Taxation for Business Entities Final
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Course Introduction
This course provides an in-depth examination of the principles and practices of taxation as they apply to various business entities, including partnerships, corporations, S corporations, and limited liability companies. Students will explore the tax implications of formation, operation, distributions, and dissolution of business organizations, with a focus on federal tax law. Key topics include income determination, tax deductions and credits, tax compliance, and planning strategies to minimize tax liability. Real-world case studies and current tax code provisions will be analyzed to prepare students for practical tax planning and reporting for businesses.
Recommended Textbook Principles of Taxation for Business and Investment Planning 2013 16th Edition by Sally Jones
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1732 Verified Questions
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Chapter 1: Taxes and Taxing Jurisdictions
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Sample Questions
Q1) How often does Congress amend the Internal Revenue Code?
A) Rarely (the Internal Revenue Code has not been amended since 1986)
B) Occasionally (perhaps once every decade)
C) Regularly (at least once every five years)
D) Constantly (at least once a year)
Answer: D
Q2) What gives the federal government the right to impose a tax on individual and corporate income?
A) Internal Revenue Code of 1986
B) Revenue Act of 1913
C) Sixteenth Amendment to the U.S. Constitution
D) Bill of Rights
Answer: C
Q3) The U.S. Constitution gives the federal government the power to impose a tax on income from whatever source derived.
A)True
B)False
Answer: True
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3
Chapter 2: Policy Standards for a Good Tax
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Sample Questions
Q1) The U.S. individual income tax has always used a progressive rate structure. A)True
B)False
Answer: True
Q2) The City of Willford levies a flat 7% tax on individual income in excess of $55,000. Individuals who earn $55,000 or less pay no income tax.
A. Ms. Vello earned $127,200 income this year. Compute her city income tax and determine her average tax rate.
B. Mr. Sui earned $68,900 income this year. Compute his city income tax and determine his average tax rate.
C. Does Willford have a proportionate, progressive, or regressive tax rate structure? Answer: A. Ms. Vello's tax is $5,054 ($72,200 * 7%), and her average tax rate is 3.97% ($5,054/$127,200).
B. Mr. Sui's tax is $973 ($13,900 * 7%), and his average tax rate is 1.41% ($973/$68,900).
C. Willford has a progressive tax rate structure because the rate increases as the base increases.
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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. Which opportunity should Borden 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 * .935] + $34,047 discounted after-tax cash flow for year 2 [$39,000 * .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 * .935] + $9,079 discounted after-tax cash flow for year 2[$10,400 * 873]). Therefore, Borden should choose Investment 2.
Q2) A deduction is worth twice as much to a taxpayer with a 30% marginal rate than to a taxpayer with a 15% rate.
A)True
B)False
Answer: True
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Page 5
Chapter 4: Maxims of Income Tax Planning
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Sample Questions
Q1) Mr. Dole needed to sell appreciated stock out of his investment portfolio to generate cash to pay for his Christmas spending. He decided to postpone the sale from December 20Y1 until January 20Y2. Mr. Dole is taking advantage of the:
A) Entity variable
B) Time period variable
C) Jurisdiction variable
D) Character variable
Q2) The tax law applies uniformly to every commercial transaction by every business entity.
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) The tax character of an item of income depends on how the income is reported on the firm's financial statements.
A)True
B)False
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Chapter 5: Tax Research
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Sample Questions
Q1) Secondary authorities explain and interpret the tax law in language often easier to understand than that of primary authorities.
A)True
B)False
Q2) The topical index of a commercial tax service is considered primary authority. A)True
B)False
Q3) When analyzing tax authorities, the researcher must decide if the authority requires a factual judgment or an evaluative judgment. The difference between the two can be described as follows:
A) In making an evaluative judgment, the researcher can provide a definitive answer to the research question.
B) In making a factual judgment, the authority may be subject to interpretation.
C) In making an evaluative judgment, the researcher must draw a subjective conclusion that results in a qualified answer.
D) There is little difference between a factual judgment and an evaluative judgment.
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Chapter 6: Taxable Income From Business Operations
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Sample Questions
Q1) If an accrual basis taxpayer receives a prepayment of rent income, the receipt results in an unfavorable temporary book/tax difference.
A)True
B)False
Q2) According to your textbook, business managers prefer to:
A) Report as much income as possible for book and tax purposes.
B) Report as much income as possible for book purposes and as little income as possible for tax purposes.
C) Report as little income as possible for book and tax purposes.
D) Report the same amount of income for book and tax purposes.
