Income Tax Accounting Practice Questions
Course Introduction
Income Tax Accounting is a course that introduces students to the fundamental principles, laws, and procedures involved in accounting for income taxes. The curriculum covers the computation of taxable income, determination of tax liability for individuals and businesses, and treatment of various types of income and deductions. Students will learn about current tax codes, filing requirements, payroll taxes, tax planning, regulations, and reporting standards. The course also explores the ethical and legal aspects of tax practice, as well as the use of accounting systems and software to prepare and analyze tax returns. Emphasis is placed on applying tax regulations to real-world scenarios to develop practical skills essential for careers in accounting and finance.
Recommended Textbook
South Western Federal Taxation 2015 Individual Income Taxes 38th Edition
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Page 2
by William H. Hoffman
Chapter 1: An Introduction to Taxation and Understanding
the Federal Tax Law
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Sample Questions
Q1) What are the pros and cons of the following state and local tax provisions?
a.An ad valorem property tax holiday made available to a manufacturing plant that is relocating.
b.Hotel occupancy tax and a rental car surcharge.
c.A back-to-school sales tax holiday.
Answer: a.Such a holiday is designed to attract new industry to the area.This means more jobs and growth in consumption.On the other hand,if the tax holiday is too generous,this places a strain on available public revenue.The result could be that schools and capital maintenance (roads,public services)will suffer.
c.The hotel occupancy tax and car rental surcharges are popular because they mainly impact visitors.Also,they can generate considerable revenue to finance major capital improvements.If these taxes become excessive,however,they could discourage major events (such as conventions).
d.Such holidays are very popular with both merchants and consumers and serve the social need of defraying some of the costs of sending children to school.Once established,however,they are difficult to get rid of.Thus,they become an annual drain on sales tax revenue.
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3
Chapter 2: Working With the Tax Law
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Sample Questions
Q1) The following citation is correct: Larry G.Mitchell,131 T.C.215 (2008).
A)True
B)False
Answer: True
Q2) A researcher can find tax information on home page sites of:
A)Governmental bodies.
B)Tax academics.
C)Publishers.
D)CPA firms.
E)All of these. Answer: E
Q3) A letter ruling applies only to the taxpayer who asks for and obtains a letter ruling.
A)True
B)False Answer: True
Q4) Electronic databases are most frequently searched by the keyword approach.
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) A dependent cannot claim a personal exemption on his or her own return. A)True
B)False Answer: True
Q2) Married taxpayers who file a joint return cannot later (i.e. ,after the filing due date)switch to separate returns for that year.
A)True
B)False Answer: True
Q3) A child who is married cannot be subject to the kiddie tax.
A)True
B)False
Answer: False
Q4) An ex-husband (divorce occurred last year)who lives with taxpayer.
A)Could be a qualifying child.
B)Could be a qualifying relative.
C)Could be either a qualifying child or a qualifying relative.
D)Could be neither a qualifying child nor a qualifying relative.
Answer: B
5
Chapter 4: Gross Income: Concepts and Inclusions
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Sample Questions
Q1) Which of the following is not a requirement for an alimony deduction?
A)The payments must be in cash.
B)The payments must cease upon the death of the payee.
C)The payments must extend over at least three years.
D)The payor and payee must not live in the same household at the time of the payments.
E)All of these are requirements for an alimony deduction.
Q2) The amount of Social Security benefits received by an individual that he or she must include in gross income:
A)Is computed in the same manner as an annuity [exclusion = (cost/expected return)× amount received].
B)May not exceed the portion contributed by the employer.
C)May not exceed 50% of the Social Security benefits received.
D)May be zero or as much as 85% of the Social Security benefits received,depending upon the taxpayer's Social Security benefits and other income.
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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Sample Questions
Q1) Mauve Company permits employees to occasionally use the copying machine for personal purposes.The copying machine is located in the office where the higher paid executives work,so they occasionally use the machine.However,the machine is not convenient for use by the lower paid warehouse employees and,thus,they never use the copier.The use of the copy machine may not be excluded from gross income because the benefit is discriminatory.
A)True
B)False
Q2) Employers can provide numerous benefits to their employees and the employees are permitted to exclude the value of these benefits from gross income.What are the effects of the exclusions on:
a.The progressiveness of the tax system?
b.The complexity of the tax system?
