Business Taxation Review
Questions
Course Introduction
Business Taxation introduces students to the principles and practices of taxation as they relate to businesses. The course covers fundamental concepts such as the structure of tax systems, types of business taxes, tax compliance, and planning strategies. Students will learn about the calculation and reporting of taxes for various business entities, including sole proprietorships, partnerships, corporations, and limited liability companies. Emphasis is placed on understanding income tax, value-added tax (VAT), and other relevant taxes, alongside the implications of tax law on business decisions. The course also highlights ethical considerations, tax avoidance versus evasion, and current issues in business taxation both nationally and internationally.
Recommended Textbook Principles of Taxation for Business and Investment Planning 2016 19th Edition by Sally Jones
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Chapter 1: Taxes and Taxing Jurisdictions
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Sample Questions
Q1) What gives the federal government the right to impose a tax on individual and corporate income?
A) Internal Revenue Code of 1986
B) Revenue Act of 1913
C) Sixteenth Amendment to the U.S. Constitution
D) Bill of Rights
Answer: C
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) When did the federal income tax become a permanent tax?
A) Immediately after the Revolutionary War
B) During the Civil War
C) In 1913 when the Sixteenth Amendment to the U.S. Constitution was ratified
D) In 1939 when Congress enacted the first Internal Revenue Code
Answer: C
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3
Chapter 2: Policy Standards for a Good Tax
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Q1) According to supply-side economic theory, a decrease in tax rates for high-income individuals could actually cause an increase in tax revenue.
A)True
B)False
Answer: True
Q2) Which of the following statements about horizontal equity is false?
A) Horizontal equity focuses on a rational and impartial measurement of the tax base.
B) Horizontal equity focuses on the measurement of taxpayers' ability to pay.
C) If persons with equal ability to pay a tax owe an equal amount of tax, the tax is horizontally equitable.
D) None of the above is false.
Answer: D
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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Sample Questions
Q1) Late in the current year, Jolsen Company signed a four-year contract with an advertising agency. Under the contract, Jolsen must pay $375,000 annually for the agency's services. After Jolsen signed the contract, Congress enacted legislation disallowing any deduction for advertising expense for future tax years. Jolsen underestimated the after-tax cost of the contract because of:
A) Marginal tax rate uncertainty
B) Financial risk
C) Audit risk
D) Tax law uncertainty
Answer: D
Q2) Which of the following statements about public market transactions is true?
A) The parties negotiate directly with each other.
B) The parties must engage in unilateral instead of bilateral tax planning.
C) The parties are not transacting at arm's length.
D) Both parties have flexibility in determining the legal and financial characteristics of the transaction.
Answer: B
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Chapter 4: Maxims of Income Tax Planning
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Sample Questions
Q1) Nilo Inc. sold an asset to PPQ Partnership, which is unrelated to Nilo. PPQ immediately sold the property to Nilo Western Inc., which is a 100% controlled Nilo subsidiary. The IRS could treat the two sales as one sale of the asset by Nilo to Nilo Western by applying the:
A) Economic substance doctrine
B) Assignment of income doctrine
C) Step transaction doctrine
D) Constructive payment doctrine
Q2) A reduced market rate of return on a tax-favored investment is called an implicit tax.
A)True
B)False
Q3) The tax character of an item of income depends on how the income is reported on the firm's financial statements.
A)True
B)False
Q4) Corporations, LLCs, and partnerships are all taxable entities.
A)True
B)False
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6
Chapter 5: Tax Research
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Sample Questions
Q1) When the Supreme Court denies certiorari, the decision of the appellate court is final.
A)True
B)False
Q2) Which of the following is not primary authority on which to base research conclusions?
A) Journal of Taxation article written by a professor.
B) Revenue ruling.
C) U.S. Tax Court decision.
D) U.S. Supreme Court decision.
Q3) When performing step one of the tax research process:
A) The researcher generally can assume that the client's initial summary of the transaction is factually accurate and complete.
B) The researcher must take into account the level of the client's tax knowledge.
C) The client's motivation in undertaking the transaction is generally irrelevant.
D) The researcher should presume that the client has some knowledge of the tax law.
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Chapter 6: Taxable Income From Business Operations
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Sample Questions
Q1) Toro Inc. received permission from the IRS to change its taxable year from a fiscal year ending July 31 to a calendar year. Consequently, Toro filed a short-period return for the five-month period from August 1 through December 31. The taxable income reported on the return was $65,000. Use the corporate tax rates in Appendix C of the text to compute Toro's tax on this income (to the nearest dollar).
