Income Tax Accounting
Final Exam Questions
Course Introduction
Income Tax Accounting provides a comprehensive overview of the principles, regulations, and procedures related to federal income tax law as it applies to individuals and businesses. The course covers the conceptual framework of the U.S. tax system, income recognition, deductions, tax credits, property transactions, and preparation of tax returns. Students will learn to analyze tax issues, research current tax laws, and apply tax planning strategies. Emphasis is placed on interpreting and applying Internal Revenue Service (IRS) codes and regulations, ensuring compliance, understanding ethical responsibilities, and utilizing accounting software for tax preparation and filing.
Recommended Textbook
South Western Federal Taxation 2018 Individual Income Taxes 41st Edition by William H. Hoffman
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Chapter 1: An Introduction to Taxation and Understanding
Federal Tax Law
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Sample Questions
Q1) A deduction for contributions by an employee to certain retirement plans.
Answer: d
Q2) Taylor, a widow, makes cash gifts to her five married children (including their spouses) and to her seven grandchildren. What is the maximum amount Taylor can give for calendar year 2017 without using her unified transfer tax credit?
Answer: $238,000. $14,000 (annual exclusion) × 17 donees = $238,000.
Q3) In 1986, Roy leased real estate to Drab Corporation for 20 years. Drab Corporation made significant capital improvements to the property. In 2006, Drab decides not to renew the lease and vacates the property. At that time, the value of the improvements is $800,000. Roy sells the real estate in 2017 for $1,200,000 of which $900,000 is attributable to the improvements. When is Roy taxed on the improvements made by Drab Corporation?
Answer: Roy is not subject to taxation on the improvements until he disposes of the property . After a controversial Supreme Court decision years ago, Congress clarified the tax law to make it more consistent with the wherewithal to pay concept.
Q4) A deduction for certain income from manufacturing activities. Answer: a
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Chapter 2: Working With the Tax Law
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Sample Questions
Q1) The IRS is not required to make a letter ruling public.
A)True
B)False
Answer: False
Q2) What are Treasury Department Regulations?
Answer: Regulations are issued by the U.S. Treasury Department under authority granted by Congress. Interpretive by nature, they provide taxpayers with considerable guidance on the meaning and application of the Internal Revenue Code. Regulations may be issued in proposed, temporary, or final form. Regulations carry considerable authority as the official interpretation of tax statutes. They are an important factor to consider in complying with the tax law. Courts generally ignore Proposed Regulations.
Q3) The U.S. Tax Court meets most often in Washington, D.C.
A)True
B)False
Answer: False
Q4) The following citation is correct: Larry G. Mitchell, 131 T.C. 215 (2008).
A)True
B)False Answer: True
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Chapter 3: Tax Formula and Tax Determination; an
Overview of Property Transactions
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Sample Questions
Q1) Surviving spouse filing status begins in the year in which the deceased spouse died.
A)True
B)False
Answer: False
Q2) The Hutters filed a joint return for 2017. They provide more than 50% of the support of Carla, Melvin, and Aaron. Carla (age 18) is a cousin and earns $2,800 from a part-time job. Melvin (age 25) is their son and is a full-time law student. He received from the university a $3,800 scholarship for tuition. Aaron is a brother who is a citizen of Israel but resides in France. Carla and Melvin live with the Hutters. How many personal and dependency exemptions can the Hutters claim on their Federal income tax return?
A)Two
B)Three
C)Four
D)Five
E)None of these
Answer: C
Q3) A daughter who does not live with taxpayer.
Answer: b
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Chapter 4: Gross Income: Concepts and Inclusions
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Sample Questions
Q1) The constructive receipt doctrine requires that income must be recognized when it is made available to the cash basis taxpayer, although it has not been actually received. The constructive receipt doctrine does not apply to accrual basis taxpayers.
A)True
B)False
Q2) Gordon, an employee, is provided group term life insurance coverage equal to twice his annual salary of $125,000 per year. According to the IRS Uniform Premium Table (based on Gordon's age), the amount is $12 per year for $1,000 of protection. The cost of an individual policy would be $15 per year for $1,000 of protection. Since Gordon paid nothing towards the cost of the $250,000 protection, Gordon must include in his 2015 gross income which of the following amounts?
A)$1,350.
B)$2,400.
C)$3,000.
D)$3,750.
E)None of these.
Q3) How does the taxation of Social Security benefits differ from the taxation of an annuity purchased by the taxpayer?
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Chapter 5: Gross Income: Exclusions
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Q1) Fresh Bakery often has unsold donuts at the end of the day. The bakery allows employees to take the leftovers home. The employees are not required to recognize gross income because the bakery does not incur any additional cost.
A)True
B)False
Q2) An employee can exclude from gross income the value of meals provided by his or her employer whenever:
A)The meal is not extravagant.
