Tax Planning for Investment
Study Guide Questions
Course Introduction
Tax Planning for Investment explores the principles and strategies utilized to minimize tax liabilities and maximize after-tax returns on personal and business investments. The course covers relevant tax laws, investment vehicles, and the impact of taxation on investment decision-making. Students will examine topics such as capital gains, dividends, retirement accounts, tax-deferred investments, and tax-advantaged plans. Through case studies and practical exercises, the course focuses on developing effective tax planning approaches in alignment with legal and ethical standards, equipping students with the knowledge to strategically integrate tax considerations into financial and investment planning.
Recommended Textbook Principles of Taxation for Business and Investment Planning 2019 22nd Edition by Sally Jones
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18 Chapters
1798 Verified Questions
1798 Flashcards
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Chapter 1: Taxes and Taxing Jurisdictions
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Sample Questions
Q1) Which tax raises the most revenue for the federal government?
A) Corporate income tax
B) Individual income tax
C) Excise taxes
D) Transfer taxes
Answer: B
Q2) Payment of a tax entitles the payer to a specific good or service from the government.
A)True
B)False
Answer: False
Q3) The property tax on a rental house owned by Mr Janey increased by $1,200 this year. Mr Janey increased the monthly rent charged to his tenant, Ms. Lacey, by $45. Who bears the incidence of the property tax increase?
A) Mr. Janey
B) Ms. Lacey
C) Both Mr. Janey and Ms. Lacey
D) Neither Mr. Janey nor Ms. Lacey
Answer: C
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Page 3
Chapter 2: Policy Standards for a Good Tax
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Sample Questions
Q1) Which of the following statements does not describe the classical standard of tax efficiency?
A) An efficient tax is a neutral factor in a free market economy.
B) An efficient tax does not change taxpayer behavior.
C) An efficient tax encourages full employment.
D) An efficient tax favors a laissez-faire economy policy.
Answer: C
Q2) Jurisdiction M imposes an individual income tax based on the following schedule. Rate \(\quad\)\(\quad\)Income bracket
5% \(\quad\)\(\quad\) \(\quad\) $-0- to $50,000 + 8% \(\quad\)\(\quad\)\(\quad\)$50,001 to $200,000 + 12% \(\quad\)\(\quad\) $200,001 and above
Which type of rate structure does this tax use?
A) Proportionate
B) Regressive
C) Progressive
D) Multi-bracket
Answer: C
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Chapter 3: Taxes as Transaction Costs
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Sample Questions
Q1) Borden Company has the choice between two investments. Investment 1 will generate a $27,000 deductible loss this year (year 0), $15,000 taxable income in year 1, and $60,000 taxable income in year 2. Investment 2 will generate $16,000 taxable income in years 0, 1, and 2. Assume that income and loss reflect before-tax cash flow for Borden. Use Appendix A to determine which opportunity Borden should choose if it has a 35% marginal tax rate and uses a 7% discount rate to compute NPV?
Answer: Investment 1 has a $25,613 NPV ($17,550 after-tax cash outflow for year 0 [$27,000 loss + $9,450 tax savings from loss deduction] + $9,116 discounted after-tax cash flow for year 1 [$9,750 × 0.935] + $34,047 discounted after-tax cash flow for year 2 [$39,000 × 0.873]). Opportunity 2 has a $29,203 NPV ($10,400 after-tax cash flow for year 0 + $9,724 discounted after-tax cash flow for year 1[$10,400 × 0.935] + $9,079 discounted after-tax cash flow for year 2[$10,400 × 0.873]). Therefore, Borden should choose Investment 2.
Q2) The tax cost of a transaction represents a cash inflow. A)True B)False Answer: False
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Page 5
Chapter 4: Maxims of Income Tax Planning
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Sample Questions
Q1) The 15% preferential tax rate on capital gains has the same value to every individual taxpayer.
A)True
B)False
Q2) Hilex Inc. structures a transaction to shift income from its California office to its Oregon office. This tax planning strategy may be taking advantage of the:
A) Character variable
B) Time period variable
C) Entity variable
D) Jurisdiction variable
Q3) According to the assignment of income doctrine, income must be taxed to the person receiving the cash from an income-generating transaction.
A)True
B)False
Q4) Municipal bond investments bear less implicit tax than investments in taxable corporate bonds.
A)True
B)False
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Chapter 5: Tax Research
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Sample Questions
Q1) A Citator may be used to determine the status of tax judicial decisions, revenue rulings, and revenue procedures.
A)True
B)False
Q2) Editorial explanations found within a tax service are a type of primary authority.
A)True
B)False
Q3) Private letter rulings are authoritative only for the specific taxpayer to whom they are issued and cannot be relied on as authority by any other taxpayer.
A)True
B)False
Q4) The advantages of electronic tax research libraries do not include:
A) The ease with which such libraries can be updated for new developments.
B) Portability.
C) Speed of access and search.
D) All of the above are advantages of electronic tax research libraries.
