Business Taxation
Test Questions
Course Introduction
Business Taxation is a foundational course that examines the tax laws and regulations affecting businesses and their operations. The course covers key topics such as the determination of taxable income, treatment of different business entities (sole proprietorships, partnerships, corporations), tax planning, compliance, and reporting requirements. Students will analyze the implications of federal, state, and local taxes on business decisions and learn how to apply tax concepts to real-world situations. Emphasis is also placed on understanding deductions, credits, and the responsibilities of businesses in meeting their tax obligations, preparing students to make informed, strategic decisions in a business environment.
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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Q1) Which of the following is an example of a transaction-based tax?
A) A tax on net business income
B) An excise tax
C) An estate tax on the transfer of assets at death
D) Both B. and C.
Answer: D
Q2) Which of the following taxes is a significant source of revenue for state governments?
A) General sales tax
B) Individual income tax
C) Corporate income tax
D) All of the above
Answer: D
Q3) 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
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Chapter 2: Policy Standards for a Good Tax
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Q1) 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
Q2) The city of Hartwell spends about $3 million annually on snow removal. The city is considering amending its real property tax law to allow homeowners to offset the cost of private snow removal against their annual property tax liability. This amendment would affect the:
A) Fairness of the tax
B) Efficiency of the tax
C) Sufficiency of the tax
D) Convenience of the tax
Answer: B
Q3) A good tax should result in either horizontal or vertical equity across taxpayers.
A)True
B)False
Answer: False
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Chapter 3: Taxes As Transaction Costs
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Q1) The arm's length transaction presumption is unreliable for transactions between related parties.
A)True
B)False
Answer: True
Q2) The before-tax cash flow and after-tax cash flow from a nontaxable transaction are equal.
A)True
B)False
Answer: True
Q3) Net cash flow from a transaction equals the difference between cash received and cash disbursed in the transaction.
A)True
B)False
Answer: True
Q4) 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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Q1) Andrea Mitchell can shift income to her daughter, Lynn, by endorsing a check for $10,000 received for a client over to Lynn.
A)True
B)False
Q2) Which of the following statements about tax strategies is false?
A) Tax planners should prefer a simple strategy over a complex strategy.
B) Tax planners should prefer a flexible strategy over an inflexible strategy.
C) Tax planners should consider the tax consequences of a strategy to all parties.
D) None of the above is false.
Q3) Which of the following entities is not a taxable entity for federal income tax purposes?
A) Mr. Bob Clark, a U.S. citizen and resident of West Virginia
B) PTS Limited, an Arizona partnership
C) Confad Inc., an Oklahoma corporation listed on Nasdaq
D) All of the above are taxable entities.
Q4) 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) Which of the following is not a typical strategy for using a commercial tax service?
A) Using the topical index
B) Using the table of contents
C) In an electronic service, using a keyword search
D) All of the above are typical strategies for using a commercial tax service.
Q2) When analyzing tax authorities, the researcher must decide if the authority requires a factual judgment or an evaluative judgment. The difference between the two can be described as follows:
A) In making an evaluative judgment, the researcher can provide a definitive answer to the research question.
B) In making a factual judgment, the authority may be subject to interpretation.
C) In making an evaluative judgment, the researcher must draw a subjective conclusion that results in a qualified answer.
D) There is little difference between a factual judgment and an evaluative judgment.
Q3) Revenue rulings are an example of administrative authority.
A)True
B)False
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Chapter 6: Taxable Income From Business Operations
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Q1) Elcox Company, a calendar year, cash basis taxpayer, paid $950 to purchase eight months' worth of office supplies on December 12. Elcox can deduct $950 in the year of payment.
A)True
B)False
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) Which of the following business expenses always results in a difference between taxable income and book income?
A) Rent expense
B) Interest expense
C) Client entertainment
D) Salary expense
Q4) A firm's choice of taxable year is usually dictated by the annual operating cycle of the firm's business.
A)True
B)False
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Chapter 7: Property Acquisitions and Cost Recovery
Deductions
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Q1) Burton Company acquired new machinery by performing professional services worth $8,250 for the seller of the machinery. Burton's tax basis in the machinery is $8,250.
A)True
B)False
Q2) Powell Inc. was incorporated and began operations on October 1 and adopted a calendar year for tax purposes. Powell paid $4,200 to the attorney who handled the corporate formation. Which of the following statements is true?
A) If Powell capitalized the $4,200 payment for financial statement purposes, it must also capitalize it for tax purposes.