B)The meals are provided on the employer's premises for the employer's convenience.
C)There are no places to eat near the work location.
D)The meals are provided for the convenience of the employee.
E)None of these.
Q3) Gary cashed in an insurance policy on his life. He needed the funds to pay for his terminally ill wife's medical expenses. He had paid $12,000 in premiums and he collected $30,000 from the insurance company. Gary is not required to include the gain of $18,000 ($30,000 - $12,000) in gross income.
A)True
B)False
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Chapter 6: Deductions and Losses: in General
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Sample Questions
Q1) The period in which an accrual basis taxpayer can deduct an expense is determined by applying the economic performance and all events tests.
A)True
B)False
Q2) Tommy, an automobile mechanic employed by an auto dealership, is considering opening a fast food franchise. If Tommy decides not to acquire the fast food franchise, any investigation expenses are:
A)A deduction for AGI.
B)A deduction from AGI, subject to the 2 percent floor.
C)A deduction from AGI, not subject to the 2 percent floor.
D)Deductible up to $5,000 in the current year with the balance being amortized over a 180-month period.
E)Not deductible.
Q3) Taylor, a cash basis architect, rents the building in which his office is located for $5,000 per month. He commenced his practice on February 1, 2017. In order to guarantee no rent increases during an 18-month period, he signed an 18-month lease and prepaid the $90,000 on February 1, 2017. How much can Taylor deduct as rent expense for 2017?
Q4) Are all personal expenses disallowed as deductions?
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Chapter 7: Deductions and Losses: Certain Business
Expenses and Losses
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Sample Questions
Q1) If a business debt previously deducted as partially worthless becomes totally worthless this year, only the amount not previously deducted can be deducted this year.
A)True
B)False
Q2) Last year, Amos had AGI of $50,000. Amos also had a diamond ring stolen which cost $20,000 and was worth $17,000 at the time of the theft. He itemized deductions on last year's tax return. In the current year, Amos recovered $17,000 from the insurance company. Therefore, he must include $11,900 in gross income on the tax return for the current year.
A)True
B)False
Q3) Which of the following events would produce a deductible loss?
A)Erosion of personal use land due to rain or wind.
B)Termite infestation of a personal residence over a several year period.
C)Damages to personal automobile resulting from a taxpayer's willful negligence.
D)A misplaced diamond ring.
E)None of the above.
Q4) Why was the domestic production activities deduction (DPAD) enacted by Congress?
Q5) Discuss the effect of alimony in computing a net operating loss.
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Chapter 8: Depreciation, Cost Recovery, Amortization, and Depletion
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Sample Questions
Q1) The factor for determining the cost recovery for eligible real estate under MACRS, in the year of disposition, is taken from the month of the disposition.
A)True
B)False
Q2) All personal property placed in service in 2017 and used in a trade or business qualifies for additional first-year depreciation.
A)True
B)False
Q3) If an automobile is placed in service in 2017, the limitation for cost recovery in 2019 will be based on the cost recovery limits for the year 2017.
A)True
B)False
Q4) Cost depletion is determined by multiplying the depletion cost per unit by the number of units sold.
A)True
B)False
Q5) Discuss the requirements in order for startup expenditures to be amortized under § 195.
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Chapter 9: Deductions: Employee and
Self-Employed-Related Expenses
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Sample Questions
Q1) Felicia, a recent college graduate, is employed as an accountant by an oil company. She would like to continue her education and obtain a law degree. Discuss Felicia's tax status if she attends a local law school on a:
a.Part-time basis.
b.Full-time basis.
Q2) For tax year 2016, Taylor used the simplified method of determining her office in the home deduction. For 2017, Taylor must continue to use the simplified method and cannot switch to the regular (actual expense) method.
A)True
B)False
Q3) Once set for a year, when might the IRS change the rate for the automatic mileage method?
Q4) Qualified moving expenses include the cost of lodging but not meals during the move.
A)True
B)False
Q5) Cutback adjustment applies
Q6) Tax home has changed
Q7) Deductible job-hunting expenses
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Chapter 10: Deductions and Losses: Certain Itemized
Deductions
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Q1) Letha incurred a $1,600 prepayment penalty to a lending institution because she paid off the mortgage on her home early. The $1,600 is deductible as interest expense.
A)True
B)False
Q2) In 2017, Dena traveled 600 miles for specialized medical treatment that was not available in her hometown. She paid $90 for meals during the trip, $145 for a hotel room for one night, and $15 in parking fees. She did not keep records of other out-of-pocket costs for transportation. Dena can include $167 in computing her medical expenses.
A)True
B)False
Q3) Harry and Sally were divorced three years ago. In July of the current year, their son, Joe, broke his arm falling out of a tree. Joe lives with Sally and Sally claims him as a dependent on her tax return. Harry paid for the medical expenses related to Joe's injury. Can Harry claim the medical expenses he paid for Joe on his tax return?
