Taxation for Accountants Exam Review
Course Introduction
This course explores the fundamental principles and practices of taxation as they apply to individuals and businesses, with a focus on the accountants role in tax planning, compliance, and reporting. Students will examine various types of taxes, including income, sales, and payroll taxes, and gain an understanding of current tax laws, regulations, and ethical considerations. Through case studies and real-world scenarios, the course emphasizes the preparation and analysis of tax returns, tax research methodologies, and effective communication with clients and tax authorities. This foundation equips aspiring accountants with the skills needed to navigate the complexities of the modern tax environment.
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) Which of the following characterizes a good tax base?
A) The base can be easily expressed in monetary terms.
B) Taxpayers cannot easily avoid or conceal the base.
C) Taxpayers cannot easily move the base from one jurisdiction to another.
D) All of the above characterize a good tax base.
Answer: D
Q2) Which of the following is/are not a primary source of authority for the tax law?
A) A revenue ruling published by the Internal Revenue Service
B) Section 162 of the Internal Revenue Code
C) Treasury Reg. §1.351-2
D) All of the above are primary sources of authority
Answer: D
Q3) Which of the following is an earmarked tax?
A) A tax imposed on the purchase of specific items such as liquor or cigarettes
B) A tax that generates revenues that the government can spend only to build more National Parks
C) A tax imposed only on individuals who earn more than $1 million annually
D) A tax that generates revenues that the government can spend for any purpose
Answer: B
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Page 3
Chapter 2: Policy Standards for a Good Tax
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Q1) Jurisdiction M imposes an individual income tax based on the following schedule. Rate\(\quad\)\(\quad\)\(\quad\)\(\quad\) Income bracket
5% \(\quad\)\(\quad\)\(\quad\)\(\quad\)\(\quad\)$-0- to $50,000 + 8% \(\quad\)\(\quad\)\(\quad\)\(\quad\) $50,001 to $200,000 + 12% \(\quad\)\(\quad\)\(\quad\)\(\quad\)$200,001 and above
Which of the following statements is true?
A) The schedule provides no information as to whether Jurisdiction M's tax is horizontally equitable.
B) Jurisdiction M's tax is vertically equitable.
C) Jurisdiction M's tax is vertically equitable only for individuals with $50,000 or less taxable income.
D) Both "The schedule provides no information as to whether Jurisdiction M's tax is horizontally equitable" and "Jurisdiction M's tax is vertically equitable" are true.
Answer: D
Q2) The federal government is not required to pay interest on the national debt.
A)True
B)False
Answer: False
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Page 4
Chapter 3: Taxes as Transaction Costs
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Q1) 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
Q2) An increase in the risk associated with a future stream of cash should result in an increase in the discount rate used in the present value calculation.
A)True
B)False
Answer: True
Q3) The IRS scrutinizes related party transactions more carefully than transactions occurring in a public market.
A)True
B)False
Answer: True
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Chapter 4: Maxims of Income Tax Planning
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Q1) Mrs Stout has a $35,000 capital gain eligible for a 28% preferential tax rate. Which of the following statements is false?
A) If Mrs Stout's regular marginal tax rate is 22%, she can elect to recharacterize the capital gain as ordinary income.
B) If Mrs Stout's regular marginal tax rate is 24%, the preferential tax rate has no value to her.
C) If Mrs Stout's regular marginal tax rate is 35%, the preferential tax rate saves her $2,450 in tax.
D) None of the above is false.
Q2) Elton Company plans to build a new facility to manufacture backpacks. Elton sells its backpacks across the country for $300 per pack. It could locate the plan in state A, which levies a 5 percent tax on business income. The estimated manufacturing cost per pack in state A would be $120. Alternatively, Elton could locate the plan in state B, which levies a 3 percent tax on business income. The estimated manufacturing cost in state B is $126 per pack. In which state should Elton locate its plant? Provide calculations to support your conclusion.
