Business Taxation
Textbook Exam Questions
Course Introduction
Business Taxation explores the principles and practices governing the taxation of business entities, including corporations, partnerships, and sole proprietorships. The course covers key topics such as tax compliance, tax planning, computation of taxable income, tax deductions and credits, and the implications of different business structures on tax liabilities. Students will learn to analyze tax legislation, apply relevant tax rules and regulations, and understand how tax considerations influence business decisions. Through case studies and practical examples, the course prepares students to navigate the complexities of the tax environment, ensuring they are equipped to manage tax responsibilities in a business context.
Recommended Textbook
McGraw Hills Essentials of Federal Taxation 2019 Edition 10th Edition by Spilker Brian C
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Chapter 1: An Introduction to Tax
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Q1) Which of the following is true?
A)A regressive tax rate structure imposes an increasing marginal tax rate as the tax base increases.
B)Regressive tax structures are the most common tax rate structure.
C)An example of a regressive tax is an excise tax.
D)In terms of effective tax rates,a sales tax can be viewed as a regressive tax.
E)None of the choices are correct.
Answer: D
Q2) The ultimate economic burden of a tax is best captured by:
A)the marginal tax rate.
B)the effective tax rate.
C)the average tax rate.
D)the proportional tax rate.
E)None of the choices are correct.
Answer: B
Q3) While sales taxes are quite common,currently the U.S.federal government does not impose a sales tax.
A)True
B)False
Answer: True
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Chapter 2: Tax Compliance, the Irs, and Tax Authorities
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Q1) Revenue rulings and revenue procedures are examples of primary authorities.
A)True
B)False
Answer: True
Q2) A taxpayer can avoid a substantial understatement of tax penalty:
A)if the position is frivolous and disclosed on the tax return.
B)if the position has a realistic possibility of being sustained by the IRS or courts.
C)if the position is not frivolous and disclosed on the tax return.
D)if the position has a reasonable basis and is disclosed on the tax return.
E)None of the choices are correct.
Answer: D
Q3) The Internal Revenue Code of 1986 is the name of the current income tax code of the United States of America.
A)True
B)False
Answer: True
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4
Chapter 3: Tax Planning Strategies and Related Limitations
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Q1) If tax rates are decreasing:
A)taxpayers should accelerate income.
B)taxpayers should defer deductions.
C)taxpayers should accelerate deductions.
D)taxpayers should defer deductions and accelerate income.
E)None of the choices are correct.
Answer: C
Q2) Assume that Shavonne's marginal tax rate is 50% and her tax rate on dividends is 15%.If a corporate bond pays 10.20% interest,what dividend yield would a dividend-paying stock (with no growth potential)have to offer for Shavonne to be indifferent between the two investments from a cash-flow perspective?
A)6.00%.
B)7.00%.
C)10.20%.
D)15.00%.
E)None of the choices are correct.
Answer: A
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Chapter 4: Individual Income Tax Overview dependents and
Filing Status
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Q1) All of the following represents a type or character of income except:
A)Tax exempt.
B)Capital.
C)Qualified dividend.
D)Normal.
Q2) 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.
Q3) In 2018,Brittany,who is single,cares for her father Raymond.Brittany pays the bills relating to Raymond's home.She also buys groceries and provides the rest of his support.Raymond has no gross income.Brittany received $45,000 of salary from her employer during the year.Brittany reports $3,000 of itemized deductions.What is Brittany's taxable income?
Q4) From AGI deductions are commonly referred to as deductions "below the line."
A)True B)False
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Chapter 5: Gross Income and Exclusions
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Q1) Vincent is a writer and U.S.citizen.After being out of work for the 1 half of the year,Vincent moved permanently to Ireland on July 4.He worked for an Irish magazine and earned $110,000 in salary from July 4 - December 31 .Earlier in April of this year Vincent received a $1,500 refund of the $3,600 in state income taxes his previous employer withheld from his pay last year.Vincent claimed $7,150 in itemized deductions last year (the standard deduction for a single filer was $6,350).Vincent wants to elect to use the foreign-earned income exclusion to the extent he is eligible.Calculate Vincent's gross income for this year.(Round your final answer to the nearest whole dollar amount and assume there are 365 days in the year.)
Q2) Kevin provided services to several clients this year who paid with different types of property.Which of the following payments is not included in Kevin's gross income?
A)Cash.
B)Shares of stock listed on the New York Stock Exchange.
C)A used car.
D)Gold coins.
E)All of the choices can be included in gross income.
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Chapter 6: Individual for Agi Deductions
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Q1) Han is a self-employed carpenter and his wife,Christine,works full-time as a grade school teacher.Han paid $525 for carpentry tools and supplies,and Christine paid $3,600 as her share of health insurance premiums (not with pre-tax dollars)for Han and herself in a qualified plan provided by the school district.Which of the following is a true statement?
A)The tools and supplies are deductible for AGI while the health insurance is an itemized deduction.
B)Both expenditures are deductible for AGI.
