Income Tax Accounting
Pre-Test Questions
Course Introduction
Income Tax Accounting provides students with a thorough understanding of the principles, regulations, and procedures related to the taxation of individuals and businesses. The course explores the determination of taxable income, calculation of tax liability, tax compliance requirements, and ethical considerations in tax practice. Emphasis is placed on the interpretation and application of the Internal Revenue Code, tax planning strategies, and the preparation of federal income tax returns. Students will also examine recent changes in tax law and their impact on financial decision-making for individuals and organizations.
Recommended Textbook
South Western Federal Taxation 2014 Individual Income Taxes 37th Edition by William Hoffman
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Page 2
Chapter 1: An Introduction to Taxation and Understanding
the Federal Tax Law
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Sample Questions
Q1) Taxes levied by both states and the Federal government include:
A) General sales tax.
B) Custom duties.
C) Car rental tax.
D) Franchise tax.
E) None of the above.
Answer: E
Q2) Ava,an estate planner,is advising her wealthier clients to make any large gifts to family members before 2013.Why?
Answer: Under existing law,the exemption equivalent for gift tax purposes is scheduled to decrease from $5.12 million to $1 million after 2012.Thus,an extra $4.12 million in value can be transferred without any tax if the gifts occur before 2013.
Q3) If a "special agent" becomes involved in the audit of a return,this indicates that the IRS suspects that fraud is involved.
A)True
B)False
Answer: True
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Page 3
Chapter 2: Working With the Tax Law
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Sample Questions
Q1) A taxpayer can obtain a jury trial in the U.S.Court of Federal Claims.
A)True
B)False
Answer: False
Q2) A particular Regulation is assumed to have received Congressional approval if the Regulation was finalized many years earlier and Congress has not amended the Code section pertaining to that Regulation.
A)True
B)False
Answer: True
Q3) In § 212(1),the number (1)stands for the:
A) Section number.
B) Subsection number.
C) Paragraph designation.
D) Subparagraph designation.
E) None of the above.
Answer: C
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Page 4
Chapter 3: Tax Formula and Tax Determination; an
Overview of Property Transactions
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Sample Questions
Q1) Sylvia,age 17,is claimed by her parents as a dependent.During 2012,she had interest income from a bank savings account of $2,000 and income from a part-time job of $4,200.Sylvia's taxable income is:
A) $4,200 - $4,500 = $0.
B) $6,200 - $5,700 = $500.
C) $6,200 - $4,500 = $1,700.
D) $6,200 - $950 = $5,250.
E) None of the above.
Answer: C
Q2) Which of the following items,if any,is deductible?
A) Parking expenses incurred in connection with jury duty-taxpayer is a dentist.
B) Substantiated gambling losses (not in excess of gambling winnings) from state lottery.
C) Contributions to mayor's reelection campaign.
D) Speeding ticket incurred while on business.
E) Premiums paid on personal life insurance policy.
Answer: B
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Page 5
Chapter 4: Gross Income: Concepts and Inclusions
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Sample Questions
Q1) Norma's income for 2012 is $27,000 from part-time work and $9,000 of Social Security benefits.Norma is not married.A portion of her Social Security benefits must be included in her gross income.
A)True
B)False
Q2) With respect to income from services,which of the following is true?
A) The income is always amortized over the period the services will be rendered by an accrual basis taxpayer.
B) A cash basis taxpayer can spread the income from a 24-month service contract over the contract period.
C) If an accrual basis taxpayer sells a 36-month service contract on July 1, 2012 for $3,600, the taxpayer's 2013 gross income from the contract is $3,000.
D) If an accrual basis taxpayer sells a 12-month service contract on July 1, 2012, all of the income is recognized in 2012.
E) None of the above.
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6
Chapter 5: Gross Income: Exclusions
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Sample Questions
Q1) In 2012,Theresa was in an automobile accident and suffered physical injuries.The accident was caused by Ramon's negligence.In 2013,Theresa collected from his insurance company.She received $15,000 for loss of income,$25,000 punitive damages,and $8,000 for medical expenses which she had deducted on her 2012 tax return (the amount in excess of 7.5% of adjusted gross income).As a result of the above,Theresa's 2013 gross income is increased by $33,000.
A)True
B)False
Q2) The Perfection Tax Service gives employees $12.50 as "supper money" when they are required to work overtime,approximately 25 days each year.The supper money received:
A) Must be included in the employee's gross income.
