Income Tax Accounting Practice Exam
Course Introduction
Income Tax Accounting is a comprehensive course that explores the principles, concepts, and regulations governing the accounting and reporting of income taxes for individuals, businesses, and other entities. Students will learn how to prepare and analyze tax returns, recognize the tax implications of various business transactions, and apply relevant provisions of the Internal Revenue Code. The course also covers deferred tax assets and liabilities, tax planning strategies, ethical considerations, and the impact of recent legislative changes on tax accounting. Emphasis is placed on developing practical skills in tax research, compliance, and documentation to support decision-making in real-world scenarios.
Recommended Textbook
South Western Federal Taxation 2017 Individual Income Taxes 40th Edition by William H. Hoffman
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Chapter 1: An Introduction to Taxation and Understanding
the Federal Law
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Sample Questions
Q1) In an office audit,the audit by the IRS takes place at the office of the taxpayer.
A)True
B)False
Answer: False
Q2) A characteristic of FICA is that:
A)It does not apply when one spouse works for the other spouse.
B)It is imposed only on the employer.
C)It provides a modest source of income in the event of loss of employment.
D)It is administered by both state and Federal governments.
E)None of these.
Answer: E
Q3) Like the Federal counterpart,the amount of the state excise taxes on gasoline varies from state to state.
A)True
B)False
Answer: False
Q4) Additional depreciation deduction allowed for the year the asset is acquired.
Answer: a
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Chapter 2: Working With the Tax Law
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Sample Questions
Q1) A jury trial is available in the following trial court:
A)U.S.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
Q2) Subchapter D refers to the "Corporate Distributions and Adjustments" section of the Internal Revenue Code.
A)True
B)False
Answer: False
Q3) The IRS is not required to make a letter ruling public.
A)True
B)False
Answer: False
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Chapter 3: Tax Formula and Tax Determination an
Overview of Property Transactions
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187 Verified Questions
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Sample Questions
Q1) Roy and Linda were divorced in 2015.The divorce decree awards custody of their children to Linda but is silent as to who is entitled to claim them as dependents.If Roy furnished more than half of their support,he can claim them as dependents in 2016.
A)True
B)False
Answer: False
Q2) Because they appear on page 1 of Form 1040,itemized deductions are also referred to as "page 1 deductions."
A)True
B)False
Answer: False
Q3) $1,050
Answer: c
Q4) Scholarship funds for room and board
Answer: g
Q5) Once a child reaches age 19,the kiddie tax no longer applies.
A)True
B)False
Answer: False
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Chapter 4: Gross Income Concepts and Inclusions
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Sample Questions
Q1) Samantha and her son,Brent,are cash basis taxpayers.Samantha gave Brent a corporate bond with a face amount and fair market value of $10,000.On the date of the gift,March 31,2016,the accrued interest on the bond was $100.On December 31,2016,Brent collected $400 interest on the bond.Brent must include in gross income the $300 interest earned after the date of the gift.
A)True
B)False
Q2) On a particular Saturday,Tom had planned to paint a room in his house,but his employer gave him the opportunity to work that day.If Tom works,he must hire a painter for $120.For Tom to have a positive cash flow from working and hiring the painter:
A)Tom must earn more than $160 if he is in the 25% marginal tax bracket.
B)Tom must earn at least $160 if he is in the 33% marginal tax bracket.
C)Tom must earn at least $150 if he is in the 25% marginal tax bracket.
D)Tom must earn at least $135 if he is in the 15% marginal tax bracket.
E)None of these.
Q3) Sarah,a widow,is retired and receives $20,000 interest income and dividends and $10,000 in Social Security benefits.Sarah is considering selling a stock at an $8,000 gain.What will be the increase in Sarah's gross income as a result of the sale of the stock?
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Chapter 5: Gross Income Exclusions
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Sample Questions
Q1) Sonja is a United States citizen who has worked in Spain for the past 10 months.She received $8,000 a month as compensation.Her employer has offered to extend Sonja's contract to work in Spain for another 6 months at the same rate of pay.If she rejects the offer,she can return to the United States and receive a salary of $10,000 per month.While working in Spain,she is subject to the Spain income tax,which is approximately 11% of her gross pay.The marginal tax rate on her income taxed in the United States is 25%.Compare Sonja's after-tax income assuming she remains in Spain with her after-tax income if she returns to the United States.
Q2) What Federal income tax benefits are provided for college students?
