Business Taxation Final Exam
Course Introduction
Business Taxation provides an in-depth exploration of the principles, laws, and practices governing the taxation of businesses. The course covers key concepts such as tax compliance, taxable entities, income determination, deductions, credits, and tax planning strategies. Students examine the taxation of various business structures sole proprietorships, partnerships, corporations, and limited liability companies emphasizing federal and, where relevant, state tax rules. Through case studies and practical examples, the course illustrates how tax considerations influence business decisions, financial reporting, and organizational strategy. By the end, students will be equipped to analyze tax obligations and optimize tax outcomes for different types of business entities.
Recommended Textbook
South Western Federal Taxation 2012 Comprehensive by William H. Hoffman
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Chapter 1: An Introduction to Taxation and Understanding
the Federal Tax Law
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Q1) Which,if any,of the following statements best describes the history of the Federal income tax?
A) It existed during the Civil War.
B) The Federal income tax on corporations was held by the U.S. Supreme Court to be contrary to the U.S. Constitution.
C) The Federal income tax on individuals was held by the U.S. Supreme Court to be allowable under the U.S. Constitution.
D) Both the Federal income tax on individuals and on corporations was held by the U.S. Supreme Court to be contrary to the U.S. Constitution.
E) None of the above.
Answer: A
Q2) If an income tax return is not filed by a taxpayer,there is no statute of limitations on assessments of tax by the IRS.
A)True
B)False
Answer: True
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Chapter 2: Working With the Tax Law
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Q1) Tax bills are handled by which committee in the U.S.Senate?
A) Taxation Committee.
B) Ways and Means Committee.
C) Finance Committee.
D) Budget Committee.
E) None of the above.
Answer: C
Q2) Which is not a Code section number?
A) § 212(1).
B) § 2(a)(1).
C) § 280B.
D) § 6(a).
E) All are current Code sections.
Answer: D
Q3) The IRS is not required to make a letter ruling public.
A)True
B)False
Answer: False
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Chapter 3: Tax Determination: Personal and Dependency
Exemptions: an Overview of Property Transactions
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Q1) During the current year,Doris received a large gift from her parents and a sizeable inheritance from an uncle.She also paid premiums on an insurance policy on her life.Doris is confused because she cannot find any place on Form 1040 to report these items.Explain.
Answer: Gifts and inheritances are exclusions from gross income.Like most exclusions,they are not reported on Form 1040.Premiums on a personal life insurance policy are nondeductible.Nondeductible items,such as these premiums,are not reported on Form 1040
Q2) Which,if any,of the following is a deduction for AGI?
A) State and local sales taxes.
B) Interest on home mortgage.
C) Unreimbursed employee expenses.
D) Charitable contributions.
E) None of the above.
Answer: E
Q3) Gain on the sale of collectibles held for more than 12 months is subject to tax at a rate no higher than 28%.
A)True
B)False
Answer: True
Page 5
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Chapter 4: Gross Income: Concepts and Inclusions
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Q1) An advantage to operating a business as an S corporation is that the shareholder has no gross income from the S corporation unless the shareholder makes a withdrawal during the tax year.
A)True
B)False
Q2) Theresa,a cash basis taxpayer,purchased a bond on July 1,2008,for $10,000,plus $400 of accrued interest.The bond paid $800 of interest each December 31.On March 31,2011,she sold the bond for $10,150,which included $200 of accrued interest.
A) Theresa's 2011 interest income from the bond is $150.
B) Theresa's gain on the sale of the bond is $150.
C) Theresa has a $250 loss from the sale of the bond.
D) Theresa has $200 of interest income and a $50 loss from the bond in 2011.
E) None of the above.
Q3) Ralph purchased his first Series EE bond during the year.He paid $709 for a 10-year bond with a $1,000 maturity value.The yield to maturity on the bonds was 3.5%.Ralph is not required to recognize the $291 ($1,000 - $709)original issue discount until the bond matures.
A)True
B)False
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Chapter 5: Gross Income: Exclusions
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Q1) Mel was the beneficiary of a $45,000 group term life insurance policy on his wife.His wife's employer paid all of the premiums on the policy.Mel used the life insurance proceeds to purchase a United States Government bond,which paid him $2,500 interest during the current year.Mel's Federal gross income from the above is $2,500.
