Tax Accounting Exam Preparation Guide
Course Introduction
Tax Accounting explores the principles, regulations, and procedures related to the preparation and analysis of tax returns for individuals, corporations, and other entities. This course covers key topics such as income tax law, tax planning strategies, taxable income determination, deductions, credits, and the ethical responsibilities of tax professionals. Emphasis is placed on current tax code provisions, compliance requirements, and the use of accounting systems to ensure accurate tax reporting. Students will develop practical skills to interpret complex tax legislation, apply tax rules to real-life scenarios, and understand the broader implications of taxation on business decisions.
Recommended Textbook
South Western Federal Taxation 2013 Comprehensive Edition by William H. Hoffman
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Chapter 1: An Introduction to Taxation and Understanding
the Federal Tax Law
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Q1) The civil fraud penalty can entail large fines and possible incarceration.
A)True
B)False Answer: False
Q2) A provision in the law that compels accrual basis taxpayers to pay a tax on prepaid income in the year received and not when earned is inconsistent with generally accepted accounting principles.
A)True
B)False Answer: True
Q3) Even though a client refuses to correct an error on a past return, it may be possible for a practitioner to continue to prepare returns for the client.
A)True
B)False Answer: True
Q4) The Federal estate and gift taxes are examples of progressive taxes.
A)True
B)False Answer: True
Page 3
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Chapter 2: Working With the Tax Law
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Q1) Which tax-related website probably gives the best policy-orientation results?
A)taxalmanac.org.
B)irs.gov.
C)taxsites.com.
D)taxanalyst.com.
E)ustaxcourt.gov.
Answer: D
Q2) Federal tax legislation generally originates in what body?
A)Internal Revenue Service.
B)Senate Finance Committee.
C)House Ways and Means Committee.
D)Senate Floor.
E)None of the above.
Answer: C
Q3) House members have considerable latitude to make amendments on the House floor.
A)True
B)False
Answer: False
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Page 4
Chapter 3: Computing the Tax
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Q1) When married persons file a joint return, joint and several liability results.What does this mean?
Answer: Joint and several liability means that either spouse is fully liable for any income tax due for the year.Thus, if more tax is due, the IRS can pursue either spouse for the deficiency.
Q2) Wilma, age 70 and single, is claimed as a dependent on her daughter's tax return.During 2012, she had interest income of $2,400 and $800 of earned income from baby sitting.Wilma's taxable income is:
A)$700.
B)$850.
C)$1,800.
D)$2,250.
E)None of the above.
Answer: E
Q3) Married taxpayers who file separately cannot later change to a joint return.
A)True
B)False
Answer: False
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5
Chapter 4: Gross Income: Concepts and Inclusions
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Q1) Under the alimony rules:
A)The income is included in the gross income of the recipient of the payments.
B)A person who receives a property division has experienced an increase in wealth and thus should be subject to tax.
C)State law determine what is alimony for Federal income tax purposes.
D)Payments for child care are included in the child's gross income.
E)None of the above.
Q2) In the case of a below-market gift loan for which there is no exception to the imputed interest rules, the lender is deemed to have received interest income even though no interest is charged and collected.
A)True
B)False
Q3) The annual increase in the cash surrender value of a life insurance policy:
A)Is taxed according to the original issue discount rules.
B)Is not included in gross income because the policy must be surrendered to receive the cash surrender value.
C)Reduces the deduction for life insurance expense.
D)Is exempt because it is life insurance proceeds.
E)None of the above.
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Page 6
Chapter 5: Gross Income: Exclusions
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Q1) Ashley received a scholarship to be used as follows: tuition $6,000; room and board $9,000; and books and laboratory supplies $2,000. Ashley is required to include only $9,000 in her gross income.
A)True
B)False
Q2) Sam was unemployed for the first two months of 2011.During that time, he received $4,000 of state unemployment benefits. He worked for the next six months and earned $14,000. In September, he was injured on the job and collected $5,000 of workers' compensation benefits.Sam's Federal gross income from the above is $18,000 ($4,000 + $14,000).