B) Must be included in the employee's gross income if the employee does not spend it for supper.
C) May be excluded from the employee's gross income as a "no-additional cost" fringe benefit.
D) May be excluded from the employee's gross income as a de minimis fringe benefit.
E) None of the above.
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Page 7
Chapter 6: Deductions and Losses: in General
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Sample Questions
Q1) Beulah's personal residence has an adjusted basis of $450,000 and a fair market value of $390,000.Beulah converts the property to rental use on November 1,2012.The vacation home rules that limit the amount of the deduction to the rental income will apply and the adjusted basis for depreciation is $390,000.
A)True
B)False
Q2) Mitch is in the 28% tax bracket.He may receive a different tax benefit for a $2,000 expenditure that is classified as a deduction from AGI than he will receive for a $1,000 expenditure that is classified as a deduction for AGI.
A)True
B)False
Q3) Abner contributes $1,000 to the campaign of the Tea Party candidate for governor,$750 to the campaign of the Tea Party candidate for senator,and $500 to the campaign of the Tea Party candidate for mayor.Can Abner deduct these political contributions?
Q4) Under what circumstances may a taxpayer deduct the expenses of investigating a possible business acquisition,if (1)the business is not acquired; and (2)the business is acquired?
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Page 8
Chapter 7: Deductions and Losses: Certain Business
Expenses and Losses
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Sample Questions
Q1) When a nonbusiness casualty loss is spread between two taxable years,the loss in the second year is reduced by 10% of adjusted gross income for the first year.
A)True
B)False
Q2) In the computation of a net operating loss,which of the following items is not added to the negative taxable income?
A) Losses incurred in a transaction entered into for profit.
B) Personal casualty loss.
C) Personal theft loss.
D) Losses from theft of securities.
E) None of the above.
Q3) A theft of investment property can create or increase a net operating loss for an individual.
A)True
B)False
Q4) Discuss the calculation of nonbusiness deductions for purposes of determining an individual's NOL.
Q5) Discuss the effect of alimony in computing a net operating loss.
Q6) How is qualified production activities income (QPAI)calculated?
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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 23,2012,at a cost of $40,000.James takes additional first-year depreciation Determine the cost recovery deduction for 2012.
A) $8,333.
B) $26,666.
C) $33,333.
D) $41,665.
E) None of the above.
Q2) Intangible drilling costs may be expensed rather than capitalized and written off through depletion.
A)True B)False
Q3) The basis of an asset on which $139,000 has been expensed under § 179 will be reduced by $139,000,even if $139,000 cannot be expensed in the current year because of the taxable income limitation.
A)True
B)False
Q4) Discuss the beneficial tax consequences of an SUV not being classified as a passenger automobile.
Page 10
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Chapter 9: Deductions: Employee and
Self-Employed-Related Expenses
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Sample Questions
Q1) Which,if any,of the following is subject to the cutback adjustment?
A) An airline pilot for an executive jet rental company who pays his own travel expenses.
B) Meals provided at cost to employees by a cafeteria funded by the employer.
C) Fourth of July company picnic for employees.
D) A trip to Aruba awarded to the company's top salesperson.
E) None of the above.
Q2) Tom owns and operates a lawn maintenance company.He does not concern himself with employment taxes because he considers all the persons who work for him to be independent contractors.He bases this assumption of the fact that several of his friends who operate similar businesses follow the same approach.Comment on Tom's situation.
Q3) The IRS will not issue advanced rulings as to whether a worker's status is that of an employee or an independent contractor.
A)True
B)False
Q4) Qualified moving expenses of an employee that are not reimbursed are a deduction for AGI.
A)True
B)False
Page 11
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Chapter 10: Deductions and Losses: Certain Itemized
Deductions
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Q1) The phaseout of certain itemized deductions has been reinstated for years beginning in 2012.
A)True
B)False
Q2) During the current year,Maria and her three dependent children had annual physical exams,which cost $750,and dental checkups for all four of them,which cost $420.In addition,Maria paid $800 for medically supervised treatments to enable her to stop smoking.After she stopped smoking,she began to gain weight and incurred $1,200 in costs for a medically supervised weight loss program.Which of these expenses qualify for the medical deduction?
Q3) In the year of her death,Maria made significant charitable contributions of capital gain property.In fact,the amount of the contributions exceeds 30% of her AGI.Maria's executor can elect to deduct charitable contributions of up to 50% of Maria's AGI on Maria's final income tax return.
