Taxation for Business Entities
Exam Answer Key
Course Introduction
This course explores the fundamental principles of taxation as they apply to various business entities, including corporations, partnerships, and limited liability companies. Students will learn about the federal tax structure, tax planning strategies, and compliance requirements pertinent to business operations. The curriculum covers topics such as entity formation, determination of taxable income, tax consequences of distributions and liquidations, and the interplay between entity and owner-level taxation. Emphasis is placed on applying tax law to real-world scenarios, analyzing tax implications for decision-making, and understanding current issues and changes in business taxation.
Recommended Textbook
Principles of Taxation for Business and Investment Planning 20th Edition by Sally Jones
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Chapter 1: Taxes and Taxing Jurisdictions
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Sample Questions
Q1) Forrest Township levies a tax on the assessed value of real property located within the town limits. The tax equals 1.4% of the value up to $300,000 plus 2% of any value in excess of $300,000. Mildred Payne owns real estate with a $983,500 assessed value. Compute her property tax.
Answer: Mildred's property tax is $17,870 ($4,200 [$300,000 * 1.4%] + $13,670 [$683,500 * 2%]).
Q2) Mrs. King is a U.S. citizen who permanently resides in South Africa. Which of the following statements is true?
A) The U.S. government has jurisdiction to tax Mrs. King.
B) The U.S. government has no jurisdiction to tax Mrs. King because she does not live in the United States.
C) The U.S. government has no jurisdiction to tax Mrs. King because she does not earn any income from a source within the United States.
D) Mrs. King can elect whether to pay tax to the United States or to South Africa.
Answer: A
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Chapter 2: Policy Standards for a Good Tax
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Q1) Which of the following statements concerning the standard of fairness is false?
A) People who believe that a tax is unfair are more likely to evade the tax.
B) People believe that the federal income tax is unfair because it contains preferences available only to wealthy individuals.
C) The public perception that the federal income tax is unfair has decreased in recent decades.
D) None of the above is false.
Answer: C
Q2) Government J decides that it must increase its tax revenue. Which of the strategies should result in more revenue?
A) Increase the rate of an existing tax.
B) Expand the base of an existing tax.
C) Enact a tax on a new base.
D) All of these strategies should result in more revenue for Government J.
Answer: D
Q3) The federal government is not required to pay interest on the national debt.
A)True
B)False
Answer: False
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Chapter 3: Taxes As Transaction Costs
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Sample Questions
Q1) Reid Inc. received a $90,000 cash payment, only $50,000 of which was taxable income. If Reid's marginal tax rate is 40%, compute Reid's after-tax cash flow.
A) $54,000
B) $50,000
C) $30,000
D) None of the above
Answer: D
Q2) Late in the current year, Jolsen Company signed a four-year contract with an advertising agency. Under the contract, Jolsen must pay $375,000 annually for the agency's services. After Jolsen signed the contract, Congress enacted legislation disallowing any deduction for advertising expense for future tax years. Jolsen underestimated the after-tax cost of the contract because of:
A) Marginal tax rate uncertainty
B) Financial risk
C) Audit risk
D) Tax law uncertainty
Answer: D
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Chapter 4: Maxims of Income Tax Planning
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Q1) The assignment of income doctrine holds that:
A) Income from a transaction must be taxed to the person who receives the cash from the transaction.
B) Income from a transaction must be taxed to the person who reports the transaction on his or her tax return.
C) Income from a transaction must be taxed to the person that earns the income.
D) None of the above
Q2) The rate at which an item of income is taxed depends on the tax character of the income.
A)True
B)False
Q3) The after-tax value of a dollar of income to a high-tax entity is more than the after-tax value to a low-tax entity.
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) What is the first step in the tax research process?
A) Discover all the facts relevant to the taxpayer's transaction.
B) Decide which tax library to use.
C) Decide whether to read primary or secondary authority.
D) Formulate a precise research question.
Q2) When performing step three of the tax research process:
A) A commercial tax service may provide an excellent starting point.
B) The researcher must discover all the facts concerning the client's transaction.
C) The researcher must communicate his or her conclusions to the client.
D) The researcher should always consult primary authorities first before turning to secondary authorities for guidance.
Q3) The first step in the tax research process is to locate relevant tax law authority.
A)True
B)False
Q4) Treasury regulations are considered statutory authority.
A)True
B)False
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Chapter 6: Taxable Income From Business Operations
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Sample Questions
Q1) Huml Inc. could not deduct an accrued expense because of the all-events test. As a result, Huml has a permanent unfavorable book/tax difference.
A)True
B)False
Q2) Earl Company uses the accrual method of accounting. Here is a reconciliation of Earl's allowance for bad debts for the current year. \[\begin{array} { l l }
\text { Begirruing allowarce for bad debts } & \$ 950,000 \\
\text { Actual write-offs of accourts receivable during the year } & ( 899,600 ) \\
\text { Addition to allowarce } & \$ 845,000 \\
\text { Erding allowarce for bad debts } & \$ \underline { 895,400 } \end{array}\] Because of the difference between the GAAP rules and the tax rules for accounting for bad debts, Earl Company has a:
A) $54,600 permanent excess of book income over taxable income.
