Income Taxation
Final Test Solutions
Course Introduction
Income Taxation explores the principles, policies, and procedures related to the taxation of individual and corporate income. The course provides an in-depth examination of the federal income tax system, including the determination of taxable income, tax rates, allowable deductions and credits, and the filing process. Students will gain practical skills by working through tax calculations and return preparation, as well as analyzing tax planning strategies and compliance issues. Legal and ethical considerations are emphasized, along with current developments and trends in tax legislation. This course is essential for students pursuing careers in accounting, finance, business, or law.
Recommended Textbook
Concepts in Federal Taxation 2018 25th Edition by Kevin
E. Murphy
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16 Chapters
2096 Verified Questions
2096 Flashcards
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Chapter 1: Conceptual Foundations of Tax Law
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Sample Questions
Q1) The excess of an asset's tax basis over its selling price.
A)Advalorem tax
B)Deduction
C)Excisetax
D)Exclusi on
E)Expense
F)Gain
G)Loss
H)Ordinary income
I)Pay-as-you-go concept
J)Personal property
K)Real property
L)Self-assessment
M)Standard deduction
N)Statute of limitations
O)Taxbase
P)Tax credit
Answer: G
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Page 3
Chapter 2: Income Tax Concepts
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Sample Questions
Q1) Annual Accounting Period Concept
A)Allocates income,losses,and deductions to its owners for inclusion in their personal returns.
B)Each tax unit must keep separate records and report the results of its operations separate and apart from other tax units.
C)Income from services must be taxed to the taxpayer rendering the service and income from property must be taxed to the owner of the property.
D)Any tax year that ends on the last day of a month other than December.
E)All taxpayers must report the results of their operations on an annual basis.
F)A tax year that ends on December 31.g.A tax entity that is liable for the payment of tax.
Answer: E
Q2) Benji hired his three-year-old son to work in his engineering consulting firm.As long as Benji fills out all the forms and properly deposits the paychecks in his son's bank account,he will be able to deduct the expenditure as a business expense.
A)True
B)False
Answer: False
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Page 4
Chapter 3: Income Sources
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154 Flashcards
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Sample Questions
Q1) Anna receives a salary of $42,000 during the current year.She sells some land that she held as an investment at a loss of $7,000 and some stock at a gain of $11,000.Anna's adjusted gross income is:
A)$42,000
B)$46,000
C)$50,000
D)$53,000
Answer: B
Q2) The hybrid method of accounting provides that taxpayers will account for sales of merchandise and the related cost of goods sold on the accrual basis and all other items of income and expense on the cash basis.
A)True
B)False
Answer: True
Q3) The holding period for receiving long-term capital gain treatment is more than 12 months.
A)True
B)False Answer: True
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Page 5
Chapter 4: Income Exclusions
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Sample Questions
Q1) Patrick ran up a large credit card debt.Since the bank wanted to keep Patrick's account they forgave $5,000 of his balance.Patrick was solvent before and after the forgiveness.He has to include the $5,000 in his income.
A)True
B)False
Q2) Ward and June are in the 28% tax bracket.Included in their assets is a Dell Corporation bond with a face value of $10,000.The bond pays $1,000 per year in interest.Ward and June gift the bond to their son,Wally (age 19),on January 1,2017.Wally is in the 10% tax bracket.Wally's taxable income from the receipt of the bond and the bond interest in 2017 is
A)$-0-
B)$1,000
C)$1,500
D)$10,000
E)$11,000
Q3) Jeane's employer pays his medical premiums each month ($130/month).
A)Fully excluded from gross income.
B)Fully included in gross income.
C)Partially excluded from gross income.
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Page 6
Chapter 5: Introduction to Business Expenses
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Sample Questions
Q1) Diana bought 1,500 shares of Dalton Protection,Inc. ,common stock for $10 per share.She paid her broker a $300 commission to close the purchase.The following year,Diana sold 1,000 of the shares for $17 per share and paid a commission of $175 on the sale.What is Diana's capital gain on the sale of the stock?
A)$1,525
B)$2,000
C)$6,625
D)$6,825
E)$7,000
Q2) Larry is a history teacher.He subscribes to several periodicals about teaching history and judging history fairs.This year Larry spends $285 on subscriptions to various periodicals.Discuss the deductibility of the expenditures for tax purposes.
Q3) An expense that is incurred for the production of rent will be deducted for adjusted gross income.
A)True
B)False
Q4) List the criteria necessary for an expenditure to be deductible as a trade or business expense or an expense for the production of income.
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Page 7
Chapter 6: Business Expenses
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148 Flashcards
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Sample Questions
Q1) Deductions for adjusted gross income include
I.Contribution to a Roth IRA.
