Tax Planning for Businesses
Exam Answer Key
Course Introduction
This course explores the principles and strategies of tax planning for businesses, focusing on minimizing tax liabilities while ensuring compliance with current laws and regulations. Students will learn about federal and state tax systems, the tax implications of various business structures, and planning opportunities related to income, expenses, investments, and employee benefits. The course delves into topics such as tax deferral, capital gains strategies, loss utilization, and the tax considerations surrounding mergers, acquisitions, and international transactions. Through case studies and practical examples, students develop the skills needed to identify tax-saving opportunities and effectively integrate tax planning into broader business decision-making.
Recommended Textbook
Principles of Taxation for Business and Investment Planning 2019 22nd Edition by Sally Jones
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Chapter 1: Taxes and Taxing Jurisdictions
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Sample Questions
Q1) Mr Bilboa is a citizen of Portugal. Which of the following statements is true?
A) The U.S. government has no jurisdiction to tax Mr. Bilboa because he is not a U.S. citizen.
B) The U.S. government has jurisdiction to tax Mr. Bilboa if he is a permanent resident of the United States.
C) The U.S. government has jurisdiction to tax Mr. Bilboa if he earns income from a business he operates in Florida.
D) Both the U.S. government has jurisdiction to tax Mr. Bilboa if he is a permanent resident of the United States and the U.S. government has jurisdiction to tax Mr. Bilboa if he earns income from a business he operates in Florida are true.
Answer: D
Q2) The U.S. government has jurisdiction to tax individuals who are not U.S. citizens but who earn income from a source within the United States.
A)True
B)False
Answer: True
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Chapter 2: Policy Standards for a Good Tax
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Sample Questions
Q1) If State H increases its sales tax rate by 1%, its sales tax revenue must also increase by 1%.
A)True
B)False
Answer: False
Q2) Which of the following statements concerning a regressive tax rate structure is true?
A) A regressive tax rate structure is justified by the tax policy of distributive justice.
B) A regressive rate structure is justified by the theory of the declining marginal utility of income.
C) Under a regressive rate structure, the average tax rate for high-income taxpayers is less than the marginal tax rate.
D) None of the statements are true.
Answer: D
Q3) A tax should result in either horizontal or vertical equity across taxpayers.
A)True
B)False
Answer: False
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Chapter 3: Taxes as Transaction Costs
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Sample Questions
Q1) If Congress enacts a temporary change in the tax law that will apply for only two taxable years, the change increases:
A) Market risk
B) Financial risk
C) Audit risk
D) Tax law uncertainty
Answer: D
Q2) Citran Company will earn $150,000 revenue as payment for a three-year consulting engagement. Compute the NPV of the revenue using Appendix A if Citran will received $35,000 cash immediately (year 0), $35,000 cash next year (year 1) and $80,000 cash the following year (year 2). Citran will report the revenue as taxable income in the year received. Its marginal tax rate is 30%, and it uses an 8% discount rate.
Answer: The NPV is $95,179 ($24,500 after-tax cash flow in year 0 + $22,687 discounted after-tax cash flow in year 1 [$24,500 × 0.926] + $47,992 discounted after-tax cash flow in year 2 [$56,000 × 0.857]).
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Page 5
Chapter 4: Maxims of Income Tax Planning
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Sample Questions
Q1) The tax law provides that individuals do not pay tax on the first $250,000 of gain realized on the sale of a principal residence. This rule is an example of the:
A) Entity variable
B) Time period variable
C) Jurisdiction variable
D) Character variable
Q2) Tax avoidance is the reduction of a person's tax liability through illegal means. A)True
B)False
Q3) Mrs Day structures a transaction to shift income from her New York business to her New Hampshire business. This tax planning strategy may be taking advantage of the:
A) Entity variable
B) Time period variable
C) Jurisdiction variable
D) Character variable
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6
Chapter 5: Tax Research
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Sample Questions
Q1) Treasury regulations are considered statutory authority.
A)True
B)False
Q2) Based on the citation Rev. Rul. 89-157, 1989-1 C.B. 221:
A) This revenue ruling was issued in 1989.
B) This revenue ruling is no longer valid.
C) The abbreviation C.B. stands for Comprehensive Bulletin.
D) This revenue ruling appears on page 157.
Q3) A keyword search using an electronic database is part of which step in the research process?
A) Understand the client's transaction and ascertain the facts
B) Identify the tax issues, problems, or opportunities suggested by the facts and formulate specific research questions
C) Locate relevant tax law authority
D) Analyze relevant authority and answer the research questions
Q4) Tax judicial decisions each have a single, unique citation.
A)True
B)False
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Chapter 6: Taxable Income from Business Operations
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Sample Questions
Q1) Which of the following statements about tax policy objectives regarding business expenses is false?
A) Lobbying expenses are not deductible because Congress does not want to subsidize political activities.
B) By disallowing a tax deduction, Congress increases the after-tax cost of undesirable expenditures.
C) The tax treatment of meals and entertainment expenses is intended to make the law more equitable.
D) The business interest expense limitation increases the disparity between the tax treatment of debt and equity financing.