A) $11,250
B) $18,371
C) $25,350
D) $44,090
Q2) According to your textbook, business managers prefer to:
A) Report as much income as possible for book and tax purposes.
B) Report as much income as possible for book purposes and as little income as possible for tax purposes.
C) Report as little income as possible for book and tax purposes.
D) Report the same amount of income for book and tax purposes.
Q3) A corporation can't have an increase in deferred tax assets and an increase in deferred tax liabilities in the same year.
A)True
B)False
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Page 8
Chapter 7: Property Acquisitions and Cost Recovery
Deductions
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Sample Questions
Q1) Which of the following statements concerning deductible repair expenses is false?
A) The distinction between a repair expense and a capital improvement is clearly defined by the tax law.
B) Businesses typically incur repair expenses on a regular and recurring basis.
C) Repair expenses do not substantially increase the value of the repaired asset.
D) Repair expenses do not substantially increase the useful life of the repaired asset.
Q2) L&P Inc., which manufactures electrical components, purchased new equipment for use in its manufacturing process. The MACRS depreciation on the equipment must be capitalized to the cost of inventory under the unicap rules.
A)True
B)False
Q3) A firm can use LIFO for computing cost of goods sold for tax purposes only if it uses LIFO for financial reporting purposes.
A)True
B)False
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Chapter 8: Property Dispositions
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Sample Questions
Q1) Lettuca Inc. generated a $77,050 ordinary loss from operations this year. It also recognized $5,920 recaptured ordinary income, $55,000 net Section 1231 loss, and $7,840 net capital loss on the sale of assets. Compute Lettuca's net operating loss.
A) $(77,050)
B) $(126,130)
C) $(132,050)
D) $(133,970)
Q2) According to the realization principle, an increase in the value of an asset is not accounted for as income unless the amount of the increase can be accurately measured.
A)True
B)False
Q3) Both corporate and individual taxpayers can deduct capital losses to the extent of capital gains.
A)True
B)False
Q4) Because land is nondepreciable, it is always a capital asset.
A)True
B)False
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Chapter 9: Nontaxable Exchanges
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Sample Questions
Q1) Loonis Inc. and Rhea Company formed LooNR Inc. by transferring business assets in exchange for 1,000 shares of LooNR common stock. Loonis transferred assets with a $820,000 FMV and a $444,000 adjusted tax basis and received 820 shares. Rhea transferred assets with a $180,000 FMV and a $75,000 adjusted tax basis and received 180 shares. Which of the following statements is true?
A) The FMV of Rhea's 180 shares is $180,000.
B) Rhea's exchange of assets for stock is taxable because Rhea is not in control of LooNR immediately after the exchange.
C) LooNR recognizes a $105,000 gain on the exchange of its stock for Rhea's assets.
D) None of the above is true.
Q2) Mrs. Volter exchanged residential real estate for a commercial office building. The residential real estate was subject to a $92,800 mortgage, which was assumed by the other party to the exchange. Mrs. Volter must treat the relief of the mortgage as $92,800 boot received.
A)True
B)False
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11
Chapter 10: Sole Proprietorships, Partnerships, Llcs, and S
Corporations
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Sample Questions
Q1) Martha Pim is a general partner in PLF Partnership. This year, Martha received a $48,000 guaranteed payment from PLF, and her distributive share of PLF's ordinary business income was $93,200. Which of the following is accurate?
A) Martha must pay income tax on $141,200 and self-employment tax on $48,000.
B) Martha must pay income tax on $141,200 and self-employment tax on $93,200.
C) Martha must pay both income tax and self-employment tax on $141,200.
D) Martha must pay income tax on $48,000 and self-employment tax on $93,200.
Q2) Adam and Barbara formed a partnership to construct an apartment building. Adam contributed $500,000 cash and Barbara contributed land ($500,000 FMV and $250,000 basis) in exchange for a 50 percent interest in AB Partnership. Immediately after its formation, the partnership borrowed $600,000 from a local bank to begin construction. Compute each partner's initial basis in their partnership interest, assuming that: a. Adam and Barbara are both general partners. b. Adam is a limited partner and Barbara is a general partner.
Q3) Haddie's Hats is a regular corporation. The business must file an income tax return each year to report its taxable income or loss and pay any related taxes.
A)True
B)False
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Chapter 11: The Corporate Taxpayer
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Sample Questions
Q1) Which of the following statements regarding corporate tax filing requirements is false?
A) Corporations must file their annual federal income tax returns by the 15<sup>th</sup> day of the third month following the close of the taxable year.
