Taxation for Accountants Exam Preparation Guide
Course Introduction
This course provides accounting students with a comprehensive understanding of taxation principles, regulations, and compliance requirements as they pertain to individuals, corporations, and other business entities. Key topics include the objectives and structure of the tax system, calculation of taxable income, tax planning strategies, reporting obligations, and the impact of taxation on business decision-making. Through real-world case studies and practical exercises, students develop analytical and research skills necessary for interpreting tax laws and preparing tax returns, while also gaining awareness of ethical considerations and current issues in the field of taxation.
Recommended Textbook McGraw Hills Taxation of Individuals and Business Entities 7th Edition by Spilker
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2779 Verified Questions
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Chapter 1: An Introduction to Tax
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Sample Questions
Q1) The effective tax rate expresses the taxpayer's total tax as a percentage of the taxpayer's taxable and nontaxable income.
A)True
B)False
Answer: True
Q2) How much implicit tax would Curtis pay on the city of Athens bond?
A) $17,500
B) $1,400
C) $1,300
D) $5,000
E) None of these
Answer: D
Q3) A 1% charge imposed by a local government on football tickets sold is not considered a tax if all proceeds are earmarked to fund local schools.
A)True
B)False
Answer: False
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Chapter 2: Tax Compliance, the Irs, and Tax Authorities
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Sample Questions
Q1) If the President vetoes tax legislation, Congress:
A) cannot override the President's veto.
B) can override the President's veto with a 50 percent positive vote in the House and Senate.
C) can override the President's veto with a 2/3rd positive vote in the House and Senate.
D) can override the President's veto with a 75 percent positive vote in the House and Senate.
E) None of these.
Answer: C
Q2) Under the Statement on Standards for Tax Services, a CPA may recommend a tax return position if the position is frivolous and the position is not disclosed on the tax return.
A)True
B)False
Answer: False
Q3) Proposed and Temporary Regulations have the same authoritative weight. A)True
B)False
Answer: False
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Page 4
Chapter 3: Tax Planning Strategies and Related Limitations
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Sample Questions
Q1) The constructive receipt doctrine is more of an issue for cash basis taxpayers.
A)True
B)False
Answer: True
Q2) Danny argues that tax accountants suffer from one-mindedness in their attempts at tax planning (i.e., reducing taxes at all costs). Is Danny's view of tax planning correct - i.e., does he understand what the goal of tax planning is? Please elaborate.
Answer: Danny has an incomplete view of the goals of tax planning. In general terms, the goal of tax planning is to maximize the taxpayer's after-tax wealth while simultaneously achieving the taxpayer's nontax goals. Maximizing after-tax wealth is not necessarily the same as tax minimization. Specifically, maximizing after-tax wealth requires one to consider both the tax and nontax costs and benefits of alternative transactions, whereas tax minimization focuses solely on a single cost (i.e., taxes). Indeed, if the goal of tax planning were simply to minimize taxes, the simplest way to achieve this goal would be to earn no income at all.
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Chapter 4: Individual Income Tax Overview, Exemptions, and Filing Status
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Sample Questions
Q1) Lydia and John Wickham filed jointly in year 1. They divorced in year 2. In late year 2, the IRS discovered that the Wickham's underpaid their year 1 taxes by $2,000. Both Lydia and John worked in year 1 and received equal income but John had $2,000 less tax withheld than did Lydia. Who is legally liable for the tax underpayment?
A) Lydia.
B) John.
C) Both Lydia and John.
D) Neither Lydia nor John.
Q2) Joanna received $60,000 compensation from her employer, the value of her stock in ABC company appreciated by $5,000 during the year (but she did not sell any of the stock), she received $30,000 of life insurance proceeds from the death of her husband. What is the amount of Joanna's gross income from these items?
A) $60,000
B) $65,000
C) $95,000
D) $97,000
Q3) What is the couple's gross income?
Q4) What is the couple's adjusted gross income?
Page 6
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Chapter 5: Gross Income and Exclusions
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Sample Questions
Q1) This year Ed celebrated his 25th year as an employee of Designer Jeans Company. In recognition of his long and loyal service, the company awarded Ed a gold watch worth $250 and a $2,000 cash bonus. What amount must Ed include in his gross income?
A) $2,250
B) $2,000
C) $250
D) Zero if Ed offers to contribute his watch and bonus to a qualified charity
E) Zero - all employee awards are excluded from gross income
Q2) The exclusion ratio for a purchased annuity is the cost of the annuity divided by the interest rate.
