Business Taxation
Test Questions
Course Introduction
Business Taxation examines the key principles, regulations, and practices related to the taxation of businesses. The course covers topics such as types of business entities, tax compliance, taxable income calculation, tax planning strategies, corporate tax, partnership taxation, and the impact of tax law changes on business operations. Students will gain an understanding of relevant tax codes, deductions, credits, and reporting requirements, while also exploring the ethical considerations and implications of tax decisions on businesses. The course provides practical skills for identifying tax issues, minimizing liabilities, and ensuring compliance with governmental regulations.
Recommended Textbook McGraw Hills Taxation of Individuals and Business Entities 6th Edition by Spilker
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Chapter 1: An Introduction to Tax
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Q1) If Leonardo instead had $30,000 of additional tax deductions for year 2014, his marginal tax rate (rounded) on the deductions would be:
A) 28.00%
B) 25.00%
C) 25.57%
D) 17.07%
E) None of these
Answer: C
Q2) In considering the "economy" criterion in evaluating tax systems, one must consider this criterion from both the taxpayer and the government's perspective.
A)True
B)False
Answer: True
Q3) A taxpayer's average tax rate is the most appropriate tax rate to use in tax planning. A)True
B)False
Answer: False
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Page 3
Chapter 2: Tax Compliance, the Irs, and Tax Authorities
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Q1) For fraudulent tax returns, the statute of limitations for IRS assessment is ten years.
A)True
B)False
Answer: False
Q2) Which of the following courts is the only court that provides for a jury trial?
A) Tax Court.
B) U.S. Court of Federal Claims.
C) U.S. District Court.
D) U.S. Circuit Court of Appeals.
E) None of these.
Answer: C
Q3) Which of the following has the highest authoritative weight?
A) Text book.
B) Private letter ruling.
C) Revenue ruling.
D) Tax service.
E) Tax article.
Answer: C
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Chapter 3: Tax Planning Strategies and Related Limitations
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Q1) Luther was very excited to hear about the potential tax savings from shifting income from his corporation to him. The next day he had his corporation declare a $30,000 dividend to him. Is this an effective income shifting strategy? If so, why? If not, why not? What recommendations do you have for Luther?
Answer: Because corporations do not get a tax deduction for dividends paid, paying dividends is not an effective way to shift income. Instead, paying dividends results in "double taxation" - the profits generating the dividends are taxed first at the corporate level, and then the dividends are taxed at the shareholder level. Luther should attempt to shift income from the corporation to him via methods that generate tax deductions at the corporate level (e.g., compensation to Luther, rent paid to Luther, interest paid to Luther, etc.).
Q2) Nontax factors do not play an important role in tax planning.
A)True
B)False Answer: False
Q3) When considering cash inflows, higher present values are preferred.
A)True
B)False
Answer: True
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Page 5
Chapter 4: Individual Income Tax Overview, Exemptions, and Filing Status
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Q1) An individual may meet the relationship test to be a taxpayer's qualifying relative even if the individual has no family relationship with the taxpayer.
A)True
B)False
Q2) The Tanakas filed jointly in 2014. Their AGI is $120,000. They reported $10,000 of itemized deductions and they have two dependent children. The 2014 standard deduction amount is $12,400 and each exemption is $3,950. What is the total amount of from AGI deductions they are allowed to claim on their 2014 tax return?
Q3) Lebron received $50,000 of compensation from his employer and he received $400 of interest from a municipal bond. What is the amount of Lebron's gross income from these items?
A) $0
B) $400
C) $50,000
D) $50,400
Q4) Inventory is a capital asset.
A)True
B)False
Page 6
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Chapter 5: Gross Income and Exclusions
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Q1) Lisa and Collin are married. Lisa works as an engineer and earns a salary of $116,000. Collin works at a beauty salon and reported wages of $45,000. Lisa received $500 of interest from corporate bonds and $250 of interest from a municipal bond. Lisa acquired these bonds prior to her marriage to Collin. Collin's father passed away on April 14. He inherited cash of $50,000 and his baseball card collection, valued at $2,000. As beneficiary of his father's life insurance policy, Collin also received $150,000. The couple spent a weekend in Atlantic City in November and came home with gambling winnings of $1,200. Collin was injured in an accident at the salon. He was unable to work for a month, but during this time he received $5,000 from disability insurance he purchased several years ago. Collin also received $2,000 in workman's compensation, and $1,500 from the salon for the emotional trauma he suffered from the accident. Calculate Lisa and Collin's gross income for this year assuming they will file married joint.
