Tax Planning and Compliance Practice Exam
Course Introduction
This course provides a comprehensive overview of tax planning strategies and compliance requirements for individuals and businesses. Students will explore the fundamental principles of tax law, gain practical knowledge of federal and state tax systems, and learn how effective tax planning can minimize liabilities while ensuring adherence to regulatory mandates. Key topics include income recognition, deductions, credits, tax timing, choice of business entities, and ethical considerations in tax practice. Through case studies and practical exercises, students will develop the skills necessary to analyze complex tax situations, prepare accurate tax returns, and advise clients or organizations on optimal tax strategies within the legal framework.
Recommended Textbook
South Western Federal Taxation 2018 Individual Income Taxes 41st Edition by William H. Hoffman
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20 Chapters
2583 Verified Questions
2583 Flashcards
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Chapter 1: An Introduction to Taxation and Understanding
Federal Tax Law
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194 Verified Questions
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Sample Questions
Q1) Your client, Connie, won $12,000 in a football office pool. She sees no reason to include it in her income for several reasons. First, the amount won will not be reported to the IRS. Second, as an average income employee, she is unlikely to be audited by the IRS. Third, she feels that she has probably lost this much in other past office pools. How do you respond?
Answer: As a practitioner, you cannot play the audit lottery. You must presume she will be audited irrespective of the probabilities. Although the use of estimates is allowed, Connie's assumptions as to her losses are not realistic. Even if they were reliable, gambling losses cannot be offset against gambling winnings but must be separately deducted. Thus, the $12,000 must be reported as income or you cannot prepare Connie's return.
Q2) If more IRS audits are producing a greater number of no change results, this indicates increased compliance on the part of taxpayers.
A)True
B)False
Answer: False
Q3) A tax credit for amounts spent to furnish care for children while the parent is at work.
Answer: b
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Chapter 2: Working With the Tax Law
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Sample Questions
Q1) The IRS issues an acquiescence or nonacquiescence only for regular Tax Court decisions.
A)True
B)False
Answer: False
Q2) A taxpayer must pay any tax deficiency assessed by the IRS and sue for a refund to bring suit in the U.S. Court of Federal Claims. Only in the Tax Court can jurisdiction be obtained without first paying the assessed tax deficiency.
A)True
B)False Answer: True
Q3) Determination letters usually involve completed transactions.
A)True
B)False Answer: True
Q4) A taxpayer can obtain a jury trial in the U.S. Tax Court. A)True
B)False Answer: False
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Chapter 3: Tax Formula and Tax Determination; an
Overview of Property Transactions
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187 Verified Questions
187 Flashcards
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Sample Questions
Q1) Homer (age 68) and his wife Jean (age 70) file a joint return. They furnish all of the support of Luther (Homer's 90-year old father), who lives with them. In 2017, they received $6,000 of interest income on city of Chicago bonds and interest income on corporate bonds of $48,000. Compute Homer and Jean's taxable income for 2017.
Answer: $20,650. Their gross income is $48,000 since the $6,000 interest on municipal bonds is an exclusion. They are entitled to a basic standard deduction of $12,700 and additional standard deductions of $1,250 each for being age 65 or older. They can claim a dependency exemption for Luther and two personal exemptions for themselves. Thus, $48,000 - $12,700 - $2,500 (2 × $1,250) - $12,150 (3 × $4,050) = $20,650.
Q2) Once they reach age 65, many taxpayers will switch from itemizing their deductions from AGI and start claiming the standard deduction.
A)True
B)False
Answer: True
Q3) $1,050
Answer: c
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Chapter 4: Gross Income: Concepts and Inclusions
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Sample Questions
Q1) How does the taxation of Social Security benefits differ from the taxation of an annuity purchased by the taxpayer?
Q2) Sharon made a $60,000 interest-free loan to her son, Todd, who used the money to start a new business. Todd's only sources of income were $25,000 from the business and $490 of interest on his checking account. The relevant Federal interest rate was 5%. Based on the above information:
A)Todd's business net profit will be reduced by $3,000 (.05 × $60,000) of interest expense.
B)Sharon must recognize $3,000 (.05 × $60,000) of imputed interest income on the below- market loan.
C)Todd's gross income must be increased by the $3,000 (.05 × $60,000) imputed interest income on the below market loan.
D)Sharon does not recognize any imputed interest income and Todd does not recognize any imputed interest expense.
E)None of these is correct.