A)True
B)False
Q2) Olaf was injured in an automobile accident and received $25,000 for his physical injury,$10,000 for his loss of income,and $50,000 punitive damages.As a result of the award,the amount Olaf must include in gross income is:
A) $10,000.
B) $50,000.
C) $60,000.
D) $85,000.
E) None of the above.
Q3) For a person who is in the 35% marginal tax bracket,$1,000 of tax-exempt income is equivalent to over $1,500 of income that is subject to tax.
A)True
B)False
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Chapter 6: Deductions and Losses: in General
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Q1) If a vacation home is classified as primarily personal use,part of the maintenance and utility expenses can be allocated and deducted as a rental expense.
A)True
B)False
Q2) The legal cost of having a will prepared is not deductible.
A)True
B)False
Q3) Under what circumstances may a taxpayer deduct the expenses of investigating a possible business acquisition,if (1)the business is not acquired; and (2)the business is acquired?
Q4) The period in which an accrual basis taxpayer can deduct an expense is determined by applying the economic performance and all events tests.
A)True
B)False
Q5) A hobby activity can result in all of the hobby income being included in AGI and no deductions being allowed.
A)True
B)False
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Chapter 7: Deductions and Losses: Certain Business
Expenses and Losses
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Q1) Peggy is in the business of factoring accounts receivable.Last year,she purchased a $30,000 account receivable for $25,000.This year,the account was settled for $18,000.How much loss can Peggy deduct and in which year?
A) $5,000 for the current year.
B) $5,000 for the prior year and $7,000 for the current year.
C) $7,000 for the current year.
D) $12,000 for the current year.
E) None of the above.
Q2) A casualty loss deduction is not allowed for losses resulting from a decline in value rather than an actual loss of property.
A)True
B)False
Q3) A nonbusiness bad debt deduction can be taken any year after the debt becomes totally worthless.
A)True
B)False
Q4) A farming NOL may be carried back 2 years.
A)True
B)False
Page 9
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Chapter 8: Depreciation, cost Recovery, amortization, and Depletion
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Q1) Bonnie purchased a new business asset (five-year property)on March 10,2011,at a cost of $20,000.She also purchased a new business asset (seven-year property)on November 20,2011,at a cost of $13,000.Bonnie did not elect to expense either of the assets under § 179,nor did she elect straight-line cost recovery.Bonnie elects not to take additional first-year depreciation.Determine the cost recovery deduction for 2011 for these assets.
A) $5,858.
B) $7,464.
C) $9,586.
D) $19,429.
E) None of the above.
Q2) If 150% declining-balance is used,there is no straight-line switchover.
A)True
B)False
Q3) Under the MACRS straight-line election for personalty,the mid-quarter convention is applicable.
A)True
B)False
Q4) Discuss the difference between the half-year convention and the mid-quarter convention.
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Chapter 9: Deductions: Employee and
Self-Employed-Related Expenses
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Q1) Joyce,age 39,and Sam,age 40,who have been married for seven years,are both active participants in qualified retirement plans.Their total AGI for 2011 is $120,000.Each is employed and earns a salary of $65,000.What are their combined deductible contributions to traditional IRAs?
A) $0.
B) $3,000.
C) $4,000.
D) $8,000.
E) None of the above.
Q2) Qualifying job search expenses are deductible even if the taxpayer does not change jobs.
A)True
B)False
Q3) The Federal per diem rates that can be used for "deemed substantiated" purposes are the same for all locations in the country.
A)True
B)False
Q4) In terms of income tax treatment,what is the difference between common law and statutory employees?
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Chapter 10: Deductions and Losses: Certain Itemized
Deductions
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Q1) Employee business expenses for travel qualify as itemized deductions subject to the 2% floor if they are not reimbursed.
A)True
B)False
Q2) Tina,whose MAGI is $50,000,paid $3,000 of interest on a qualified education loan in 2011.Tina is single.She may deduct the $3,000 interest as a deduction for AGI.