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6
Chapter 5: Tax Research
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Sample
Questions
Q1) Alex inherited an antique diamond bracelet from her grandmother. She is thinking of selling the bracelet to raise cash for her college tuition and wonders about the tax consequences of such a sale. If you were to research this question using a keyword search in an electronic library, what keywords would you use? Propose three distinct keyword searches.
Q2) Editorial explanations found within a tax service are a type of primary authority.
A)True
B)False
Q3) When performing step two of the tax research process:
A) The identification of tax issues precedes the formulation of research questions.
B) Research questions should be as broadly stated as possible.
C) Each tax issue is always associated with a single research question.
D) The order in which research questions are addressed is irrelevant.
Q4) Which of the following is not a primary authority?
A) Internal Revenue Code
B) Treasury regulations
C) Revenue Procedure
D) Tax textbook
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Chapter 6: Taxable Income from Business Operations
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Sample Questions
Q1) A taxpayer that operates more than one business may use a different method of accounting for each business.
A)True
B)False
Q2) Mundo Company is a calendar year, accrual basis taxpayer. In June 2018, Mundo received a $72,000 cash payment from a tenant who leases space in a commercial office building that Mundo owns. The payment was rent for the 24-month period beginning on July 1, 2018. As a result of the payment, Mundo should report:
A) $6,000 book income and taxable income
B) $72,000 book income and taxable income
C) No book income and $72,000 taxable income
D) None of the above
Q3) Ladow Inc. incurred a $32,000 net operating loss in 2018. If Ladow's 2019 taxable income was $38,000 before NOLs, compute Ladow's 2019 NOL deduction.
A) $0
B) $25,600
C) $30,400
D) $32,000
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Chapter 7: Property Acquisitions and Cost Recovery
Deductions
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Sample Questions
Q1) Pyle Inc., a calendar year taxpayer, generated over $10 million taxable income in 2018. Pyle made one asset purchase: new heating and air conditioning system for existing nonresidential real property at a cost of $1,322,000. The system has a 39-year recovery period and was placed in service on February 9. Assuming that Pyle made the Section 179 election with respect to the acquisition, compute Pyle's 2018 cost recovery deduction.
A) $1,000,000
B) $1,007,226
C) $1,008,256
D) $1,322,000
Q2) Norwell Company purchased $1,413,200 of new business equipment on July 10, 2018. This was Norwell's only asset purchase for its 2018 taxable year. Compute Norwell's total tax depreciation deduction for this 7-year recovery property.
A) $1,413,200
B) $201,946
C) $1,021,848
D) $1,026,134
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Page 9
Chapter 8: Property Dispositions
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Sample Questions
Q1) Dolzer Inc. sold a business asset with a $474,000 adjusted book and tax basis for $775,000. The purchaser paid $100,000 in cash and gave Dolzer a note for the $675,000 balance of the price. Dolzer will not receive a payment on the note until next year. Assuming that Dolzer uses the installment sale method, compute Dolzer's book and tax gain in the year of sale.
A) Book gain $301,000; tax gain $100,000
B) Book and tax gain $38,839
C) Book gain $301,000; tax gain $38,839
D) None of the above
Q2) Mr Quick sold marketable securities with a $112,900 tax basis to his 100% owned corporation for $95,000 cash. Which of the following statements is true?
A) If Mr. Quick can offer evidence that the FMV of the securities is $95,000, he can recognize his $17,900 realized loss.
B) If Mr. Quick and his corporation negotiated the terms of the sale at arm's length, Mr. Quick can recognize his $17,900 realized loss.
C) The corporation's tax basis in the securities is $112,900.
D) None of the above is true.
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Page 10
Chapter 9: Nontaxable Exchanges
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Sample Questions
Q1) 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
Q2) Carman wishes to exchange 10 acres of Iowa farm land in a like-kind exchange. Which of the following properties will qualify for like-kind exchange treatment?