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Chapter 5: Gross Income: Exclusions
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Sample Questions
Q1) Julie was suffering from a viral infection that caused her to miss work for 90 days. During the first 30 days of her absence, she received her regular salary of $8,000 from her employer. For the next 60 days, she received $12,000 under an accident and health insurance policy purchased by her employer. The premiums on the health insurance policy were excluded from her gross income. During the last 30 days, Julie received $6,000 on an income replacement policy she had purchased. Of the $26,000 she received, Julie must include in gross income:
A)$0.
B)$6,000.
C)$8,000.
D)$14,000.
E)$20,000.
Q2) A U.S. citizen who works in France from February 1, 2017 until January 31, 2018 is eligible for the foreign earned income exclusion in 2017 and 2018.
A)True
B)False
Q3) What are the tax problems associated with payments received by a wife from her deceased husband's employer? (Assume the wife renders no services to the employer.)
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Page 7
Chapter 6: Deductions and Losses: in General
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Sample Questions
Q1) Section 212 expenses that are related to rent and royalty income are deductions for AGI.
A)True B)False
Q2) The income of a sole proprietorship is reported on Schedule C (Profit or Loss from Business).
A)True B)False
Q3) If an activity involves horses, a profit in at least two of seven consecutive years meets the presumptive rule of § 183.
A)True
B)False
Q4) Which of the following must be capitalized by a business?
A) Replacement of a windshield of a business truck which was broken in an accident.
B) Repair of a roof of a building used in business.
C) Amount paid for a covenant not to compete.d. Only b. and c. must be capitalized.e. a., b., and c. can be expensed rather than capitalized.
Q5) 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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Sample Questions
Q1) If an election is made to defer deduction of research expenditures, the amortization period is based on the expected life of the research project if less than 60 months.
A)True
B)False
Q2) A taxpayer can carry any NOL incurred forward up to 20 years.
A)True
B)False
Q3) Nonbusiness income for net operating loss purposes includes dividends received. A)True
B)False
Q4) If the amount of the insurance recovery for a theft of business property is greater than the asset's fair market value but less than it's adjusted basis, a gain is recognized. A)True B)False
Q5) A theft of investment property can create or increase a net operating loss for an individual.
A)True
B)False
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Chapter 8: Depreciation, Cost Recovery, Amortization, and Depletion
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Sample Questions
Q1) On June 1, 2017, Irene places in service a new automobile that cost $21,000. The car is used 70% for business and 30% for personal use. (Assume this percentage is maintained for the life of the car.) She does not take additional first-year depreciation. Determine the cost recovery deduction for 2018.
A)$3,160
B)$3,290
C)$3,570
D)$6,720
E)None of the above
Q2) For personal property placed in service in 2017, the § 179 maximum deduction is limited to $510,000.
A)True
B)False
Q3) For a new car that is used predominantly in business, the "luxury auto" limit depends on whether the taxpayer takes MACRS or straight-line depreciation.
A)True
B)False
Q4) Discuss the reason for the inclusion amount with respect to leased automobiles.
Page 10
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Chapter 9: Deductions: Employee and
Self-Employed-Related Expenses
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Sample Questions
Q1) Ashley and Matthew are husband and wife and both are practicing CPAs. On a joint return, Ashley gets to deduct her professional dues but Matthew does not. Explain.
Q2) Lily went from her office in Portland to Lisbon, Portugal on business. While there, she spent part of the time on vacation. How much of the air fare of $5,000 can she deduct based on the following assumptions:
a.Lily was gone five days (i.e., three business and two personal).
b.Lily was gone five weeks (i.e., four business and one personal).
c.Lily was gone five weeks (i.e., three business and two personal).
Q3) One indicia of independent contractor (rather than employee) status is when the individual performing the services is paid based on time spent (rather than on tasks performed).
A)True
B)False
Q4) A taxpayer who maintains an office in the home to conduct his only business will not have nondeductible commuting expense.
A)True
B)False
Q5) Time test (for moving expenses) waived
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Chapter 10: Deductions and Losses: Certain Itemized
Deductions
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Sample Questions
Q1) Which of the following items would be an itemized deduction on Schedule A of Form 1040 not subject to the 2%-of-AGI floor?
A)Professional dues paid by an accountant (employed by Ford Motor Co.) to the National Association of Accountants.
B)Gambling losses to the extent of gambling winnings.
C)Job hunting costs.
D)Appraisal fee paid to a valuation expert to determine the fair market value of art work donated to a qualified museum.
E)None of the above.