A)True
B)False
Q3) Cyrus is a cash method taxpayer who reports on a calendar-year. Last year Cyrus received salary of $88,000 and at year-end his employer announced that Cyrus would receive an additional year-end bonus of $10,000 in cash and a new TV worth $2,000. Cyrus didn't receive his bonus check until January of this year and the TV didn't arrive until March of this year. Determine the amount Cyrus should include in his gross income for last year.
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Chapter 6: Individual Deductions
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Sample Questions
Q1) Madeoff donated stock (capital gain property) to a public charity. He purchased the stock 3 years ago for $100,000, and on the date of the gift, it had a fair market value of $200,000. What is his maximum charitable contribution deduction for the year if his AGI is $500,000 (before considering the itemized deduction phase-out)?
A) $100,000
B) $200,000
C) $150,000
D) $250,000
E) None of these
Q2) Which of the following is a true statement?
A) Taxpayers may only deduct interest on up to $1,500,000 of acquisition indebtedness.
B) Taxpayers may deduct interest on up to $1,000,000 of home-equity debt.
C) The deduction for investment interest expense is not subject to limitation.
D) Interest on home-equity debt up to $100,000 is deductible, even if the loan proceeds are used to buy a new car.
E) None of these is true.
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Chapter 7: Individual Income Tax Computation and Tax Credits
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Sample Questions
Q1) What happens if the taxpayer owes an underpayment penalty, but does not compute it on Form 2210?
A) Nothing, unless the taxpayer is audited
B) The taxpayer is immediately sent to the Tax Court
C) The IRS will compute and assess the penalty
D) The penalty is increased by five percentage points
Q2) To qualify for the earned income credit, the taxpayer must have a qualified dependent.
A)True
B)False
Q3) If both spouses of a married couple earn roughly equivalent wages, the couple is likely to pay a marriage penalty due to the nature of the tax rate schedules.
A)True
B)False
Q4) Sam is 30 years old. In 2014, he reported an AGI of $12,000, all from his job as a server at the local café. He is single and has no dependents. What amount of earned income credit may he claim in 2014?
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Chapter 8: Business Income, Deductions, and Accounting Methods
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Sample Questions
Q1) Although expenses associated with illegal activities are not deductible, political contributions can be deducted as long as the donation is not made to a candidate for public office.
A)True
B)False
Q2) Which of the following expenditures is most likely to be deductible for a construction business?
A) A fine for a zoning violation.
B) A tax underpayment penalty.
C) An "under the table" payment to a government representative to obtain a better price for raw materials.
D) A payment to a foreign official to expedite an application for a business permit.
E) An arm's length payment to a related party for emergency repairs of a sewage line.
Q3) Only half the cost of a business meal is deductible even if the meal is associated with the active conduct of business.
A)True
B)False
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Page 10
Chapter 9: Property Acquisition and Cost Recovery
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Sample Questions
Q1) If a taxpayer places only one asset (a building) in service during the fourth quarter of the year, the mid-quarter convention must be used.
A)True
B)False
Q2) Simmons LLC purchased an office building and land several years ago for $250,000. The purchase price was allocated as follows: $200,000 to the building and $50,000 to the land. The property was placed in service on October 2. If the property is disposed of on February 27 during the 10th year, calculate Simmons' maximum depreciation in the 10th year:
A) $641
B) $909
C) $5,128
D) $7,346
E) None of these
Q3) During April of the current year, Ronen purchased a warehouse that he used for business purposes. The basis was $1,600,000. Calculate the maximum depreciation expense during the current year.
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Chapter 10: Property Dispositions
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Sample Questions
Q1) Arlington LLC traded machinery used in its business to a machinery dealer for some new machinery. Arlington originally purchased the machinery for $60,000 and it had an adjusted basis of $28,000 at the time of the exchange. The new machinery had a fair market value of $35,000. Arlington also received $2,000 of office equipment in the transaction. What is Arlington's gain or loss recognized on the exchange?
A) $0.
B) $2,000.
C) $7,000.
D) $9,000.
E) None of these.
Q2) The sale of land held for investment results in the following type of gain or loss?
A) Capital.
B) Ordinary.
C) §1231.
D) §1245.
E) None of these.
Q3) Explain whether the sale of a machine used in a trade or business that is sold at a loss generates an ordinary or capital loss?