Q2) Jethro Company, an accrual basis taxpayer, had a $10,000 overdue account payable to a major supplier. The supplier agreed to settle the account for $9,000 cash from Jethro. Which of the following statements is true?
A) Jethro recognizes $1,000 income because of the settlement.
B) Jethro recognizes no income because of the settlement.
C) Jethro can deduct the $9,000 payment.
D) Jethro can deduct a $1,000 bad debt expense.
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Page 8
Chapter 7: Property Acquisitions and Cost Recovery
Deductions
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Sample Questions
Q1) Hextone Inc., which has a 21% tax rate, purchased a new business asset. First-year book depreciation was $14,890, and first-year MACRS depreciation was $27,090. As a result of this book/tax difference, Hextone recorded a $2,562 deferred tax liability.
A)True
B)False
Q2) Cobly Company, a calendar year taxpayer, made only one asset purchase this year: machinery costing $1,932,500. The machinery is 7-year recovery property, and Cobly placed it in service on October 12. How many months of MACRS depreciation on the machinery is Cobly allowed?
A) Six months
B) Two and one-half months
C) One and one-half months
D) None of the above
Q3) This year, Nigle Inc.'s auditors required the corporation to write down the $1 million book value of purchased goodwill to $850,000. Nigle can deduct the $150,000 impairment expense on this year's tax return.
A)True
B)False
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Chapter 8: Property Dispositions
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Sample Questions
Q1) Three years ago, ChaGo Inc. sold a business asset with a $39,400 adjusted tax basis for $130,000. The purchaser paid $50,000 cash and gave ChaGo a note for the $80,000 balance of the price. ChaGo is using the installment sale method to recognize its gain on sale. This year, ChaGo sold the note to a financial institution for the note's $55,000 face value (ChaGo had received a total of $25,000 principal payments on the note.) Compute ChaGo's gain recognized on sale of the installment note.
A) -0-
B) $38,332
C) $52,268
D) $55,000
Q2) Zeron Inc. generated $1,349,600 ordinary income from operations this year. It also recognized $29,200 recaptured ordinary income, $21,000 net Section 1231 gain, and $14,900 net capital loss on the sale of assets. Compute Zeron's taxable income.
A) $1,349,000
B) $1,378,800
C) $1,384,900
D) $1,399,800
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Chapter 9: Nontaxable Exchanges
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Sample Questions
Q1) Reiter Inc. exchanged an old forklift for new office furniture. This exchange qualifies as a nontaxable like-kind exchange.
A)True
B)False
Q2) The tax basis in property received in a like-kind exchange in which no gain or loss is recognized is a:
A) FMV basis
B) Cost basis
C) Substituted basis
D) Carryover basis
Q3) Itak Company transferred an old asset with a $44,300 adjusted tax basis in exchange for a new asset worth $48,000 and $3,000 cash. Which of the following statements is false?
A) If the exchange is taxable, Itak recognizes a $6,700 gain.
B) If the exchange is nontaxable, Itak recognizes a $3,000 gain.
C) If the exchange is nontaxable, Itak's tax basis in the new asset is $44,300.
D) None of the statements is false.
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11
Chapter 10: Sole Proprietorships
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Sample Questions
Q1) Which of the following statements regarding the home office deduction is true?
A) In order to qualify for the deduction, a portion of the taxpayer's home must be used regularly and exclusively to meet with clients or customers.
B) A home office deduction is not allowed for using the home office for administrative or management activities only.
C) The home office deduction is limited to the taxable income of the business before the deduction.
D) A depreciation deduction is not allowed for a home office.
Q2) A limited liability company with more than one member is generally considered a partnership for federal tax purposes.
A)True
B)False
Q3) On June 1, Jefferson had a basis in his partnership interest of $75,000. On June 2, he received a cash distribution from the partnership of $28,000. All of the cash distribution is taxable.
A)True
B)False
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Chapter 11: The Corporate Taxpayer
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Sample Questions
Q1) A corporation that owns more than $10 million of total assets uses which schedule to reconcile book income to taxable income?
A) Schedule M-1
B) Schedule M-2
C) Schedule M-3
D) Schedule M-4
Q2) Mandrake, Inc. has book income of $569,300. Its income includes a $50,700 bad debt expense, determined by the allowance method. Actual write offs this year were $48,000. Based only on this information, compute Mandrake's taxable income.
A) $569,300
B) $572,000
C) $566,600
D) $528,600
Q3) TasteCo, Inc. reported $210,500 of taxable income this year. What is its regular tax liability?
A) $44,205
B) $65,345
C) $54,775
D) $71,570
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Chapter 12: The Choice of Business Entity
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Sample Questions
Q1) The use of a corporation as a tax shelter is most effective when the individual tax rate is significantly higher than the corporate tax rate.
A)True
B)False
Q2) Glover, Inc. had $350,000 of taxable income, all of which was personal holding company income. The corporation paid a dividend of $350,000 in November. The corporation will owe a personal holding company tax for the year.
A)True
B)False
Q3) Compute Dodger's accumulated earnings tax, assuming that it had accumulated $2 million after-tax income in prior years.