A)True
B)False
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Chapter 11: Investor Losses
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Sample Questions
Q1) Paula owns four separate activities.She elects not to group them together as a single activity under the "appropriate economic unit" standard.Paula participates for 130 hours in Activity A,115 hours in Activity B,260 hours in Activity C,and 100 hours in Activity D.She has one employee,who works 125 hours in Activity D.Which of the following statements is correct?
A)Activities A,B,C,and D are all significant participation activities.
B)Paula is a material participant with respect to Activities A,B,C,and D.
C)Paula is not a material participant with respect to Activities A,B,C,and D.
D)Losses from all of the activities can be used to offset Paula's active income.
E)None of the above.
Q2) 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?
Q3) 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
Q4) What special passive loss treatment is available to real estate activities?
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Chapter 12: Alternative Minimum Tax
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Sample Questions
Q1) The AMT does not apply to qualifying "small corporations."
A)True
B)False
Q2) Is it possible that no AMT adjustment is necessary for medical expenses in calculating AMTI even though the floor limitation is different (7.5% of AGI for regular income tax compared to 10% for AMT purposes)?
Q3) Kay,who is single,had taxable income of $0 in 2012.She has positive timing adjustments of $206,300 and exclusion items of $100,000 for the year.What is the amount of her alternative minimum tax credit for carryover to 2013?
A) $80,500.
B) $68,861.
C) $20,930.
D) $13,403.
E) None of the above.
Q4) If circulation expenditures are amortized over a ten-year period for regular income tax purposes,there will be no AMT adjustment.
A)True
B)False
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Page 14
Chapter 13: Tax Credits and Payment Procedures
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Sample Questions
Q1) Certain situations exist where the wage-bracket table method of determining income tax withholdings cannot be used.
A)True
B)False
Q2) Rick spends $750,000 to build a qualified low-income housing project,which is placed in service on January 1,2012.He financed the project using his personal funds.What is the amount of the low-income housing credit that Rick may claim in 2012 (assuming a rate of 7.42%)? What is the total amount of the credit that Rick may claim as a result of the $750,000 expenditure?
Q3) An eligible taxpayer may elect to receive advance payments of the earned income credit from his or her employer.
A)True
B)False
Q4) A taxpayer who qualifies for the low-income housing credit claims the credit over a 15-year period.
A)True
B)False
Q5) Discuss the treatment of unused general business credits.
Q6) Describe the withholding requirements applicable to employers.
Page 15
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Chapter 14: Property Transactions: Determination of Gain or
Loss and Basis Considerations
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Sample Questions
Q1) Ashley sells real property for $280,000.The buyer pays $4,000 in property taxes that had accrued during the year while the property was still legally owned by Ashley.In addition,Ashley pays $14,000 in commissions and $3,000 in legal fees in connection with the sale.How much does Ashley realize (the amount realized)from the sale of her property?
A) $259,000.
B) $263,000.
C) $267,000.
D) $280,000.
E) None of the above.
Q2) Monica sells a parcel of land to her son,Elbert,for $90,000.Monica's adjusted basis is $100,000.Three years later,Elbert gives the land to his fiancée,Karen.At that date,the land is worth $104,000.No gift tax is paid.Since Elbert is going to be stationed in the U.S.Army in Germany for 3 years,they do not plan on being married until his tour is completed.Six months after receiving the land,Karen sells it for $110,000.At the same time,Karen sends Elbert a "Dear John" email.Calculate Karen's realized and recognized gain or loss.
Q3) Identify two tax planning techniques that can be used to avoid the wash sale disallowance of loss.
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Chapter 15: Property Transactions: Nontaxable Exchanges
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Q1) If a taxpayer exchanges like-kind property under § 1031 and assumes a liability associated with the property received,the taxpayer is considered to have given boot in the transaction.
A)True
B)False
Q2) Define qualified small business stock under § 1045.
Q3) What effect do the assumption of liabilities have on a § 1031 like-kind exchange?
Q4) What requirements must be satisfied to receive nontaxable exchange treatment under § 1031?
Q5) A realized gain on an indirect (conversion into money)involuntary conversion of business property can be postponed,but a realized loss on an indirect involuntary conversion of business property cannot be postponed.
A)True
B)False
Q6) The surrender of depreciated boot (fair market value is less than adjusted basis)in a like-kind exchange can result in the recognition of loss.
