Business Tax Planning
Mock Exam
Course Introduction
Business Tax Planning explores the strategies and principles involved in managing and minimizing tax liabilities for businesses. The course covers key topics such as tax law fundamentals, tax compliance, income recognition, deductions, tax credits, and methods for deferring and reducing taxes through careful planning. Students analyze case studies involving various business structures, including sole proprietorships, partnerships, corporations, and LLCs, and learn how to identify opportunities within current tax regulations to optimize after-tax income. Practical emphasis is placed on planning for both short- and long-term objectives while complying with legal and ethical standards in tax practice.
Recommended Textbook
Principles of Taxation for Business and Investment Planning 2019 22nd Edition by Sally Jones
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18 Chapters
1798 Verified Questions
1798 Flashcards
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Chapter 1: Taxes and Taxing Jurisdictions
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Sample Questions
Q1) Company D, which has its home office in Raleigh, North Carolina, conducts business in the United States, Canada, and Mexico. Which of the following statements is true?
A) Because Company D must pay income tax to North Carolina, it is not required to pay tax to any other state.
B) Because Company D must pay income tax to North Carolina, it is not required to pay federal income tax.
C) Because Company D must pay income tax to the United States, it is not required to pay tax to Canada or Mexico.
D) None of the above is true.
Answer: D
Q2) Which of the following is not considered administrative authority?
A) Treasury regulations
B) Revenue rulings
C) Tax Court decisions
D) All of the above are administrative authorities
Answer: C
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3
Chapter 2: Policy Standards for a Good Tax
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Sample Questions
Q1) A tax meets the standard of sufficiency if it is easy for people to pay the tax:
A)True
B)False
Answer: False
Q2) Which of the following statements is false?
A) If Mr. Clem owns real property valued at $112,500, his average tax rate is 3%.
B) If Ms. Barker owns real property valued at $455,650, her average tax rate is 2.1%.
C) If Ms. Lumley owns real property valued at $750,000, her marginal tax rate is 1%.
D) None of the choices are false.
Answer: D
Q3) Changes in the tax law intended to make the measurement of taxable income more precise usually make the tax law less complex.
A)True
B)False
Answer: False
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4
Chapter 3: Taxes as Transaction Costs
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Sample Questions
Q1) Reid Inc. received a $90,000 cash payment, only $50,000 of which was taxable income. If Reid's marginal tax rate is 40%, compute Reid's after-tax cash flow.
A) $54,000
B) $50,000
C) $30,000
D) None of the above
Answer: D
Q2) Which of the following statements about tax minimization is true?
A) Tax minimization always maximizes the NPV of a transaction.
B) Tax minimization should be the goal of business and financial planning.
C) Tax minimization with respect to a transaction may not be the optimal strategy.
D) Tax minimization has no effect on nontax cash flows.
Answer: C
Q3) The tax law prohibits related party transactions.
A)True
B)False
Answer: False
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Chapter 4: Maxims of Income Tax Planning
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Sample Questions
Q1) The tax character of an item of income can change when Congress amends the tax law.
A)True
B)False
Q2) The substance over form doctrine allows the IRS to look through the legal formalities of a transaction to determine its true economic nature.
A)True
B)False
Q3) Understal Company has $750,000 to invest and two competing investment opportunities. Investment 1 would pay 9% per year ($67,500 annual before-tax cash flow). Investment 2 would pay 7% per year ($52,500 annual before-tax cash flow). The return on Investment 1 is taxable at Understal's 35% rate on ordinary income, while the return on Investment 2 is taxable at a 20% preferential rate.
A. Compute the explicit and implicit tax that Understal would pay with respect to each investment.
B. Which investment results in the greater after-tax cash flow?
Q4) Deduction-shifting transactions usually occur between unrelated taxpayers.
A)True
B)False
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Chapter 5: Tax Research
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Sample Questions
Q1) Professional tax research conclusions should always be based on relevant secondary authority.
A)True
B)False
Q2) The first step in the tax research process is to locate relevant tax law authority.
A)True
B)False
Q3) Editorial explanations provided by electronic tax services are examples of secondary authority.
A)True
B)False
Q4) Tax research typically occurs as part of the tax compliance process; it is rarely important in tax planning.
A)True
B)False
Q5) A single tax issue may result in multiple research questions.
A)True
B)False
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Chapter 6: Taxable Income from Business Operations
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Sample Questions
Q1) Unex Company is an accrual basis taxpayer. This year, an employee sued Unex for unlawful age discrimination, and the company's auditors required it to accrue a $500,000 liability for the estimated expense of settling this lawsuit. Which of the following statements is true?
A) Unex can deduct the accrued expense only if it makes a written disclosure to the IRS of the contingent liability.
B) Unex will be allowed a deduction in the year in which its liability for the settlement becomes fixed and the amount of the settlement can be estimated with reasonable accuracy.
C) Unex will be allowed a deduction in the year that it actually pays the settlement to the employee.
D) Unex can never deduct any expense in connection with this lawsuit.
Q2) Which of the following statements most accurately defines taxable income from business operations?