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Chapter 11: Investor Losses
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Sample Questions
Q1) Nathan owns Activity A, which produces income, and Activity B, which produces passive activity losses. From a tax planning perspective, Nathan will be better off if Activity A is passive.
A)True
B)False
Q2) Services performed by an employee are treated as being related to a real estate trade or business if the employee performing the services has more than a 5% ownership interest in the employer.
A)True
B)False
Q3) When determining whether an individual is a material participant, participation by an owner's spouse generally counts.
A)True
B)False
Q4) Anne sells a rental house for $100,000 (adjusted basis of $55,000). During her ownership, $60,000 of losses have been suspended under the passive activity loss rules. Determine the tax treatment to Anne on the disposition of the property.
Q5) Treatment of an installment sale of a passive activity.
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Chapter 12: Alternative Minimum Tax
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Sample
Questions
Q1) Dale owns and operates Dale's Emporium as a sole proprietorship. On January 30, 2003, Dale's Emporium acquired a warehouse for $100,000. For regular income tax purposes in 2017, depreciation was deducted under MACRS using a 2.564% rate. Determine the AMT adjustment for depreciation and indicate whether it is positive or negative.
A)$64 negative adjustment.
B)$64 positive adjustment.
C)No adjustment is required because Dale's Emporium used the Alternative Depreciation System (ADS) to compute depreciation on the property for AMT purposes.
D)No adjustment is required because Dale's Emporium used MACRS to compute the depreciation of the property for regular income tax purposes.
Q2) Because passive losses are not deductible in computing either taxable income or AMTI, no AMT adjustment for passive losses is required.
A)True
B)False
Q3) Why is there a need for a second tax system called the alternative minimum tax?
Q4) How can the positive AMT adjustment for research and experimental expenditures be avoided?
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Chapter 13: Tax Credits and Payment Procedures
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Sample Questions
Q1) Realizing that providing for a comfortable retirement is up to them, Jim and Julie commit to making regular contributions to their IRAs, beginning this year. Consequently, they each make a $2,000 contribution to their traditional IRA. If their AGI is $35,000 on their joint return, what is the amount of their credit for certain retirement plan contributions?
A)$2,000
B)$1,000
C)$400
D)$200
E)None of the above
Q2) Unused foreign tax credits can be carried back three years and forward fifteen years. A)True
B)False
Q3) Explain the purpose of the disabled access credit and describe the general characteristics of its computation.
Q4) Discuss the treatment of unused general business credits.
Q5) The maximum child tax credit under current law is $1,500 per qualifying child. A)True B)False
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Chapter 14: Property Transactions: Determination of Gain or
Loss and Basis Considerations
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Questions
Q1) Ben sells stock (adjusted basis of $25,000) to his son, Ray, for its fair market value of $15,000. Ray gives the stock to his daughter, Trish, who subsequently sells it for $26,000. Ben's recognized loss is $0 and Trish's recognized gain is $1,000 ($26,000 - $15,000$10,000).
A)True
B)False
Q2) Kelly inherits land which had a basis to the decedent of $95,000 and a fair market value of $50,000 on August 4, 2017, the date of the decedent's death. The executor distributes the land to Kelly on November 12, 2017, at which time the fair market value is $49,000. The fair market value on February 4, 2018, is $45,000. In filing the estate tax return, the executor elects the alternate valuation date. Kelly sells the land on June 10, 2018, for $48,000. What is her recognized gain or loss?
A)($1,000)
B)($2,000)
C)($47,000)
D)$1,000
E)None of the above
Q3) Discuss the effect of a liability assumption on the seller's amount realized and the buyer's adjusted basis.
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Chapter 15: Property Transactions: Nontaxable Exchanges
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Q1) Weston sells his residence to Joanne on October 15, 2017. Indicate which of the following statements is correctly associated with § 121 (exclusion of gain on sale of principal residence).
A) Selling expenses decrease the seller's amount realized and increase the buyer's adjusted basis.
B) Repair expenses of the seller decrease the seller's amount realized and have no effect on the buyer's adjusted basis.
C) Capital expenditures made by the seller prior to the sale increase the seller's adjusted basis and have no effect on the buyer's adjusted basis.
D) Only a. and c.e. a., b., and c.
Q2) Byron, who lived in New Hampshire, acquired a personal residence ten years ago when he was 52 years old. During this period he has occupied the residence for only eight months (out of 12) each year due to winter vacations in Florida. Is Byron eligible for exclusion of gain under § 121?
Q3) Distinguish between a direct involuntary conversion and an indirect involuntary conversion.
Q4) Discuss the treatment of realized gains from involuntary conversions.
Q5) What kinds of property do not qualify under the like-kind provisions?