A)True
B)False
Q3) If an employer pays for the employee's long-term care insurance premiums, the employee can exclude from gross income the premiums but all of the benefits collected must be included in gross income.
A)True
B)False
Q4) What Federal income tax benefits are provided for college students?
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Page 7
Chapter 6: Deductions and Losses: in General
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Q1) Why are there restrictions on the recognition of gains and losses resulting from transactions between related parties?
Q2) A hobby activity can result in all of the hobby income being included in AGI and no deductions being allowed.
A)True
B)False
Q3) Ordinary and necessary business expenses, other than cost of goods sold, of an illegal drug trafficking business do not reduce taxable income.
A)True
B)False
Q4) Alice incurs qualified moving expenses of $12,000.If she is reimbursed by her employer, the deduction is classified as a deduction for AGI.If not reimbursed, the deduction is classified as an itemized deduction.
A)True
B)False
Q5) Bruce owns several sole proprietorships.Must Bruce use the same accounting method for each of these businesses?
Q6) Under what circumstance can a bribe be deducted?
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Chapter 7: Deductions and Losses: Certain Business
Expenses and Losses
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Q1) How is qualified production activities income (QPAI) calculated?
Q2) "Other casualty" means casualties similar to those associated with fires, storms, or shipwrecks.
A)True
B)False
Q3) Identify the factors that should be considered in determining whether a transaction is a bona fide loan or a gift.
Q4) Losses on rental property are classified as deductions from AGI (itemized deductions).
A)True
B)False
Q5) The amount of partial worthlessness on a nonbusiness bad debt is deducted in the year partial worthlessness is determined.
A)True
B)False
Q6) A bona fide debt cannot arise on a loan between father and son.
A)True
B)False
9
Q7) Discuss the effect of alimony in computing a net operating loss.
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Chapter 8: Depreciation, Cost Recovery, Amortization, and Depletion
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Q1) Residential rental real estate includes property where 80% or more of the net rental revenues are from nontransient dwelling units.
A)True
B)False
Q2) Percentage depletion enables the taxpayer to recover more than the cost of an asset.
A)True
B)False
Q3) The amortization period in 2012 for $4,000 of startup expenses if no election is made is 180 months.
A)True
B)False
Q4) Taxpayers may elect to use the straight-line method under MACRS for personalty. A)True B)False
Q5) Under the MACRS straight-line election for personalty, the mid-quarter convention is applicable.
A)True B)False
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Chapter 9: Deductions: Employee and Self-Employed
Related Expenses
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Q1) 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.
Q2) After the automatic mileage rate has been set by the IRS for a year, it can later be changed by the IRS.
A)True
B)False
Q3) A participant, who is age 38, in a cash or deferred arrangement plan [§ 401(k)] may contribute up to what amount in 2012?
A)$12,000.
B)$16,500.
C)$17,000.
D)$17,500.
E)None of the above.
Q4) In terms of income tax treatment, what is the difference between common law and statutory employees?
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Chapter 10: Deductions and Losses: Certain Itemized
Deductions
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Q1) During the year, Victor spent $300 on bingo games sponsored by his church.If all profits went to the church, Victor has a charitable contribution deduction of $300.
A)True
B)False
Q2) The election to itemize is appropriate when total itemized deductions are less than the standard deduction based on the taxpayer's filing status.
A)True
B)False
Q3) Margaret, who is self-employed, paid $6,000 for medical insurance coverage.She can include the $6,000 when calculating her medical expense deduction.
A)True
B)False
Q4) Any capital asset donated to a public charity that would result in long-term capital gain if sold, is subject to the 30%-of-AGI ceiling limitation on charitable contributions for individuals.
A)True
B)False
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Chapter 11: Investor Losses
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Q1) In the current year, Rich has a $40,000 loss from a business he owns.His at-risk amount at the end of the year, prior to considering the current year loss, is $24,000.He will be allowed to deduct the $40,000 loss this year if he is a material participant in the business.
