Business Taxation Exam Bank
Course Introduction
Business Taxation provides an in-depth understanding of the fundamental principles and practices of taxation as they apply to various forms of business entities. The course covers topics such as tax concepts and classifications, income determination, allowable deductions, compliance requirements, and the impact of taxation on business decisions. Students will examine tax planning strategies, preparation and filing of business tax returns, and the implications of tax laws and regulations on corporate, partnership, and small business operations. Through case studies and practical examples, the course emphasizes the importance of ethical tax practice and staying current with evolving tax legislation.
Recommended Textbook
Principles of Taxation for Business and Investment Planning 20th Edition by Sally Jones
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Chapter 1: Taxes and Taxing Jurisdictions
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Q1) Treasury regulations are tax laws written by the Treasury Department.
A)True
B)False
Answer: False
Q2) Which of the following federal taxes is not earmarked for a specific purpose?
A) Employment taxes
B) Unemployment taxes
C) Transfer taxes
D) All of the above are earmarked taxes.
Answer: C
Q3) The city of Mayfield charges individuals convicted of DWI (driving while intoxicated) $500 for the first conviction and $2,000 for any subsequent conviction. These charges are an example of a(n):
A) User's fee
B) Transaction-based tax
C) Activity-based tax
D) Government penalty
Answer: D
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Chapter 2: Policy Standards for a Good Tax
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Q1) Which of the following statements concerning the federal Social Security tax is true?
A) The tax burden increases annually because the rate increases annually.
B) The tax burden increases annually because the base increases annually.
C) Both the rate and the base increase annually.
D) The Social Security tax burden has not increased since 1990.
Answer: B
Q2) Vertical equity focuses on measurement of the tax base, and horizontal equity focuses on the tax rate structure.
A)True
B)False
Answer: False
Q3) If State H increases its sales tax rate by 1%, its sales tax revenue must also increase by 1%.
A)True
B)False
Answer: False
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Chapter 3: Taxes As Transaction Costs
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Q1) Omar Inc. paid a $24,000 expense, only $18,000 of which was deductible. If Omar's marginal tax rate is 40%, compute the after-tax cost of the expense.
A) $24,000
B) $18,000
C) $16,800
D) $10,800
Answer: C
Q2) Mrs. Scott loaned $100,000 to her daughter Evelyn, who agreed to pay her mother $3,000 annual interest on the debt. This loan is an example of a/an:
A) Prohibited transaction
B) Public market transaction
C) Related party transaction
D) Arm's length transaction
Answer: C
Q3) The tax cost of a transaction depends on the taxpayer's average tax rate for the year.
A)True
B)False
Answer: False
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Page 5
Chapter 4: Maxims of Income Tax Planning
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Q1) Which of the following statements about the character variable is true?
A) The tax character of income is determined strictly by tax law.
B) The tax character of income cannot change from year to year.
C) Tax planning strategies based on the character variable must involve at least two different taxpayers.
D) The tax character of income cannot change from year to year and tax planning strategies based on the character variable must involve at least two different taxpayers.
Q2) Both the individual and the corporate federal income tax rates are progressive.
A)True
B)False
Q3) Mrs. Day structures a transaction to shift income from her sole proprietorship to her grandson's business. This tax planning strategy may be taking advantage of the:
A) Entity variable
B) Time period variable
C) Jurisdiction variable
D) Character variable
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Chapter 5: Tax Research
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Q1) A keyword search in an electronic tax service:
A) Allows the researcher to combine words and phrases to define the search.
B) Is identical to using the topical index in a paper service.
C) Is not an efficient way to conduct tax research.
D) Cannot be restricted to only a part or portion of the data base.
Q2) Which of the following is not a primary authority?
A) Internal Revenue Code
B) Treasury regulations
C) Revenue Procedure
D) Tax textbook
Q3) Which of the following is not a secondary authority?
A) Tax textbook
B) Commercial tax service
C) Tax professional journal
D) Revenue procedure
Q4) The advantages of electronic tax research libraries do not include:
A) The ease with which such libraries can be updated for new developments.
B) Portability.
C) Speed of access and search.
D) All of the above are advantages of electronic tax research libraries.
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Chapter 6: Taxable Income From Business Operations
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Q1) B&B Inc.'s taxable income is computed as follows. \[\begin{array} { l r }
\text { Book income before tax } & \mathbf { \$ 9 , 8 8 2 , 5 9 0 } \\
\text { Net permarnent differences } & 447,600 \\
\text { Net temporary differences } & ( 802,100) \\
\text { Taxable income } & \$ 9,528,090
\end{array}\] Using a 34% rate, compute B&B's tax expense per books and tax payable.
A) Tax expense per books $3,360,081; tax payable $3,239,551
B) Tax expense per books $3,512,265; tax payable $3,239,551
C) Tax expense per books $3,512,265; tax payable $3,512,265
D) Tax expense per books $3,087,367; tax payable $3,087,367
Q2) Taxpayers that sell merchandise to their customers must use the accrual method to account for purchases and sales of merchandise.