A)True
B)False
Q3) For purposes of computing the deduction for qualified residence interest,a qualified residence includes only the taxpayer's principal residence.
A)True
B)False
Q4) In January 2012,Pam,a calendar year cash basis taxpayer,made an estimated state income tax payment for 2011.The payment is deductible in 2011.
A)True
B)False
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Chapter 11: Investor Losses
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Q1) Which of the following factors should be considered in determining whether an activity is treated as an appropriate economic unit?
A) The similarities and differences in types of business.
B) The extent of common control.
C) The extent of common ownership.
D) The geographic location.
E) All of the above.
Q2) A taxpayer is considered to be a material participant in a significant participation activity if he or she spends at least 400 hours in the activity.
A)True
B)False
Q3) Services performed by an employee are treated as being related to a real estate trade or business if the employee performing the services has more than a 5% ownership interest in the employer.
A)True
B)False
Q4) Describe the general rules that limit the deduction of investment interest expense.
Q5) What special passive loss treatment is available to real estate activities?
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Chapter 12: Tax Credits and Payments
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Q1) An employer's tax deduction for wages is not affected by the work opportunity tax credit.
A)True
B)False
Q2) Bradley has two college-age children,Clint,a freshman at State University,and Abigail,a junior at Northwest University.Both Clint and Abigail are full-time students.Clint's expenses during the 2011 fall semester are as follows: $2,400 tuition,$250 books and course materials,and $1,600 room and board.Abigail's expenses for the 2011 calendar year are as follows: $10,200 tuition,$1,200 books and course materials,and $3,600 room and board.Tuition and the applicable room and board costs are paid at the beginning of each semester.Bradley is married,files a joint tax return,claims both children as dependents,and has a combined AGI with his wife of $114,000 for 2011.Determine Bradley's available education tax credit for 2011.
Q3) The disabled access credit was enacted to encourage small businesses to make their businesses more accessible to disabled individuals.
A)True
B)False
Q4) Discuss the treatment of unused general business credits.
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Chapter 13: Property Transactions
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Q1) If a taxpayer purchases a business and the price exceeds the fair market value of the listed assets,how is the excess allocated among the purchased assets?
Q2) After 5 years of marriage,Dave and Janet decided to get a divorce.As part of the divorce settlement,Janet transfers to Dave the house she purchased prior to their marriage.Janet's adjusted basis for the house is $125,000 and the fair market value is $200,000 on the date of the transfer.What are the tax consequences to Janet and to Dave as a result of the transfer?
Q3) For gifts made after 1976,when will part of the gift tax paid by the donor be added to the donee's basis?
Q4) Rose's manufacturing plant is destroyed by fire on the afternoon of November 1,2011.The adjusted basis is $800,000.The insurance company offers a settlement of $760,000.After protracted negotiations,Rose receives $810,000 on July 25,2012.Rose is a fiscal year taxpayer whose tax year ends on June 30th.What is the latest date that Rose can invest the proceeds in qualifying replacement property and elect to defer the gain under § 1033?
Q5) Taxpayer's principal residence is destroyed by a tornado.Taxpayer is single and his realized gain is $400,000.Is it possible for the taxpayer's recognized gain to be $0?
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Chapter 14: Property Transactions: Capital Gains and Losses
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Q1) To compute the holding period,start counting on the day the property was acquired and include the day of disposition.
A)True
B)False
Q2) Section 1231 property generally includes certain intangible assets (such as patents and goodwill)that are developed by the taxpayer and that are not eligible for amortization,but are held for more than one year.
A)True
B)False
Q3) Septa is the owner of vacant land that he purchased in 2006 for $400,000 and held for investment.On January 22,2010,he was paid $45,000 for an eighteen-month option on the land by Samantha.Samantha could buy the land for an additional $1,200,000 by exercising the option.Samantha had hoped to develop the land into a shopping center,but was unable to get the zoning changed to accommodate building a shopping center on the land.Consequently,Samantha did not exercise her option and the option expired on August 15,2011.What is Septa's basis,gain,and type of gain from these events?
Q4) What characteristics must the seller of a patent have in order to be classified as a holder?