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Chapter 11: Investments
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Sample Questions
Q1) On January 1, 20X8, Jill contributed $18,000 of cash to the XYZ limited partnership for a 25 percent limited partnership interest. On April 6, 20X8, XYZ, limited partnership distributed $2,000 to Jill. For the year ended December 31, 20X8, Jill received the following income/loss allocations from her partnership investments: (1) XYZ, limited partnership allocated a $5,000 loss to Jill (2) ABC limited partnership allocated $2,300 of income to Jill. How much of the $5,000 loss from XYZ limited partnership can Jill deduct in 20X8?
Q2) In the current year, Norris, an individual, has $50,000 of ordinary income, a Net Short Term Capital Loss (NSTCL) of $10,000 and a Net Long Term Capital Gain (NLTCG) of $2,800. From his capital gains and losses, Norris reports:
A) an offset against ordinary income of $10,000
B) an offset against ordinary income of $3,000 and a NSTCL carryforward of $7,000
C) an offset against ordinary income of $2,800 and a NSTCL carryforward of $7,200
D) an offset against ordinary income of $3,000 and a NSTCL carryforward of $7,200
E) an offset against ordinary income of $3,000 and a NSTCL carryforward of $4,200
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Chapter 12: Compensation
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Sample Questions
Q1) Rick recently received 500 shares of restricted stock from his employer, Crazy Corporation, when the share price was $5 per share. Rick's restricted shares vested three years later when the market price was $12. Rick held the shares for a little more than a year and sold them when the market price was $15. What is the amount of Rick's income on the vesting date? Assuming a marginal tax rate of 30 percent, what is Rick's tax on the restricted stock?
Q2) Employees will always prefer to receive incentive stock options over nonqualified stock options.
A)True
B)False
Q3) Hazel received 20 NQOs (each option gives her the right to purchase 10 shares of stock for $7 per share) at the time she started working when the stock price was $14 per share. Now that the share price is $20 per share, she intends to exercise all of her options. If Hazel holds the shares for two years and sells them when the market price is $25, how much gain will Hazel recognize on the sale and how much tax will she pay assuming her marginal tax rate is 25 percent?
Q4) When stock options are exercised they are converted into actual employer stock. A)True B)False
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Chapter 13: Retirement Savings and Deferred Compensation
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Sample Questions
Q1) Taxpayers never pay tax on the earnings of a traditional 401(k) account.
A)True
B)False
Q2) In 2014, Tyson (age 22) earned $3,500 from his part-time job and he reported $15,000 of interest income (unearned income). Assuming he does not participate in an employer-sponsored plan, what is the maximum deductible IRA contribution Tyson can make in 2014?
Q3) Employers may choose whom they allow to participate and whom they do not allow to participate in their nonqualified deferred compensation plans.
A)True
B)False
Q4) Qualifying distributions from traditional IRAs are nontaxable while qualifying distributions from Roth IRAs are fully taxable as ordinary income.
A)True
B)False
Q5) High-income taxpayers are not allowed to receive the saver's credit.
A)True
B)False
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Chapter 14: Tax Consequences of Home Ownership
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Sample Questions
Q1) In 2012, Gabby purchased a new home for $500,000 by making a down payment of $200,000 and financing the remaining $300,000 with a loan, secured by the residence, at 6 percent. In 2014, Gabby made interest-only payments of $18,000 on the $300,000 loan. On January 1, 2014, Gabby executed two home equity loans (both secured by the home). The first was for $80,000 at an interest rate of 7 percent. The second home equity loan from a different bank was for $40,000 at an interest rate of 9 percent. In 2014, Gabby paid $5,600 of interest payments on the first home equity loan and $3,600 interest expense on the second. Gabby used the loan proceeds for purposes unrelated to the home. What is the maximum amount of interest expense Gabby can deduct on these loans as home related interest expense?
A) $18,000
B) $25,400
C) $25,905
D) $27,200
Q2) To be allowed to exclude gain on the sale of a principal residence, the taxpayer selling the home must be using the home as a principal residence at the time of the sale.
A)True
B)False
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Chapter 15: Entities Overview
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Sample Questions
Q1) Corporations are legally better suited for taking a business public compared with LLCs and general partnerships.
A)True
B)False
Q2) Entities taxed as partnerships can use special allocations to reward owners based on their responsibilities, contributions, and individual needs.
A)True B)False
Q3) C corporations and S corporations are separate taxpaying entities that pay tax on their own income.
A)True
B)False
Q4) All unincorporated entities are generally treated as flow-through entities for tax purposes.
A)True B)False
Q5) S corporations have more restrictive ownership requirements than other entities. A)True B)False
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Chapter 16: Corporate Operations
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Sample Questions
Q1) Taxable income of the most profitable corporations is subject to a flat 35% tax rate.