A)True
B)False
Q3) A permanent difference between book income and taxable income affects only one taxable year.
A)True
B)False
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Chapter 7: Property Acquisitions and Cost Recovery
Deductions
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Sample Questions
Q1) The uniform capitalization rules generally allow many indirect costs that were capitalized to inventory for financial statement purposes to be expensed and deducted for tax purposes.
A)True
B)False
Q2) Cobly Company, a calendar year taxpayer, made only one asset purchase this year: machinery costing $1,932,500. The machinery is 7-year recovery property, and Cobly placed it in service on October 12. How many months of MACRS depreciation on the machinery is Cobly allowed?
A) Six months
B) Two and one-half months
C) One and one-half months
D) None of the above
Q3) An asset's adjusted book basis and adjusted tax basis convey no information about the asset's fair market value.
A)True
B)False
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Chapter 8: Property Dispositions
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Q1) Andrew sold IBM stock to his sister Susan for $6,000. Andrew purchased the stock two years ago for $8,000. Susan sold the stock through her broker for $7,300. How much gain or loss did Susan recognize on the sale?
A) $700 loss
B) No gain or loss
C) $1,300 gain
D) None of the above
Q2) Which of the following statements about Section 1250 recapture rule is false?
A) The rule applies to sales of depreciable realty by noncorporate taxpayers but not to sales by corporate taxpayers.
B) The rule applies only to sales of depreciable realty placed in service before 1987.
C) The rule applies only to sales of depreciable realty for which an accelerated tax depreciation method was used.
D) The rule has no effect on the characterization of gain recognized on sale of any realty with a zero tax basis.
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Chapter 9: Nontaxable Exchanges
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Q1) Babex Inc. and OMG Company entered into an exchange of real property. Here is the information for the properties to be exchanged. \[\begin{array} { l r r }
& \text { Babex } & O M G \\
\text { FMV } & \$ 1,000,000 & \$ 825,000 \\
\text { Adjusted tax basis } & \mathbf { 7 6 8 , 0 0 0 } & \mathbf { 5 1 4 , 5 0 0 } \\
\text { Mortgage } & \mathbf { 1 7 5 , 0 0 0 } & - \mathbf { 0 }\end{array}\] Pursuant to the exchange, OMG assumed the mortgage on the Babex property. Compute Babex's gain recognized on the exchange and its tax basis in the property received from OMG.
A) $175,000 gain recognized; $768,000 basis in OMG property
B) No gain recognized; $768,000 basis in OMG property
C) $175,000 gain recognized; $943,000 basis in OMG property
D) None of the above
Q2) If a taxpayer elected to defer a $13,000 gain realized on an involuntary conversion, the tax basis of the taxpayer's replacement property equals the cost of the property less $13,000.
A)True
B)False
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Page 11
Chapter 10: Sole Proprietorships, Partnerships, Llcs, and S
Corporations
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Q1) Alex is a partner in a calendar year partnership. His partnership Schedule K-1 for the current tax year showed the following: Ordinary business income\( \quad \)\( \quad \)\(\$ 41,000\)
Short-term capital loss \( \quad \)\( \quad \)\( \quad \)\(\mathbf { 1 , 5 0 0 }\) Alex has a $7,000 loss carryforward from the partnership last year, which he could not deduct because of the basis limitation. What is his tax basis in his partnership interest at the end of the current tax year?
A) $41,000
B) $32,500
C) $39,500
D) $34,000
Q2) Drake Partnership earned a net profit of $400,000. Four partners share profits and losses equally. No cash was distributed. The partners will report taxable income from the partnership on their personal income tax returns for the year.
A)True
B)False
Q3) The earnings of a C corporation are taxed only at the shareholder level.
A)True
B)False
Page 12
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Chapter 11: The Corporate Taxpayer
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Q1) Lexington Associates, Inc. is a personal service corporation. This year, Lexington reported $75,000 of taxable income. Which of the following statements regarding Lexington's regular tax liability is true?
A) Regular tax liability will be less than it would have been if Lexington were not a personal service corporation.
B) Regular tax liability will be greater than it would have been if Lexington were not a personal service corporation.
C) Regular tax liability will be the same as it would have been if Lexington were not a personal service corporation.
D) Regular tax liability will be zero.
Q2) The corporate alternative minimum tax is designed to insure that corporations with substantial economic income will pay their fair share of the federal tax burden.
A)True
B)False
Q3) At least three corporations are required to form an affiliated group.
A)True
B)False
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Chapter 12: The Choice of Business Entity
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Sample Questions
Q1) The IRS agent who audited the Form 1120 filed by Alano Inc. concluded that $300,000 of the salary that Alano paid to its CEO and sole shareholder was a constructive dividend. As a result:
A) The CEO/shareholder's taxable income increases by $300,000.
B) The CEO/shareholder must repay $300,000 of his salary to Alano.
C) Alano must distribute an additional $300,000 cash to the CEO/shareholder.
D) Alano's taxable income increases by $300,000.
Q2) Kyrsten Haas expects her S corporation to generate a profit of $200,000. What is the effective tax rate on the $200,000 if no cash is distributed? Kyrsten's marginal tax rate on ordinary income is 39.6%.