A)True
B)False
Q2) All of a taxpayer's tax credits relating to a passive activity can be utilized when the activity is sold at a loss.
A)True
B)False
Q3) Tom participates for 300 hours in Activity A and 250 hours in Activity B, both of which are nonrental businesses.Both activities are active.
A)True
B)False
Q4) 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?
Q5) What special passive loss treatment is available to real estate activities?
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Chapter 12: Tax Credits and Payments
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Q1) The maximum credit for child and dependent care expenses is $2,100 if only one spouse is employed and the other spouse is a full-time student.
A)True
B)False
Q2) During the year, Green Corporation (a U.S.corporation) has U.S.-source income of $750,000 and foreign income of $500,000.The foreign-source income generates foreign income taxes of $240,000.The U.S.income tax before the foreign tax credit is $425,000.Green Corporation's foreign tax credit is:
A)$170,000.
B)$240,000.
C)$425,000.
D)$500,000.
E)None of the above.
Q3) For purposes of computing the credit for child and dependent care expenses, the qualifying employment-related expenses are limited to an individual's actual or deemed earned income.
A)True
B)False
Q4) Discuss the treatment of unused general business credits.
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Chapter 13: Property Transactions: Determination of Gain or
Loss, Basis Considerations, and Nontaxable
Exchanges-Part 2
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Q1) Under what circumstances will a distribution by a corporation to its only shareholder result in a capital gain?
Q2) Nigel purchased a blending machine for $125,000 for use in his business.As to the machine, he has deducted MACRS cost recovery of $31,024, maintenance costs of $5,200, and repair costs of $4,000.Calculate Nigel's adjusted basis for the machine.
Q3) Lynn transfers her personal use automobile to her business (a sole proprietorship).The car's adjusted basis is $35,000 and the fair market value is $12,000.No cost recovery had been deducted by Lynn, since she held the car for personal use.Determine the adjusted basis of the car to Lynn's sole proprietorship including the basis for cost recovery.
Q4) Larry, who lived in Maine, acquired a personal residence eight years ago when he was 42 years old.During this period he has occupied the residence for only nine months (out of 12) each year due to winter vacations in Florida.Is Larry eligible for exclusion of gain under § 121?
Q5) Mitchell owned an SUV that he had purchased two years ago for $48,000 and which he transfers to his sole proprietorship.How is the sole proprietorship's basis for the SUV calculated? What additional information does Mitchell need?
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Chapter 13: A: Property Transactions: Determination
of Gain or Loss, Basis Considerations, and Nontaxable Exchanges-Part 1
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Q1) Which of the following is correct?
A)Realized gains are always recognized and realized losses are never recognized.
B)Realized gains and realized losses on the sale of personal use assets are not recognized.
C)Realized gains and realized losses on the sale of personal use assets are recognized.
D)Only a.and b.are correct.
E)None of the above.
Q2) Gabe's office building (adjusted basis of $430,000; fair market value of $500,000) is destroyed by a hurricane.Due to a 20% co-insurance clause, Gabe receives insurance proceeds of only $400,000.If Gabe purchases an office building for $500,000 one month later, its adjusted basis is $530,000 ($500,000 cost + $30,000 postponed loss).
A)True
B)False
Q3) The amount realized does not include any amount received by the taxpayer that is designated as severance damages by both the government and the taxpayer.
A)True
B)False
Page 16
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Chapter 14: Property Transactions: Capital Gains and Losses,
1231, Recapture Provisions
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Q1) Property sold to a related party purchaser that is depreciable by the purchaser may cause the seller to have ordinary gain.
A)True
B)False
Q2) Personal use property casualty gains and losses are not subject to the § 1231 rules.
A)True
B)False
Q3) Rental use depreciable machinery held more than 12 months is an example of a § 1231 asset.
A)True
B)False
Q4) Which of the following assets held by a retail business is a § 1231 asset?
