Business Taxation
Pre-Test Questions
Course Introduction
Business Taxation explores the principles, laws, and practices that govern the taxation of businesses. The course covers the various types of taxes that affect business entities, including income tax, value-added tax (VAT), and other relevant levies. Students will examine tax compliance, planning strategies, and the implications of tax regulations on business decision-making. The course also addresses contemporary issues such as emerging tax policies, digital business taxation, and international tax considerations, equipping students with the knowledge to manage tax obligations effectively and ethically in a dynamic business environment.
Recommended Textbook Principles of Taxation for Business and Investment Planning 2013 16th Edition by Sally Jones
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Chapter 1: Taxes and Taxing Jurisdictions
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Q1) The city of Springvale imposes a net income tax on businesses operating within its jurisdiction. The tax equals 1% of income up to $100,000 and 1.5% of income in excess of $100,000. The Springvale Bar and Grill generated $782,000 net income this year. Compute its city income tax.
A) $10,230
B) $11,230
C) $11,730
D) None of the above
Answer: B
Q2) Sellers of retail goods are responsible for collecting sales tax from their customers and remitting the tax to the state government.
A)True
B)False Answer: True
Q3) The U.S. government has jurisdiction to tax individuals who are not U.S. citizens but who are permanent U.S. residents.
A)True
B)False
Answer: True
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Chapter 2: Policy Standards for a Good Tax
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Q1) Which of the following tax policies would increase the redistribution of wealth across society?
A) Repealing the federal estate and gift taxes
B) Increasing the highest marginal income tax rate by 10%
C) Replacing the progressive income tax rate structure with a flat rate
D) Replacing the income tax with a national sales tax
Answer: B
Q2) The federal income tax law allows individuals whose property is destroyed by a natural disaster such as a fire or hurricane to reduce their taxable income by the amount of their financial loss. This rule is intended to improve the:
A) Convenience of the tax
B) Efficiency of the tax
C) Horizontal equity of the tax
D) Vertical equity of the tax
Answer: C
Q3) A tax meets the standard of sufficiency if it is easy for people to pay the tax.
A)True
B)False
Answer: False
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Chapter 3: Taxes As Transaction Costs
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Sample Questions
Q1) Leto Inc. has $500,000 in an investment paying 8% annual taxable interest. Each year, the corporation incurs a $3,000 nondeductible cash expense relating to the investment. If Leto's marginal tax rate is 35%, compute the annual after-tax cash flow.
A) $23,000
B) $24,050
C) $37,000
D) None of the above.
Answer: A
Q2) A taxpayer's marginal tax rate and discount rate are independent variables in the NPV calculation.
A)True
B)False
Answer: True
Q3) Marginal rate uncertainty includes the risk that Congress will change tax rates, increasing the tax costs of future income.
A)True
B)False
Answer: True
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Chapter 4: Maxims of Income Tax Planning
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Q1) Mrs. Day structures a transaction to shift income from her New York business to her New Hampshire business. This tax planning strategy may be taking advantage of the:
A) Entity variable
B) Time period variable
C) Jurisdiction variable
D) Character variable
Q2) Hilex Inc. structures a transaction to shift income from its 20Y0 tax year to its 20Y2 tax year. This tax planning strategy may be taking advantage of the:
A) Character variable
B) Entity variable
C) Time period variable
D) Jurisdiction variable
Q3) The goal of tax planning is to reduce tax costs or increase tax savings as much as possible.
A)True
B)False
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Chapter 5: Tax Research
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Q1) A keyword search using an electronic database is part of which step in the research process?
A) Understand the client's transaction and ascertain the facts
B) Identify the tax issues, problems, or opportunities suggested by the facts and formulate specific research questions
C) Locate relevant tax law authority
D) Analyze relevant authority and answer the research questions
Q2) Which of the following is not a citation to a primary authority?
A) Sec. 1245
B) Lengsfield v. Comm., 50 AFTR 1683 (CA-5, 1957)
C) M-5800 Activities Not Engaged in for Profit - Hobby Losses
D) Rev. Proc. 2002-32, 2002-1 C.B. 959
Q3) Locate the revenue procedure that includes the inflation-adjusted individual tax rate schedules for 2012. This revenue procedure usually is released in the fourth quarter of the previous year. Provide a complete citation for your source.
Q4) Editorial explanations provided by electronic tax services are examples of secondary authority.
A)True
B)False
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Chapter 6: Taxable Income From Business Operations
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Q1) Which of the following statements concerning the cash method of accounting is true?
A) A cash basis taxpayer who is in constructive receipt of an income item must recognize that income, even if the item is not in the taxpayer's actual possession.
B) A cash basis taxpayer can deduct the purchase cost of business equipment.
C) A cash basis taxpayer does not recognize gross income on receipt of an economic benefit unless that benefit consists of money.
D) A cash basis taxpayer can deduct interest when it is paid, regardless of the time period for which the interest is charged.
Q2) Laine Services, a calendar year taxpayer, billed a client for $8,450 of services on November 30, 2012, and received a check in full payment from the client on January 12, 2013. If Poole is an accrual basis taxpayer, it reports $8,450 taxable income in 2012.