A)True
B)False
Q2) Which of the following describes the correct treatment of nonqualified stock options (NQOs) granted when ASC 718 (a codification of FAS 123R) did not apply?
A) Financial-no expense; tax-no deduction
B) Financial-no expense; tax-deduct bargain element at exercise
C) Financial-expense value over vesting period; tax-no deduction
D) Financial-expense value over vesting period; tax-deduct bargain element at exercise
Q3) Both Schedules M-1 and M-3 require taxpayers to identify book-tax differences as either temporary or permanent.
A)True
B)False
Q4) The tax rate for the corporate alternative minimum tax is a flat 26%.
A)True
B)False
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Chapter 17: Accounting for Income Taxes
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Q1) MAC, Inc. completed its first year of operations with a pretax loss of $300,000. The tax return showed a net operating loss of $500,000, which MAC will carry forward. The $200,000 book-tax difference results from excess tax depreciation over book depreciation. Management has determined that they should record a valuation allowance equal to the net deferred tax asset. Assuming a tax rate of 34%, prepare the journal entries to record the deferred tax provision and the valuation allowance.
Q2) ASC 740 deals with accounting for uncertain tax positions.
A)True
B)False
Q3) A valuation allowance is recorded against a deferred tax asset when:
A) It is probable that the deferred tax asset will not be realized in the future
B) It is more likely than not that the deferred tax asset will not be realized in the future
C) It is highly likely the deferred tax asset will not be realized in the future
D) It is remote the deferred tax asset will not be realized in the future
Q4) Publicly-traded companies usually file their financial statements before they file their federal income tax returns.
A)True
B)False
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Page 19
Chapter 18: Corporate Taxation: Nonliquidating Distributions
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Sample Questions
Q1) Cavalier Corporation had current and accumulated E&P of $500,000 at December 31 20X3. On December 31, the company made a distribution of land to its sole shareholder, Tom Jefferson. The land's fair market value was $200,000 and its tax and E&P basis to Cavalier was $50,000. The tax consequences of the distribution to Cavalier in 20X3 would be:
A) No gain recognized and a reduction in E&P of $200,000
B) $150,000 gain recognized and a reduction in E&P of $200,000
C) $150,000 gain recognized and a reduction in E&P of $50,000
D) No gain recognized and a reduction in E&P of $50,000
Q2) Pine Creek Company is owned equally by Bob and his sister Samantha, each of whom own 1,000 shares in the company. On December 31, 20X3, Pine Creek redeemed 200 of Samantha's shares for $5,000,000 in a transaction treated as an exchange by Samantha. Pine Creek has current E&P of $10,000,000 and accumulated E&P of $30,000,000 (computed without regard to the stock redemption). Assuming Pine Creek did not make any dividend distributions during 20X3, by what amount does the company reduce its E&P because of the redemption?
Q3) A stock redemption is always treated as a sale or exchange for tax purposes.
A)True B)False
Page 20
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Chapter 19: Corporate Formation, Reorganization, and Liquidation
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Q1) April transferred 100 percent of her stock in June Company to March Corporation in a taxable merger. In exchange she received stock in March with a fair market value of $400,000 plus $1,200,000 in cash. April's tax basis in the June stock was $2,000,000. What amount of loss does April recognize in the exchange and what is her basis in the March stock she receives?
Q2) A liquidated corporation always recognizes gain realized in a complete liquidation. A)True B)False
Q3) Billie transferred her 20 percent interest to Jean Company as part of a complete liquidation of the company. In the exchange, she received land with a fair market value of $200,000. Billie's basis in the Jean stock was $100,000. The land had a basis to Jean Company of $400,000. What amount of loss does Jean recognize in the exchange and what is Billie's basis in the land she receives? Billie is not considered a related party to Jean Company.
A) $200,000 loss recognized by Jean and a basis in the land of $200,000
B) $200,000 loss recognized by Jean and a basis in the land of $400,000
C) No loss recognized by Jean and a basis in the land of $200,000
D) No loss recognized by Jean and a basis in the land of $400,000
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Chapter 20: Forming and Operating Partnerships
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Sample Questions
Q1) Which of the following would not be classified as a separately-stated item?
A) Short-term capital gains
B) Charitable contributions
C) MACRS depreciation expense
D) Guaranteed payments
Q2) Guaranteed payments are included in the calculation of a partnership's ordinary business income (loss) and are also treated as separately-stated items.
A)True
B)False
Q3) Actual or deemed cash distributions in excess of a partner's outside basis are generally taxable as capital gains.