Q3) Benny loaned $100,000 to his controlled corporation.When it became apparent the corporation would not be able to repay the loan in the near future,Benny canceled the debt.The corporation should treat the cancellation as a nontaxable contribution to capital.
A)True
B)False
Q4) If a tax-exempt bond will yield approximately .65 (1 - .35)times the yield on a taxable bond of equal risk,who benefits from the tax exemption: the Federal government,the state and local governments who issue the bonds,or the investors?
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Page 7
Chapter 6: Deductions and Losses in General
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Sample Questions
Q1) Which of the following is incorrect?
A)Alimony is a deduction for AGI.
B)The expenses associated with royalty property are a deduction from AGI.
C)Contributions to a traditional IRA are a deduction for AGI.
D)Property taxes on taxpayer's personal residence are a deduction from AGI
E)All of the above are correct.
Q2) Are there any exceptions to the rule that personal expenditures cannot be deducted?
Q3) If a taxpayer can satisfy the three-out-of-five year presumption test associated with hobby losses,then expenses from the activity can be deducted in excess of the gross income from the activity.
A)True
B)False
Q4) Bobby operates a drug trafficking business.Because he has an accounting background,he keeps detailed financial records.What expenses can Bobby deduct on his Federal income tax return?
Q5) Describe the circumstances under which a taxpayer can receive rent income from a personal residence,but does not have to report it as gross income.
Q6) Are all personal expenses disallowed as deductions?
Page 8
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Chapter 7: Deductions and Losses Certain Business
Expenses and Losses
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Sample Questions
Q1) A taxpayer who sustains a casualty loss in an area designated by the President of the United States as a disaster area may take the loss in the year in which the loss occurred or elect to take the loss in the previous year.Identify factors that should be considered in deciding in which year to take the loss.
Q2) Jason,married and filing jointly,had the following income for 2016: Salary
$ 70,000
Loss on the sale of § 1244 stock held for 5 years (110,000)
Dividends
25,000 Interest income
10,000
Itemized deductions (no casualty losses) (12,000)
Jason has four dependent children.Calculate the net operating loss for 2016.
Q3) A nonbusiness bad debt can offset an unlimited amount of long-term capital gain.
A)True
B)False
Page 9
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Chapter 8: Depreciation Cost Recovery Amortization and Depletion
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Sample Questions
Q1) James purchased a new business asset (three-year personalty)on July 23,2016,at a cost of $40,000.James takes additional first-year depreciation but does not elect Section 179 expense on the asset.Determine the cost recovery deduction for 2016.
A)$8,333
B)$26,666
C)$33,333
D)$41,665
E)None of the above
Q2) Discuss the reason for the inclusion amount with respect to leased automobiles.
Q3) The "luxury auto" cost recovery limits change if mid-quarter cost recovery is used. A)True B)False
Q4) The key date for calculating cost recovery is the date the asset is placed in service. A)True B)False
Q5) Discuss the beneficial tax consequences of an SUV not being classified as a passenger automobile.
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Chapter 9: Deductions Employee and Self Employed
Related Expenses
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Sample Questions
Q1) After graduating from college with a degree in chemistry,Alberto obtains a job as a chemist with DuPont.Alberto's job search expenses qualify as deductions.
A)True
B)False
Q2) Alfredo,a self-employed patent attorney,flew from his home in Chicago to Miami,had lunch alone at the airport,conducted business in the afternoon,and returned to Chicago in the evening.His expenses were as follows:
What is Alfredo's deductible expense for the trip?
Q3) Deductible moving expense
Q4) Cutback adjustment does not apply
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Chapter 10: Deduction and Losses Certain Itemized
Deductions
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Sample Questions
Q1) Rick and Carol Ryan,married taxpayers,took out a mortgage of $160,000 when purchasing their home ten years ago.In October of the current year,when the home had a fair market value of $200,000 and they owed $125,000 on the mortgage,the Ryans took out a home equity loan for $110,000.They used the funds to purchase a sailboat to be used for recreational purposes.The sailboat does not qualify as a residence.What is the maximum amount of debt on which the Ryans can deduct home equity interest?
A)$75,000
B)$90,000
C)$110,000
D)$125,000
E)None of the above
Q2) Chad pays the medical expenses of his son,James.James would qualify as Chad's dependent except that he earns $7,500 during the year.Chad may claim James' medical expenses even if he is not a dependent.
