Tax Planning for Business Exam Preparation Guide
Course Introduction
Tax Planning for Business examines the principles, strategies, and legal frameworks involved in optimizing the tax position of various business entities. The course covers key topics such as tax compliance, deductions and credits, business structure selection, and the impact of tax regulations on financial decision-making. Students will learn to interpret tax laws, identify planning opportunities, and implement effective tax strategies to minimize liabilities while ensuring adherence to legal requirements. Real-world case studies and scenario analysis provide practical insights into the dynamic relationship between business operations and taxation.
Recommended Textbook
Principles of Taxation for Business and Investment Planning 2014 17th Edition by Sally Jones
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18 Chapters
1724 Verified Questions
1724 Flashcards
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Page 2
Chapter 1: Taxes and Taxing Jurisdictions
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85 Verified Questions
85 Flashcards
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Sample Questions
Q1) A business that operates in more than one state is required to pay state income tax only to the state in which it is incorporated.
A)True
B)False
Answer: False
Q2) SJF Inc., which has its corporate offices in Boise, Idaho, conducts business in Idaho, Oregon, California, and British Columbia, Canada. Which of the following statements is true?
A)SJF must pay income tax only to Idaho and the United States.
B)SJF may be required to pay income tax to Idaho, Oregon, California, British Columbia, the United States, and Canada.
C)SJF must pay income tax only to Idaho, Oregon, California, and the United States.
D)SJF may be required to pay income tax to either the United States or to Canada, but not to both.
Answer: B
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3
Chapter 2: Policy Standards for a Good Tax
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Sample Questions
Q1) A static forecast of the revenue effect of a tax rate change assumes that the tax base does not change.
A)True
B)False
Answer: True
Q2) The government of Nation C operated at a $32 billion deficit this year. The deficit suggests that Nation C's tax system is:
A)Inefficient
B)Insufficient
C)Unfair
D)Inconvenient
Answer: B
Q3) According to the Keynesian concept of efficiency, an efficient tax should be neutral in its effect on free market allocations of economic resources.
A)True
B)False
Answer: False
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Chapter 3: Taxes As Transaction Costs
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Sample Questions
Q1) XYT Company engaged in a transaction that generated $50,000 cash deposited in the company bank account and required the company to pay $12,000 out of that account. XYT's marginal tax rate is 30%. Which of the following statements is false?
A)If the deposit is taxable income and the payment is deductible, the transaction generated $26,600 after-tax cash flow.
B)If the deposit is taxable income but the payment is nondeductible, the transaction generated $35,000 after-tax cash flow.
C)If the deposit is not taxable income and the payment is nondeductible, the transaction generated $38,000 after-tax cash flow.
D)None of the above is false.
Answer: B
Q2) Which of the following statement about private market transactions is false?
A)Both parties have flexibility in determining the legal and financial characteristics of the transaction.
B)The parties negotiate directly with each other.
C)The parties are dealing at arm's length.
D)The parties must engage in unilateral instead of bilateral tax planning.
Answer: D
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Page 5
Chapter 4: Maxims of Income Tax Planning
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Sample Questions
Q1) Bailey Inc. is planning a transaction that requires a $60,000 deductible cash expenditure. The transaction is structured so that Bailey will pay the cash and report the deduction this year (year 0). Compute the increase in the NPV of the transaction if it can be restructured so that Bailey will report the deduction this year, but pay the cash two years later (year 2). Bailey's marginal tax rate is 25%, and it uses a 9% discount rate to compute NPV.
A)$8,677
B)$9,014
C)$9,480
D)None of the above
Q2) Tax evasion is a federal crime punishable by imprisonment.
A)True
B)False
Q3) The tax character of an item of income can change when Congress amends the tax law.
A)True
B)False
Q4) The assignment of income doctrine constraints tax deferral strategies.
A)True
B)False
Page 6
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Chapter 5: Tax Research
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75 Flashcards
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Sample Questions
Q1) Which of the following statements regarding documentation of research conclusions is false?
