Federal Taxation of Entities
Question Bank
Course Introduction
Federal Taxation of Entities offers an in-depth exploration of the federal income tax principles as they apply to business entities, including corporations, partnerships, S corporations, and limited liability companies. The course examines entity formation, operational taxation, distributions, and liquidation, with an emphasis on tax planning and compliance strategies. Students will analyze the tax implications of various business transactions, understand reporting requirements, and consider the impact of tax law changes on entity structure and business decisions. This course is essential for those pursuing careers in public accounting, taxation, or business advisory services.
Recommended Textbook
McGraw Hills Taxation of Business Entities 2018 9th Edition by Brian C. Spilker
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14 Chapters
1506 Verified Questions
1506 Flashcards
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Chapter 1: Business Income,Deductions,and Accounting Methods
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99 Flashcards
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Sample Questions
Q1) Crystal operates a business that provides typing and delivery services.This year Crystal spent $2,500 to purchase special shirts that identify her employees and provide some notoriety for her business.The shirts are especially colorful and include logos on the front pocket and back.Besides salary payments,Crystal also compensates her employees by offering to pay whole life insurance premiums for any that want to provide insurance coverage for their beneficiaries.This year Crystal paid $5,000 in life insurance premiums.What amount of these payments can Crystal deduct? Crystal is on the cash method and calendar year.
Answer: $7,500 Uniforms are deductible if not adaptable to normal wear (as would be the case with colorful logo shirts)and life insurance premiums (if not key man policies)are deductible as compensation.
Q2) Taxpayers must maintain written contemporaneous records of business purpose when entertaining clients in order to claim a deduction for the expenditures.
A)True
B)False
Answer: True
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Page 3
Chapter 2: Property Acquisition and Cost Recovery
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107 Flashcards
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Sample Questions
Q1) Bonnie Jo used two assets during the current year.The first was computer equipment with an original basis of $15,000,currently in the second year of depreciation,and under the half-year convention.This asset was disposed of on October 1st of the current year.The second was furniture with an original basis of $24,000 placed in service during the first quarter,currently in the fourth year of depreciation,and under the mid-quarter convention.What is Bonnie Jo's depreciation expense for the current year? (Round final answer to the nearest whole number)(Use MACRS Table 1 and Table 2)
Answer: $5,023
The depreciation expense for the current year is $5,023.The calculations are $15,000 × 0.32 × 1/2 year = $2,400 and $24,000 × 0.1093 = $2,623.The total is $5,023 ($2,400 + $2,623).
Q2) In general,a taxpayer should select longer-lived property for the §179 immediate expensing election.
A)True
B)False
Answer: True
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Page 4
Chapter 3: Property Dispositions
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110 Flashcards
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Sample Questions
Q1) Bozeman sold equipment that it uses in its business for $80,000.Bozeman bought the equipment two years ago for $75,000 and has claimed $20,000 of depreciation expense.What is the amount and character of Bozeman's gain or loss?
A) $25,000 §1231 gain.
B) $20,000 ordinary gain, and $5,000 §1231 gain.
C) $5,000 ordinary gain, and $20,000 §1231 gain.
D) $25,000 capital gain.
E) None of the choices are correct.
Answer: B
Q2) Bull Run sold a computer for $1,200 on November 10<sup>th</sup> of the current year.The computer was purchased for $2,800.Bull Run had taken $1,000 of depreciation deductions.What is Bull Run's gain or loss realized on the computer?
Answer: $600 loss realized. The gain or loss realized is the $1,200 amount realized less the $1,800 ($2,800$1,000)adjusted basis.
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Chapter 4: Entities Overview
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70 Flashcards
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Sample Questions
Q1) Which of the following is most effective in mitigating the double tax?
A) Shift income from high tax rate shareholders to low tax rate corporations.
B) Shift income from low tax rate shareholders to high tax rate corporations.
C) Shift income from high tax rate corporations to low tax rate shareholders.
D) Shift income from low tax rate corporations to high tax rate shareholders.
Q2) Nancy purchased a building and then leased the building to ZML.Nancy is the sole shareholder of ZML.She leased the building to ZML for $2,500 per month.However,the IRS determined that the fair market value of the lease payment should only be $1,500 per month.How would the lease payment be treated with respect to both Nancy and ZML?
Q3) An unincorporated entity with more than one owner is,by default,taxed as a partnership.
A)True
B)False
Q4) Shareholders of C corporations receiving property distributions must recognize dividend income equal to the fair market value of the distributed property if the distributing corporation has sufficient earnings and profits.