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Chapter 6: Taxable Income from Business Operations
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Sample Questions
Q1) Taxpayers may adopt the cash receipts and disbursements method, the accrual method, or a hybrid method of accounting for tax purposes.
A)True
B)False
Q2) Which of the following businesses is prohibited from using the cash receipts and disbursement method of accounting for tax purposes?
A) Partnership with two individual partners with $9 million average annual gross receipts
B) Personal service corporation with $8 million average annual gross receipts
C) Corporation with $3 million average annual gross receipts
D) None of the businesses are prohibited from using the cash method
Q3) Jackey Company, a calendar year, accrual basis taxpayer, did not pay the $44,200 December rent on its commercial office space until January 8. As result, Jackey's accountant made a routine year-end accrual of $44,200 rent expense. Which of the following statements is true?
A) Jackey can deduct the $44,200 accrued rent expense.
B) Jackey can deduct the $44,200 expense in the year of payment.
C) The accrued rent expense results in a permanent book/tax difference.
D) The accrued rent expense results in a temporary book/tax difference.
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8
Chapter 7: Property Acquisitions and Cost Recovery
Deductions
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Sample Questions
Q1) In an inflationary economy, the use of FIFO maximizes the cost of goods sold and minimizes the cost of ending inventory.
A)True
B)False
Q2) Maxcom Inc. purchased 15 passenger automobiles for use by its sales force. Which of the following statements is true?
A) Maxcom must use the straight-line method to depreciate the passenger automobiles for tax purposes.
B) Maxcom's annual tax depreciation on the passenger automobiles may be limited to an amount less than MACRS depreciation.
C) Maxcom's annual tax depreciation on the passenger automobiles is computed under MACRS.
D) Even though Maxcom purchased the automobiles for business use, Maxcom is not allowed any tax depreciation for the automobiles.
Q3) The after-tax cost of an expenditure is minimized when the expenditure is deductible in the current year.
A)True
B)False
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Chapter 8: Property Dispositions
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Sample Questions
Q1) Four years ago, Mrs Beights purchased marketable securities for $75,000 cash. At the end of the current year, the FMV of the securities had plummeted to $4,000. Mrs Beights may elect to recognize her $71,000 loss this year, even though she still owns the securities.
A)True
B)False
Q2) Gupta Company made the following sales of capital assets this year. What is the effect of the three sales on Gupta's taxable income?
A) $700 increase
B) $12,900 increase
C) No effect
D) None of the choices are correct
Q3) Mrs Tinker paid $78,400 to purchase 15,000 shares of HiFli common stock in 2007. This year, HiFli declared bankruptcy and announced that its stock has no value. What is the tax consequence to Mrs Tinker of this bad news?
A) $78,400 ordinary abandonment loss
B) $78,400 capital loss
C) No loss recognition until Mrs Tinker actually disposes of the stock
D) None of the above
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Page 10
Chapter 9: Nontaxable Exchanges
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Sample Questions
Q1) A taxpayer who exchanges property for an interest in a partnership never recognizes gain or loss on the exchange.
A)True
B)False
Q2) Teco Inc. and MW Company exchanged like-kind assets. Teco's asset had an $80,000 FMV and $53,900 adjusted tax basis, and MW's asset had an $87,500 FMV and a $28,100 adjusted tax basis. Teco paid $7,500 cash to MW as part of the exchange. Which of the following statements is false?
A) Teco's realized gain is $26,100 and recognized gain is -0-.
B) MW's realized gain is $59,400 and recognized gain is $7,500.
C) Teco's basis in its newly acquired asset is $61,400.
D) MW's basis in its newly acquired asset is $35,600.
Q3) V&P Company exchanged unencumbered investment land for farmland subject to a $200,000 mortgage. If V&P realized a $168,000 gain on the exchange, it must recognize the entire gain.
A)True B)False
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Page 11
Chapter 10: Sole Proprietorships
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Sample Questions
Q1) Haddie's Hats is a regular corporation. The business must file an income tax return each year to report its taxable income or loss and pay any related taxes.
A)True
B)False
Q2) During 2018, Scott Howell received a salary of $135,000. The social security base amount for 2018 was $128,400. How much payroll tax should have been withheld from Scott's salary for 2018?
A) $0
B) $10,328
C) $9,823
D) $9,919
Q3) The shareholders of an S corporation must pay self-employment tax on their share of the corporation's ordinary income.
A)True
B)False
Q4) Corporations cannot be shareholders in an S corporation.
A)True
B)False
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Page 12
Chapter 11: The Corporate Taxpayer
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Sample Questions
Q1) For distributions prior to 2018, dividends-received deductions generally are not allowed for dividends from foreign corporations.
A)True
B)False
Q2) Honu, Inc. has book income of $1,200,000. Book income includes $380,000 income tax expense, $10,000 of municipal bond interest income, and $150,000 of business meals expense. Based only on these items, compute Honu's taxable income.
A) $1,580,000
B) $1,665,000
C) $1,720,000
D) $1,645,000
Q3) Corporations report their taxable income and calculate the federal income tax on Form 1040.