A)True B)False
Q3) An unfavorable temporary book/tax difference generates a deferred tax asset.
A)True B)False
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Chapter 7: Property Acquisitions and Cost Recovery
Deductions
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Q1) The MACRS calculation ignores any salvage or residual value of an asset.
A)True
B)False
Q2) Merkon Inc. must choose between purchasing a new asset for $86,000 or leasing the asset for four years for $27,500 annual rent. The purchased asset would be 3-year recovery property that Merkon could use for four years, after which the asset would have no salvage value. Assuming a 35% tax rate, an 8% discount rate, and no 50% bonus depreciation, which of the following statements is true?
A) Merkon's after-tax cost of the purchase is $5,953 less than the after-tax cost of the lease.
B) Merkon's after-tax cost of the lease is $1,374 less than the after-tax cost of the purchase.
C) Merkon's after-tax cost of the purchase is $8,226 less than the after-tax cost of the lease.
D) None of the above
Q3) A corporation that incurs $28,500 organization costs must capitalize the costs and amortize them over 180 months.
A)True
B)False
Page 9
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Chapter 8: Property Dispositions
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Sample Questions
Q1) Schatz Corporation generated $8,083,000 ordinary business income and recognized a $73,900 net capital gain on the sale of assets. Which of the following statements is true?
A) Schatz must pay tax at the regular corporate rates on $8,156,900 taxable income.
B) Schatz must pay tax at the regular corporate rates on $8,083,000 taxable income. The $73,900 capital gain is eligible for a preferential tax rate.
C) Schatz's net capital gain results in a permanent book/tax difference.
D) None of the above is true.
Q2) Several years ago, Nipher paid $70,000 to purchase equipment to use in its business. This year, it sold the equipment for $76,500. Accumulated MACRS depreciation through date of sale was $18,000. Determine the amount and character of Nipher's gain recognized.
A) $24,500 ordinary gain
B) $24,500 Section 1231 gain
C) $18,000 ordinary gain and $6,500 capital gain
D) $18,000 ordinary gain and $6,500 Section 1231 gain
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Chapter 9: Nontaxable Exchanges
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Q1) Mr. Weller and the Olson Partnership entered into an exchange of investment real property. Mr. Weller's property was subject to a $428,000 mortgage, which Olson assumed. Olson's property was subject to a $235,000 mortgage, which Mr. Weller assumed. Which of the following statements is true?
A) Mr. Weller received $193,000 boot; Olson paid $193,000 boot.
B) Mr. Weller paid $193,000 boot; Olson received $193,000 boot.
C) Mr. Weller received $428,000 boot; Olson received $235,000 boot.
D) Mr. Weller paid $428,000 boot; Olson paid $235,000 boot.
Q2) A taxpayer who transfers property for corporate stock can defer gain recognition only if the taxpayer owns at least 50% of the corporation's outstanding stock immediately after the exchange.
A)True
B)False
Q3) Yelano Inc. exchanged an old forklift used in its business for a new forklift. This like-kind exchange is nontaxable.
A)True
B)False
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Chapter 10: Sole Proprietorships, Partnerships, Llcs, and S
Corporations
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Q1) Businesses must withhold payroll taxes from payments made to independent contractors and periodically remit such taxes to the state and federal governments.
A)True
B)False
Q2) A guaranteed payment may be designed to compensate a partner for personal services rendered to the partnership.
A)True
B)False
Q3) Which of the following statements regarding sole proprietorships is false?
A) A sole proprietorship has no legal identity separate from that of its owner.
B) Sole proprietorships are the most common form of business entity in the U.S.
C) The cash flow generated by a sole proprietorship belongs to the owner.
D) The assets and liabilities of a sole proprietorship are held in the name of the business, not the owner.
Q4) A corporate shareholder usually cannot be held personally liable for the debts arising from the corporate business.
A)True
B)False
Page 12
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Chapter 11: The Corporate Taxpayer
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Q1) Which of the following statements about the calculation of alternative minimum taxable income is true?
A) Excess percentage depletion is a positive adjustment to AMTI.
B) The AMT net operating loss can reduce AMTI to zero.
C) The AMTI exemption for all corporations is $40,000.
D) The minimum tax credit can be carried back two years.
Q2) The stock of Wheel Corporation, a U.S. company, is publicly traded, with no single shareholder owning more than 5 percent of its outstanding stock. Wheel owns 90 percent of the outstanding stock of Axle, Inc, also a U.S. company. Axle owns 100% of the outstanding stock of Tire Corporation, a German company. Wheel and Tire each own 50 percent of the outstanding stock of Bumper, Inc., a U.S. company. Wheel and Axle each own 50 percent of the outstanding stock of Trunk Corporation, a U.S. company. Which of these corporations form an affiliated group eligible to file a consolidated tax return?
A) Wheel, Axle, Tire, Bumper, and Trunk are an affiliated group.
B) Wheel, Axle, and Tire are an affiliated group.
C) Wheel and Axle are an affiliated group.
D) Wheel, Axle, and Trunk are an affiliated group.
