Income Taxation Test Questions
Course
Introduction
Income Taxation introduces students to the principles and applications of taxation on individual and corporate income. The course covers the legal framework, concepts, and procedures related to taxable income, allowable deductions, tax credits, and computation of income tax liability. Students will learn about compliance, filing requirements, tax planning, and reporting standards in accordance with current tax laws and regulations. Emphasis is placed on the application of tax rules in practical scenarios, including analysis of taxable transactions, exemptions, and the ethical considerations in tax practice.
Recommended Textbook
Concepts in Federal Taxation 2019 26th Edition Kevin E. Murphy
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16 Chapters
2071 Verified Questions
2071 Flashcards
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Page 2
Chapter 1: Federal Income Taxation-An Overview
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Sample Questions
Q1) Gifts to qualified charitable organizations may be deducted as a contribution, but not to exceed 60% of an individual taxpayer's adjusted gross income.
A)True
B)False
Answer: True
Q2) Amy hired Carey, a CPA, to prepare her 2018 federal income tax return. Amy had prepared her own 2017 return. In reviewing her records, Carey discovered that Amy had recorded $5,000 of consulting income she received by check in December 2017 as though it had been received in 2018. What should Carey do about this situation?
Answer: Under SSTS No. 6, Carey should inform Amy of the error and recommend that she correct the error. In this case, Amy should file an amended return for 2017 to correct the understatement of income. If Amy will not correct the error, Casey will have to consider whether he should continue to prepare the 2018 return.
Q3) All tax practitioners are governed by the AICPA's Code of Professional Conduct.
A)True
B)False
Answer: False
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Page 3
Chapter 2: Income Tax Concepts
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Sample Questions
Q1) At what three points in time might a given expenditure be deductible?
a. ______________________
b. ______________________
c. ______________________
Answer: a. As paid or incurred.
b. Over the life of the asset.
c. On disposition of the asset.
Q2) Ted sells 200 shares of common stock for $2,000. The stock cost Ted $500 several years ago. Ted's realized gain from the sale is only $1,500. Which of the following provides support for this treatment?
A)Annual Accounting Period Concept.
B)Capital Recovery Concept.
C)Wherewithal-To-Pay Concept.
D)Claim of Right Doctrine.
E)Constructive Receipt Doctrine.
Answer: B
Q3) All deductions are allowed because of the legislative grace concept.
A)True
B)False
Answer: True
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Chapter 3: Income Sources
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Sample Questions
Q1) Alexis Corporation allows an employee, Cynthia, to use a company car for her vacation to San Diego.
I.Cynthia will not need to recognize the value of the use of the car since it was not cash.
II.A "cash equivalent approach" is used to measure the amount of income that must be recognized by Cynthia.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
Answer: B
Q2) For any unrecovered portion of an annuity investment, the taxpayer is allowed a deduction in the year of death.
A)True
B)False
Answer: True
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Page 5
Chapter 4: Income Exclusions
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Sample
Questions
Q1) For the past seven years Karen, an attorney, has directed litigation clients to Rebecca, a CPA, for accounting investigatory work. Because of the amount of litigation work Karen directed to Rebecca, Rebecca's business is now comprised solely of litigation support work. Karen began taking tennis lessons this year. Rebecca gives Karen a new tennis racquet so they could share afternoons by playing tennis together.
I.The "gift" appears to be a form of compensation.
II.Substance-over-form applies to this situation.
III.The tennis racquet meets the income tax definition of a gift.
IV.Karen recognizes no gross income from the receipt of the tennis racquet.
A)Only statement I is correct.
B)Only statement IV is correct.
C)Statements I and II are correct.
D)Statements III and IV are correct.
E)Statements I, II, and IV are correct.
Q2) The interest from Guam Water Authority bonds is excluded from income as "Municipal Bond Interest."
A)True
B)False
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Page 6
Chapter 5: Introduction to Business Expenses
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167 Flashcards
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Sample Questions
Q1) Sheila extensively buys and sells securities. The IRS has determined upon examination that she is not in a trade or business concerning the securities' transactions and therefore, Shelia must be
A)a broker.
B)an active trader.
C)an active investor.
D)a securities' dealer.
Q2) Active Trader
A)Specifically disallowed.
B)Appropriate and helpful.
C)Considered a trade or business.
D)Not considered a trade or business.
E)Problems with this generally arise with related parties.