Page 16
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Chapter 15: Alternative Minimum Tax
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Q1) Medical expenses are reduced by 10% of AGI to compute the amount deductible for AMT purposes and 7.5% of AGI for regular income tax purposes.
A)True
B)False
Q2) What is the relationship between taxable income and AMTI?
The indirect method,rather than the direct method,is normally used to calculate the AMT (i.e.,the starting point is taxable income).
Q3) Julia's tentative AMT is $62,000.Her regular income tax liability is $59,000.Julia's AMT is $3,000.
A)True
B)False
Q4) What is the relationship between the regular income tax liability and the tentative AMT?
Q5) Identify an AMT adjustment that applies for the individual taxpayer that does not apply for the corporate taxpayer and identify an AMT adjustment that applies for the corporate taxpayer that does not apply for the individual taxpayer.
Q6) Why is there a need for a second tax system called the alternative minimum tax?
Q7) Will all AMT adjustments reverse? That is,do they relate to timing differences?
Page 17
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Chapter 16: Accounting Periods and Methods
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Q1) Computer Consultants Inc.,began business as an adviser to chains of retail stores.The company assisted the stores in the selection of hardware and the development of software used by retail chain stores.Later the company developed software and sold it to its customers.The company also began selling some of the equipment to the customers.That is,the company would bid on a job to purchase and install equipment and the software.The company has consistently reported its income by the cash method.At the end of the year,the company has substantial accounts receivables from clients and a small amount of inventory on hand.What advice can you offer the company regarding its accounting method?
Q2) The installment method applies where a payment will be received after the tax year of the sale:
A) By an investor who sold real estate at a gain.
B) By an investor who sold real estate at a loss.
C) By an appliance dealer who sold inventory at a gain.
D) By an investor who sold IBM Corporation common stock at a gain.
E) None of the above.
Q3) A doctor's incorporated medical practice may end the last day of any month of the year.
A)True
B)False
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Chapter 17: Corporations: Introduction and Operating Rules
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Q1) A corporation with $10 million or more in assets must file Schedule M-3 (instead of Schedule M-1).
A)True
B)False
Q2) Discuss the purpose of Schedule M-1.Give two examples of an addition and two examples of a subtraction that could be reported on Schedule M-1.
Q3) Schedule M-3 is similar to Schedule M-1 in that the form is designed to reconcile net income per books with taxable income.However,an objective of Schedule M-3 is more transparency between financial statements and tax returns than that provided by Schedule M-1.
A)True
B)False
Q4) On December 20,2011,the directors of Quail Corporation (an accrual basis,calendar year taxpayer)authorized a cash donation of $5,000 to the American Cancer Society,a qualified charity.The payment,which is made on March 15,2012,may be claimed as a deduction for tax year 2011.
A)True
B)False
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Chapter 18: Corporations: Organization and Capital Structure
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Q1) When depreciable property is transferred to a controlled corporation under § 351,any recapture potential disappears and does not carry over to the corporation.
A)True
B)False
Q2) Lark City donates land worth $300,000 and cash of $100,000 to Orange Corporation as an inducement to locate in the city.Four months later,Orange purchases additional land and a building at a cost of $500,000 and moves its operations to Lark City.Ann,the sole shareholder,contributes equipment (basis of $70,000 and fair market value of $200,000)to help Orange in its new operations.What are the tax consequences of these transfers to Orange Corporation?
Q3) Similar to like-kind exchanges,the receipt of "boot" under § 351 can cause loss to be recognized.
A)True
B)False
Q4) In a § 351 transfer,the receipt of boot is not taxed if the shareholder has a realized loss.
A)True
B)False
Page 20
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Chapter 19: Corporations: Distributions Not in Complete
Liquidation
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Q1) Navy Corporation makes a property distribution to its sole shareholder,Troy.The property distributed is a car (fair market value of $10,000; basis of $15,000)that is subject to a $2,000 liability which Troy assumes.Navy makes no other distributions during the current year.Navy has no accumulated E & P and $15,000 of current E & P from other sources during the year.What is Navy's E & P after taking into account the distribution of the car?
A) $2,000.
B) $3,000.
C) $5,000.
D) $7,000.
E) None of the above.