B) Powell can deduct the $4,200 payment on its first tax return.
C) For tax purposes, Powell must capitalize the $4,200 organizational cost and amortize it over 15 years.
D) None of the above is true.
Q3) A book/tax difference resulting from application of the unicap rules to manufactured inventory reverses in the year in which the inventory is sold.
A)True
B)False
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Chapter 8: Property Dispositions
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Sample Questions
Q1) O&V sold an asset with a $78,300 adjusted tax basis for $100,000. The purchaser paid $30,000 in cash and assumed O&V's $70,000 mortgage on the asset. Compute O&V's net cash flow from the sale assuming a 35% tax rate.
A) $22,405
B) $13,095
C) $14,105
D) None of the above
Q2) The general rule is that a net Section 1231 loss is treated as a capital loss and a net Section 1231 gain is treated as ordinary income.
A)True B)False
Q3) A taxpayer that is using the installment sale method to recognize gain must recompute the gross profit percentage every year during the term of the installment note.
A)True B)False
Q4) The sale of business inventory always generates ordinary income or loss.
A)True B)False
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Chapter 9: Nontaxable Exchanges
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Q1) Ms. Ellis sold 889 shares of publicly traded Omer stock (tax basis $161,400) for $125,000 cash on July 2. She paid $136,200 cash to purchase 900 Omer shares on August
8. Compute Ms. Ellis' loss recognized on the July 2 sale and determine her tax basis in the 1,000 shares.
A) $36,400 loss recognized; $136,200 basis
B) No loss recognized; $136,200 basis
C) No loss recognized; $76,200 basis
D) $36,400 loss recognized $125,000 basis
Q2) Mrs. Brinkley transferred business property (FMV $340,200; adjusted tax basis $111,700) to M&W Inc. in exchange for 4,200 shares of M&W stock. Immediately after the exchange, M&W had 7,800 shares of outstanding stock. Determine Mrs. Brinkley's realized and recognized gain on the exchange and the tax basis in her 4,200 M&W shares.
A) $228,500 gain realized and recognized; $340,200 basis in M&W shares
B) $228,500 gain realized and recognized; $111,700 basis in M&W shares
C) $228,500 gain realized and no gain recognized; $111,700 basis in M&W shares
D) None of the above.
Q3) Tax neutrality for asset exchanges is the exception rather than the rule.
A)True
B)False
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Page 11
Chapter 10: Sole Proprietorships, Partnerships, Llcs, and S
Corporations
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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) Which of the following items would be separately stated instead of included in ordinary income when reported by a partnership?
A) Municipal bond interest income
B) Capital loss
C) Dividend income
D) All of the above items would be separately stated
Q3) 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
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Chapter 11: The Corporate Taxpayer
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Q1) Corporations are allowed a deduction for charitable contributions, limited to 10 percent of taxable income before the deduction.
A)True B)False
Q2) Corporations report their taxable income and calculate the federal income tax on Form 1040.
A)True B)False
Q3) In determining the incidence of the corporate income tax:
A) Corporations may pass the tax burden onto consumers in the form of higher prices
B) Corporate shareholders may bear the burden of the corporate tax in the form of lower return on investment
C) Corporate employees may bear the burden of the corporate tax in the form of lower compensation
D) All of the above parties may bear the indirect burden of the corporate income tax
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Chapter 12: The Choice of Business Entity
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Q1) Which of the following is a consequence of establishing a family partnership or a family-owned S corporation?
A) The original owners will have their control of the business diluted.
B) For the structure of the family business to be honored, the transfers to the younger family members must be complete and legally binding.
C) The transfers to the younger family members must be irrevocable.
D) All of the above are consequences of establishing a family partnership or a family-owned S corporation.
Q2) Which of the following statements regarding alternative business forms is true?
A) If an S corporation's election terminates, the corporation is forced to liquidate.
B) Some states treat S corporations as taxable corporations for purposes of corporate franchise taxes.
C) Generally, the transfer of property to a new partnership in exchange for a partnership interest is a taxable event.
D) The owners of a new business should be indifferent between operating as an S corporation and a partnership.
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Chapter 13: Jurisdictional Issues in Business Taxation
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Q1) Lincoln Corporation, which has a 34% marginal tax rate, owns 50% of the stock of a controlled foreign corporation (CFC). At the beginning of the year, Lincoln's basis in its CFC stock was $100,000. The CFC's current year income was $1 million, $600,000 of which was subpart F income. The CFC paid no foreign income tax and distributed no dividends. What is Lincoln's tax basis in its CFC stock at the end of the taxable year?