Q3) The taxpayer was in the 35% marginal tax bracket in 2013 and deducted $15,000 in state income taxes as an itemized deduction that year.In 2014,he filed his 2013 state income tax return and received a $5,000 refund of state income taxes paid in 2013.His marginal tax rate in 2014 was 15%.What was the taxpayer's Federal tax benefit from the overpayment of his 2013 state income tax?
Q4) What Federal income tax benefits are provided for college students?
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Chapter 6: Deductions and Losses: in General
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Sample Questions
Q1) If a vacation home is a personal/rental residence,no maintenance and utility expenses can be claimed as a deduction.
A)True
B)False
Q2) Graham,a CPA,has submitted a proposal to do the annual audit for a municipality.Owen,the city treasurer,tells Graham that for a $1,000 fee,he will use his influence to have the audit awarded to Graham.What factors are relevant in determining if Graham can deduct the $1,000 payment assuming he pays the fee to Owen?
Q3) In applying the $1 million limit on deducting executive compensation,what corporations are subject to the deduction limit? What executives are covered?
Q4) All domestic bribes (i.e. ,to a U.S.official)are disallowed as deductions.
A)True B)False
Q5) Only some employment related expenses are classified as deductions for AGI. A)True B)False
Q6) Are all personal expenses disallowed as deductions?
Q7) What losses are deductible by an individual taxpayer?
Page 8
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Chapter 7: Deductions and Losses: Certain Business
Expenses and Losses
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Sample Questions
Q1) The limit for the domestic production activities deduction (DPAD)uses all W-2 wages paid to employees by the taxpayer during the tax year.
A)True
B)False
Q2) A theft of investment property can create or increase a net operating loss for an individual.
A)True
B)False
Q3) 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.
Q4) A theft loss of investment property is an itemized deduction not subject to the 2%-of-AGI floor.
A)True
B)False
Q5) A father cannot claim a loss on his daughter's rental use property.
A)True
B)False
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Chapter 8: Depreciation, cost Recovery, amortization, and Depletion
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Q1) Antiques may be eligible for cost recovery if they are used in a trade or business.
A)True
B)False
Q2) For real property,the ADS convention is the mid-month convention.
A)True
B)False
Q3) Any § 179 expense amount that is carried forward is subject to the business income limitation in the carryforward year.
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) Intangible drilling costs must be capitalized and written off through depletion.
A)True
B)False
Q6) Discuss the difference between the half-year convention and the mid-quarter convention.
Page 10
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Chapter 9: Deductions: Employee and
Self-Employed-Related Expenses
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Sample Questions
Q1) Allowing for the cutback adjustment (50% reduction for meals and entertainment),which of the following trips,if any,will qualify for the travel expense deduction?
A)Dr.Jones,a general dentist,attends a two-day seminar on developing a dental practice.
B)Dr.Brown,a surgeon,attends a two-day seminar on financial planning.
C)Paul,a romance language high school teacher,spends summer break in France,Portugal,and Spain improving his language skills.
D)Myrna went on a twoweek vacation in Boston.While there,she visited her employer's home office to have lunch with former co-workers.
E)All of these.
Q2) Once the actual cost method is used,a taxpayer cannot change to the automatic mileage method in a later year.
A)True
B)False
Q3) For self-employed taxpayers,travel expenses are not subject to the 2%-of-AGI floor.
A)True
B)False
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Chapter 10: Deductions and Losses: Certain Itemized
Deductions
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Sample Questions
Q1) Fees for automobile inspections,automobile titles and registration,bridge and highway tolls,parking meter deposits,and postage are not deductible if incurred for personal reasons,but they are deductible as deductions for AGI if incurred as a business expense by a self-employed taxpayer.
A)True
B)False
Q2) Ross,who is single,purchased a personal residence eight years ago for $170,000 and took out a mortgage of $100,000 on the property.In May of the current year,when the residence had a fair market value of $220,000 and Ross owed $70,000 on the mortgage,he took out a home equity loan for $110,000.He used the funds to purchase a BMW for himself and a Lexus SUV for his wife.For both vehicles,100% of the use is for personal activities.What is the maximum amount on which Ross can deduct home equity interest?
Q3) Phyllis,a calendar year cash basis taxpayer who itemized deductions,overpaid her 2013 state income tax and is entitled to a refund of $400.Phyllis chooses to apply the $400 overpayment toward her state income taxes for 2014.She is required to recognize that amount as income in 2014.