Q2) An increase in the LIFO recapture amount must be added to taxable income to determine E & P.
A)True
B)False
Q3) A corporate shareholder that receives a constructive dividend cannot apply a dividends received deduction to the distribution.
A)True
B)False
Page 21
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Chapter 20: Corporations: Distributions in Complete
Liquidation and an Overview of Reorganizations
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Q1) Lyon has 100,000 shares outstanding that are worth $10 per share.It uses 32% of its stock plus $80,000 to acquire Zebra Corporation in a "Type A" reorganization.Zebra's assets are valued at $400,000 and its accumulated earnings and profits are $25,000 at the time of the reorganization.The Lyon shares and cash are distributed to the Zebra shareholders as follows.Jake (owning 62.5% of Zebra)receives 18,000 shares (value $180,000)and $70,000.Kara (owning 37.5% of Zebra)receives 14,000 shares (value $140,000)and $10,000.Jake and Kara each recognize gains to the extent of the cash they received.What is the character of Jake's and Kara's gains?
Q2) A shareholder bought 2,000 shares of Zee Corporation for $90,000 several years ago.When the stock is valued at $200,000,Zee redeems these shares in exchange for 6,000 shares of Yea Corporation stock.This transaction meets the requirements of § 368.Which of the following statements is true with regard to this transaction?
A) The shareholder has a recognized gain of $110,000.
B) The shareholder has a postponed gain of $110,000.
C) The shareholder has a basis in the Yea stock of $200,000.
D) Gain or loss cannot be determined because the value of the Yea stock is not given.
E) None of the above statements is true.
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Chapter 21: Partnerships
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Q1) Which of the following is a correct definition of a concept related to partnership taxation?
A) The entity concept treats partners and partnerships as separate units and gives the partnership its own tax "personality."
B) A partner's capital sharing ratio is defined as the percent of partnership profits that will be allocated to the partner.
C) The partnership's inside basis is defined as the sum of each partner's capital account balance.
D) A special allocation is defined as an amount that could differently affect the tax liabilities of two or more partners.
E) None of these statements is correct.
Q2) In a proportionate nonliquidating distribution of cash and a capital asset,the partner recognizes gain to the extent the amount of cash distributed exceeds the partner's basis in the partnership interest.
A)True
B)False
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Chapter 22: S Corporations
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Q1) Which item does not appear in an S corporation's nonseparately computed income?
A) Net sales.
B) Tax-exempt income.
C) Cost of goods sold.
D) Depreciation recapture.
E) All of the above appear.
Q2) Tax-exempt income is listed on Schedule ____________________ of Form 1120S.
Q3) The Schedule M-3 is the same for a C corporation and an S corporation.
A)True
B)False
Q4) Samantha owned 1,000 shares in Evita,Inc.,an S corporation,that uses the calendar year.On October 11,2011,Samantha sells all of her Evita stock.Her basis at the beginning of 2011 was $60,000.Her share of the corporate income for 2011 was $22,000,and she receives a distribution of $37,000 between January 1 and October 11,2011.Her stock basis at the time of the sale is:
A) $45,000.
B) $60,000.
C) $75,000.
D) $82,000.
E) Some other answer.
Page 24
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Chapter 23: Exempt Entities
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Q1) Federal agencies exempt from Federal income tax under § 501(c)(1)are not subject to the unrelated business income tax (UBIT).
A)True
B)False
Q2) Which of the following are organizations exempt under § 501(c)(3)?
A) Girl Scouts of America.
B) Washington and Lee University.
C) Veterans of Foreign Wars (VFW).
D) Only a. and b. are § 501(c)(3) organizations.
E) All of the above are § 501(c)(3) organizations.
Q3) For an activity to be considered as regularly carried on for purposes of the unrelated business income tax,the activity must be conducted during the work week (i.e.,activities performed on the weekend are not considered in determining if the activity is regularly carried on).
A)True
B)False
Q4) Define average acquisition indebtedness with respect to debt-financed property.
Q5) Define "trade or business" for purposes of the unrelated business income tax (UBIT).
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Chapter 24: Multistate Corporate Taxation
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Q1) Usually a business chooses a location where it will build a new plant based chiefly on tax considerations.