F)This is met when services or property are provided to the taxpayer.
G)Normal, common, and accepted but not necessarily regularly recurring.
H)This is met when the existence and the amount of a liability have been established.
Q3) 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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Chapter 6: Business Expenses
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Sample Questions
Q1) To be deductible, employee compensation must be for services actually performed by the employee and the amount must be reasonable.
A)True
B)False
Q2) A taxpayer can deduct multiple gifts to a single customer as long as the total value of all gifts to that customer does not exceed $25.
A)True B)False
Q3) Garcia is a self-employed chiropractor and a cash basis taxpayer. During the most recent tax year, he provides patient services totaling $400,000. Of that total amount, he estimates $20,000 will never be collected. How much can Garcia deduct as a bad debt expense in the current tax year?
A)$- 0 -
B)$6,000
C)$10,000
D)$14,000
E)$20,000
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Chapter 7: Losses-Deductions and Limitations
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129 Flashcards
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Sample Questions
Q1) "Active participation" and "real estate professional" are both exceptions to the general rule for passive activity losses with rental real estate.
I.A taxpayer qualifying under both exceptions is limited to a maximum annual deduction of $25,000.
II.Active participation results from owning at least a 10% interest in the activity and arranging for repairs and maintenance and collecting rents.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
Q2) Which of the following losses are generally deductible?
I.Loss on the sale of a personal residence.
II.Loss due to the theft of business inventory.
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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9
Chapter 8: Taxation of Individuals
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Sample Questions
Q1) Cory is a 32 years old, unmarried, and has no children. Cory's father lives in a nursing home.
I.Because Cory's father does not live in the same household, Cory cannot file as a head of household.
II.If his father's taxable income is less than $4,150 and the other dependency tests are met, Cory will file as head of household.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
Q2) Kristin has AGI of $120,000 in 2018 and 2019. She makes cash contributions to the American Cancer Society of $75,000 in 2018 and $77,000 in 2019. Kristin's charitable contribution carryover from 2020 is:
A)$- 0 -
B)$3,000
C)$5,000
D)$8,000
E)$34,000
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Page 10
Chapter 9: Acquisitions of Property
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Sample Questions
Q1) Phyllis purchased an automobile for $3,000 down and a note for $15,000. During the year she paid interest of $1,000. Her basis is $18,000.
A)True
B)False
Q2) Ted purchases some forest land in 2016 with the intention of building a log cabin to use as a vacation home. To obtain the land, Ted pays $10,000 cash, assumes the seller's $19,000 mortgage on the land and pays $3,000 in commissions and legal fees related to the purchase. In 2017, Ted pays a contractor $4,000 to bulldoze and level the site of the log cabin. In 2018, Ted has a well dug and water and sewer lines laid in the ground at a cost of $6,000. Ted paid $2,000 of property taxes in 2016 and $5,000 of property taxes in 2017 and 2018 on the land. What is Ted's basis in the land at the end of 2018?
A)$54,000
B)$42,000
C)$38,000
D)$36,000
E)$32,000
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Chapter 10: Cost Recovery on Property: Depreciation, Depletion,
and Amortization
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110 Verified Questions
110 Flashcards
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Sample Questions
Q1) The Section 179 election promotes which of the following tax concept(s) or doctrine(s)?
I.Claim of Right Doctrine.
II.Administrative Convenience Concept.
III.Tax benefit rule.
IV.Substance-Over-Form Doctrine.
A)Only statement I is correct.
B)Only statement II is correct.
C)Statements I, II, and IV are correct.
D)Statements II and IV are correct.
E)Statements I, II, III, and IV are correct.
Q2) Rand Company purchases and places into service a company automobile costing $40,000 in April 2018. What is the 2018 depreciation deduction on the auto?
A)$4,000
B)$8,000
C)$10,000
D)$18,000
E)$40,000
Q3) Discuss why listed property gets special attention.
Page 12
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Chapter 11: Property Dispositions
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Sample Questions
Q1) Benson Company purchased a drill press on November 13, 2014, at a cost of $30,000. Benson sells the drill press on January 3, 2018, for $16,000. Regular MACRS depreciation on the drill press would be $18,500, while straight-line MACRS depreciation would total $12,000.
I.If Benson used regular MACRS depreciation, it would have a Section 1231 gain of $4,500.
II.If Benson used straight-line depreciation, it would have a Section 1231 loss of $2,000.