A)True
B)False
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Page 6
Chapter 5: Corporate Operations
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140 Verified Questions
140 Flashcards
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Sample Questions
Q1) In 2014,Smith Traders Inc.reported taxable income of $100,000.In 2015,it reported taxable income of $15,000.In 2016,it reported taxable income of $95,000.In 2017,Smith Traders experienced a net operating loss of $25,000.What amount of refund can Smith Traders receive if it does not elect to forgo the carry back (see the Corporate Tax Rate Schedule.)?
Q2) Which of the following statements regarding the dividends and/or the dividends received deduction (DRD)is true?
A) Dividends are taxed at preferential rates for corporations as well as for individuals.
B) The DRD can increase the net operating loss of a corporation.
C) Corporations are allowed to deduct from a dividend received the product of the dividend and the percentage of the receiving corporation's ownership in the distributing corporation's stock.
D) The DRD allows corporations to deduct the amount of dividends that they distribute.
Q3) Federal income tax expense reported on a corporation's books generates a temporary book-tax difference for Schedule M-3 purposes.
A)True B)False
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Page 7
Chapter 6: Accounting for Income Taxes
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100 Verified Questions
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Sample Questions
Q1) As part of its uncertain tax position assessment,Madison Corporation records interest and penalties related to its unrecognized tax benefits of $1,000,000.Which of the following statements about recording this amount is most correct?
A) Madison must record the expense separate from its income tax provision.
B) Madison can elect to include the expense as part of its income tax provision or record the expense separate from its income tax provision, provided the company discloses which option it chose.
C) Madison must record the expense in its income tax provision.
D) Madison does not record the expense until it is paid.
Q2) Potter,Inc.reported pretax book income of $5,000,000.During the current year,the reserve for bad debts increased by $100,000.In addition,tax depreciation exceeded book depreciation by $300,000.Potter sold a fixed asset and reported book gain of $60,000 and tax gain of $80,000.Finally,the company received $50,000 of tax-exempt municipal bond interest.Using a tax rate of 34%,compute Potter's deferred income tax expense or benefit.
Q3) A valuation allowance can reduce both a deferred tax asset and a deferred tax liability.
A)True
B)False
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Page 8
Chapter 7: Corporate Taxation: Nonliquidating Distributions
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Sample Questions
Q1) Houghton Company reports negative current E&P of ($500,000)and negative accumulated E&P of ($800,000).Houghton distributed $100,000 to its sole shareholder,Blossom Applegate,on December 31,20X3.Blossom's tax basis in her Houghton stock is $50,000.What is the tax treatment of the distribution to Blossom and what is her tax basis in Houghton stock after the distribution?
Q2) Lansing Company is owned equally by Jennifer,her husband Dan,and DeWitt Corporation,which is owned 50 percent by Jennifer and her sister Jane.Each of the three shareholders holds 100 shares in the company.Under the §318 stock attribution rules,how many shares of Lansing stock is DeWitt Corporation deemed to own?
A) 100.
B) 200.
C) 250.
D) 300.
Q3) Evergreen Corporation distributes land with a fair market value of $200,000 to its sole shareholder.Evergreen's tax basis in the land is $50,000.Assuming sufficient earnings and profits,the amount of dividend reported by the shareholder is $200,000.
A)True
B)False
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Chapter 8: Corporate Formation, Neorganization, and Liquidation
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Sample Questions
Q1) Ken and Jim agree to go into business together selling old comic books and records.According to the agreement,Ken will contribute inventory valued at $200,000 in return for 80 percent of the stock in the corporation.Ken's tax basis in the inventory is $100,000.Jim will receive 20 percent of the stock in return for providing accounting services to the corporation (these qualify as organizational expenditures).The accounting services are valued at $50,000.
Please answer the following questions about the tax consequences of the transaction to Jim.
a.What amount of income,gain or loss does Jim realize on the formation of the corporation?
b.What amount of gain or loss,if any,does he recognize?
c.What is Jim's tax basis in the stock he receives in return for his contribution of services to the corporation?
Q2) A shareholder will own the same percentage of stock in the distributing corporation under both a spin-off and a split-off of a subsidiary.
A)True
B)False
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Page 10
Chapter 9: Forming and Operating Partnerships
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Sample Questions
Q1) Tax elections are rarely made at the partnership level.
A)True
B)False
Q2) Actual or deemed cash distributions in excess of a partner's outside basis are generally taxable as capital gains.