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Chapter 12: The Choice of Business Entity
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Q1) The personal holding company tax is a penalty tax imposed in addition to the regular income tax.
A)True
B)False
Q2) Which of the following is not a controlled corporate group?
A) A corporation owning 100% of the outstanding stock of two other corporations.
B) Two corporations wholly-owned by the same individuals.
C) Two corporations each of whose stock is owned 80% by individual A and 20% by individual B
D) Two corporations whose stock is publicly traded, where the two corporations are equal partners in a partnership.
Q3) Ms. Alfred anticipates that her business will generate $500,000 taxable income. She can reduce the total tax burden imposed on this income if she spreads it among five separate corporations.
A)True
B)False
Q4) 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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Q1) Which of the following statements about the foreign tax credit is true?
A) The foreign tax credit allows U.S. companies to defer U.S. tax on foreign source income.
B) The foreign tax credit is available to foreign corporations doing business in the U.S.
C) The foreign tax credit is allowed for all types of foreign taxes.
D) By permitting a foreign tax credit, the U.S. relinquishes its taxing jurisdiction on foreign source income earned by U.S. corporations to the extent that income is taxed by a foreign jurisdiction.
Q2) If a corporation with a 35% marginal federal income tax rate pays $20,000 state income tax, the after-tax cost of the state tax is $13,000.
A)True
B)False
Q3) The UDITPA formula for state income tax apportionment consists of three factors: sales, payroll, and profit.
A)True
B)False
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Chapter 14: The Individual Tax Formula
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Q1) Which of the following statements concerning extensions of time to file an individual tax return is false?
A) The extension of time to file does not extend the time for payment of any tax due.
B) An individual may receive an automatic extension of the filing date without providing any explanation to the IRS.
C) The extended due date of a calendar-year individual tax return is October 15 of the following year.
D) An extension request must be filed before the end of the taxable year.
Q2) Mr. and Mrs. Upton's marginal tax rate on their joint return is 33%. This year, their itemized deductions totaled $13,400, and their standard deduction (MFJ) was $11,900. Compute their incremental tax savings from their itemized deductions.
A) 0
B) $495
C) $3,927
D) $4,422
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Chapter 15: Compensation and Retirement Planning
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Q1) Mr. and Mrs. Owens moved from San Francisco, California, to Richmond, Virginia, so that Mrs. Owens could accept employment with Mega Corporation. As part of her employment contract, Mrs. Owens received a $10,000 moving allowance. What is the affect of this $10,000 cash receipt on the couple's AGI assuming that:
a. Their deductible moving expenses totaled $8,000?
b. Their deductible moving expenses totaled $11,000?
Q2) Mr. Hazel, the principal executive officer of a publicly held corporation, received $2.5 million compensation this year. The compensation consisted of an $800,000 salary and a $1.7 million bonus because Mr. Hazel met a performance goal established by outside members of the board of directors. The corporation is allowed to deduct the entire amount of Mr. Hazel's compensation.
A)True
B)False
Q3) A stock option is the right to purchase the stock of a corporate employer at a stated price for an indefinite period of time.
A)True
B)False
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Chapter 16: Investment and Personal Financial Planning
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Q1) Ruth Darma is a shareholder who is not involved in the day-to-day activities of an S corporation. Her interest in the business is a passive activity.
A)True
B)False
Q2) As a general tax planning rule, an individual should sell assets that have declined in value prior to death and keep appreciated property to transfer to his heirs at his death.
A)True
B)False
Q3) Mr. Ames, an unmarried individual, made a gift of real estate to his nephew. Compute the amount subject to the federal gift tax in each of the following situations.
a. FMV of the real estate was $1,800,000, and the transfer was Mr. Ames first taxable gift.
b. FMV of the real estate was $7,250,000 and the transfer was Mr. Ames first taxable gift.
c. FMV of the real estate was $2,300,000. Two years ago, Mr. Ames made his first taxable gift of marketable securities with a $3,920,000 FMV in excess of the annual exclusion.
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Chapter 17: Tax Consequences of Personal Activities
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Q1) 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.
Q2) Mrs. Hanson's financial support this year consisted of: $14,650 Social Security benefits; $9,600 pension from her former employer's qualified retirement plan, and $15,000 cash gifts from her children. Compute Mrs. Hanson's AGI.
Q3) Gifts are not included in the recipient's gross income.
A)True
B)False
Q4) Which of the following items is included in the recipient's gross income?
A) Life insurance death benefit
B) Legal award for personal injury
C) Legal award for punitive damages
D) Scholarship for tuition, fees, and books
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Chapter 18: The Tax Compliance Process
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Q1) Only one spouse must sign a jointly filed Form 1040.
A)True
B)False
Q2) Which of the following statements about taxpayer responsibility is false?
A) Taxpayers are responsible for paying the correct amount of federal tax.
B) Taxpayers are responsible for filing the proper federal income tax return.
C) Taxpayers are responsible for maintaining adequate tax records.
D) None of the above is false.
Q3) 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 can't result 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.
Q4) The statute of limitations for a tax return does not begin to run until the return is filed.
A)True
B)False
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