B) Corporations may request an automatic six-month extension of time to file their federal income tax returns.
C) An extension of the income tax filing deadline does not extend the payment deadline for any balance of tax due for the taxable year.
D) Corporations must file their annual federal income tax returns by 15<sup>th</sup> day of the fourth month following the close of the taxable year.
Q2) Alexus Inc.'s alternative minimum taxable income before any AMT exemption is $210,000. Compute the corporation's AMT exemption:
A) $25,000
B) $0
C) $42,500
D) $40,000
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Chapter 12: The Choice of Business Entity
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Sample Questions
Q1) In today's tax environment, the opportunity for individuals to exploit the difference between the individual and the corporate rate structure is greater than ever.
A)True B)False
Q2) If a business is formed as a regular corporation, the income may be subject to double taxation.
A)True B)False
Q3) Contributions of property to S corporations are tax-free only if the contributing parties have control (80% ownership) immediately after the contribution.
A)True B)False
Q4) Partnerships offer more flexibility in allocating income among owners than S corporations.
A)True B)False
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Chapter 13: Jurisdictional Issues in Business Taxation
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Q1) Multi-state businesses can reduce their overall tax cost to the extent they can shift income from a low-tax state to a high-tax state.
A)True
B)False
Q2) The foreign tax credit is available for income taxes paid to a foreign country.
A)True
B)False
Q3) 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
Q4) Non-resident firms selling tangible goods to in-state residents can use P.L. 86-272 to avoid having income tax nexus in a state.
A)True
B)False
Q5) The United States taxes its citizens on their worldwide incomes.
A)True
B)False
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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) Only natural and adopted children or stepchildren can be a qualifying child for tax purposes.
A)True
B)False
Q3) The majority of individual taxpayers take the standard deduction rather than itemizing.
A)True
B)False
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) 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) Section 401(k) plans allow employees to contribute a portion of their current wages or salary to a tax-exempt retirement account. However, the contributed portion is still taxable compensation to the employee.
A)True
B)False
Q3) Nonqualified deferred compensation plans are prohibited from discriminating in favor of highly compensated employees.
A)True
B)False
Q4) An S corporation generated $160,000 ordinary taxable income this year. The shareholders must pay both income and self-employment tax on their pro rata shares of this income.
A)True
B)False
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Page 17
Chapter 16: Investment and Personal Financial Planning
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Sample Questions
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) At the beginning of the year, Ms. Faro paid $15,000 for 750 shares of Gravois stock. She instructed her broker to reinvest any dividends in additional Gravois shares. Her Form 1099-DIV reported that she earned $820 dividend income which purchased 39 additional shares. Which of the following statements is true?
A) Ms. Faro recognizes no dividend income and has a $15,000 basis in her 789 shares.
B) Ms. Faro recognizes no dividend income and has a $15,820 basis in her 789 shares.
C) Ms. Faro recognizes $820 dividend income and has a $15,820 basis in her 789 shares. D) None of the above statements is true.
Q3) Brokerage fees paid when stock is purchased are added to the basis of the stock. A)True
B)False
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Chapter 17: Tax Consequences of Personal Activities
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Q1) Which of the following expenditures is not a medical expense for federal tax purposes?
A) Payment for eyeglasses
B) Health insurance premiums
C) Payment for prescription antibiotics
D) All of the above are deductible medical expenses
Q2) Any gain recognized on the sale of a personal residence is excluded from the seller's gross income.
A)True
B)False
Q3) Ted and Alice divorced this year. Pursuant to the divorce agreement, Ted pays $5,000 alimony and $7,500 child support to Alice every month. Which of the following statements is true?
A) Alice includes the monthly alimony and child support payments in gross income.
B) Ted is allowed to deduct the monthly alimony and child support payments.
C) Ted is entitled to the exemptions for the couples' two minor children because he is paying child support.
D) None of the above is true.
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Chapter 18: The Tax Compliance Process
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Q1) Which of the following statements about a tax deficiency is true?
A) If a taxpayer is assessed a deficiency, the government will charge interest on the deficiency regardless of the reason for the deficiency.
B) Individuals who pay interest on a tax deficiency can deduct it as an itemized deduction.
C) Individuals who pay interest on a tax deficiency can deduct it as a business expense.
D) Statements A. and B. are both true.
Q2) A special agent is assigned to a tax investigation to determine if the government has enough evidence to indict the taxpayer for criminal fraud.
A)True
B)False
Q3) A professional tax return preparer must attach his or her signature and identifying number to each return prepared.
A)True
B)False
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