A)Inventory.
B)A machine used in the business and held less than one year.
C)A factory building used in the business and held more than one year.
D)Accounts receivable.
E)All of the above.
Q5) Describe the circumstances in which the potential § 1245 depreciation recapture is extinguished.
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Chapter 15: Alternative Minimum Tax
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Q1) Durell owns a construction company that builds residential housing.The company is eligible to use the completed contract method for regular income tax purposes.What can Durell do to minimize his AMT?
Q2) How can the positive AMT adjustment for research and experimental expenditures be avoided?
Q3) Which of the following can produce an AMT preference rather than an AMT adjustment?
A)Standard deduction.
B)Research and experimental expenditures.
C)Percentage depletion.
D)Incentive stock options (ISOs).
E)None of the above.
Q4) What is the purpose of the AMT exemption amount? What is the maximum amount for each filing status for an individual taxpayer and for a corporate taxpayer?
Q5) What itemized deductions are allowed for both regular income tax purposes and for AMT purposes?
Q6) The C corporation AMT rate can be higher than the individual AMT rates.
A)True
B)False
Page 18
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Chapter 16: Accounting Periods and Methods
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Q1) In the case of a sale reported under the installment method, no gain is reported until the seller has recovered the entire cost of the property sold.
A)True
B)False
Q2) Red Corporation and Green Corporation are equal partners in the R & G Partnership.Red Corporation's tax year ends September 30th, and Green Corporation is a calendar year taxpayer.R & G Partnership must use September 30th as its tax year, unless it has a business purpose for using a different tax year.
A)True
B)False
Q3) A CPA practice that is incorporated earns 40% of its annual revenues in the months of March and April. Although the CPA practice is a professional services corporation (PSC), it may use a fiscal year ending April 30th.
A)True
B)False
Q4) What incentives do the tax accounting rules provide for taxpayers to voluntarily change from an incorrect method of accounting that has reduced the company's tax liability in prior years?
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Chapter 17: Corporations: Introduction and Operating Rules
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Q1) A taxpayer is considering the formation of a business that would derive some amounts of tax-exempt interest, qualified dividends, and capital gains. Explain how these income categories would be reported and taxed under the various types of entity forms discussed in the chapter. Consider the tax implications both to the entities and to their owners.
Q2) Copper Corporation, a C corporation, had gross receipts of $5 million in 2009, $6 million in 2010, and $3 million in 2011.Gold Corporation, a personal service corporation (PSC), had gross receipts of $4 million in 2009, $7 million in 2010, and $5 million in 2011.Which of the corporations will be allowed to use the cash method of accounting in 2012?
A)Copper Corporation only.
B)Gold Corporation only.
C)Both Copper Corporation and Gold Corporation.
D)Neither Copper Corporation nor Gold Corporation.
E)None of the above.
Q3) A calendar year C corporation with average annual gross receipts of $5 million or less must use the cash method of accounting.
A)True
B)False
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Chapter 18: Corporations: Organization and Capital Structure
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Q1) Gabriella and Maria form Luster Corporation with each receiving 50 shares of its stock. Gabriella transfers cash of $50,000, while Maria transfers a secret process (basis of $0; fair market value of $50,000). Neither Gabriella nor Maria will recognize gain on the transfer.
A)True
B)False
Q2) Stock in Merlin Corporation is held equally by Jane, Eve, and Fred.Merlin seeks additional capital to buy a valuable tract of land that will cost $6,000,000.Jane, Eve, and Fred propose to loan Merlin $2,000,000 each, taking from Merlin a $2,000,000 ten-year note with interest payable annually at five points above the prime rate.Merlin Corporation has current taxable income of $7,000,000.How are the payments on the notes treated for tax purposes?
Q3) When a taxpayer transfers property subject to a mortgage to a controlled corporation in an exchange qualifying under § 351, the transferor shareholder's basis in stock received in the transferee corporation is increased by the amount of the mortgage on the property.