II.Contribution to conventional IRA
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
Q2) Thomas changes jobs during the year and moves from Philadelphia to El Paso.Which of the following expenses relating to the move can Thomas deduct?
I.Prior to the move,Thomas flies to El Paso to find an apartment.
II.The cost of meals while driving his household goods to El Paso.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
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Chapter 7: Losses -- Deductions and Limitations
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Sample Questions
Q1) Jose,Mahlon,and Eric are partners in New Communications Partnership.Jose owns a 50% interest,Mahlon owns a 35% interest,and Eric owns a 15% interest.During the current year (the first year of operation for the enterprise),the business has a loss.Although the partnership is established as a general partnership,Jose functions as the manager and performs all of the day-to-day duties of a chief operating officer.Mahlon and Eric are merely investors who receive monthly reports about the business.At the close of the current tax year,each partner will receive a share of the partnership loss.Which of the partners will be able to deduct his (their)share of the partnership loss?
I.Jose
II.Mahlon
III.Eric
A)Mahlon
B)Jose,Mahlon,and Eric
C)Jose
D)Jose and Mahlon
E)Mahlon and Eric
Q2) Why do the wash sale rules apply to the sale of stock at a loss but not to the sale of stock at a gain?
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Page 9
Chapter 8: Taxation of Individuals
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Sample Questions
Q1) George and Kelly have their three children in daycare at an exclusive River Oaks pre-kindergarten center.They incur $20,000 in expenses to keep their children in daycare.George is a physician and Kelly is an assistant district attorney.Together their adjusted gross income is $450,000.What amount can they claim as a child-care credit?
A)$- 0 -
B)$600
C)$1,200
D)$1,800
E)$4,000
Q2) Hugh donates investment real estate to Habitat for Humanity.The property cost him $10,000 six years ago.The fair market value of the property at the date of the contribution is $18,000.Hugh's AGI is $80,000.What is the maximum amount Hugh can deduct as a charitable contribution?
A)$- 0 -
B)$5,000
C)$10,000
D)$18,000
E)$24,000
Q3) Explain the support test and the gross income test to be a qualifying relative.
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Page 10
Chapter 9: Acquisitions of Property
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Sample Questions
Q1) Samantha receives 100 shares of Burnet Corporation stock as a gift from her cousin.At the date of the gift the stock is valued at $60 per share.It cost her cousin $10 per share several years before.One month later,Samantha's uncle dies and she inherits 100 shares of Crockett Corporation stock from her uncle's estate.The stock cost her uncle $10 per share twenty-five years ago.On the date of death the stock has a value of $60 per share.Samantha needs money to invest in her business,but she does not need to sell both blocks of stock this year.Which stock would you recommend Samantha to sell? (Assume any long-term capital gains would be taxed at 15%. )
Q2) On February 3 of the current year,Caroline converts her house to a rental property.Caroline's adjusted basis in the house is $120,000 and the fair market value is $150,000 on the date of conversion.What is Caroline's adjusted basis in the rental property for depreciation purposes?
A)$30,000
B)$120,000
C)$150,000
D)$170,000
E)$180,000
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Chapter 10: Cost Recovery on Property: Depreciation, depletion,
and Amortization
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110 Flashcards
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Sample Questions
Q1) Ying pays $170,000 for an office building on August 27,2016,to use in his consulting business.He properly allocates $150,000 to the building and $20,000 to the land.What is Ying's 2017 depreciation deduction on the property?
A)$1,124
B)$1,443
C)$1,923
D)$3,846
E)$5,454
Q2) Listed property
A)Computers,and automobiles.
B)Used to recover the investment in intangible assets.
C)Used to recover the investment in long-lived tangible business-use assets.
D)An attempt to stimulate capital investment by small businesses.
E)Used to recover the investment in assets that waste away through extraction.
Q3) If more than 40% of the depreciable basis of personal property is placed in service during the last three months of the tax year,the taxpayer must use the mid-quarter convention.
A)True
B)False
Page 12
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Chapter 11: Property Dispositions
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139 Flashcards
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Sample Questions
Q1) For depreciable real property,all depreciation taken must be recaptured and treated as ordinary income.
A)True
B)False
Q2) Section 1250 recapture
A)Stocks,bonds,options.
B)Depreciable real property.
C)All or part of any gain on sale is excluded.
D)Taxed at a maximum rate of 25%.
E)Gain or loss on the sale of artwork.
F)Depreciable tangible personal property.
G)Subject to full recapture as ordinary income of all depreciation taken.
H)Gain on real property attributable to excess depreciation is ordinary income.
Q3) All of the gain from the sale of qualified small business stock,purchased after 9/27/2010 and held more than five years is excluded from tax.