A)True
B)False
Q2) Under _____________________,a state is prohibited from taxing a business if the only connection with the state is the solicitation of orders for sales of tangible personal property that are sent outside the state for approval or rejection and,if approved,are filled and shipped by the business from a point outside of the state.
Q3) Most states' consumer sales taxes apply directly to the final purchaser of the taxable asset,but the seller remits the tax to the state treasury.
A)True
B)False
Q4) Typically included in the sales/use tax base is the purchase of computer and cell phone equipment by a large consulting firm that is incorporated in the state.
A)True B)False
Q5) An ad valorem property tax is based on the asset's current
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Chapter 25: Taxation of International Transactions
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Q1) If a foreign corporation's U.S.effectively connected earnings for the taxable year are $900,000 and its net equity has increased by $40,000,its dividend equivalent amount is $940,000.
A)True
B)False
Q2) Which of the following is not a U.S.person?
A) Domestic corporation.
B) Citizen of Turkey with U.S. permanent residence status (i.e., green card).
C) U.S. corporation 100% owned by a foreign corporation.
D) Foreign corporation 100% owned by a domestic corporation.
Q3) Jokerz,a CFC of a U.S.parent,generated $80,000 of Subpart F foreign base company services income in its first year of operations.The next year,Jokerz distributes $50,000 cash to the parent,from those service profits.The parent is taxed on $80,000 in the first year and $50,000 in the second year.
A)True
B)False
Q4) "Inbound" and "offshore" transfers are exempt from taxation under § 367.
A)True
B)False
Q5) Discuss the primary purposes of income tax treaties.
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Chapter 26: Tax Practice and Ethics
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Sample Questions
Q1) Faye,a CPA,is preparing Judith's tax return.Before computing Judith's deduction for business supplies,Faye must examine Judith's records in support of the deducted amount.
A)True
B)False
Q2) If a taxpayer is audited by the IRS and is unwilling to accept the findings of the agent,how does the taxpayer's audit strategy change when the dispute is taken to the IRS Appeals Division? Hint: What are the "hazards of litigation?"
Q3) A letter ruling is issued by the IRS at no charge.
A)True
B)False
Q4) The IRS employs almost 90,000 personnel,making it one of the largest Federal agencies.
A)True
B)False
Q5) A taxpayer can be subject to both ____________________ and ____________________ penalties for tax misconduct. or
Q6) The IRS is a subsidiary agency of the Department of the
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Chapter 27: The Federal Gift and Estate Taxes
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Q1) Ben and Lynn are married and have two pre-teen grandchildren.They want to contribute to a § 529 plan on behalf of their education.For 2011,what is the maximum amount they can transfer to the plan without making a taxable gift?
Q2) At one point,the tax rates applicable to transfers by gift were lower than those applying to transfers by death.
A)True
B)False
Q3) In 2010 and with $100,000,Ronald establishes a joint savings account with his cousin,Allison.In 2011,Allison withdraws the $100,000 and disappears.Ronald made a gift to Allison in 2011.
A)True
B)False
Q4) The election of the alternate valuation date does not include any income earned by the property after the date the deceased owner died.
A)True
B)False
Q5) How could the § 2513 election to split gifts help avoid the generation-skipping transfer tax (GSTT)?
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Chapter 28: Income Taxation of Trusts and Estates
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Q1) A fiduciary entity computes its alternative minimum tax in a manner similar to that used for a(n)____________________.
Q2) With respect to a timely filed Form 1041 for a trust based in Delaware,the IRS will accept:
A) Only paper returns.
B) Only e-filed returns.
C) Returns either on paper or in electronic form.
D) Returns only at its Ogden, Utah office.
Q3) The depreciation deductions of a trust usually are allocable to ____________________ beneficiaries. or
Q4) When a trust distributes an in-kind asset with a realized loss,most likely this loss should be allocated to and immediately deducted by the first-tier beneficiaries. A)True B)False
Q5) When a beneficiary receives a distribution from a trust of an asset other than cash,the realized loss could be disallowed under the ____________________ rule.
Q6) Every ____________________ trust is allowed a $300 personal exemption.
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