A) Gross income from the sales of goods or performance of services less allowable deductions.
B) Gross income from whatever source derived less allowable deductions.
C) Revenues from business transactions less expenses.
D) Gross income from whatever source derived less expenses.
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Page 8
Chapter 7: Property Acquisitions and Cost Recovery
Deductions
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Sample Questions
Q1) On November 7, a calendar year business placed in service $900,000 of 3-year recovery property. If this was the only property placed in service during the year, MACRS depreciation is computed using the:
A) Mid-month convention
B) Mid-quarter convention
C) Mid-year convention
D) Daily pro-ration method
Q2) Kassim Company purchased an asset by paying $35,000 cash and giving the seller its 3-year note for $240,000. Which of the following statements is true?
A) Kassim's book basis and tax basis in the asset is $275,000.
B) Kassim's book basis is $275,000, but its tax basis is $35,000.
C) Kassim's book basis and tax basis in the asset is $35,000.
D) If Kassim is a cash basis taxpayer, its initial tax basis in the asset is zero.
Q3) Firms engaged in the extraction of natural resources such as oil, gas, or minerals can deduct the lesser of cost depletion or percentage depletion on their productive wells or mines.
A)True
B)False
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Chapter 8: Property Dispositions
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Sample Questions
Q1) Kopel Company transferred an inventory asset to Cassim LLC in exchange for Cassim's $230,000 interest-bearing note. Kopel's tax basis in the note is its $230,000 face value.
A)True
B)False
Q2) The same asset may be an ordinary asset in the hands of one taxpayer and a capital asset in the hands of a different taxpayer.
A)True
B)False
Q3) Mr and Mrs Sykes operate a very profitable small business. This year, the Sykes recognized a $100,000 gain on sale of a trade name they had created and copyrighted for use in their business. Which of the following statements is true?
A) The $100,000 gain is capital gain eligible for a preferential tax rate.
B) The $100,000 gain is capital gain against which the Sykes can deduct any capital losses recognized this year.
C) The $100,000 gain is ordinary business income.
D) Statements a. and b. are true.
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Page 10
Chapter 9: Nontaxable Exchanges
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Sample Questions
Q1) A partnership always takes a carryover basis in property received from a partner in exchange for an equity interest in the partnership.
A)True
B)False
Q2) Itak Company transferred an old asset with a $44,300 adjusted tax basis in exchange for a new asset worth $48,000 and $3,000 cash. Which of the following statements is false?
A) If the exchange is taxable, Itak recognizes a $6,700 gain.
B) If the exchange is nontaxable, Itak recognizes a $3,000 gain.
C) If the exchange is nontaxable, Itak's tax basis in the new asset is $44,300.
D) None of the statements is false.
Q3) Which of the following statements about the transfer of debt in a like-kind exchange is false?
A) The party relieved of debt treats the relief as boot received.
B) The party assuming debt treats the assumption as boot paid.
C) If both properties in the exchange are subject to debt, both parties will be treated as receiving boot.
D) None of the above is false.
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11
Chapter 10: Sole Proprietorships
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Sample Questions
Q1) Which of the following statements regarding the home office deduction is true?
A) In order to qualify for the deduction, a portion of the taxpayer's home must be used regularly and exclusively to meet with clients or customers.
B) A home office deduction is not allowed for using the home office for administrative or management activities only.
C) The home office deduction is limited to the taxable income of the business before the deduction.
D) A depreciation deduction is not allowed for a home office.
Q2) Jack operates a service business as a sole proprietorship. Her taxable income for the current year will be less than $100,000. Ms. Jack is not eligible for the Section 199A deduction.
A)True
B)False
Q3) A partnership deducts guaranteed payments paid to its partners in computing ordinary income, and partners report guaranteed payments received as ordinary income.
A)True
B)False
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Chapter 11: The Corporate Taxpayer
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Sample Questions
Q1) The federal tax law considers the member corporations of an affiliated group to be a single entity for federal tax purposes.
A)True B)False
Q2) A corporation with a June 30 fiscal year earns $1 million for its tax year ended June 30, 2018. Regular tax liability on this income is $210,000.
A)True B)False
Q3) Generally, the corporate income tax is computed using a regressive rate schedule.
A)True B)False
Q4) For a consolidated group of corporations, Schedule M-3 reconciles worldwide financial statement net income to the financial statement net income of those corporations permitted to be included in the U.S. consolidated tax return group. A)True B)False
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Page 13
Chapter 12: The Choice of Business Entity
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Sample Questions
Q1) Mr and Mrs Maxwell are equal partners in Family partnership. The Maxwell's marginal tax rate is 35%. Next year, the partnership is expected to generate $200,000 of ordinary income. The Maxwells are considering transferring 20% interests in the partnership to each of their children. Their daughter, Melissa, has a 12% marginal tax rate. Their son, Mark, has a 22% marginal tax rate. Calculate the expected annual tax savings to the family from the proposed transfer of partnership interests.
A) $14,000
B) $28,000
C) $14,400
D) $16,000
Q2) Which of the following entities does not provide all the owners with limited liability for debts incurred by the entity?
