cash, short-term investments, and receivables.

Answer

The higher current ratio establishes that more cash is available for the next round of supplier payments.

Answer

The quick ratio establishes insolvency even if the inventory remains saleable at normal margins.

Answer

The inventory increase represents stronger operating cash generation because more merchandise is available to sell.

Question 3

For 2026, eight-year-old Leo spends 240 nights with his divorced mother, Dana, and 125 nights with his father, Eric. Dana pays more than half the cost of her home. The parents together provide all of Leo's support, and neither has remarried. Dana signs a valid Form 8332 release for 2026, which Eric attaches to his return. All other requirements for the child tax credit are met. Based on Leo, which allocation of benefits is permitted?

Accepted Answer

Dana may use head-of-household status; Eric may claim the child tax credit.

Answer

Eric may use head-of-household status and claim the child tax credit.

Answer

Dana may use head-of-household status and claim the child tax credit.

Answer

Dana must file single; Eric may claim the child tax credit.

Question 4

A business owner tells a regular supplier that the purchasing manager may place the company's inventory orders. The owner later privately limits the manager's authority but never informs the supplier. Unaware of the restriction, the supplier reasonably accepts an ordinary inventory order exceeding that limit. The owner immediately rejects the order and accepts no goods or other benefit. Under agency law, the strongest basis for holding the business to the order is:

Accepted Answer

Apparent authority based on the owner's representations to the supplier.

Answer

Actual authority, because the supplier never received notice of the owner's restriction.

Answer

Ratification through the owner's prior dealings with the supplier.

Answer

Implied actual authority that overrides the owner's private restriction.

Question 5

The sole shareholder of a C corporation wants a nonliquidating distribution of appreciated investment land in 2026. The land is debt-free, and the corporation has sufficient earnings and profits to cover its full fair market value. No shares will be redeemed. The shareholder believes that transferring the deed avoids the corporate tax that a sale followed by a cash dividend would trigger. What tax consequence defeats that argument?

Accepted Answer

The corporation recognizes the appreciation, and the shareholder receives a dividend measured at fair market value.

Answer

The shareholder recognizes a dividend, but the corporation defers its gain until the shareholder sells the land.

Answer

The corporation recognizes gain, but the shareholder treats the land as a tax-free recovery of stock basis.

Answer

Neither party recognizes income immediately because the land keeps its existing tax basis after the distribution.

Question 6

Martin turns 74 in 2026 and still works for the company sponsoring his traditional 401(k). He has no ownership interest in the employer, and the plan permits eligible employees to postpone required minimum distributions until retirement. Martin also owns a traditional IRA and satisfied its 2025 distribution requirement. He wants to avoid withdrawals that are not yet required. Which instruction correctly addresses his 2026 obligations?

Accepted Answer

Take the IRA's required minimum distribution; the current employer's 401(k) may remain deferred while he qualifies.

Answer

Take required minimum distributions from both accounts; continued employment cannot postpone either obligation after age 73.

Answer

Postpone distributions from both accounts; the employer's still-working exception also covers a traditional IRA.

Answer

Take a single distribution from the 401(k) large enough to satisfy the IRA's required minimum distribution.

Question 7

A tax firm's security provider confirms an active unauthorized session exporting client return files. The exports contain Social Security numbers and bank-account details, although no fraudulent returns have yet been identified. Filing deadlines are approaching. The firm's immediate response should be to:

Accepted Answer

Contain the compromised access, preserve evidence with the security provider, and promptly contact the IRS stakeholder liaison.

Answer

Change account passwords and resume filing, postponing outside notification until a client reports a fraudulent return.

Answer

Reinstall the affected systems from clean backups before retaining logs, then assess whether any client information was exposed.

Answer

Keep the session connected while staff identify every exported record, then report the incident once the affected-client list is complete.

Question 8

A manufacturer enters a five-year lease of highly customized equipment with a 20-year remaining economic life. The present value of the lease payments is 45% of the equipment's fair value. There is no ownership transfer, purchase option, or residual-value guarantee. Because of the customization, the equipment is expected to have no alternative use to the lessor when the lease ends. How should the manufacturer classify the lease under U.S. GAAP?

Accepted Answer

Finance, because the specialized asset has no expected alternative use to the lessor at the end of the term.

Answer

Operating, because the lease term is not a major part of the equipment's remaining economic life.

Answer

Operating, because ownership stays with the lessor and the present value is below substantially all of fair value.

Answer

Finance, because equipment leases extending beyond twelve months are required to use finance-lease accounting.

Question 9

Priya, a single taxpayer, is the sole owner of a residential rental property that she actively manages in 2026. She approves tenants and major repairs but does not qualify as a real estate professional. The property has no personal use and produces a $24,000 tax loss. Her modified adjusted gross income for the rental real estate special allowance is $128,000. She has no other passive activities, and her basis and amount at risk cover the loss. Determine the portion deductible against nonpassive income and the portion suspended.

Accepted Answer

$11,000 deductible; $13,000 suspended.

Answer

$0 deductible; $24,000 suspended.

Answer

$14,000 deductible; $10,000 suspended.

Answer

$24,000 deductible; $0 suspended.

Question 10

A U.S. citizen dies in 2026 with a gross estate of $7 million, no prior taxable gifts, and a surviving U.S.-citizen spouse. No federal estate tax return is otherwise required. The spouse wants to preserve any available unused estate and gift tax exclusion and generation-skipping transfer tax exemption for future family transfers. Before the original Form 706 deadline, what should the advisor explain?

Accepted Answer

Elect portability on Form 706 for the unused estate and gift tax exclusion; the GST exemption is not portable.

Answer

Elect portability on Form 706 for both unused exemptions, since they share the same exclusion amount.

Answer

Retain the estate valuation records without filing; an unused exclusion passes automatically when no estate tax is due.

Answer

Wait until the survivor makes a taxable gift; the survivor can then elect portability on that gift tax return.

Free ATA Practice Questions

Domain 1: Financial Statements Accounting

Question 1

Question 2

Domain 2: Taxation

Question 3

Question 4

Question 5

Question 6

Question 7

Question 8

Domain 3: Business Law

Question 9

Domain 4: Ethics

Question 10

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