A)True B)False
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Chapter 19: Corporations: Distributions Not in Complete
Liquidation
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Q1) Which of the following is an incorrect statement regarding the application of the § 318 stock attribution rules?
A)An individual is not deemed to own the shares owned by his or her siblings.
B)Stock owned by an estate is deemed to be owned in full by a beneficiary.
C)Stock owned by any shareholder owning 50% or more of a corporation's stock is deemed to be owned in full by the corporation.
D)Stock owned by a partnership is deemed to be owned proportionately by a partner.
E)None of the above.
Q2) Puffin Corporation makes a property distribution to its sole shareholder, Bonnie. The property distributed is a car (basis of $30,000; fair market value of $20,000) that is subject to a $6,000 liability which Bonnie assumes.Puffin has no accumulated E & P and $30,000 of current E & P from other sources during the year.What is Puffin's E & P after taking into account the distribution of the car?
A)$4,000.
B)$6,000.
C)$10,000.
D)$14,000.
E)None of the above.
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Chapter 20: Corporations: Distributions in Complete
Liquidation and an Overview of Reorganizations
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Q1) Which of the following statements is true?
A)The dollar amounts involved in reorganizations are generally substantial; thus, it is important that the financial and tax treatment of the reorganization is consistent.
B)A letter ruling indicates the income tax treatment the IRS will apply to the proposed corporate restructuring transaction.
C)Careful planning can ensure that all gains recognized by individual shareholders receive beneficial dividend treatment.
D)Corporations prefer to recognize capital gains on reorganizations because they can offset the capital losses they may have.
E)None of the statements is true.
Q2) The text discusses four different limitations on loss recognition by liquidating corporations. Provide a brief description of each of these loss limitations.
Q3) Discuss the role of letter rulings in corporate reorganizations.
Q4) Compare the sale of a corporation's assets with a sale of its stock from the perspective of the seller.
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Chapter 21: Partnerships
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Q1) In a proportionate nonliquidating distribution, cash is deemed to be distributed first, followed by unrealized receivables and inventory and, last, capital and other assets.
A)True
B)False
Q2) Generally, gain is recognized on a proportionate current or liquidating distribution if the fair market value of property distributed exceeds the partner's basis in the partnership interest.
A)True
B)False
Q3) Section 721 provides that, in general, no gain or loss is recognized by the partnership or the partner on contribution of appreciated or depreciated property to a partnership in exchange for an interest in the partnership.
A)True
B)False
Q4) A distribution cannot be "proportionate" if only one partner receives assets from the partnership.
A)True
B)False
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Chapter 22: S: Corporations
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Q1) A two-or-more member LLC operates under partnership tax principles.
A)True
B)False
Q2) If an S corporation shareholder's basis in a loan to the entity has been _________________, the shareholder recognizes gross income when the S corporation repays the shareholder.
Q3) A cash basis calendar year C corporation reports $100,000 of accounts receivable on the date of its conversion to an S corporation on February 14.By the end of the year, $60,000 of these receivables are collected.Calculate any built-in gains tax, assuming that there is sufficient taxable income.
A)$0.
B)$10,000.
C)$21,000.
D)$35,000.
Q4) In the case of a complete termination of an S corporation interest, a ____________________ tax year may occur.
Q5) ____________________ common stock and ____________________ preferred stock (with preference on dividends) are treated as two different classes of stock by the S corporation rules.
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Chapter 23: Exempt Entities
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Q1) Which of the following statements regarding exempt organization filing requirements is incorrect?
A)Churches are required to file Form 990 (Return of Organization Exempt from Income Tax) only if its annual gross receipts exceed $50,000.
B)The due date for Form 990 (Return of Organization Exempt from Income Tax) is the fifteenth day of the fifth month after the end of the taxable year, whereas for private foundations the due date for Form 990-PF (Return of Private Foundation) is the fifteenth day of the fourth month after the end of the tax year.
C)Exempt organizations whose annual gross receipts do not exceed $50,000 can file an e-Postcard.