B) $54,600 permanent excess of taxable income over book income.
C) $54,600 temporary excess of taxable income over book income.
D) $54,600 temporary excess of book income over taxable income.
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Chapter 7: Property Acquisitions and Cost Recovery
Deductions
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Sample Questions
Q1) NRW Company, a calendar year taxpayer, purchased a residential apartment complex for $5.8 million and allocated $1 million cost to the land and $4.8 million cost to the building. NRW placed the realty in service on August 2, 2016.
a. Compute NRW's MACRS depreciation with respect to the realty for 2016 and 2017.
b. Compute NRW's adjusted basis in the land and building on December 31, 2017.
c. How would your answer to a. change if the building was a manufacturing plant instead of an apartment complex?
Q2) Pettit Company purchased heavy equipment by giving the seller a $30,000 cash down payment and a 5-year interest-bearing note for the $170,000 balance of the price.
Compute Pettit's book basis and tax basis in the equipment.
A) Book basis $30,000; tax basis $170,000
B) Book and tax basis $200,000
C) Book basis $200,000; tax basis $30,000
D) Book and tax basis $30,000
Q3) Environmental clean-up costs are generally deductible in the year incurred.
A)True
B)False
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Page 9
Chapter 8: Property Dispositions
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Sample Questions
Q1) CBM Inc. realized a $429,000 gain on sale of a commercial office building that the corporation placed in service in 1993. Accumulated MACRS depreciation on the complex was $311,800. The entire gain is characterized as Section 1231 gain.
A)True
B)False
Q2) Mrs. Tinker paid $78,400 to purchase 15,000 shares of HiFli common stock in 2006. 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
Q3) Every gain or loss realized on the disposition of property is ultimately characterized as either ordinary or capital for tax purposes.
A)True
B)False
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Chapter 9: Nontaxable Exchanges
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Q1) Signo Inc.'s current year income statement includes a $21,000 gain realized on the exchange of an old business asset for a new business asset. If the exchange is nontaxable, Signo has a $21,000 favorable permanent book/tax difference.
A)True
B)False
Q2) In a like-kind exchange in which both properties are subject to a mortgage, both parties to the exchange are treated as receiving boot equal to the relief of their respective mortgage.
A)True
B)False
Q3) Which of the following statements about the inclusion of boot in a nontaxable exchange is false?
A) The purpose of including boot in a nontaxable exchange is to equalize the adjusted tax bases of the properties exchanged.
B) The receipt of boot can trigger gain recognition but not loss recognition.
C) The party paying the boot includes the FMV of the boot in the tax basis of the property received.
D) None of the above is false.
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Chapter 10: Sole Proprietorships, Partnerships, Llcs, and S
Corporations
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Q1) Which of the following statements concerning partnerships is false?
A) A properly-drafted partnership agreement is crucial.
B) A general partner's basis in a partnership includes his share of partnership debt.
C) Limited partnerships must have at least one general partner.
D) A partner is taxed annually on only that portion of a partnership's taxable income that is actually distributed.
Q2) Matthew earned $150,000 in wages during 2016. FICA taxes withheld by his employer would have been $11,475.
A)True
B)False
Q3) Which of the following statements regarding sole proprietorships is false?
A) A sole proprietorship has no legal identity separate from that of its owner.
B) Sole proprietorships are the most common form of business entity in the U.S.
C) The cash flow generated by a sole proprietorship belongs to the owner.
D) The assets and liabilities of a sole proprietorship are held in the name of the business, not the owner.
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Chapter 11: The Corporate Taxpayer
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Sample Questions
Q1) The four primary legal characteristics of a corporation are unlimited liability, limited life, free transferability of interests, and centralized management.
A)True
B)False
Q2) Calliwell Corporation is a Colorado corporation engaged in the manufacture and sale of computer components. This year, it earned $2 million of net income from this qualified activity. Before the domestic production activities deduction, its taxable income is $2,100,000 and compensation paid to its U.S. workforce is $670,000. Its allowable domestic production activities deduction is:
A) $180,000
B) $120,000
C) $189,000
D) $335,000
Q3) The taxable income earned by a personal service corporation is taxed at a flat rate of 35%.
A)True B)False
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Chapter 12: The Choice of Business Entity
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Sample Questions
Q1) Mr. and Mrs. Maxwell and their two children (Alicia and Percy) are the four equal partners in MAP Partnership. This year, MAP generated $52,000 ordinary income. Compute the tax cost for the business if Mr. and Mrs. Maxwell's marginal rate is 39.6 percent, Alicia's marginal rate is 28 percent, and Percy's marginal rate is 15 percent. (Ignore SE tax consequences.)
Q2) Contributions of property to S corporations are tax-free only if the contributing parties have control (80% ownership) immediately after the contribution.
A)True
B)False
Q3) Chad is the president and sole shareholder of Greenfield, Inc., a regular corporation. The corporation reported taxable income of $575,000 after deducting his $900,000 salary. If the IRS disallowed $550,000 as unreasonable compensation, Chad's taxable income will:
A) Increase by $550,000
B) Decrease by $550,000
C) Increase by $900,000
D) Stay the same
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Chapter 13: Jurisdictional Issues in Business Taxation
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Q1) Which of the following statements about organizational forms for conducting foreign operations is false?