III.If Benson used regular MACRS depreciation, it would have Section 1245 ordinary income of $4,500.
IV.If Benson used straight-line depreciation, it would have an ordinary loss of $4,500.
A)Only statement I is correct.
B)Only statement II is correct.
C)Statements I and II are correct.
D)Statements I and IV are correct.
E)Statements II and III are correct.
Q2) Discuss the general differences between Section 1245 and Section 1250 property.
Q3) What incentive provisions or preferential treatments exist for capital gains?
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Page 13
Chapter 12: Non-Recognition Transactions
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Sample Questions
Q1) Rosilyn trades her old business-use luxury car with an adjusted basis of $13,000 and an outstanding loan liability balance of $2,000 for a new business-use economy car valued at $9,000 plus $3,000 cash from Bob's Auto Sales and Loan Company. Bob assumes Rosilyn's loan balance. What is Rosilyn's amount realized on the transaction?
A)$3,000
B)$9,000
C)$12,000
D)$13,000
E)$14,000
Q2) A fire destroyed Josh's Scuba Shop. The business had an adjusted basis of $500,000 and a fair market value of $600,000. Josh received $550,000 from the insurance company and used the cash to go to HawaiI.I.Josh has a realized gain of $100,000.
II)Josh has a recognized gain of $50,000.
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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Page 14
Chapter 13: Choice of Business Entity-General Tax and Nontax Factorsformation
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Sample Questions
Q1) Partners have extensive flexibility in choosing their tax year-end for their partnership.
A)True
B)False
Q2) Rockhill Corporation operates a women's clothing boutique. Taxable income for the current year is $60,000. What is Rockhill's income tax liability?
A)$- 0 -
B)$6,000
C)$9,000
D)$12,600
E)$15,000
Q3) The shareholder of an S corporation can reduce income taxes by passing income to the owner-employee as a dividend rather than paying salary.
A)True
B)False
Q4) Discuss what limited liability means. What type of entity (or entities) offers this characteristic to its owners? What type(s) of entity (or entities) do not provide this characteristic?
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Chapter 14: Choice of Business Entity-Operations and Distributions
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Sample Questions
Q1) Double taxation
A)Sole Proprietorship.
B)Partnership.
C)Corporation.
D)S Corporation.
Q2) If a sole proprietorship has a net operating loss for the current period, the loss can only be used to offset other business income in the current year. Any current loss can be carried back three years and forward five years and used to offset business income in those years.
A)True
B)False
Q3) During the current year, Swallowtail Corporation receives dividend income of $40,000 from a 15%-owned domestic corporation. What is Swallowtail's maximum allowable dividend-received deduction for the current year?
A)$- 0 -
B)$20,000
C)$26,000
D)$28,000
E)$40,000
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Chapter 15: Choice of Business Entity-Other Considerations
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Sample Questions
Q1) Money purchase plan
A)A separate, parallel tax system designed to ensure a taxpayer pays some tax.
B)A compensation tool that is based on potential price increases of the company's stock.
C)An individual trust account maintained for the exclusive benefit of an individual or beneficiary.
D)A type of defined contribution pension plan in which the company and the employee contribute a fixed percentage of the employee's salary to the plan.
E)A pension plan in which the benefits are based on the number of years an employee has worked for a company and on the employee's annual salary.
F)A pension plan whose benefits are determined by the amount of contributions the employee and the company contribute to the plan and the earnings of the plan.
Q2) Peter opened his IRA in 2003 and withdrew money to purchase a house in 2018. Since the distribution qualified as a "qualified first-time-homebuyer expenses," it is not subject to the 10% early withdrawal penalty.
A)True
B)False
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Page 17
Chapter 16: Tax Research
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Sample
Questions
Q1) The Tax Court strictly follows the precedent of prior decisions of the Court of Appeals for a particular circuit when
A)the taxpayer requests it to do so.
B)the IRS requests it to do so.
C)the taxpayer resides in the United States.
D)the taxpayer resides in that circuit.
Q2) Taxpayers may elect to use the small claims division of the U.S. Tax Court if the amount of tax in dispute is less than
A)$1,000
B)$2,500
C)$5,000
D)$10,000
E)$50,000
Q3) Tax statute
A)Tax Court Reports
B)United States Tax Cases
C)Internal Revenue Code
D)Cumulative Bulletin
E)Not a primary source
Q4) Describe the steps of the tax research process.
Page 18
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