A) 35%
B) 60.8%
C) 44.5%
D) 39.6%
Q3) If a new business organized as a C corporation incurs start-up losses, the tax benefits of those losses will be recognized immediately.
A)True
B)False
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Page 14
Chapter 13: Jurisdictional Issues in Business Taxation
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Q1) The payroll factor in the UDITPA state income tax apportionment formula always includes executive compensation.
A)True
B)False
Q2) A corporation is usually subject to tax by any state in which it engages in any business transactions.
A)True B)False
Q3) Foreign value-added taxes and excise taxes are eligible for the U.S. foreign tax credit.
A)True B)False
Q4) Excess foreign tax credits can only be carried to future tax years. A)True B)False
Q5) Under the U.S. tax system, a domestic corporation pays U.S. tax only on the portion of its business income earned in the United States.
A)True B)False
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Chapter 14: The Individual Tax Formula
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Q1) An individual's taxable income equals adjusted gross income less the greater of the standard deduction or itemized deductions less the exemption amount.
A)True
B)False
Q2) The standard deduction and exemption amount are not deductible in the computation of alternative minimum taxable income.
A)True
B)False
Q3) Mr. and Mrs. Kain reported $80,000 AGI on their joint return. The couple has four dependent children: Beatrice, age 19; Bruce, age 16; Angie, age 11, and Arnold, age 8. Compute the Kains' child credit.
A) $1,000
B) $2,000
C) $3,000
D) $4,000
Q4) Adjusted gross income equals total income less itemized deductions.
A)True
B)False
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Chapter 15: Compensation and Retirement Planning
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Q1) Jason Inc. maintains a qualified profit-sharing plan for its employees. This year, Jason contributed $2,300 to Ms. Preston's profit-sharing account. Which of the following statements is true?
A) Jason can deduct the contribution, and Ms. Preston must include the contribution in her gross income.
B) Jason can't deduct the contribution, but Ms. Preston must include the contribution in her gross income.
C) Jason can deduct the contribution, but Ms. Preston does not include the contribution in her gross income.
D) Jason can't deduct the contribution, and Ms. Preston does not include the contribution in her gross income.
Q2) Harold Biggs is provided with $200,000 coverage under his employer's group-term life insurance plan. Which of the following statements is true?
A) The value of $50,000 coverage is included in Harold's gross income.
B) The value of $150,000 coverage is included in Harold's gross income.
C) The value of $200,000 coverage is included in Harold's gross income.
D) Harold's life insurance coverage is a nontaxable fringe benefit.
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Page 17
Chapter 16: Investment and Personal Financial Planning
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Sample Questions
Q1) The interest earned on a state or local government bond is exempt from federal taxation.
A)True
B)False
Q2) Which of the following statements about investment property is false?
A) The term securities includes corporate stock, certificates of deposit, notes, bonds, and other debt instruments.
B) Interest and dividends are taxed at the same rate as long-term capital gain.
C) Interest on private activity bonds issued by a state or local government is excluded from ordinary income.
D) A mutual fund is a diversified portfolio of securities owned and managed by a regulated investment company.
Q3) Mr. Lee made the following transfers this year. Which of the transfers are treated as gifts for federal tax purposes?
A) Political contribution to the Democratic party
B) Charitable contribution to the United Way
C) Payment to a hospital for the medical expenses of his 39-year old son
D) None of the above are treated as gifts.
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Chapter 17: Tax Consequences of Personal Activities
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Q1) A nondeductible charitable contribution may be carried forward five years.
A)True
B)False
Q2) Josh donated a painting to the local art museum. He purchased the painting twenty years ago for $34,000, and its appraised FMV at date of gift was $115,000. Which of the following statements about this donation is true?
A) Josh must recognize an $81,000 long-term capital gain and is allowed a $115,000 charitable contribution deduction.
B) Josh recognizes no gain and is allowed a $115,000 charitable contribution deduction.
C) Josh recognizes no gain and is allowed a $34,000 charitable contribution deduction.
D) None of the above is true.
Q3) Mia inherited $1 million from her deceased grandfather. Mia must include the inheritance in gross income.
A)True
B)False
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Chapter 18: The Tax Compliance Process
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Q1) The geographic location of the trial court in a tax dispute determines which of the appellate courts will hear an appeal.
A)True
B)False
Q2) Which of the following statements about the U.S. Tax Court is false?
A) Tax Court judges are experts who specialize in the tax law.
B) Individuals can request a jury trial in the Tax Court.
C) The Tax Court is one of three courts of original jurisdiction for tax cases.
D) Both individual and corporate taxpayers can take their case to the Tax Court.
Q3) Which of the following statements about the DIF score is true?
A) Details of the DIF score computation are available on the IRS website.
B) The lower the DIF score assigned to a tax return, the higher the probability that the return will be selected for audit.
C) The DIF score theoretically measures a tax return's potential for generating additional revenue on audit.
D) Taxpayers can contact the IRS to determine their DIF score before filing their annual tax return.
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