A)A research memorandum is a permanent record of the research process.
B)A researcher communicates his or her conclusions to the client in a letter containing information similar to that in the research memorandum.
C)Technical references are generally inappropriate in a client letter.
D)A research memorandum contains only research conclusions and not a detailed analysis of legal authorities supporting those conclusions.
Q2) The first step in the tax research process is to locate relevant tax law authority.
A)True
B)False
Q3) The final step in the tax research process is to document and communicate research conclusions.
A)True
B)False
Q4) Revenue procedures are a type of secondary authority.
A)True
B)False
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Chapter 6: Taxable Income From Business Operations
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Sample Questions
Q1) The tax law does not allows deductions based on estimated expenses that result in an allowance or reserve for financial statement purposes.
A)True
B)False
Q2) Which of the following statements most accurately defines taxable income from business operations?
A)Gross income from the sales of goods or performance of services less allowable deductions.
B)Gross income from whatever source derived less allowable deductions.
C)Revenues from business transactions less expenses.
D)Gross income from whatever source derived less expenses.
Q3) Accurate measurement of taxable income is the only objective of the federal income tax laws.
A)True
B)False
Q4) A permanent difference between book income and taxable income affects only one taxable year.
A)True
B)False
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Chapter 7: Property Acquisitions and Cost Recovery
Deductions
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Sample Questions
Q1) This year, Zulou Industries capitalized $552,000 indirect costs to inventory for book purposes and $591,600 indirect cost to inventory under unicap. Zulou's cost of goods sold for book purposes was $2,458,000, and its cost of goods sold for tax purposes was $2,707,000. If Zulou has no other book/tax differences, and its book income is $5,000,000, compute Zulou's taxable income.
A)$4,711,400
B)$4,751,000
C)$4,790,600
D)$5,288,600
Q2) Ingol Inc. was organized on June 1 and began business on September 13. Ingol elected a calendar year for tax purposes. The corporation incurred $60,300 of legal and other professional fees attributable to its formation. How much of these costs can Ingol deduct on its first tax return?
A)-0-
B)$1,340
C)$6,229
D)None of the above
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Page 9
Chapter 8: Property Dispositions
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Sample
Questions
Q1) Oslego Company, a calendar year taxpayer, sold land with a $400,000 tax basis for $635,000 in March 2013. The purchaser paid $50,000 cash at closing and gave Oslego an interest-bearing note for the $585,000 remaining price. In September, Oslego received $50,450 cash from the purchaser consisting of a $29,250 principal payment and a $21,200 interest payment. Assuming that Oslego does not elect out of the installment sale method, compute the company's 2013 gain recognized on sale and its tax basis in the note receivable on December 31.
Q2) Rizzi Corporation sold a capital asset with a $692,000 book and tax basis for $650,000 cash. This was Rizzi's only asset sale during the year. The sale results in:
A)$42,000 unfavorable permanent book/tax difference
B)$42,000 unfavorable temporary book/tax difference
C)$42,000 favorable permanent book/tax difference
D)No book/tax difference
Q3) Stone Company recognized a $7,700 loss on sale of depreciable equipment held for three years. If Stone's accumulated MACRS depreciation on the equipment is $7,700 or more, the entire loss is ordinary.
A)True
B)False
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Chapter 9: Nontaxable Exchanges
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Sample Questions
Q1) Mr. Jamail transferred business personalty (FMV $187,000; adjusted tax basis $29,900) to J&K Inc. in exchange for J&K common stock. Which of the following statements is true?
A)If Mr.Jamail owns 14% of J&K's outstanding stock immediately after the exchange, he must recognize a $157,100 gain.
B)If Mr.Jamail owns 74% of J&K's outstanding stock immediately after the exchange, he must recognize a $157,100 gain.
C)If Mr.Jamail owns 81% of J&K's outstanding stock immediately after the exchange, he must recognize a $157,100 gain.
D)Statements a.and b.are true.
Q2) Yelano Inc. exchanged an old forklift used in its business for a new forklift. This like-kind exchange is nontaxable.