Q2) Interest income is earned in the year in which it is received by the taxpayer or credited to the bank account.
A)True
B)False
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Chapter 6: Individual Deductions
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Q1) Shelby is working as a paralegal while attending law school at night. This year she has incurred the following expenses associated with school. \[\begin{array} { l r }
\text { Tuition } & \$ 22,700 \\
\text { Room and board } & 9,200 \\
\text { Books } & 1,600 \\
\text { Transportation to work } & 350 \end{array}\] What amount can Shelby deduct as an employee business expense if her modified AGI this year is $25,000?
Q2) Bryan is 67 years old and lives alone. This year he has received $25,000 in taxable interest and pension payments, and he has paid the following expenses: \(\begin{array}{llcc}
\text { Real estate taxes } & \$1,640\\
\text {Medical expenses ( \$ 2,000 was reimbursed by insurance) } &3,650\\
\text {Charitable contributions (cash to the Unity church) } &460\\ \end{array}\)
If Bryan files single with one personal exemption, calculate his taxable income.
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Chapter 7: Individual Income Tax Computation and Tax Credits
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Q1) Which of the following tax credits is fully refundable?
A) American opportunity credit
B) Dependent care credit
C) Earned income credit
D) None of these
Q2) Which of the following is not a barrier to income shifting among family members?
A) The assignment of income doctrine
B) Net unearned income for children 18 and younger taxed at parents' marginal tax rates
C) Elimination of preferential tax rates (on dividends and long-term capital gains) for dependents
D) Two of these
Q3) For married couples, the Medicare tax is based on the couple's combined wages.
A)True
B)False
Q4) Employees must pay both Social Security tax and Medicare tax on all of their wages no matter the amount of their wages.
A)True
B)False
Page 9
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Chapter 8: Business Income, Deductions, and Accounting Methods
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Q1) Sole proprietorships must use the same tax year as the proprietor of the business.
A)True
B)False
Q2) Beth operates a plumbing firm. In August of last year she signed a contract to provide plumbing services for a renovation. Beth began the work that August and finished the work in December of last year. However, Beth didn't bill the client until January of this year and she didn't receive the payment until March when she received payment in full. When should Beth recognize income under the accrual method of accounting?
A) In August of last year
B) In December of last year
C) In January of this year
D) In March of this year
E) In April of this year
Q3) A short tax year can end on any day of any month other than December.
A)True
B)False
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Chapter 9: Property Acquisition and Cost Recovery
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Q1) Real property is always depreciated using the straight-line method.
A)True
B)False
Q2) All assets subject to amortization have the same recovery period.
A)True
B)False
Q3) Putin Corporation began business on September 23rd of the current year. It incurred $40,000 of start-up costs and $60,000 of organizational expenditures.
1) How much may be immediately expensed for the year?
2) How much amortization may be deducted in the first year, rounded to the nearest whole number?
Q4) Which of the following depreciation conventions are not used under MACRS?
A) Full-month
B) Half-year
C) Mid-month
D) Mid-quarter
E) All of these are used under MACRS
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Chapter 10: Property Dispositions
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Q1) Brandon, an individual, began business four years ago and has sold §1231 assets with $5,000 of losses within the last 5 years. Brandon owned each of the assets for several years. In the current year, Brandon sold the following business assets: \[\begin{array} { |
l | r | r | r | }
\hline { \text { Asset } } & \text { Original Cost } & \begin{array} { r }
\text { Accumulated } \\
\text { Depreciation }
\end{array} & \text { Gain/Loss } \\
\hline \text { Machinery } & \$ 30,000 & \$ 7,000 & \$ 10,000 \\
\hline \text { Land } & 40,000 & 0 & 20,000 \\
\hline \text { Building } & 90,000 & 20,000 & ( 5,000 ) \\
\hline
\end{array}\] Assuming Brandon's marginal ordinary income tax rate is 35 percent, what effect do the gains and losses have on Brandon's tax liability?
A) $25,000 ordinary income, $8,750 tax liability.
B) $25,000 §1231 gain and $3,750 tax liability.
C) $13,000 §1231 gain, $12,000 ordinary income, and $6,150 tax liability.
D) $12,000 §1231 gain, $13,000 ordinary income, and $6,350 tax liability.
E) None of these.