A) $100,000
B) $300,000
C) $400,000
D) $0
Q2) The deemed paid foreign tax credit is available only to U.S. corporations that own 30% or more of the voting stock of a foreign corporation that paid dividends during the taxable year.
A)True
B)False
Q3) A corporation is usually subject to tax by any state in which it engages in any business transactions.
A)True
B)False
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Chapter 14: The Individual Tax Formula
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Q1) In order to be claimed as a dependent, an individual must be either a qualifying child or a qualifying relative.
A)True
B)False
Q2) Mr. and Mrs. Upton's marginal tax rate on their joint return is 33%. This year, their itemized deductions totaled $13,800, and their standard deduction (MFJ) was $12,600. Compute their incremental tax savings from their itemized deductions.
A) $0
B) $396
C) $4,158
D) $4,554
Q3) Mr. and Mrs. Luang reported $517,900 ordinary taxable income for regular tax purposes and had $39,100 positive AMT adjustments and preferences. Compute their tentative minimum tax.
A) $152,252
B) $155,960
C) $144,820
D) None of the above.
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Chapter 15: Compensation and Retirement Planning
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Q1) Mr. and Mrs. Williams are the sole shareholders of Lessing, Inc., an S corporation. Last year, Lessing employed the Williams' son and paid him a $50,000 salary. During a recent IRS audit, the revenue agent discovered that the son rarely shows up for work and spends most of his time playing golf. Which of the following statements is true?
A) The IRS can disallow Lessing's $50,000 deduction for the son's salary.
B) The IRS can treat the $50,000 payment as a constructive dividend to the son.
C) The IRS can treat the $50,000 payment as a constructive dividend to Mr. and Mrs. Williams.
D) The discovery has no tax consequences to Mr. and Mrs. Williams or their son.
Q2) The classification of a worker as an employee or an independent contractor determines how much payroll tax a company must pay.
A)True
B)False
Q3) Julie, a single individual, is employed by Dashell Inc. but doesn't participate in any employer-sponsored retirement plan. Julie's annual contribution to her traditional IRA is deductible.
A)True
B)False
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Chapter 16: Investment and Personal Financial Planning
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Q1) Electing to reinvest dividends in additional shares of stock does not defer income recognition.
A)True
B)False
Q2) Which of the following statements about Section 1244 stock is true?
A) Some portion of a loss recognized on sale of Section 1244 stock is an ordinary deduction.
B) Gain recognized on sale of Section 1244 stock is taxed at a 28% maximum rate.
C) Individuals may purchase Section 1244 stock directly from the issuing corporation or from another shareholder.
D) Corporations may issue an unlimited amount of Section 1244 stock.
Q3) At the beginning of the year, Calvin paid $5,000 for 60 shares of Eddington stock. In June, he received a $300 cash distribution with respect to the stock. His Form 1099-DIV reported that $170 was an ordinary dividend and $130 was nontaxable. Compute Calvin's tax basis in his 60 shares at year-end.
A) $4,870
B) $4,700
C) $4,830
D) $5,000
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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) Sue, a single taxpayer, purchased a principal residence in 2001 for $415,000. In 2005, she paid $18,000 to add a sunroom. This year, Sue sold the residence for $686,000. Her selling expenses were $5,000. How much gain must Sue recognize on the sale?
A) $0
B) $3,000
C) $16,000
D) $25,000
Q3) Gifts are not included in the recipient's gross income.
A)True
B)False
Q4) Alimony payments are included in the recipient's gross income.
A)True
B)False
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Chapter 18: The Tax Compliance Process
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Q1) Macy filed her 2014 tax return on its extended due date of October 15, 2015. The IRS has until December 31, 2017, to audit this return.
A)True
B)False
Q2) Mr. Hepp, a self-employed consultant, failed to include a $38,200 income item on his 2014 Form 1040, which he filed on March 9, 2015. The gross income reported on the return was $102,380. What is the latest date that the IRS can assess any additional 2014 tax?
A) March 9, 2018
B) April 15, 2018
C) March 9, 2021
D) April 15, 2021
Q3) Taxpayers who can't complete their tax return by the filing date can request an automatic extension of time to file the return and pay any balance of tax due.
A)True
B)False
Q4) Only the government may appeal a tax case to the U.S. Supreme Court.
A)True
B)False
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