A) Income from a foreign branch office is reported on the consolidated U.S. income tax return.
B) Income from foreign operations conducted through a domestic subsidiary is reported on the consolidated U.S. income tax return.
C) Income from foreign operations conducted through a foreign subsidiary is reported on the consolidated U.S. income tax return.
D) Dividends received by a U.S. multinational corporation from a foreign subsidiary are reported on the consolidated U.S. income tax return.
Q2) Foreign value-added taxes and excise taxes are eligible for the U.S. foreign tax credit. 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
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Chapter 14: The Individual Tax Formula
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Sample Questions
Q1) Melissa, age 16, is claimed as a dependent on her parents' tax return. This year, Melissa earned $2,000 from babysitting and $1,280 interest income from a savings account. Compute Melissa's standard deduction.
A) $2,000
B) $2,350
C) $0
D) $1,050
Q2) Mr. and Mrs. Liddy, ages 39 and 41, file a joint return and have no dependents for the year. Here is their relevant information. \[\begin{array} { l r }
\text { Salaries } & \$ 47,000 \\
\text { Taxable interest incone } & 5,000 \\
\text { Above-the-line deductions } & 1,800 \\
\text { Iterrized deductions } & \mathbf { 3 , 2 0 0 }
\end{array}\] Compute their adjusted gross income (AGI) and taxable income.
A) AGI $50,200; taxable income $29,500
B) AGI $52,000; taxable income $31,300
C) AGI $52,000; taxable income $29,500
D) AGI $50,200; taxable income $40,300
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Chapter 15: Compensation and Retirement Planning
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Q1) This year, Haven Corporation granted a nonqualified stock option to Olivia to buy 5,000 shares of Haven stock for $20 for five years. At date of grant, Haven stock was selling on Nasdaq for $19 per share. For financial statement purposes, Haven recorded $16,500 compensation expense for the estimated value of the option. Five years after Haven granted the option to Olivia, she exercised it on a day when Haven stock was selling for $27 per share.
a. How much income must Olivia recognize in the year of exercise?
b. What is Haven's tax deduction in the year of exercise?
c. What is the effect of the exercise on Haven's book income and deferred taxes?
Q2) Which of the following statements regarding Keogh plans is false?
A) Keogh plans provide a tax-deferred retirement savings option for self-employed individuals.
B) Keogh plans must be administered by an independent trustee.
C) Keogh plans can be either defined-benefit or defined-contribution plans.
D) A self-employed person with a Keogh plan is not required to provide retirement benefits to his or her employees through the plan.
Q3) 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) Investment expenses are a miscellaneous itemized deduction subject to the 2% AGI limitation.
A)True
B)False
Q2) Two years ago, Mr. Young paid $40,000 to buy a publicly traded corporate bond through his broker. The bond's stated redemption value was $45,000. This year, Mr. Young sold the bond for $47,100. Compute and characterize his gain or loss on sale.
A) $2,100 long-term capital gain.
B) $7,100 ordinary income.
C) $5,000 ordinary income and $2,100 long-term capital gain.
D) $7,100 long-term capital gain.
Q3) Which of the following statements about the federal gift tax is false?
A) The tax is imposed on the donor.
B) The tax is based on the fair market value of the gifted property.
C) An individual can give away $5 million (adjusted for inflation) every year without being subject to tax.
D) The donor's basis in the gifted property carries over to become the donee's basis.
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Chapter 17: Tax Consequences of Personal Activities
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Q1) Ms. Bjorn's only contribution this year was a donation of marketable securities (FMV $600,000; tax basis $273,000) to a public charity. Her AGI was $814,000. Which of the following statements is true?
A) Ms. Bjorn's charitable contribution deduction is limited to $407,000, and she has a $193,000 contribution carryover to future years.
B) Ms. Bjorn's charitable contribution deduction is $273,000.
C) Ms. Bjorn's charitable contribution deduction is limited to $407,000. The $193,000 nondeductible amount will never result in a tax benefit.
D) Ms. Bjorn's charitable contribution deduction is $600,000.
Q2) Ms. Ruang owns a principal residence subject to an $817,000 acquisition mortgage. The home has an $875,000 appraised FMV. What is the maximum home equity debt that Ms. Ruang could incur for federal tax purposes?
A) $183,000
B) $100,000
C) $58,000
D) $0
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Chapter 18: The Tax Compliance Process
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Q1) Which type of audit can be handled entirely by telephone or through the mail?
A) Correspondence examination
B) Office examination
C) Field examination
D) All of the above
Q2) A taxpayer who is disputing a deficiency of $50,000 or less may request an informal hearing by the Small Tax Case Division of the Tax Court.
A)True
B)False
Q3) Individuals are allowed to deduct interest paid on an income tax deficiency as a miscellaneous itemized deduction.
A)True
B)False
Q4) Taxpayers should keep all supporting documentation (credit card statements, etc.) for a tax return for at least three years after the return is filed.
A)True
B)False
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