A)True
B)False
Q4) A general partner's share of ordinary business income is similar to investment income; thus, a general partner only includes their guaranteed payments as self-employment income.
A)True
B)False
Q5) What is the difference between a partner's tax basis and at-risk amount?
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Chapter 21: Dispositions of Partnership Interests and Partnership Distributions
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Q1) At the end of last year, Cynthia, a 20% partner in the five-person CYG partnership, has an outside basis of $30,000 including her $15,000 share of CYG debt. On January 1 of the current year, Cynthia sells her partnership interest to Roger for a cash payment of $22,500 and the assumption of her share of CYG's debt. CYG has no hot assets. What is the amount and character of Cynthia's recognized gain or loss on the sale?
A) $7,500 capital loss.
B) $7,500 ordinary loss.
C) $7,500 capital gain.
D) $7,500 ordinary income.
Q2) Cash distributions include decreases in a partner's share of partnership liabilities.
A)True
B)False
Q3) A partner will recognize a loss from a liquidating distribution when the distribution includes only cash, unrealized receivables, and inventory and the partner's outside basis is less than the sum of the bases of the distributed assets.
A)True
B)False
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Page 23
Chapter 22: S Corporations
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Q1) Bobby T (75% owner) would like to terminate the S corporation status for DJ, Inc. Dallas (5% owner) does not want to terminate the S corporation status. Bobby T can terminate the S status for DJ, Inc. without Dallas' consent.
A)True
B)False
Q2) C corporations that elect S corporation status and use the FIFO inventory method are subject to the FIFO recapture tax.
A)True
B)False
Q3) Which of the following is not a separately stated item for S corporations?
A) Dividends.
B) Interest income.
C) Charitable contributions.
D) Investment interest expense.
E) All of these are separately stated items.
Q4) Publicly traded corporations cannot be treated as S corporations.
A)True
B)False
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Page 24
Chapter 23: State and Local Taxes
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Q1) What was the Supreme Court's holding in Quill?
A) An out-of-state mail-order company did not have a sales tax collection responsibility because it lacked physical presence.
B) Reaffirmed that an out-of-state business must have physical presence in the state before the state may require the business to collect sales tax from in-state customers.
C) Spelled out four criteria for determining whether states may subject nondomiciliary companies to an income tax.
D) Defined solicitation for purposes of Public Law 86-272.
Q2) Which of the following is incorrect regarding nondomiciliary businesses?
A) Subject to tax only where nexus exists.
B) A business cannot be nondomiciliary where headquartered.
C) A business can be nondomiciliary in only one jurisdiction.
D) Subject to tax only where a sufficient connection exists.
Q3) Businesses must pay income tax in their state of commercial domicile.
A)True
B)False
Q4) List the steps necessary to determine an interstate businesses' state income tax liability.
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Page 25
Chapter 24: The Us Taxation of Multinational Transactions
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Q1) Under which of the following scenarios could Charles, a citizen of England, be eligible to claim the "closer connection" exception to the substantial presence test in 2014?
A) Charles spent 183 days in the United States in 2014 and has his tax home in England.
B) Charles spent 183 days in the United States in 2014 and has his tax home in the United States.
C) Charles spent 182 days in the United States in 2014 and has his tax home in England.
D) Charles spent 182 days in the United States in 2014 and has his tax home in the United States.
Q2) Natsumi is a citizen and resident of Japan. She has a full-time job in Japan and has lived there with her family for the past 20 years. In 2012, Natsumi came to the United States on business and stayed for 240 days. She came to the United States again on business in 2013 and stayed for 120 days. In 2014 she came back to the United States on business and stayed for 120 days. Does Natsumi meet the U.S. statutory definition of a resident alien in 2014 under the substantial presence test?
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Chapter 25: Transfer Taxes and Wealth Planning of the Cfa Institute
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Q1) A gratuitous transfer of cash to an individual who uses the cash to pay medical expenses is not subject to a gift tax.
A)True
B)False
Q2) This year Nicholas earned $500,000 and used it to purchase land in joint tenancy with a right of survivorship with Nevaeh. Has Nicholas made a taxable gift to Nevaeh and, if so, in what amount?
Q3) Which of the following is a true statement?
A) A fiduciary entity is a legal entity that takes possession of property for the benefit of a person.
B) An estate is a fiduciary that comes into existence upon a person's death to transfer the decedent's real and personal property.
C) A trust is also a fiduciary whose purpose is to hold and administer the corpus for other persons (beneficiaries).
D) An estate exists only temporarily, but a trust may have a prolonged or even indefinite existence.
E) All of these are true.
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