A)True
B)False
Q4) Discuss the general differences between Section 1245 and Section 1250 recapture provisions.
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Chapter 12: Nonrecognition Transactions
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Sample Questions
Q1) Dominic and Lois sell their home for $775,000,incurring selling expenses of $40,000.They had purchased the residence in 1990 for $185,000 and made capital improvements totaling $45,000.They buy a new residence for $310,000.What is their realized gain and recognized gain on the sale? What is their basis in the new house?
Q2) Jason and Mark exchange equipment each use in their business.In the trade,Jason receives Mark's equipment that is worth $20,000.Mark also assumes the $10,000 loan Jason had on the equipment.Jason purchased his equipment for $25,000 and had taken $12,000 of depreciation on the equipment up to the date of the exchange.Mark's adjusted basis in his equipment is $16,000 on the date of the exchange.
a.What is Jason's realized gain on the exchange?
b.What are the amount and the character of the gain Jason must recognize on the exchange?
c.What is Jason's basis in the equipment acquired in the exchange?
Q3) An airplane for a duplex apartment.
A)qualifies as a like-kind exchange
B)does not qualify as a like-kind exchange
Q4) Discuss the concepts underlying the determination of the basis of property received in a nontaxable exchange.
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Page 14
Chapter 13: Choice of Business Entity -- General Tax and
Nontax Factorsformation
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Sample Questions
Q1) Nick and Rodrigo form the NRC Partnership by combining the assets of their respective businesses.Nick contributes $10,000 and assets worth $90,000 (adjusted basis of $60,000)for a 1/3 interest.Rodrigo contributes $90,000 and assets worth $270,000 (adjusted basis of $150,000)for a 2/3 interest.NRC also assumes $60,000 of debt on Rodrigo's assets.What is Nick's basis in his partnership interest?
A)$70,000
B)$90,000
C)$100,000
D)$120,000
E)$160,000
Q2) Western Corporation began operations in 1999.Its fiscal year end is October 31.This date coincides with its natural business year.On June 2,2016,Western elects S corporation status.All of the corporate shareholders consented to the election.The earliest date the corporation is recognized as an S corporation is
A)November 1,2018.
B)January 1,2017.
C)June 2,2017.
D)November 1,2017.
E)December 31,2017.
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Chapter 14: Choice of Business Entity -- Operations and Distributions
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Sample Questions
Q1) Malcolm receives a liquidating distribution of land with a fair market value of $14,000 and a basis of $19,000 from Blithe Corporation,an S corporation.Malcolm's basis in the stock is $21,000.What must Malcolm and Blithe report as income (loss)from the property distribution?
Malcolm Blithe
A)$-0- $-0-
B)$(2,000)$(5,000)
C)$(7,000)$-0-
D)$(7,000)$(5,000)
Q2) Not a separate entity
A)Sole Proprietorship.
B)Partnership.
C)Corporation.
D)S Corporation.
Q3) When a partner receives a cash distribution from a partnership,the distribution is never taxable even if the amount of cash received is greater than the partner's basis in the partnership.
A)True
B)False
Page 16
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Chapter 15: Choice of Business Entity -- Other
Considerations
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Sample Questions
Q1) Abraham establishes a Roth IRA at age 45 and contributes $5,500 per year for the next 25 years.Assume he meets the income limits during this period.The account balance is now $364,500 ($137,500 contributions,$227,000 earnings).Abraham would like to draw out the entire amount this year.How much tax would Abraham have to pay as a result of this decision?
Q2) Harriet is an employee of Castiron Inc.and earns $200,000 in 2017.The maximum amount Castiron can contribute to a money purchase plan on behalf of Harriet is
A)$40,000
B)$45,000
C)$46,000
D)$50,000
E)$54,000
Q3) Which of the following itemized deductions is not allowed for AMT purposes?
A)State income taxes.
B)Qualified housing interest.
C)Investment interest.
D)Interest on home equity loan where loan proceeds are used to improve the residence.
E)Charitable contributions.
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Chapter 16: Tax Research
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Sample Questions
Q1) Revenue Ruling 86-457
A)Tax Court Reports
B)United States Tax Cases
C)Internal Revenue Code
D)Cumulative Bulletin
E)Not a primary source
Q2) Joint Committee on Taxation
A)Where federal tax legislation generally originates.
B)Has jurisdiction over all tax matters in the U.S.Senate.
C)The committee responsible for initial hearings and deliberations on a tax bill.
D)Responsible for negotiating a resolution of the differences in the House and Senate versions of a tax bill.
E)The agency within the administrative branch of government with overall responsibility for administration of tax law.
F)Oversees the operation and administration of the tax system as a whole,and prepares a general explanation of any tax bill signed by the President.
Q3) Describe the steps of the tax research process.
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