A) C corporation
B) S corporation
C) Limited partnership
D) LLC
Q3) Typical family-owned businesses are operated as passthrough entities.
A)True
B)False
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Chapter 13: Jurisdictional Issues in Business Taxation
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110 Flashcards
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Sample Questions
Q1) BiState Inc. conducts business in North Carolina and South Carolina. If BiState's apportionment percentage in North Carolina is 63%, its apportionment percentage in South Carolina can be no more than 37%.
A)True
B)False
Q2) The United States has jurisdiction to tax income earned by any foreign corporation that is a controlled subsidiary of a U.S. parent corporation.
A)True
B)False
Q3) Which of the following entities is not subject to U.S. federal income tax?
A) U.S. corporation conducting 100 percent of its business outside the United States
B) Branch of U.S. corporation operating entirely in Germany
C) French subsidiary of U.S. parent operating entirely in France
D) Dutch corporation operating entirely within the United States
Q4) The sales factor in the UDITPA state income tax apportionment formula equals in-state sales divided by total sales.
A)True
B)False
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Page 15
Chapter 14: The Individual Tax Formula
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Sample Questions
Q1) Ms. Lewis maintains a household which is the principal place of residence for Kathy. Ms. Lewis' provides more than 50% of Kathy's financial support. In which of the following cases can Ms. Lewis' claim Kathy as a qualifying child?
A) Kathy is age 8 and the child of Ms. Lewis' best friend, who died three years ago.
B) Kathy is Ms. Lewis' 15-year old niece.
C) Kathy is Ms. Lewis' 30-year old unmarried sister.
D) Both B. and C.
Q2) An extension of the time to file an individual tax return also extends the time to pay any balance of tax due with the return.
A)True
B)False
Q3) An individual's taxable income equals adjusted gross income less the greater of the standard deduction or itemized deductions less the Section 199A deduction.
A)True
B)False
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16
Chapter 15: Compensation and Retirement Planning
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Sample Questions
Q1) An individual who wants to roll over the balance in an employer-sponsored qualified retirement plan to an IRA should always choose a Roth IRA over a traditional IRA.
A)True
B)False
Q2) An employee receives $110,000 of group term life insurance coverage per year. The cost of this coverage to his employer is $90. The cost based on the IRS's uniform premium table is $1.08 per year per $1,000 of coverage. What amount is taxable to the employee?
A) $64.80
B) $54.00
C) $90.00
D) $118.80
Q3) An independent contractor is not entitled to the same fringe benefits as an employee.
A)True
B)False
Q4) Unreimbursed moving expenses are an itemized deduction.
A)True
B)False
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Chapter 16: Investment and Personal Financial Planning
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Sample Questions
Q1) This year, Mr Chester gave $50,000 to an old friend who has no legal obligation to repay the money. The entire $50,000 is a taxable gift.
A)True
B)False
Q2) Investment expenses are an itemized deduction.
A)True
B)False
Q3) Individual taxpayers are not allowed to deduct capital losses in excess of capital gains.
A)True
B)False
Q4) Mr and Mrs Holt made no taxable gifts during their lifetimes. Mrs Holt died two years ago. Her estate tax return shows that she owed no estate tax and had an $800,000 unused lifetime exclusion. Mr Hold died in 2018. The lifetime transfer tax exclusion available to his estate is $12 million.
A)True
B)False
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Page 18
Chapter 17: Tax Consequences of Personal Activities
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Sample Questions
Q1) Tax return preparation fees are itemized deductions.
A)True
B)False
Q2) Which of the following government transfer payments is included in the recipient's gross income?
A) Food stamps
B) Need-based welfare payments
C) Unemployment compensation
D) None of the above is included.
Q3) A nondeductible charitable contribution may be carried forward five years.
A)True
B)False
Q4) For federal income tax purposes, a taxpayer may deduct state and federal employment taxes ($10,000 maximum) as itemized deductions.
A)True
B)False
Q5) Taxpayers include a maximum of 85% of Social Security benefits in gross income.
A)True
B)False
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Chapter 18: The Tax Compliance Process
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Sample Questions
Q1) During the audit of Mr and Mrs Luce's income tax return, the revenue agent concluded that the couple had claimed a $26,300 deduction that was not allowed by law. The improper deduction reduced the couple's tax by $9,205. The Luces' total tax deficiency was $13,890.
a. Compute the penalty that the IRS agent can impose if he concludes that the improper deduction was attributable to negligence.
b. Compute the penalty that the IRS agent can impose if he concludes that the improper deduction was attributable to fraud.
Q2) Which of the following statements about the outcome of an IRS audit is false?
A) The most probable outcome of an audit is that the taxpayer will be assessed a deficiency.
B) An audit never results in a refund of tax due to the taxpayer.
C) If a revenue agent finds no mistakes on a return during an audit, the agent files a report concluding "no change."
D) None of the above is false.
Q3) Only the government may appeal a tax case to the U.S. Supreme Court.
A)True
B)False
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Page 20