D)Only a.and b.are incorrect.
E)a., b., and c.are incorrect.
Q2) If personal property is leased with real property and more than 45% of the rent income under the lease is from personal property, all of the rent income is subject to the unrelated business income tax.
A)True
B)False
Q3) Why are some organizations exempt from Federal income tax?
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Chapter 24: Multistate Corporate Taxation
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Q1) Politicians frequently use tax credits and exemptions to create economic development incentives.
A)True
B)False
Q2) Roughly five percent of all taxes paid by businesses in the U.S.are to state, local, and municipal jurisdictions.
A)True
B)False
Q3) Typically exempt from the sales/use tax base is the purchase by a symphony orchestra of printed music for its players.
A)True
B)False
Q4) A state sales tax usually falls upon:
A)The sale of a used dinette set sold at a rummage sale.
B)The sale of a dinette set by the manufacturer to a furniture retailer.
C)The sale of a case of Bibles by the publisher to a church bookstore.
D)The sale of a Bible to a member of the church.
E)All of the above are exempt transactions.
Q5) An ad valorem property tax is based on the asset's current
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Chapter 25: Taxation of International Transactions
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Q1) The following income of a foreign corporation is not subject to the regular U.S.corporate income tax rates.
A)FIRPTA gains.
B)Capital gains effectively connected with a U.S.trade or business.
C)Net long-term capital gains, where no U.S.trade or business exists.
D)Fixed, determinable, annual or periodic (FDAP) income effectively connected with a U.S.trade or business.
Q2) AirCo, a domestic corporation, purchases inventory for resale from unrelated distributors within the United States and resells this inventory to customers outside the United States, with title passing outside the United States.What is the source of AirCo's inventory sales income?
A)100% U.S.source.
B)100% foreign source.
C)50% U.S.source and 50% foreign source.
D)50% foreign source and 50% sourced based on location of manufacturing assets.
Q3) A U.S.taxpayer may take a current FTC equal to the greater of the FTC limit or the actual foreign taxes (direct or indirect) paid or accrued.
A)True
B)False
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Chapter 26: Tax Practice and Ethics
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Q1) The taxpayer must pay a significant fee to have a letter ruling issued by the IRS.
A)True
B)False
Q2) Describe the potential outcomes to a party who provides information to the IRS under the informant or whistleblower program.
Q3) Fiona, a VITA volunteer for her college's tax clinic, is exempted from the Code's tax preparer penalties.
A)True
B)False
Q4) An individual is not subject to an underpayment penalty until more than $____________________ is due and unpaid through estimated taxes. or
Q5) In connection with the taxpayer penalty for substantial understatement of tax liability, what defenses (if any) are available?
Q6) A CPA, an attorney, and a(n) ____________________ can represent taxpayers before the IRS in an Appeals conference.
Q7) The IRS is a subsidiary agency of the Department of the ____________________.
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Chapter 28: Income Taxation of Trusts and Estates
Available Study Resources on Quizplus for this Chatper
145 Verified Questions
145 Flashcards
Source URL: https://quizplus.com/quiz/69999
Sample Questions
Q1) A single trust that is operated independently for each of its three beneficiaries might be taxed using the ____________________ rule.
Q2) The grantor of a trust generally designates both ____________________ and ____________________ beneficiaries under the controlling agreement. or
Q3) Which, if any, of the following statements relates to the tax treatment of both estates and trusts?
A)The entity is required to distribute all of its income currently to its beneficiaries.
B)The entity must use the same tax year as its creator (i.e., grantor, decedent).
C)In the year of its termination, the entity's net operating loss carryovers are passed through to its beneficiaries.
D)The termination date of the entity is specified in the controlling document.
Q4) A fiduciary assigns its tax credits to beneficiaries corresponding to the disposition of its ____________________ for the year.
Q5) The IRS encourages ____________________ filing for Forms 1041.
Q6) Every ____________________ trust is allowed a $300 personal exemption.
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