A)True
B)False
Q3) A taxpayer who receives or pays boot in a nontaxable exchange must recognize gain to the extent of the FMV of the boot.
A)True
B)False
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11
Chapter 10: Sole Proprietorships, Partnerships, Llcs, and S Corporations
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Sample Questions
Q1) Which of the following statements regarding limited liability companies is true?
A)Just like an S corporation, an LLC member's share of ordinary income is not subject to self-employment taxes.
B)Just like an S corporation, an LLC is restricted to 100 members.
C)Because LLCs are a relatively new organizational form, many tax questions concerning their operation have yet to be resolved.
D)Just like a limited partnership, only LLC members who are not actively involved in the entity's business activities have limited liability for the LLC's debts.
Q2) Cramer Corporation and Mr. Chips formed a partnership in which Cramer is the general partner and Mr. Chips is a limited partner. Cramer contributed $500,000 cash, and Mr. Chips contributed a building with a $500,000 FMV and $300,000 tax basis. The partnership immediately borrowed $700,000 of recourse debt. What is Mr. Chips' tax basis in its partnership interest?
A)$500,000
B)$850,000
C)$650,000
D)$300,000
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Page 12
Chapter 11: The Corporate Taxpayer
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Sample Questions
Q1) In terms of dispersal of ownership, corporations are classified as either closely held or publicly held.
A)True
B)False
Q2) Which of the following is a primary legal characteristic of the corporate form of business?
A)The management of the business is centered in a Board of Directors elected by the shareholders.
B)A shareholder must seek permission to sell his stock.
C)The life of the corporation will terminate when a majority of the shareholders die or cease to exist.
D)A shareholder is personally liable for the debts of the corporation.
Q3) Donatoni Corporation owns 40% of Market, Inc. voting common stock. During the current year, Donatoni received a $30,000 dividend from Market. Donatoni must report the dividend as gross income, and is allowed a $21,000 dividends-received deduction.
A)True
B)False
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Chapter 12: The Choice of Business Entity
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Sample Questions
Q1) After-tax cash flow is minimized when a business operates as a pass-through entity rather than a taxable corporation.
A)True
B)False
Q2) The three Crosby children intend to form a business. The business will borrow $900,000 from a local bank. Which of the following statements is true?
A)Regardless of whether the business is a partnership or an S corporation, the owners will include the bank debt in the tax basis of their ownership interests.
B)From a liability standpoint, the owners should be indifferent as to whether they are a general partnership or an S corporation.
C)If the business is an S corporation, the owners can allocate income and losses in any reasonable manner.
D)If the business is a partnership the owners can allocate income and losses in any reasonable manner.
Q3) Typical family-owned businesses are operated as pass-through entities.
A)True
B)False
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14
Chapter 13: Jurisdictional Issues in Business Taxation
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Sample Questions
Q1) Article 1 of the U.S. Constitution, referred to as the commerce clause, prohibits a state from charging an extra 10 cent tax per gallon on gasoline sold to trucks with out-of-state license plates.
A)True
B)False
Q2) Transfer pricing issues arise:
A)When tangible goods are transferred between related parties operating in different taxing jurisdictions.
B)When rights to use intangible assets, such as patents or trademarks, are licensed between related parties operating in different taxing jurisdictions.
C)Both of the above situations can create transfer pricing issues.
D)Neither of the above situations creates transfer pricing issues.
Q3) A foreign source dividend received by a U.S. corporation is eligible for the 70% dividends-received deduction.
A)True
B)False
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Chapter 14: The Individual Tax Formula
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Sample Questions
Q1) The earned income credit is available only to low-income taxpayers with dependent children.
A)True
B)False
Q2) Mr. and Mrs. Toliver's AGI on their jointly filed return is $339,000. Regardless of the number of their children, the Tolivers are not eligible for a child credit.
A)True
B)False
Q3) Mr. and Mrs. Cox reported $115,900 AGI on their joint return. The couple has three dependent children under age 17. Compute their child credit.