Q2) Helen pays nursing home expenses of $3,000 per month for her mother. The monthly charge covers the following items: $1,400 for medical care, $900 for lodging, and $700 for food. Under what circumstances can Helen include the $3,000 per month payment when computing her medical expense deduction for the year? If Helen is not allowed to include the entire payment, how much can she include?
Q3) Linda is planning to buy Vicki's home. They want to keep the transaction simple, so the sales agreement will not apportion the property taxes that Vicki has already paid on the home. Comment on the tax implications for Linda and Vicki.
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Page 12
Chapter 11: Investor Losses
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Sample Questions
Q1) Lucy owns and actively participates in the operations of an apartment complex that produces a $50,000 loss during the year. Her modified AGI is $125,000 from an active business. Disregarding any at-risk amount limitation, she may deduct $25,000 of the loss, and the remaining $25,000 is a suspended passive activity loss.
A)True
B)False
Q2) White Corporation, a closely held personal service corporation, has $150,000 of passive activity losses, $120,000 of active business income, and $30,000 of portfolio income. How much of the passive activity loss can White Corporation deduct?
A)$0
B)$30,000
C)$120,000
D)$150,000
E)None of the above
Q3) Treatment of an installment sale of a passive activity.
Q4) Treatment of a disposition of a passive activity by gift.
Q5) Treatment of suspended credits when passive activity is sold at a loss.
Q6) Treatment of a disposition of a passive activity at death.
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Chapter 12: Alternative Minimum Tax
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Sample Questions
Q1) Which of the following amounts generally produce positive AMT adjustments?
A) Real property taxes deduction.
B) Personal exemption deduction.
C) Charitable contribution deduction.
D) Only a. and b. are correct.
E) a., b., and c. are correct.
Q2) The sale of business property could result in an AMT adjustment.
A)True
B)False
Q3) The AMT exemption for a C corporation is $50,000, reduced by 50% of the amount by which AMTI exceeds $150,000.
A)True
B)False
Q4) If a gambling loss itemized deduction is permitted for regular income tax purposes, no AMT adjustment results.
A)True
B)False
Q5) C corporations are not required to make AMT adjustments for depreciation.
A)True
B)False
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Chapter 13: Tax Credits and Payment Procedures
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Sample Questions
Q1) Explain the purpose of the disabled access credit and describe the general characteristics of its computation.
Q2) Unless a taxpayer is disabled, the tax credit for the elderly or disabled is available only if the taxpayer is at least 59 1/2 years old.
A)True
B)False
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) Refundable tax credits include the:
A)Foreign tax credit.
B)Tax credit for rehabilitation expenses.
C)Credit for certain retirement plan contributions.
D)Earned income credit.
E)None of the above.
Q5) How does the FICA tax compare to the self-employment tax? How are these two taxes similar and how do they differ?
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Chapter 14: Property Transactions: Determination of Gain or
Loss and Basis Considerations
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Sample Questions
Q1) Alvin is employed by an automobile dealership as its manager. As such, he purchased an SUV for $32,000 (fair market value is $48,000). No other employees are permitted a discount. What is Alvin's basis in the SUV?
A)$16,000.
B)$32,000.
C)$48,000.
D)$80,000.
E)None of the above.
Q2) Broker's commissions, legal fees, and points paid by the seller reduce the seller's amount realized.
A)True
B)False
Q3) Under what circumstances will a distribution by a corporation to its only shareholder result in a capital gain?
Q4) If the alternate valuation date is elected by the executor of the estate, the basis of all of the property included in the decedent's estate becomes the fair market value 6 months after the decedent's death.
A)True
B)False
Page 16
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Chapter 15: Property Transactions: Nontaxable Exchanges
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Q1) Owen and Polly have been married for five years. Owen sells investment property to Polly for a realized gain of $140,000. Owen's gain of $140,000 is not recognized and Polly's basis for the property she purchased is her cost.
A)True
B)False
Q2) On January 5, 2017, Waldo sells his principal residence with an adjusted basis of $270,000 for $690,000. He has owned and occupied the residence for 15 years. He pays $35,000 in commissions and $2,000 in legal fees in connection with the sale. One month before the sale, Waldo painted the exterior of the house at a cost of $5,000 and repaired various items at a cost of $3,000. On October 15, 2017, Waldo purchases a new home for $600,000. On November 15, 2018, he pays $25,000 for completion of a new room on the house, and on January 14, 2019, he pays $15,000 for the construction of a pool. What is the Waldo's recognized gain on the sale of his old principal residence and what is the basis for the new residence?
Q3) The maximum amount of the § 121 gain exclusion on sale of a principal residence is $250,000 for a single individual and $500,000 for a married couple.