C)The tools and supplies are an itemized deduction but the health insurance is deductible for AGI.
D)Both expenditures are itemized deductions.
E)Neither of the expenditures is deductible.
Q2) All investment expenses are itemized deductions.
A)True
B)False
Q3) A tax loss from a rental home is generally a passive activity loss.
A)True
B)False
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Chapter 7: Individual Income Tax Computation and Tax Credits
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Q1) John and Sally pay Janet (Sally's older sister)to watch John and Sally's child Dexter during the day.Janet cares for Dexter in her home.John and Sally may claim a child and dependent care credit based on the amount they pay Janet to care for Dexter.
A)True
B)False
Q2) During 2018,Montoya (age 15)received $2,200 from a corporate bond.He also received $600 from a savings account established for him by his parents.Montoya lives with his parents and he is their dependent.What is Montoya's taxable income?
A)$0
B)$2,200
C)$2,800
D)$1,750
Q3) Long-term capital gains,dividends,and taxable interest income are all taxed at preferential rates.
A)True
B)False
Q4) Jackson earned a salary of $254,000 in 2018.What amount of FICA taxes should Jackson's employer withhold from his paycheck?
Page 9
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Chapter 8: Business Income, deductions, and Accounting Methods
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Q1) Even a cash method taxpayer must consistently use accounting methods that "clearly reflect income" for tax purposes.
A)True
B)False
Q2) Riley operates a plumbing business and this year the 3-year old van he used in the business was destroyed in a traffic accident.The van was originally purchased for $20,000 and the adjusted basis was $5,800 at the time of the accident.Although the van was worth $6,000 at the time of accident,insurance only paid Riley $1,200 for the loss.What is the amount of Riley's casualty loss deduction?
A)$6,000.
B)$14,000.
C)$5,800.
D)$4,600.
E)$5,300.
Q3) Sandy Bottoms Corporation generated taxable income (before depreciation,interest expense and any tax loss carryovers)of $3 million this year.Taxable income included $75,000,000 of revenue and $350,000 of interest income.What is Sandy Bottom's domestic maximum interest expense deduction for the year?
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Chapter 9: Property Acquisition and Cost Recovery
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Q1) An asset's capitalized cost basis includes only the actual purchase price; whereas expenses to purchase,prepare the asset for use,and begin using the asset are immediately expensed.
A)True
B)False
Q2) Suvi,Inc.purchased two assets during the current year (a full 12-month tax year).Suvi placed in service computer equipment (5-year property)on August 10 with a basis of $20,000 and machinery (7-year property)on November 18 with a basis of $10,000.Calculate the maximum depreciation expense (ignoring §179 and bonus depreciation).(Use MACRS Table 1)(Round final answer to the nearest whole number.)
A)$857.
B)$3,357.
C)$5,429.
D)$6,000.
E)None of the choices are correct.
Q3) The §179 immediate expensing election phases out based upon a taxpayer's taxable income.
A)True
B)False
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Chapter 10: Property Dispositions
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Q1) The gain or loss realized on the sale of an asset is always recognized for tax purposes.
A)True
B)False
Q2) Alpha sold machinery,which it used in its business,to Beta,a related entity,for $40,000.Beta used the machinery in its business.Alpha bought the machinery a few years ago for $50,000 and has claimed $30,000 of depreciation expense.What is the amount and character of Alpha's gain?
A)$20,000 ordinary income under §1239.
B)$10,000 ordinary gain and $10,000 §1231 gain.
C)$20,000 ordinary gain.
D)$20,000 capital gain.
E)None of the choices are correct.
Q3) §1231 assets include all assets used in a trade or business.
A)True
B)False
Q4) After application of the look-back rule,net §1231 gains become capital while net §1231 losses become ordinary.
A)True
B)False
Page 12
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Chapter 11: Entities Overview
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Q1) On which tax form do LLCs with more than one owner generally report their income and losses?
A)Form 1120.
B)Form 1120S.
C)Form 1065.
D)Form 1040,Schedule C.
Q2) Both tax and nontax objectives should be considered when choosing the entity type for a new business.
A)True
B)False
Q3) In its first year of existence (2018)Aspen Corp.(a C corporation)reported a loss for tax purposes of $60,000.In 2019,it reports a $40,000 loss.For 2020,it reports taxable income from operations of $120,000.How much tax will Aspen Corp.pay for year 3?
Q4) S corporations have more restrictive ownership requirements than other entities.
A)True
B)False
Q5) A single-member LLC is taxed as a partnership.
A)True
B)False
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Chapter 12: Corporate Formations and Operations
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Q1) Which of the following statements is false regarding consolidated tax returns?
A)An affiliated group can file a consolidated tax return only if it elects to do so.
B)To file a consolidated tax return,one corporation must own at least 50% of the stock of another corporation.
C)For a group of corporations filing a consolidated tax return,an advantage is that losses of one group member may offset gains of another group member.