A)True
B)False
Q4) Walker Inc. has accumulated minimum tax credits of $740,000 from tax years prior to 2018. Below are Walker's regular tax before credits for 2018 through 2021.
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13
Chapter 12: The Choice of Business Entity
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Sample Questions
Q1) One disadvantage of the creation of a family-owned entity is that there is dilution of control with respect to the original business owners.
A)True
B)False
Q2) Compute Dodger's accumulated earnings tax, assuming that it had accumulated $130,000 after-tax income in prior years.
A) $0
B) $100,000
C) $76,000
D) $50,000
Q3) Which of the following entities does not provide all the owners with limited liability for debts incurred by the entity?
A) C corporation
B) S corporation
C) Limited partnership
D) LLC
Q4) Typical family-owned businesses are operated as passthrough entities.
A)True
B)False
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Chapter 13: Jurisdictional Issues in Business Taxation
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Sample Questions
Q1) According to Public Law 86-272, the sale of tangible goods to residents of a state is not sufficient to establish nexus in that state.
A)True
B)False
Q2) In the United States, corporations are subject only to taxes imposed by the federal government.
A)True
B)False
Q3) A corporation is usually subject to tax by any state in which it engages in any business transactions.
A)True
B)False
Q4) S. parent corporation that receives a dividend from a wholly-owned foreign subsidiary that pays a 45% income tax to its home country typically does not owe any U.S. tax on the dividend.
A)True
B)False
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Chapter 14: The Individual Tax Formula
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Sample Questions
Q1) Mr and Mrs Kline file a joint return on which they claim the standard deduction. If the taxable income on their return is $35,000, they are not paying a marriage penalty.
A)True
B)False
Q2) 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
Q3) Married individuals who elect to file separate tax returns may use the single rates to compute their tax.
A)True
B)False
Q4) Adjusted gross income equals total income less itemized deductions.
A)True
B)False
Q5) The Section 199A deduction always has the impact of lowering taxable income.
A)True B)False
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Chapter 15: Compensation and Retirement Planning
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Sample Questions
Q1) Self-employed individuals are allowed to deduct the cost of health insurance for themselves and their families only as an itemized deduction.
A)True
B)False
Q2) Reimbursed employment-related business expenses have no net effect on the employee's taxable income.
A)True B)False
Q3) Employees who save for retirement through an employer-sponsored qualified plan never include the earnings on their savings in gross income.
A)True
B)False
Q4) The IRS is less likely to raise the issue of reasonable compensation during the audit of a publicly held corporation than a closely held corporation.
A)True B)False
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Page 17
Chapter 16: Investment and Personal Financial Planning
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Sample Questions
Q1) Which of the following statements about the individual capital gains and losses is false?
A) Gain on sale of Section 1231 depreciable real property is taxed at a 25% maximum rate.
B) Short-term capital gains are taxed as ordinary income.
C) Capital losses are deductible only against capital gains.
D) Nondeductible capital losses are carried forward for deduction against future capital gains.
Q2) Mr and Mrs Golding own 13,850 shares in PTJ mutual fund. This year, they received a $6,390 cash distribution from PTJ. Which of the following statements is false?
A) Some or all of the distribution may be a capital gain distribution.
B) Some or all of the distribution may be a qualified dividend.
C) Some or all of the distribution may be ordinary income.
D) None of the above is false.
Q3) Revenue generated by the unearned income Medicare contribution tax is earmarked for the Medicare trust fund.
A)True
B)False
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Chapter 17: Tax Consequences of Personal Activities
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Sample Questions
Q1) The federal income tax system provides incentives for individual taxpayers to meet their housing needs by purchasing instead of renting a home.
A)True
B)False
Q2) Unemployment benefits are excluded from gross income.
A)True
B)False
Q3) Ruang, a single taxpayer, purchased her principal residence on August 19, 2018 and financed the purchase with a mortgage secured by the residence. In 2018, the average balance of the mortgage was $817,000, and Ms Ruang paid $35,000 of mortgage interest. How much of this interest is an itemized deduction?
A) $0
B) $20,270
C) $32,130
D) $35,000
Q4) A nondeductible charitable contribution may be carried forward five years.
A)True
B)False
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Chapter 18: The Tax Compliance Process
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Sample Questions
Q1) Linney Corporation, which uses a June 30 fiscal year end for tax purposes, requested an automatic six-month extension of time to file its return for FYE June 30, 2018. It filed the return on February 18, 2019. The revenue agent who examined the return suspects that Linney may have substantially underreported income for the year. Which of the following is false?
A) If the underreporting of income constitutes fraud, there is no statute of limitations, and the IRS can assess additional tax at any time.
B) If the amount of unreported income exceeds 25% of the gross income reported on the return, the IRS has until February 18, 2025, to assess additional tax.
C) If the amount of unreported income is less than 25% of the gross income reported on the return and the return is not fraudulent, the IRS has until December 31, 2021, to assess additional tax.
D) None of the above is false.
Q2) If a taxpayer has insufficient financial means to pay a deficiency, the IRS may make an offer in compromise to settle for a lesser amount.
A)True B)False
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