A) New York office building
B) Tractor
C) 35 hogs raised for slaughter
D) Personal residence in Des Moines which Carman would use as her personal residence
Q3) Determine Mrs Brinkley's realized and recognized gain on the exchange and the tax basis in her 4,200 M&W shares.
A) $228,500 gain realized and recognized; $340,200 basis in M&W shares
B) $228,500 gain realized and recognized; $111,700 basis in M&W shares
C) $228,500 gain realized and no gain recognized; $111,700 basis in M&W shares
D) None of the above
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Chapter 10: Sole Proprietorships
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Sample Questions
Q1) George and Martha formed a partnership by each contributing $5,000 cash. The partnership then borrowed another $60,000 to finance its operations. If George and Martha are both general partners, compute each partner's initial basis in his/her partnership interest.
A) $5,000
B) $65,000
C) $35,000
D) $0
Q2) In 2018, William Wallace's sole proprietorship, Western Wear Apparel, generated $140,769 Schedule C net profit ($130,000 net earnings from self-employment). In addition, William recognized a $25,000 Section 1231 gain on a sale of land formerly used by the business as a parking lot. The business checking account earned $250 interest income. William qualifies for the Section 199A deduction without regard to the wage limitation.
a. Which of these income items are subject to self-employment tax?
b. Compute Williams' 2018 self-employment tax, assuming he has no other earned income.
c. Compute the total increase in William's 2018 taxable income attributable to his business.
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Page 12
Chapter 11: The Corporate Taxpayer
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Sample Questions
Q1) The Schedule M-3 reconciliation requires less detailed information than the Schedule M-1 reconciliation.
A)True
B)False
Q2) Assuming that the corporation has a 21% MTR, which of the following statements is true?
A) Jacky, Inc. borrowed $500,000 and paid interest of $48,000; the after-tax cost of the interest was $37,920.
B) Jacky, Inc issued 1,000 shares of 7%, $100 par preferred stock for $100,000. The after-tax cost of the $7,000 dividend paid was $5,530.
C) Jacky, Inc issued 1,000 shares of 7%, $100 par preferred stock for $100. The after-tax cost of the $7,000 dividend paid was $1,470.
D) Jacky, Inc. borrowed $500,000 and paid interest of $48,000; the after-tax cost of the interest was $10,080.
Q3) After 2017, a 100% dividends-received deduction is permitted for any dividends received from a foreign corporation.
A)True
B)False
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Chapter 12: The Choice of Business Entity
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Q1) Which of the following statements regarding alternative business forms is true?
A) If an S corporation's election terminates, the corporation is forced to liquidate.
B) Some states treat S corporations as taxable corporations for purposes of corporate franchise taxes.
C) Generally, the transfer of property to a new partnership in exchange for a partnership interest is a taxable event.
D) The owners of a new business should be indifferent between operating as an S corporation and a partnership.
Q2) After-tax cash flow from a passthrough entity will always exceed after-tax cash flow from a taxable corporation.
A)True
B)False
Q3) The IRS may conclude that a CEO/shareholder of a closely held corporation has been paid a nondeductible constructive dividend rather than a deductible salary.
A)True
B)False
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Chapter 13: Jurisdictional Issues in Business Taxation
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Sample Questions
Q1) Compute its U.S. income tax liability.
A) $840,000
B) $737,625
C) $567,000
D) $170,625
Q2) Which of the following statements about subpart F income is false?
A) Subpart F income is constructively repatriated to U.S. shareholders of a controlled foreign corporation (CFC) when earned.
B) Subpart F income has no commercial or economic connection to the CFC's home country.
C) Subpart F income includes income from the manufacture of goods in the CFC's home country.
D) Subpart F income includes income from the purchase of goods from a related party that are subsequently sold to another related party for use outside the CFC's home country.
Q3) Koscil Inc. had the following taxable income. Corporate tax rate schedule.
U.S. source income \(\quad\)\(\quad\)\(\quad\)$ 1,435,000
Foreign source income \(\quad\)\(\quad\)\(\quad\)850,000
Taxable income \(\quad\)\(\quad\)\(\quad\)\(\quad\) $ 2,285,000
Koscil paid $315,000 foreign income tax. Compute its U.S. income tax liability.