A) $100,000
B) $400,000
C) $50,000
D) $0
Q4) Typical family-owned businesses are operated as passthrough entities.
A)True
B)False
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Page 14
Chapter 13: Jurisdictional Issues in Business Taxation
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Sample Questions
Q1) Which of the following statements about the foreign tax credit is true?
A) The foreign tax credit allows U.S. companies to defer U.S. tax on foreign source income.
B) The foreign tax credit is available to foreign corporations doing business in the U.S.
C) The foreign tax credit is allowed for all types of foreign taxes.
D) By permitting a foreign tax credit, the U.S. relinquishes its taxing jurisdiction on foreign source income earned by U.S. corporations to the extent that income is taxed by a foreign jurisdiction.
Q2) The foreign subsidiaries of a U.S. corporation cannot be included in a U.S. consolidated tax return.
A)True
B)False
Q3) The federal income tax deduction allowed for state income taxes paid decreases the cost of the state taxes.
A)True
B)False
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15
Chapter 14: The Individual Tax Formula
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Sample Questions
Q1) Only natural and adopted children or stepchildren can be a qualifying child for tax purposes.
A)True
B)False
Q2) Individual taxpayers can obtain an automatic extension of time to file a calendar year Form 1040 until October 15 of the following year.
A)True
B)False
Q3) A taxpayer with a non-child dependent may be eligible for the full $2,000 child tax credit provided the taxpayer's AGI does not exceed the phase-out thresholds.
A)True
B)False
Q4) The unextended due date for the individual tax return (Form 1040) is the 15th day of the third month following the close of the taxable year.
A)True
B)False
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Page 16
Chapter 15: Compensation and Retirement Planning
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Sample Questions
Q1) Which of the following statements concerning qualified retirement plans is false?
A) Employer contributions to the plan are not included in the employees' gross income.
B) The plan is tax-exempt so that earnings can accumulate on a before-tax basis.
C) Employer contributions are deductible in the year of payment.
D) None of the above is false.
Q2) Knox, age 34 and single, has $127,800 AGI, $108,200 of which is compensation income. Compute her maximum contribution to her Roth IRA.
A) $0
B) $2,640
C) $2,860
D) $5,500
Q3) Section 401(k) plans allow employees to contribute a portion of their current wages or salary to a tax-exempt retirement account. However, the contributed portion is still taxable compensation to the employee.
A)True
B)False
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Chapter 16: Investment and Personal Financial Planning
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Sample Questions
Q1) Which of the following statements about investment property is false?
A) The term securities includes corporate stock, certificates of deposit, notes, bonds, and other debt instruments.
B) Interest and dividends are taxed at the same rate as long-term capital gain.
C) Interest on private activity bonds issued by a state or local government is excluded from ordinary income.
D) A mutual fund is a diversified portfolio of securities owned and managed by a regulated investment company.
Q2) Mr Johnson borrowed money to buy Chicago municipal bonds. This year, he paid $2,000 interest on his loan and earned $3,500 interest income from the bonds. None of the interest expense is deductible.
A)True
B)False
Q3) Mr Adams paid $53,500 in premiums on a whole life insurance policy. When he canceled the policy, he received its cash surrender value of $61,600. He must recognize $61,600 income as a result of the cancellation.
A)True
B)False
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Page 18
Chapter 17: Tax Consequences of Personal Activities
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Q1) Mr and Mrs Trent divorced last year. Pursuant to the divorce, Mr Trent transferred marketable securities (FMV $100,000; basis $67,000) to Mrs Trent. This year, Mrs Trent sold the securities for $112,000. Which of the following statements is true?
A) Mrs Trent recognized a $45,000 gain on sale this year.
B) Mrs Trent recognized $100,000 income last year.
C) Mrs Trent recognized a $12,000 gain on sale this year.
D) Mrs Trent recognized no income last year and no gain on sale this year.
Q2) Mr Lightfoot owns three mortgaged residences that he occupies at different times of the year. He can treat the interest paid on only one mortgage as qualified residence interest.
A)True
B)False
Q3) For federal income tax purposes, a taxpayer may deduct state and federal employment taxes ($10,000 maximum) as itemized deductions.
A)True
B)False
Q4) Losses realized on the sale of personal use assets are deductible.
A)True
B)False
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Chapter 18: The Tax Compliance Process
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Sample Questions
Q1) An individual who didn't graduate from high school has less exposure to a negligence penalty from the IRS than a college graduate.
A)True
B)False
Q2) The revenue agent who audited Mr and Mrs Vento's Form 1040 assessed a $49,200 tax deficiency. The Ventos strongly disagree with the result of the audit. What is their first step in contesting the result?
A) They may request that a different revenue agent conduct a second audit.
B) They must appeal the result of the audit to the regional Appeals Office of the IRS.
C) They must pay the deficiency and sue the federal government for a refund.
D) They must file a petition with the U.S. Tax Court.
Q3) Macy filed her 2017 tax return on its extended due date of October 17, 2018. The IRS has until December 31, 2020, to audit this return.
A)True
B)False
Q4) Only the government may appeal a tax case to the U.S. Supreme Court.
A)True
B)False
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Page 20