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Chapter 11: Investments
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Q1) Which of the following portfolio investments is incorrectly characterized (Investment - Income Type - Timing of Taxation - Tax Rate)?
A) Growth stock - appreciation in capital assets - current - capital gains
B) Municipal bonds - tax-exempt income - never - zero
C) Savings account - taxable interest - current - ordinary income
D) None of these.
Q2) Alain Mire files a single tax return and has adjusted gross income of $304,000. His net investment income is $53,000. What is the additional tax that Alain will pay on his net investment income for the year?
A) Zero
B) $2,014
C) $3,952
D) $1,938
E) None of these
Q3) Unrecaptured §1250 gain is taxed at the 28 percent preferential capital gains rate.
A)True
B)False
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Chapter 12: Compensation
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Q1) When a CEO's salary exceeds $1,000,000, the employee _____ taxed on the entire amount, and the employer ______ allowed a deduction on the entire amount. A) is; is
B) is; is not
C) is not; is D) is not; is not
Q2) How is the bargain element for a stock option calculated?
A) The difference between the strike price and the market price on the date of grant.
B) The difference between the market price on the exercise date and the market price on the date of grant.
C) The difference between the market price on the exercise date and the strike price.
D) The difference between the market price on the sale date and the strike price.
Q3) An employee can indicate whether they want an additional amount withheld for payroll taxes on the Form W-4.
A)True
B)False
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Chapter 13: Retirement Savings and Deferred Compensation
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Q1) Katrina's executive compensation package allows her to participate in the company's nonqualified deferred compensation plan. In the current year, Katrina defers 15 percent of her $300,000 salary. Katrina's deemed investment choice will earn 8 percent annually on the deferred compensation until she takes a lump sum distribution in 10 years. Katrina's current marginal tax rate is 30 percent and she expects her marginal tax rate to be 28 percent upon receipt on the deferred salary. What is her after-tax accumulation from the deferred salary in 10 years?
Q2) Kathy is 48 years of age and self-employed. During the year she reported $100,000 of revenues and $40,000 of expenses relating to her self-employment activities. If Kathy has no other retirement accounts in her name, what is the maximum amount she can contribute to an individual 401(k)?
A) $11,152
B) $16,652
C) $28,652
D) $52,000
Q3) Individual 401(k) plans generally have higher contribution limits than SEP IRAs.
A)True B)False
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Chapter 14: Tax Consequences of Home Ownership
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Q1) Darren (single) purchased a home on January 1, 2010 for $400,000. Darren lived in the home as his primary residence until January 1, 2012 when he began using the home as a vacation home. He used the home as a vacation home until January 1 2013 (he used a different home as his primary residence from January 1, 2012 to January 1, 2013). On January 1, 2013, Darren moved back into the home and used it as his primary residence until January 1, 2014 when he sold the home for $500,000. What amount of the $100,000 gain Darren realized on the sale must he recognize for tax purposes in 2014?
Q2) A taxpayer who is financing his personal residence and who pays points on the loan in the form of prepaid interest generally must deduct the points over the life of the loan no matter whether the loan is an original loan or a refinance of an existing loan.
A)True
B)False
Q3) For regular tax purposes, a taxpayer may deduct interest expense on qualifying home equity indebtedness even if the taxpayer uses the loan proceeds for a purpose unrelated to the home.
A)True B)False
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Chapter 15: Entities Overview
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Q1) In its first year of existence, BYC Corporation (a C corporation) reported a loss for tax purposes of ($40,000). How much tax will BYC pay in year 2 if it reports taxable income from operations of $35,000 in year 2 before any loss carryovers?
Q2) Which of the following is not an effective strategy for mitigating double taxation in a C corporation?
A) C corporations can shift income to shareholders via deductible payments
B) C corporations can make an S election
C) C corporations can pay dividends to their shareholders
D) None of these. All of these statements are effective strategies to mitigate or avoid double taxation.
Q3) Which of the following legal entities file documents with the state to be formally recognized by the state?
A) Limited Liability Company
B) General Partnership
C) Sole Proprietorship
D) None of these
Q4) S corporations have more restrictive ownership requirements than other entities.
A)True
B)False
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Chapter 16: Corporate Operations
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Q1) Corporations may carry excess charitable contributions forward five years, but they may not carry them back.