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Chapter 16: Property Transactions: Capital Gains and Losses
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Q1) In 2017, Satesh has $5,000 short-term capital loss, $13,000 0%/15%/20% long-term capital gain, and $7,000 qualified dividend income. Satesh is single and has other taxable income of $15,000. Which of the following statements is correct?
A)No more than $13,000 of Satesh's taxable income is taxed at 0%.
B)No more than $7,000 of Satesh's taxable income is taxed at 0%.
C)No more than $15,000 of Satesh's taxable income is taxed at 0%.
D)None of Satesh's taxable income is taxed at 0%.
E)All of Satesh's taxable income is taxed at 0%.
Q2) If the holder of an option fails to exercise the option, the lapse of the option is considered a sale or exchange on the option expiration date.
A)True
B)False
Q3) If a capital asset is sold at a gain, the holding period is important.
A)True
B)False
Q4) All collectibles short-term gain is subject to a potential alternative tax rate of 28%.
A)True
B)False
Page 18
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Chapter 17: Property Transactions: 1231 and Recapture
Provisions
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Q1) An individual had the following gains and losses during 2017 on property held for the long-term holding period: sale of Orange common stock ($8,000 gain); sale of real property used in the taxpayer's business ($1,800 loss); destruction of real property used in the taxpayer's business by fire ($1,000 loss). Which of the following statements is correct?
A)The fire loss would reduce the real property sale loss.
B)The fire loss would reduce the stock sale gain.
C)The sale of real property loss would be netted against the stock sale gain.
D)The sale of real property is a § 1231 loss.
E)None of the above.
Q2) Business equipment is purchased on March 10, 2016, used in the business until September 29, 2016, and sold at a $23,000 loss on October 10, 2016. The equipment was not suitable for the work the business had purchased it for. The loss on the disposition should have been reported in the 2016 Form 4797, Part:
A)I.
B)II.
C)III.
D)IV.
E)This transaction would not be reported in the Form 4797.
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Chapter 18: Accounting Periods and Methods
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Q1) Andrew owns 100% of the stock of Crow's Farm Inc., an S corporation, that raises cattle and corn. The farm's annual gross receipts have never exceeded $3 million and the farm is not considered a tax shelter.
A)The farm must report its sales and cost of goods sold by the accrual method because inventories are material to the business.
B)The income from the farm may be reported by the cash method.
C)The income from the sales of cattle may be reported by the cash method, but the income from the sales of corn must be reported by the accrual method.
D)The income from the sales of corn may be reported by the cash method, but the income from cattle sales must be reported by the accrual method.
E)None of the above.
Q2) What incentives do the tax accounting rules provide for taxpayers to voluntarily change from an incorrect method of accounting that has reduced the company's tax liability in prior years?
Q3) Using your knowledge of GAAP and financial reporting, list and explain one good reason why GAAP should not be used for tax purposes and one good reason why it should be used.
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Chapter 19: Deferred Compensation
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Q1) In a direct transfer from one qualified retirement plan to another qualified retirement plan, the employer does not have to withhold 20% of the amount of the direct transfer.
A)True
B)False
Q2) Roxy, Inc., grants 1,000 NQSO to an employee, Carol, entitling her to purchase Roxy stock at $10 per share (the current price of the stock). Roxy simultaneously grants 1,000
ISOs to another employee, Donna, entitling her to buy 1,000 shares of Roxy at $10 per share over a two-year period. One year later, 2017, the stock has risen to $20 per share, and Carol and Donna both exercise their options in full, receiving stock not subject to an SRF.
a.What happens to Carol tax-wise in 2017?
b.What happens to Donna tax-wise in 2017?
c.What happens to Roxy, Inc., tax-wise in 2017?
d.What happens to Carol tax-wise in 2019 when she sells her stock for $37?
e.What happens to Donna tax-wise in 2019 when she sells her stock for $38?
f. What happens to Roxy, Inc., tax-wise in 2019 with respect to these transactions?
Q3) What is a defined contribution plan?
Q4) What is a profit sharing plan?
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Chapter 20: Corporations and Partnerships
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Q1) On January 1, 2017, Copper Corporation (a calendar year S corporation for many years) became a C corporation. A possible reason for this change in status is:
A)The corporation had too much passive investment income for 2017.
B)A partnership became a shareholder on March 4, 2017.
C)A majority of the shareholders met on March 14, 2017, and revoked the S election.
D)All of the shareholders met on April 11, 2017, and revoked the election.
E)None of the above.
Q2) In computing the taxable income (or loss) of an S corporation, a domestic production activities deduction (DPAD) is allowed.
A)True
B)False
Q3) Amount the corporation borrows from a bank increases the basis its shareholders have in their stock.
Q4) If a corporation does not choose to amortize its organizational expenditures, such expenses can never be deducted.
A)True
B)False
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