A)True
B)False
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Chapter 11: Investor Losses
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Sample Questions
Q1) Tonya owns an interest in an activity (not real estate)that converted recourse financing to nonrecourse financing.Recapture of previously allowed losses is required if Tonya's at-risk amount is reduced below zero as a result of the debt restructuring.
A)True
B)False
Q2) Active participation.
Q3) Ahmad owns four activities.He participated for 120 hours in Activity A,150 hours in Activity B,140 hours in Activity C,and 100 hours in Activity D.Which of the following statements is correct?
A)Activities A,B,C,and D are all significant participation activities.
B)Activities A,B,and C are significant participation activities.
C)Ahmad is a material participant with respect to Activities A,B,and C.
D)Ahmad is a material participant with respect to Activities A,B,C,and D.
E)None of the above.
Q4) Material participation.
Q5) Describe the types of activities and taxpayers that are subject to the at-risk rules.
Q6) Treatment of suspended credits when passive activity is sold at a loss.
Q7) Treatment of an installment sale of a passive activity.
Page 13
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Chapter 12: Alternative Minimum Tax
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Sample Questions
Q1) In May 2013,Swallow,Inc. ,issues options to Karrie,a corporate officer,to purchase 100 shares of Swallow stock under an ISO plan.At the date the stock options are issued,the fair market value of the stock is $1,000 per share and the option price is $1,200 per share.The stock becomes freely transferable in 2014.Karrie exercises the options in November 2013 when the stock is selling for $1,500 per share.She sells the stock in December 2015 for $1,800 per share.
a.Determine the amount of the AMT adjustment for 2013.
b.Determine the amount of the AMT adjustment for 2014.
c.Determine Karrie's recognized gain for regular income tax purposes and for AMT purposes in 2015 on the sale of the stock.
d.Determine the amount of the AMT adjustment for 2015.
Q2) All of a C corporation's AMT is available for carryover as a minimum tax credit,regardless of whether the adjustments and preferences originate from timing differences or AMT preferences.
A)True
B)False
Q3) Will all AMT adjustments reverse? That is,do they relate to timing differences?
Q4) Why is there a need for a second tax system called the alternative minimum tax?
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Chapter 13: Tax Credits and Payment Procedures
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Sample Questions
Q1) A taxpayer who qualifies for the low-income housing credit claims the credit over a 20-year period.
A)True
B)False
Q2) The purpose of the work opportunity tax credit is to encourage employers to hire individuals from specified target groups traditionally subject to high rates of unemployment.
A)True
B)False
Q3) The base amount for the Social Security portion (old age,survivors,and disability insurance)is different from that for the Medicare portion of FICA.
A)True
B)False
Q4) Jack and Jill are married,have three children,and have earnings during 2016 of $28,500.Do they qualify for the earned income credit? If so,calculate the amount of credit that is available to them.
Q5) Explain the purpose of the tax credit for rehabilitation expenditures and describe the general characteristics of its computation.
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Chapter 14: Property Transactions Determination of Gain and
Loss and Basic Considerations
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Sample Questions
Q1) If the alternate valuation date is elected by the executor in 2016,the total basis of inherited property will be more than what it would have been if the primary valuation date and amount had been used.
A)True
B)False
Q2) Tariq sold certain U.S.Government bonds and State of Oregon bonds at a loss to offset short-term capital gain from a previous transaction.He felt that the U.S.Government and State of Oregon bonds were "good" investments,so he repurchased identical securities within one week.Do these transactions constitute wash sales? If the bond sales resulted in the recognition of gain (rather than loss),would the wash sale provisions prevent the gains from being recognized?
Q3) Discuss the application of holding period rules to property acquired by gift and inheritance.
Q4) The basis for gain and loss of personal use property converted to business use is the lower of the adjusted basis or the fair market value on the date of conversion.
A)True
B)False
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Chapter 15: Property Transactions Nontaxable Exchanges
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Sample Questions
Q1) When boot in the form of cash is given in a like-kind exchange,recognized gain is the greater of the boot or the realized gain.
A)True
B)False
Q2) Kelly,who is single,sells her principal residence,which she has owned and occupied for 8 years,for $375,000.The adjusted basis is $64,000 and selling expenses are $22,000.She purchases another principal residence three months later for $200,000.Her recognized gain is $39,000 and her basis for the new principal residence is $200,000.
A)True
B)False
Q3) 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?