A)True
B)False
Page 12
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Chapter 11: Investor Losses
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Q1) Lindsey,an attorney,earns $125,000 from her law practice in the current year.In addition,she receives $50,000 in dividends and interest during the year.Further,she incurs a loss of $40,000 from an investment in a passive activity.What is Lindsey's AGI for the year after considering the passive investment?
Q2) From January through November,Vern participated for 420 hours as a salesman in a partnership in which he owns a 50% interest.The partnership has four full-time employees.During December,Vern spends 110 hours cleaning the store and painting the walls in order to meet the material participation standards.Vern qualifies as a material participant.
A)True
B)False
Q3) Ken has a $40,000 loss from an investment in a partnership in which he does not materially participate.He paid $30,000 for his interest.How much of the loss is disallowed by the at-risk rules? How much is disallowed by the passive loss rules?
Q4) What special passive loss treatment is available to real estate activities?
Q5) When a taxpayer disposes of a passive activity by gift,what happens to any unused passive losses?
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Page 13
Chapter 12: Alternative Minimum Tax
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Sample Questions
Q1) The deduction for personal and dependency exemptions is allowed for regular income tax purposes,but is disallowed for AMT purposes.This results in a positive AMT adjustment.
A)True
B)False
Q2) 66. Wallace owns a construction company that builds both commercial and residential buildings. He contracts to build a residential building for $800,000 for which he is eligible to use the completed contract method of accounting. In the current year for regular income tax purposes, Wallace does not recognize any income on the contract. Under the percentage of completion method, the income recognized under the contract would have been $60,000. Wallaces AMT adjustment is:
A) $0.
B) $60,000 negative adjustment.
C) $60,000 positive adjustment.
D) $800,000 positive adjustment.
E) None of these.
Q3) Interest on a home equity loan cannot be deducted for AMT purposes.
A)True
B)False
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Page 14
Chapter 13: Tax Credits and Payment Procedures
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Sample Questions
Q1) An employee with outside income may be able to avoid the penalty for underpayment of estimated tax by having his employer increase income tax withholdings.
A)True
B)False
Q2) An employer calculates the amount of income tax withheld from salary or wages based on the information an employee provides on the following form:
A)Form W-2.
B)Form W-3.
C)Form W-4.
D)Form 941.
E)None of these.
Q3) A taxpayer who qualifies for the low-income housing credit claims the credit over a 20-year period.
A)True
B)False
Q4) All foreign taxes qualify for the foreign tax credit.
A)True
B)False
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Chapter 14: Property Transactions: Determination of Gain or
Loss and Basis Considerations
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Q1) What is the easiest way for a taxpayer who is going to sell property that has declined in value to avoid the § 267 loss disallowance provision?
Q2) Etta received nontaxable stock rights on October 3,2014.She allocated $16,000 of the $50,000 basis for the associated stock to the stock rights.The stock rights are exercised on November 8,2014.The exercise price for the stock is $52,000.What is Etta's basis for the acquired stock?
A)$0
B)$16,000
C)$52,000
D)$68,000
E)None of these
Q3) If the fair market value of the property on the date of death is greater than on the alternate valuation date,the use of the alternate valuation amount is mandatory.
A)True
B)False
Q4) Define fair market value as it relates to property transactions.
Q5) When a property transaction occurs,what four questions should be considered with respect to the sale or other disposition?
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Chapter 15: Property Transactions: Nontaxable Exchanges
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Q1) Edith's manufacturing plant is destroyed by fire on the afternoon of November 3,2014.The adjusted basis is $800,000.The insurance company offers a settlement of $700,000.After protracted negotiations,Edith receives $825,000 on June 9,2015.Edith is a fiscal year taxpayer whose tax year ends on June 30th.What is the latest date that Edith can invest the proceeds in qualifying replacement property and elect to defer the gain under § 1033?
Q2) Ross lives in a house he received as a gift from his father.His father had lived in the house for 12 years.The adjusted basis of the house to his father was $160,000 and the fair market value at the time of the gift was $140,000.Ross sells this residence after living in it for 18 months for $150,000 and purchases a new home for $125,000.He incurs selling expenses of $7,000.What is Ross' recognized gain or loss and basis for the new residence?
A)($17,000);$125,000.
B)($17,000);$142,000.
C)$3,000;$125,000.
D)$3,000;$128,000.
E)None of these.
Q3) Discuss the relationship between realized gain and boot received in a § 1031 likekind exchange.