A)True
B)False
Q2) On January 1, 2005 [before the adoption of ASC 718 (a codification of FAS 123R)], Net Optimizers Inc. granted 1,000 nonqualified stock options (NQOs) valued at $.05 per option. Each option entitles the owner to purchase one share of stock for $1. These options vest at 10 percent per year for ten years. On December 31, 2014, 300 options are exercised when the stock price is $5. In 2014, what is the book-tax difference associated with the stock options? Is it favorable or unfavorable? Is it permanent or temporary?
Q3) Corporations are allowed to deduct at least some AMT exemption regardless of profitability.
A)True
B)False
Q4) Depreciation adjustments can increase or decrease the AMT base relative to taxable income.
A)True
B)False
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Chapter 17: Accounting for Income Taxes
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Q1) A valuation allowance can reduce both a deferred tax asset and a deferred tax liability.
A)True
B)False
Q2) Which of the following statements best describes the ASC 740 process for evaluating a company's uncertain tax positions?
A) ASC 740 requires a company to complete a two-step analysis every time it evaluates its uncertain tax positions.
B) ASC 740 requires a company to complete step 2 (measurement) in its evaluation of its uncertain tax positions only if it is more-likely-than-not that that its tax position will be sustained on its merits (recognition).
C) ASC 740 allows a company to take into account the probability of audit by a tax authority in step 1 (measurement) in its evaluation of its uncertain tax positions.
D) ASC 740 allows a company to record a tax benefit from an uncertain tax position only if it is probable the benefit will be sustained on audit by a tax authority.
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Chapter 18: Corporate Taxation: Nonliquidating Distributions
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Q1) Which of the following statements best describes current earnings and profits?
A) Current earnings and profits is another name for a corporation's retained earnings on its balance sheet.
B) Current earnings and profits is a precisely defined tax term in the Internal Revenue Code and represents a corporation's economic income.
C) Current earnings and profits is an ill-defined tax concept in the Internal Revenue Code and represents a corporation's economic income.
D) Current earnings and profits is a conceptual tax concept with no definition in the Internal Revenue Code.
Q2) Inca Company reports current E&P of negative $100,000 in 20X3 and accumulated E&P at the beginning of the year of $200,000. Inca distributed $300,000 to its sole shareholder on January 1, 20X3. How much of the distribution is treated as a dividend in 20X3?
A) $0
B) $100,000
C) $200,000
D) $300,000
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Page 20
Chapter 19: Corporate Formation, Reorganization, and Liquidation
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Q1) Which of the following statements best describes a section 338 transaction?
A) A section 338 transaction is an election made by the buyer to treat a stock acquisition as an asset acquisition.
B) A section 338 transaction is an election made by the buyer to treat an asset acquisition as a stock acquisition.
C) A section 338 transaction is an election made by the seller to treat a stock acquisition as an asset acquisition.
D) A section 338 transaction is an election made by the seller to treat an asset acquisition as a stock acquisition.
Q2) In December 2011, Jill incurred a $50,000 loss on the sale of Crown Corporation stock that she purchased in 2005. The stock satisfied all of the §1244 stock requirements at the time of issue. Jill is married to Jack and together they file a joint tax return. How much of the loss can Jack and Jill deduct in 2011, assuming they do not have capital gains in the current or prior years, and what is the character of the loss?
Q3) What amount of gain or loss does Keegan realize on the transfer of the property to his corporation?
Q4) What amount of gain or loss does Gary recognize in the complete liquidation?
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Chapter 20: Forming and Operating Partnerships
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Q1) Frank and Bob are equal members in Soxy Socks, LLC. When forming the LLC, Frank contributed $50,000 in cash and $50,000 worth of equipment. Frank's adjusted basis in the equipment was $35,000. Bob contributed $50,000 in cash and $50,000 worth of land. Bob's adjusted basis in the land was $30,000. On 3/15/X4, Soxy Socks sells the land Bob contributed for $60,000. How much gain (loss) related to this transaction will Bob report on his X4 return?
A) $10,000
B) $15,000
C) $25,000
D) $35,000
Q2) In what order should the tests to determine a partnership's year end be applied?
A) majority interest taxable year - least aggregate deferral - principal partners test.
B) principal partners test - majority interest taxable year - least aggregate deferral.
C) principal partners test - least aggregate deferral - majority interest taxable year.
D) majority interest taxable year - principal partners test - least aggregate deferral.
E) None of these.
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Chapter 21: Dispositions of Partnership Interests and Partnership Distributions
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Q1) Which of the following statements is false concerning partnership liquidating distributions?
A) A partner who receives a liquidating distribution can retain an interest in the partnership.