D)For a group of corporations filing a consolidated tax return,losses from certain intercompany transactions are deferred until realized through a transaction outside of the group.
Q2) Which of the following class of stock is not allowed to be used in a section 351 transaction?
A)Voting common stock.
B)Voting preferred stock.
C)Nonvoting preferred stock.
D)All of the choices of classes of stock can be used in a section 351 transaction.
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Chapter 13: Corporate Nonliquidating and Liquidating
Distributions
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Q1) Panda Company is owned equally by Min,her husband Bin,her sister Xiao,and her grandson,Han,each of whom hold 100 shares in the company.Under the family attribution rules,how many shares of Panda stock is Min deemed to own?
A)100.
B)200.
C)300.
D)400.
Q2) Cavalier Corporation had current and accumulated E&P of $500,000 at December 31 year 1.On December 31,the company made a distribution of land to its sole shareholder,Tom Jefferson.The land's fair market value was $200,000 and its tax and E&P basis to Cavalier was $50,000.The tax consequences of the distribution to Cavalier in year 1 would be (assume a 0 percent marginal tax rate for Cavalier):
A)No gain recognized and a reduction in E&P of $200,000.
B)$150,000 gain recognized and a reduction in E&P of $200,000.
C)$150,000 gain recognized and a reduction in E&P of $50,000.
D)No gain recognized and a reduction in E&P of $50,000.
Q3) A stock redemption is always treated as a sale or exchange for tax purposes.
A)True B)False
Page 15
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Chapter 14: Forming and Operating Partnerships
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Q1) Which of the following would not be classified as a material participant in an activity?
A)An individual who participates more than 100 hours a year and the person's participation is not less than any other individual's participation.
B)An individual who participated in the activity for at least one of the preceding five taxable years.
C)An individual who participates in an activity regularly,continuously,and substantially.
D)An individual who participates in an activity for more than 500 hours a year.
Q2) The term "outside basis" refers to the partnership's basis in its assets; whereas,the term "inside basis" refers an individual partner's basis in her partnership interest.
A)True
B)False
Q3) A partner's outside basis must first be decreased by any negative basis adjustments and then increased by any positive basis adjustments.
A)True
B)False
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Chapter 15: Dispositions of Partnership Interests and Partnership Distributions
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Q1) Marcella has a $65,000 basis in her 50% partnership interest in the JM Partnership before receiving any distributions.This year JM makes a proportionate operating distribution to Marcella of $10,000 cash and inventory with an $80,000 fair value and a $40,000 basis to JM.What is Marcella's basis in the inventory and her remaining basis in JM after the distribution?
A)$80,000 inventory basis,$0 JM basis.
B)$40,000 inventory basis,$0 JM basis.
C)$40,000 inventory basis,$15,000 JM basis.
D)$80,000 inventory basis,$15,000 JM basis.
Q2) At the end of last year,Cynthia,a 20% partner in the five-person CYG partnership,has an outside basis of $30,000 including her $15,000 share of CYG debt.On January 1 of the current year,Cynthia sells her partnership interest to Roger for a cash payment of $22,500 and the assumption of her share of CYG's debt.CYG has no hot assets.What is the amount and character of Cynthia's recognized gain or loss on the sale?
A)$7,500 capital loss.
B)$7,500 ordinary loss.
C)$7,500 capital gain.
D)$7,500 ordinary income.
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Chapter 16: S Corporations
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Q1) The built-in gains tax does not apply to S corporations that never operated as C corporations.
A)True
B)False
Q2) Suppose SPA Corp.was formed by Sara Inc.(a C corporation that is 100% owned by Sara)and Sara's friend Tyson.In exchange for 50% of the stock of SPA,Sara contributed $100,000.In exchange for the remaining 50% of the SPA stock,Tyson contributed a building with a fair market value of $100,000 and an adjusted tax basis of $60,000.How much gain is Tyson required to recognize on the contribution? Is SPA eligible to elect S corporation status?
Q3) SoTired,Inc.,a C corporation with a June 30 year-end,elects S corporation status this year.Assuming no special elections,SoTired,Inc.will continue to use a June 30 year-end as an S corporation.
A)True B)False
Q4) An S corporation can use a non-calendar year-end if it can establish a business purpose for an alternative year end.
A)True B)False
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Chapter 17: Individual From Agi Deductions
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Q1) Homer is an executive who is paid a salary of $80,000. Homer also paints landscapes as a hobby. This year Homer expects to sell paintings for a total of $750 and incur the following expenses associated with his painting activities: \(\begin{array}{r}
\text {Travel}&\$ 1,480 \\
\text {Paints and canvas}&610\\ \text {Painting classes}&230 \end{array}\) What is the effect of Homer's hobby on his taxable income?
Q2) Taxpayers generally deduct the lesser of their standard deduction or their itemized deductions.
A)True
B)False
Q3) Bunching itemized deductions is one form of tax evasion. A)True
B)False
Q4) The itemized deduction for taxes includes all types of state, local, and foreign taxes.
A)True
B)False
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