A)True
B)False
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Chapter 16: Property Transactions: Capital Gains and Losses
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Q1) When a patent is transferred,the most common forms of payment received by the transferor are a lump sum and/or periodic payment.
A)True
B)False
Q2) An individual taxpayer received a valuable painting from his uncle,a famous painter.The painter did not create the painting,but had purchased it from another artist.After the taxpayer held the painting for two years,he sold it for a $400,000 gain.The gain is a long-term capital gain.
A)True
B)False
Q3) The tax law requires that capital gains and losses be separated from other types of gains and losses.Among the reasons for this treatment are:
A) Long-term capital gains may be taxed at a lower rate than ordinary gains.
B) Capital losses that are short-term are not deductible.
C) Net capital loss is deductible only up to $3,000 per year for individual taxpayers.
D) a. and c.
E) None of the above.
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Page 18
Chapter 17: Property Transactions: Section 1231 and Recapture Provisions
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Q1) Section 1231 applies to the sale or exchange of business properties,but not to personal use activity casualties.
A)True
B)False
Q2) Personal use property casualty gains and losses are not subject to the § 1231 rules.
A)True
B)False
Q3) For § 1245 recapture to apply,accelerated depreciation must have been taken on the property.
A)True
B)False
Q4) Section 1231 property includes nonpersonal use property where casualty losses exceed casualty gains for the taxable year.
A)True
B)False
Q5) The Code contains two major depreciation recapture provisions-§§ 1245 and 1250. A)True
B)False
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Chapter 18: Accounting Periods and Methods
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Q1) Juan,not a dealer in real property,sold land that he owned.His adjusted basis in the land was $500,000 and it was encumbered by a mortgage for $200,000.The terms of the sale required the buyer to pay Juan $100,000 on the date of the sale.The buyer assumed Juan's mortgage and gave Juan a note for $600,000 (plus interest at the Federal rate)due in the following year.What is the gross profit percentage (gain ¸ contract price)?
A) 300/900 = 33.3%.
B) 400/700 = 57.14%.
C) 400/600 = 66.67%.
D) 500/900 = 55.55%.
E) None of the above.
Q2) Laura Corporation changed its tax year-end from July 31st to December 31st in 2012.The income for the period August 1,2012 through December 31,2012 was $35,000.The corporate tax rate is 15% on the first $50,000 of income,25% on income from $50,001 to $75,000,and 34% on income from $75,001 to $100,000.A portion of Laura's JuneDecember 2012 income will be taxed at 34%.
A)True
B)False
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Page 20
Chapter 19: Deferred Compensation
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Q1) Under what circumstances is it advantageous for an employee to elect to be taxed immediately as ordinary income on the FMV in excess of the amount paid for restricted property?
Q2) Dana,age 48,is the sole remaining participant of a money purchase pension plan.The plan is terminated and a $240,000 taxable distribution is made to Dana.The early distribution penalty tax,if any,for 2012 is:
A) $0.
B) $12,000.
C) $24,000.
D) $30,000.
E) None of the above.
Q3) In 2012,Jindal Corporation paid compensation of $42,300 to the participants in a profit sharing plan and then contributed $12,800 to the plan.Jindal's deductible amount and any contribution carryover are as follows:
A) $0 deductible; $12,800 carryover.
B) $8,460 deductible; $4,340 carryover.
C) $10,575 deductible; $2,225 carryover.
D) $12,690 deductible; $110 carryover.
E) None of the above.
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Page 21
Chapter 20: Corporations and Partnerships
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Q1) Organizational expenditures do not include the costs of transferring assets to the new corporation.
A)True
B)False
Q2) Darlene,a 30% shareholder in a calendar year S corporation,sells her stock on June 8,2012.If the corporation has an operating loss for 2012,none of this loss can be claimed by Darlene because she was not a shareholder as of December 31,2012.
A)True
B)False
Q3) Alabaster Corporation,a calendar year taxpayer,was formed on July 1,2012,and incurred organizational expenditures of $52,000.Its deduction for these expenditures for 2012 can be a:
A) Maximum of $5,000.
B) Maximum of $2,000 + (6/180 ´ $50,000).
C) Maximum of $3,000 + (6/180 ´ $49,000).
D) Minimum of 6/180 ´ $52,000.
E) None of the above.
Q4) How can the Subchapter S election be lost?
Q5) When might an NOL carryback to prior years be ill-advised?
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