Q4) Livestock of different sexes can qualify for like-kind exchange treatment if the livestock has been held for over 24 months.
A)True
B)False
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Chapter 16: Property Transactions Capital Gains and Losses
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Sample Questions
Q1) Tan,Inc. ,sold a forklift on April 12,2016,for $8,000 (its FMV)to its 100% shareholder,Ashley.Tan's adjusted basis for the forklift was $12,000.Ashley's holding period for the forklift:
A)Includes Tan's holding period for the forklift.
B)Begins on April 12,2016.
C)Begins on April 13,2016.
D)Does not begin until Ashley sells the forklift.
E)None of the above.
Q2) If a capital asset is sold at a gain,the holding period is important.
A)True
B)False
Q3) An individual taxpayer with 2016 net short-term capital loss of $5,000 generally can deduct up to $3,000 for AGI and carry the balance forward to 2017.
A)True
B)False
Q4) To compute the holding period,start counting on the day after the property was acquired and include the day of disposition.
A)True
B)False
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Chapter 17: Property Transactions Section 1231 and Recapture Provisions
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Sample Questions
Q1) Section 1231 property generally includes certain purchased intangible assets (such as patents and goodwill)that are eligible for amortization and held for more than one year.
A)True
B)False
Q2) Which of the following would extinguish the § 1245 recapture potential?
A)An exchange of depreciable business equipment for like-kind business equipment with gain realized,but not recognized.
B)A nontaxable incorporation under § 351.
C)A nontaxable contribution to a partnership under § 721.
D)A nontaxable reorganization.
E)None of the above.
Q3) The Code contains two major depreciation recapture provisions: § 1245 and § 1250. A)True
B)False
Q4) A personal use property casualty loss is generally deductible only to the extent it exceeds 10% of AGI.
A)True
B)False
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Chapter 18: Accounting Periods and Methods
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Sample Questions
Q1) Pedro,not a dealer,sold real property that he owned with an adjusted basis of $120,000 and encumbered by a mortgage for $56,000 to Pat in 2014.The terms of the sale required Pat to pay $28,000 cash,assume the $56,000 mortgage,and give Pedro eleven notes for $12,000 each (plus interest at the Federal rate).The first note was payable two years from the date of sale and each succeeding note became due at two-year intervals.Pedro did not "elect out" of the installment method for reporting the transaction.If Pat pays the 2016 note as promised,what is the recognized gain to Pedro in 2016 (exclusive of interest)?
A)$12,000
B)$7,200
C)$4,800
D)$0
E)None of the above
Q2) In the case of a taxpayer who uses the lower-of-cost-or-market inventory method:
A)Taxpayers may not use the lower of cost or market method for tax purposes.
B)Market price means the expected selling price.
C)Taxpayers may deduct a reserve for anticipated inventory price changes.
D)Each inventory item must be valued at the lower of its cost or its market value.
E)None of the above.
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Chapter 19: Deferred Compensation
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Sample Questions
Q1) Sammy,age 31,is unmarried and is not an active participant in a qualified retirement plan.His modified AGI is $55,000 in 2016.The maximum amount that Sammy can deduct for a contribution to a traditional IRA is:
A)$2,800.
B)$3,500.
C)$5,000.
D)$5,500.
E)None of the above.
Q2) A 20% excise tax is imposed on nondeductible contributions by an employer to a qualified plan.
A)True
B)False
Q3) A company is denied a deduction for a golden parachute payment to an employee,but not for a golden parachute payment to an independent contractor.
A)True
B)False
Q4) For the spousal IRA provision to apply,a joint return must be filed.
A)True
B)False
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Chapter 20: Corporations and Partnerships
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Sample Questions
Q1) Recapture of depreciation on real property can be more severe.
Q2) In computing the NOL of a corporation,the dividends received deduction cannot be claimed.
A)True
B)False
Q3) Even though partnerships are not subject to income tax,they are required to file income tax returns.
A)True
B)False
Q4) If a corporation does not choose to amortize its organizational expenditures,such expenses can never be deducted.
A)True
B)False
Q5) Dividends received deduction is not available.
Q6) Regarding the check-the-box Regulations,comment on each of the following:
a.An entity is a corporation under state laws
b.A limited liability company defaults (no election is made).
c.A one-person business defaults (no election is made).
Q7) A domestic production activities deduction is available.
Q8) Cannot be a shareholder in another corporation.
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