A)True
B)False
Q3) A partner can generally apply passive activity losses against passive activity income for the year.
A)True
B)False
Q4) 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
Q5) Explain why partners must increase their tax basis for their share of partnership taxable and nontaxable income or gain and reduce their basis by their share of partnership deductible and nondeductible expenses or losses?
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Chapter 10: Dispositions of Partnership Interests and Partnership Distributions
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Sample Questions
Q1) Jason is a 25% partner in the JJM Partnership when he sells his entire interest to Lavelle for $76,000.At the time of the sale,Jason's basis in JJM is $87,000.JJM does not have any debt or hot assets.Jason's will recognize a gain of $11,000 on the sale of his partnership interest.
A)True
B)False
Q2) A partner will recognize a loss from a liquidating distribution when the distribution includes only cash,unrealized receivables,and inventory and the partner's outside basis is less than the sum of the bases of the distributed assets.
A)True
B)False
Q3) Which of the following statements regarding hot assets for purposes of disproportionate distributions is false?
A) Hot assets include unrealized receivables.
B) Hot assets include all inventory.
C) Hot assets include substantially appreciated inventory.
D) The definition of hot assets for distributions and sales of partnership interests differs.
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Page 12
Chapter 11: S Corporations
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Sample Questions
Q1) If an S corporation never operated as a C corporation,it may earn passive investment income without fear of an involuntary S election termination.
A)True
B)False
Q2) S corporations are not entitled to a dividends received deduction.
A)True
B)False
Q3) S corporations are required to recognize both gains and losses on non-liquidating distributions of property to shareholders.
A)True
B)False
Q4) Bobby T (75% owner)would like to terminate the S corporation status for DJ,Inc.but Dallas (5% owner)does not want to terminate the S corporation status.Bobby T can terminate the S status for DJ,Inc.without Dallas's consent.
A)True
B)False
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Page 13
Chapter 12: State and Local Taxes
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117 Flashcards
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Sample Questions
Q1) Which of the following statements regarding income tax commercial domicile is incorrect?
A) The location where a business is headquartered.
B) The location where a business is incorporated.
C) The location from which a business directs its operations.
D) None of the choices are correct.
Q2) All 50 states impose a sales and use tax system.
A)True
B)False
Q3) The trade-show rule allows businesses to maintain a sample room for up to four weeks per year.
A)True
B)False
Q4) Most services are sourced to the state where the services were performed.
A)True
B)False
Q5) Public Law 86-272 protects only companies selling tangible personal property.
A)True
B)False
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Chapter 13: The Ustaxation of Multinational Transactions
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Sample Questions
Q1) Wooden Shoe Corporation is a 100 percent owned Dutch subsidiary of Tulip Corporation,a U.S.corporation.Wooden Shoe had post-1986 earnings and profits of 3,000,000 and post-1986 foreign taxes of $1,000,000.During the current year,Wooden Shoe paid a dividend of 300,000 to Tulip.Assume an exchange rate of 1 = $1.40.No withholding tax was imposed on the dividend.What amount of taxable income does the dividend generate on Tulip's U.S.tax return?
Q2) Russell Starling,an Australian citizen and resident,received the following investment income during 2017: $5,000 of dividend income from ownership of stock in a U.S.corporation,$10,000 interest from a certificate of deposit in a U.S.bank,$3,000 of interest income earned from a loan to Clint Westwood,a U.S.citizen,and $2,000 capital gain from sale of a stock in a U.S.corporation.How much of Russell's income will be subject to U.S.taxation in 2017?
A) $20,000.
B) $15,000.
C) $10,000.
D) $8,000.
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Chapter 14: Transfer Taxes and Wealth Planning
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Q1) Which of the following is a true statement?
A) Leaving all property to the surviving spouse maximizes the marital deduction and therefore minimizes total transfer taxes on the estates of both spouses.
B) A bypass provision in the will of the deceased spouse is designed to use the applicable credit of the deceased spouse by transferring property to beneficiaries other than the surviving spouse.
C) Serial gifts are limited in scope because only $10,000 can be transferred each year tax-free to any specific donee.
D) Serial gifts can move significant amounts of wealth only if employed by multiple donors.
E) None of the choices are true.
Q2) Including adjusted taxable gifts in the taxable estate causes these gifts to be taxed twice,once under the gift tax and again under the estate tax. A)True B)False
Q3) A future interest is a right to receive income or property in the future. A)True B)False
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