A)True
B)False
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Chapter 16: Property Transactions: Capital Gains and Losses
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Q1) In 2017, Satesh has $5,000 short-term capital loss, $13,000 0%/15%/20% long-term capital gain, and $7,000 qualified dividend income. Satesh is single and has other taxable income of $15,000. Which of the following statements is correct?
A)No more than $13,000 of Satesh's taxable income is taxed at 0%.
B)No more than $7,000 of Satesh's taxable income is taxed at 0%.
C)No more than $15,000 of Satesh's taxable income is taxed at 0%.
D)None of Satesh's taxable income is taxed at 0%.
E)All of Satesh's taxable income is taxed at 0%.
Q2) An accrual basis taxpayer accepts a note receivable from a retail customer with a weak credit rating. The taxpayer immediately sells the note to a bank for less than the note's stated value. The taxpayer has an ordinary loss.
A)True
B)False
Q3) An individual taxpayer with 2017 net short-term capital loss of $5,000 generally can deduct up to $3,000 for AGI and carry the balance forward to 2018.
A)True
B)False
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Page 18
Chapter 17: Property Transactions: 1231 and Recapture
Provisions
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Q1) Vertigo, Inc., has a 2017 net § 1231 loss of $64,000 and had a $32,000 net § 1231 gain in 2016. For 2017, Vertigo's net § 1231 loss is treated as:
A)Ordinary loss.
B)Ordinary gain.
C)Capital loss.
D)Capital gain.
E)None of the above.
Q2) Verway, Inc., has a 2017 net § 1231 gain of $55,000 and had a $62,000 net § 1231 loss in 2016. For 2017, Verway's net § 1231 gain is treated as:
A)$55,000 ordinary loss.
B)$55,000 ordinary gain.
C)$55,000 capital loss.
D)$55,000 capital gain.
E)None of the above.
Q3) Property sold to a related party that is depreciable by the purchaser may cause the seller to have ordinary gain.
A)True
B)False
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Chapter 18: Accounting Periods and Methods
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Sample Questions
Q1) The taxpayer has consistently, but incorrectly, used an allowance for bad debts. At the beginning of the year, the balance in the allowance account is $90,000.
A)If the IRS examines the taxpayer's return and requires the taxpayer to change accounting methods, the taxpayer will be required to recognize an additional $90,000 of income (one-half in the current year and one-half in the following year) as the adjustment due to the change in accounting methods.
B)If the taxpayer voluntarily changes methods, the $90,000 adjustment can be spread over the current and three following years.
C)If the taxpayer voluntarily changes methods, the $90,000 reserve can be used to absorb bad debts until the account balance is zero.
D)If the IRS examines the taxpayer's return, no adjustment to the reserve account will be required if the balance is consistent with prior bad debt experience. E)None of the above.
Q2) 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 19: Deferred Compensation
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Q1) If the special election under § 83(b) is made as a result of a restricted property transaction, which statement is false?
A)A factor supporting making the § 83(b) election is the expectation the property will appreciate substantially.
B)Ordinary income is recognized on the excess of the FMV over the amount paid for the property on the date received.
C)Any appreciation on the property after receipt is treated as capital gain.
D)A deduction is allowed to the employee for any taxes paid on the original amount included in gross income if the property is subsequently forfeited.
E)None of the above is false.
Q2) What is a defined contribution plan?
Q3) If an employer's contribution to a SEP IRA is less than $54,000 in 2017 (or 25% of the employee's earned income, if less), the employee can contribute the difference.
A)True
B)False
Q4) What is a profit sharing plan?
Q5) What is a highly compensated employee?
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Page 21
Chapter 20: Corporations and Partnerships
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Sample Questions
Q1) Auburn Corporation owns 6% of the stock in Cerulean Corporation. During the year, Auburn received cash dividends of $800,000 from this investment. Determine Auburn Corporation's dividends received deduction based on the following assumptions:
a.Taxable income before the deduction is $960,000.
b.Taxable income before the deduction is $720,000.
c.Taxable income before the deduction is $480,000.
Q2) The holding period to the partnership of property contributed by a partner includes the period during which the property was held by the contributing partner.
A)True
B)False
Q3) Upon its formation, § 351 (transfers to controlled corporations) can apply.
Q4) A net short-term capital loss can be used to offset a net long-term capital gain.
Q5) A deduction for organizational expenditures is allowed.
Q6) The amortization of organizational expenditures and the dividends received deduction are allowed in determining the taxable income of an S corporation.
A)True
B)False
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