A)$0
B)$2,100
C)$2,700
D)$3,000
Q4) An above-the-line deduction reduces both adjusted gross income and taxable income.
A)True
B)False
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Page 16
Chapter 15: Compensation and Retirement Planning
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Sample Questions
Q1) This year, Larry was awarded a bonus by his corporate employer that will be paid in five annual installments beginning in the year Larry retires. The employer's liability for the future payment is unfunded. Even though Larry earned the bonus this year, he does not recognize any current income.
A)True
B)False
Q2) Tony's marginal income tax rate is 28%, and he pays FICA tax on his entire salary (7.65% rate in 2013). Tony's employer offered him a choice between $5,000 additional salary or a nontaxable fringe benefit. Tony would have to pay $3,400 to purchase the benefit directly. Which of the following statements is true?
A)The fringe benefit and the additional salary have the same after-tax value.
B)The fringe benefit is worth $183 more than the additional salary.
C)The additional salary is worth $200 more than the fringe benefit.
D)None of the above is true.
Q3) Unreimbursed moving expenses are a miscellaneous itemized deduction.
A)True
B)False
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Page 17
Chapter 16: Investment and Personal Financial Planning
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Sample Questions
Q1) Ms. Plant owns and actively manages an apartment complex. This year, the complex generated a $32,790 net loss. If Ms. Plant's AGI before considering this loss is $196,100 and she owns no other passive activities, how much of the loss is deductible this year?
A)$0
B)$25,000
C)$32,790
D)None of the above
Q2) At the beginning of the year, Ms. Faro paid $15,000 for 750 shares of Gravois stock. She instructed her broker to reinvest any dividends in additional Gravois shares. Her Form 1099-DIV reported that she earned $820 dividend income which purchased 39 additional shares. Which of the following statements is true?
A)Ms.Faro recognizes no dividend income and has a $15,000 basis in her 789 shares.
B)Ms.Faro recognizes no dividend income and has a $15,820 basis in her 789 shares.
C)Ms.Faro recognizes $820 dividend income and has a $15,820 basis in her 789 shares.
D)None of the above statements is true.
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Chapter 17: Tax Consequences of Personal Activities
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Q1) Which of the following deductions is allowed in the computation of alternative minimum taxable income (AMTI)?
A)Property taxes paid on a personal residence.
B)Interest paid on a mortgage incurred to purchase a personal residence.
C)Interest paid on a home equity debt.
D)All of the above deductions are allowed.
Q2) Jenna Leigh is employed as a receptionist for a CPA firm, but on evenings and weekends, she bakes wedding cakes. In each of the past four years, Jenna's baking activity resulted in a net profit. This year, the activity generated a $720 net loss. Which of the following statements is true?
A)The legal presumption is that Jenna's $720 loss is a business loss.
B)The legal presumption is that Jenna's $720 loss is a nondeductible hobby loss.
C)Jenna must include the revenues from her baking activity in gross income but can't deduct any of her related expenses.
D)Jenna is allowed to report her $720 loss as a miscellaneous itemized deduction.
Q3) Taxpayers include a maximum of 85% of Social Security benefits in gross income.
A)True
B)False
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19
Chapter 18: The Tax Compliance Process a Present Value of
$1 B Present Value of Annuity of $1 C 2013 Income Tax Rates
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Sample Questions
Q1) Who of the following can't represent a taxpayer during an interview with the IRS?
A)An enrolled agent
B)A certified public accountant
C)An attorney
D)All of the above can represent the taxpayer.
Q2) For no particularly good reason, Ms. Totter has not yet filed her 2012 Form 1040. Which of the following statements is false?
A)If the government owes Ms.Totter a refund of 2012 tax, there is no penalty if she never files the return.
B)The statute of limitations on the return will not begin to run until Ms.Totter files the return.
C)If Ms.Totter owes additional 2012 tax, she also will owe a late-filing and late-payment penalty.
D)None of the above is false.
Q3) Only attorneys and CPAs may prepare tax returns for compensation.
A)True
B)False
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Page 20