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Chapter 16: Property Transactions: Capital Gains and Losses
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Q1) When an individual taxpayer has a net long-term capital gain that includes both 28% gain and 0%/15%/20% gain,which of these gains will be taxed first when the alternative tax on net long-term capital gain method is used and what difference does it make?
Q2) 36. On June 1, 2014, Brady purchased an option to buy 1,000 shares of General, Inc. at $40 per share. He purchased the option for $3,000. It was to remain in effect for five months. The market experienced a decline during the latter part of the year, so Brady decided to let the option lapse as of December 1, 2014. On his 2014 tax return, what should Brady report?
A) A $3,000 long-term capital loss.
B) A $3,000 short-term capital loss.
C) A $3,000 § 1231 loss.
D) A $3,000 ordinary loss.
E) None of these.
Q3) Since the Code section that defines "capital asset" says what is not a capital asset,other Code sections have to help determine what is and what is not a capital gain or loss.
A)True
B)False
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Chapter 17: Property Transactions: 1231 and Recapture
Provisions
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Q1) Depreciable personal property was sold at a gain in 2013.On what 2013 form would this transaction be reported,where initially in that form,and what will the form most likely do with the gain?
Q2) Describe the circumstances in which the maximum unrecaptured § 1250 gain (25% gain)does not become part of the Schedule D netting process for an individual taxpayer?
Q3) An individual had the following gains and losses during 2014 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 these.
Q4) A business machine purchased April 10,2012,for $98,000 was fully depreciated in 2012 using § 179 immediate expensing.On August 15,2014,the machine was sold for $67,000.What is the amount and nature of the gain or loss from disposition of the machine?
Page 19
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Chapter 18: Accounting Periods and Methods
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Q1) John sold an apartment building for $600,000.His basis in the building was $360,000 and it was subject to $30,000 of depreciation recapture.John received $150,000 in the year of sale,the buyer assumed John's mortgage payable of $240,000,and the buyer gave John an 8% (the current Federal rate)note of $210,000 due in 5 years.The interest on the note was payable each June 30th,beginning in the year following the year of the sale.John incurred $30,000 of selling expenses which he paid in the year of sale.Compute John's installment sales gain that should be reported in the year of sale.
Q2) In the case of an accrual basis taxpayer,an item of income:
A)Is not recognized until cash is received.
B)From services is never recognized until the services are performed.
C)Is not recognized if the customer can return the goods.
D)Is recognized when all the events have occurred to fix the taxpayer's right to receive the income and the amount of the income can be determined with reasonable accuracy.
E)None of these.
Q3) The taxpayer does need the IRS's permission to change from the FIFO inventory method to the LIFO method.
A)True
B)False
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Page 20
Chapter 19: Deferred Compensation
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Q1) Which of the followings is not a characteristic of a Keogh plan?
A)A trust is established.
B)Considered to be a qualified plan.
C)Contribution to plan by extension due date.
D)Favorable 10-year forward averaging is not available.
E)All of these are characteristics.
Q2) The minimum annual distributions must be made over the life of the participant or the life of the participant and a designated individual beneficiary.
A)True
B)False
Q3) The compensation paid by Purple Corporation to the plan participants of a profit sharing plan in 2014 was $38,300.During 2014,Purple Corporation contributed $10,000 to the plan.Purple's deductible amount for 2014 is what amount,if any?
A)$0
B)$7,660
C)$9,575
D)$10,000
E)None of these
Q4) What is a defined contribution plan?
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Chapter 20: Corporations and Partnerships
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Q1) John owns stock in Green Corporation,which,in turn,owns stock in IBM.When IBM earns income,it is subject to the corporate income tax (i.e. ,the first tax).When IBM pays a dividend,Green Corporation must pay a corporate income tax on its share (i.e. ,the second tax).When Green Corporation pays a dividend,John must pay an individual income tax on what he receives (i.e. ,the third tax).Thus,the same income is subject to triple taxation.
a.How does the tax law mitigate the tax on Green Corporation?
b.How does the tax law mitigate the tax imposed on John?
Q2) Under the check-the-box Regulations,an entity is allowed an annual election on how it will be treated (e.g. ,corporation,partnership)for Federal income tax purposes.
A)True
B)False
Q3) A net short-term capital loss can be used to offset a net long-term capital gain.
A)Applies only to the income taxation of individuals
B)Applies only to the income taxation of C corporations
C)Applies to both the income taxation of individuals and of C corporations
D)Applies to neither the income taxation of individuals nor of C corporations
Q4) When might an NOL carryback to prior years be ill-advised?
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