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Chapter 14: The Individual Tax Formula
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Q1) Which of the following statements regarding a qualifying child is false?
A) The child must have been alive at least 180 days during the tax year.
B) The child must be a U.S. citizen or resident of the United States, Canada, or Mexico.
C) The child must not have provided more than 50% of his or her own financial support during the year.
D) The child must not have filed a joint return with a spouse unless the return was filed only as a refund claim.
Q2) Tamara and Todd Goble, ages 66 and 60, file a joint return. Todd is legally blind. Compute their standard deduction.
A) $21,400
B) $24,000
C) $25,300
D) $26,600
Q3) Every individual taxpayer is entitled to an AMT exemption, the amount of which varies with filing status.
A)True
B)False
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Page 16
Chapter 15: Compensation and Retirement Planning
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Sample Questions
Q1) Qualified withdrawals from both traditional and Roth IRAs are tax-exempt.
A)True
B)False
Q2) An S corporation generated $160,000 ordinary taxable income this year. The shareholders must pay both income and self-employment tax on their pro rata shares of this income.
A)True
B)False
Q3) Profit-sharing plans and employee stock ownership plans are examples of defined-benefit plans.
A)True
B)False
Q4) Which of the following statements regarding a Roth IRA is false?
A) Contributions to a Roth IRA are nondeductible.
B) A Roth IRA is tax exempt.
C) Individuals of any age can make tax-exempt withdrawals from a Roth IRA.
D) High-income individuals are not allowed to contribute directly to a Roth IRA.
Q5) Both traditional IRAs and Roth IRAs are tax-exempt accounts.
A)True
B)False
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Chapter 16: Investment and Personal Financial Planning
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Q1) 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.
Q2) The federal taxable estate of a decedent can exceed the value of the probate estate.
A)True
B)False
Q3) Lana owns 50 shares of stock qualifying as Section 1244 stock. If she sells the stock to George, he can also treat the stock as Section 1244 stock.
A)True
B)False
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Chapter 17: Tax Consequences of Personal Activities
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Q1) Mr Haugh owns a sporting goods store as a sole proprietorship. This year, he donated baseball equipment (bats, gloves, balls) to the local YMCA to use in their community sports programs. His cost basis in the inventory items was $45,700, and their retail value was $68,200. Which of the following statements about this donation is true?
A) Mr. Haugh must recognize $22,500 ordinary business income and is allowed a $68,200 business deduction.
B) Mr. Haugh must recognize $22,500 ordinary business income and is allowed a $68,200 charitable contribution deduction.
C) Mr. Haugh is allowed a $45,700 charitable contribution deduction.
D) Mr. Haugh is allowed a $68,200 charitable contribution deduction.
Q2) Which of the following tax payments is allowed as an itemized income tax deduction?
A) Federal gift tax
B) Payroll tax on wages paid to a housekeeper
C) Social Security tax withheld from salary
D) Local property tax on personal automobile
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Chapter 18: The Tax Compliance Process
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Q1) Mr and Mrs Nestor were assessed a $51,240 income tax deficiency. Which of the following statements is false?
A) If the Nestors don't have cash on hand to pay the deficiency, the IRS can't force them to sell assets to raise the cash.
B) If the Nestors don't have sufficient assets to pay the deficiency, the IRS may allow them to pay it off over time under an installment plan.
C) If the Nestors don't have sufficient assets to pay the deficiency, the IRS may negotiate an offer in compromise for a lesser payment.
D) Mr. and Mrs Nestor are jointly and severally liable for the tax deficiency because they both signed their tax return.
Q2) The fact that a taxpayer receives a refund check indicates that the IRS is satisfied with the accuracy of the taxpayer's return.
A)True
B)False
Q3) Only the government may appeal a tax case to the U.S. Supreme Court.
A)True
B)False
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