B) A partnership agreement may restrict the sale of a partnership making a liquidating distribution the only way a partner can close out his interest in the partnership.
C) Liquidating a single partner's interest is similar in concept to a corporate redemption of a shareholder's interest.
D) None of these statements is false.
Q2) Lola is a 35% partner in the LW Partnership. On January 1, LW distributes $39,000 cash to Lola in complete liquidation of her partnership interest. LW has only capital assets and no liabilities at the date of the distribution. Lola's basis in LW is $50,000. What is the amount and character of Lola's gain or loss?
Q3) Tyson, a one-quarter partner in the TF Partnership, receives a proportionate distribution of $70,000 to liquidate his partnership interest on January 1. Tyson's outside basis is $75,000 including his $10,000 share of TF's liabilities. What is the amount and character of Tyson's recognized gain or loss?
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Page 23
Chapter 22: S Corporations
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Q1) Vanessa contributed $20,000 of cash and land with a fair market value of $100,000 and an adjusted basis of $40,000 to Cook, Inc. (an S corporation) when it was formed. The land was encumbered by a $30,000 mortgage executed two years before. What is Vanessa's tax basis in Cook, Inc. after formation?
A) $20,000.
B) $30,000.
C) $60,000.
D) $80,000.
E) $120,000.
Q2) Regarding debt, S corporation shareholders are deemed at risk only for direct loans they make to S corporations.
A)True
B)False
Q3) Bobby T (75% owner) would like to terminate the S corporation status for DJ, Inc. Dallas (5% owner) does not want to terminate the S corporation status. Bobby T can terminate the S status for DJ, Inc. without Dallas' consent.
A)True
B)False
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Chapter 23: State and Local Taxes
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Q1) Gordon operates the Tennis Pro Shop in Blacksburg, Virginia. Tennis Pro sells, manufacturers, and customizes tennis racquets for serious amateurs. Tennis Pro's business has expanded significantly over the last few years. Currently, it has sales personnel in 10 states (Virginia, North Carolina, South Carolina, Georgia, Tennessee, Kentucky, Ohio, Maryland, District of Columbia, New Jersey). All in state activity is limited to solicitation. Orders are taken by the sales team and forwarded to Blacksburg for approval. All orders are sent by common carrier to customers. Tennis Pro owns retail and warehouse space in Virginia and has another warehouse in Kentucky. Is Tennis Pro subject to Ohio's Commercial Activity Tax?
Q2) Which of the following businesses is likely to have taxable sales for purposes of sales and use tax?
A) Campus bookstore selling textbooks and university apparel.
B) An online retailer of textbooks.
C) A local accounting firm.
D) Mail order clothing company.
Q3) The Wrigley case held that the sale of intangibles is protected by Public Law 86-272. A)True
B)False
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Chapter 24: The US Taxation of Multinational Transactions
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Q1) Orono Corporation manufactured inventory in the United States and sold the inventory to customers in Canada. Gross profit from the sale of the inventory was $300,000. Title to the inventory passed FOB: destination. How much of the gross profit is treated as foreign source income for purposes of computing the corporation's foreign tax credit in the current year?
A) $300,000
B) $150,000
C) $0
D) The answer cannot be determined with the information provided.
Q2) Gwendolyn was physically present in the United States for 90 days in 2014, 180 days in 2013, and 30 days in 2012. Under the substantial presence test formula, how many days is Gwendolyn deemed physically present in the United States in 2014?
A) 300
B) 155
C) 150
D) 90
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Chapter 25: Transfer Taxes and Wealth Planning of the Cfa Institute
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Q1) At her death Tricia owned a life insurance policy on her life that paid her daughter $500,000 upon her death. The policy was only valued at $25,000 prior to Tricia's death. What amount, if any, is included in Tricia's gross estate?
A) $500,000
B) $25,000
C) $25,000 if Tricia transferred ownership of the policy within three years of her date of death.
D) zero - life insurance proceeds due to the death of the decedent are not included in the decedent's gross estate.
E) zero if Tricia's daughter refused to accept the proceeds.
Q2) Which of the following transactions would not utilize the "Section 7520 rate" to calculate the value of the transfer?
A) A transfer of property with a retained life estate.
B) A transfer of property to a spouse.
C) A transfer of a remainder interest in real property.
D) A transfer of a 10-year term certain in real property.
E) None of these utilizes the "Section 7520 rate" in the calculation of the value of the property.
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