Q3) Derik Inc., a calendar year, accrual basis corporation, accrued $278,000 vacation pay expense and a corresponding liability at the end of 2012. Derik paid $22,000 of the accrued liability to employees who took vacation between January 1 and March 15, 2013.
How much of the accrued vacation pay expense is deductible in 2012?
A) None of the accrued expense is deductible in 2012.
B) $22,000.
C) $256,000.
D) The entire accrued expense is deductible in 2012.
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Page 8
Chapter 7: Property Acquisitions and Cost Recovery
Deductions
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Sample Questions
Q1) Which of the following statements about the uniform capitalization (unicap) rules is false?
A) The unicap rules determine the annual costs that firms must capitalize to inventory for tax purposes.
B) The unicap rules may require capitalization of more indirect costs to inventory for tax purposes than for book purposes.
C) The unicap rules may result in a book/tax difference for cost of goods sold.
D) None of the above is false.
Q2) Four years ago, Bettis Inc. paid a $5 million lump-sum price to purchase a business. Bettis allocated $600,000 of the price to goodwill. Which of the following statements is true?
A) The accounting treatment of the goodwill does not result in any book/tax difference in the current year.
B) This year, Bettis has a $40,000 unfavorable temporary difference because of the accounting treatment of goodwill.
C) This year, Bettis has a $40,000 favorable temporary difference because of the accounting treatment of goodwill.
D) None of the above is true.
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Page 9
Chapter 8: Property Dispositions
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Sample Questions
Q1) Mr. and Mrs. Sykes operate a very profitable small business. This year, the Sykes recognized a $100,000 gain on sale of a trade name they had created and copyrighted for use in their business in 1994. Which of the following statements is true?
A) The $100,000 gain is capital gain eligible for a preferential tax rate.
B) The $100,000 gain is capital gain against which the Sykes can deduct any capital losses recognized this year.
C) The $100,000 gain is ordinary business income.
D) Statements a. and b. are true.
Q2) Verno Inc. purchased business equipment in March and sold it in November. Verno's gain or loss recognized on the sale is ordinary.
A)True
B)False
Q3) Four years ago, Mrs. Beights purchased marketable securities for $75,000 cash. At the end of 2011, the FMV of the securities had plummeted to $4,000. Mrs. Beights may elect to recognize her $71,000 loss in 2011, even though she still owns the securities.
A)True
B)False
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Chapter 9: Nontaxable Exchanges
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Sample Questions
Q1) Tanner Inc. owns a fleet of passenger automobiles that it would like to dispose of in a nontaxable exchange. Which of the following would qualify as like-kind property?
A) Sports utility vehicles
B) Double decker buses
C) Dump trucks
D) Both a. and b. would qualify as like-kind.
Q2) A taxpayer who pays boot in a nontaxable exchange includes the value of the boot in the basis of the qualifying property received.
A)True
B)False
Q3) A taxpayer who receives or pays boot in a nontaxable exchange must recognize gain to the extent of the FMV of the boot.
A)True
B)False
Q4) All types of business and investment real properties are like-kind.
A)True
B)False
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Chapter 10: Sole Proprietorships, Partnerships, Llcs, and S Corporations
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Sample Questions
Q1) Kelly received a $60,000 salary during 2012. Her federal income tax withholding rate was 20%, and the Social Security base amount for 2012 was $110,100. What is the total amount that her employer should have withheld in 2012?
A) $15,390
B) $16,590
C) $15,979
D) $6,849
Q2) Cramer Corporation and Mr. Chips formed a partnership in which Cramer is the general partner and Mr. Chips is a limited partner. Cramer contributed $500,000 cash, and Mr. Chips contributed a building with a $500,000 FMV and $300,000 tax basis. The partnership immediately borrowed $700,000 of recourse debt. What is Cramer's tax basis in its partnership interest?
A) $500,000
B) $1,200,000
C) $850,000
D) $650,000
Q3) Corporations cannot be shareholders in an S corporation.
A)True
B)False
Page 12
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Chapter 11: The Corporate Taxpayer
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Sample Questions
Q1) The Schedule M-3 reconciliation requires less detailed information than the M-1 reconciliation.
A)True B)False
Q2) Frazier, Inc. paid a $150,000 cash dividend to its shareholders. The corporation cannot deduct this payment on its corporate income tax return.
A)True B)False
Q3) Calliwell Corporation is a Colorado corporation engaged in the manufacture and sale of computer components. In 2012, 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 2012 domestic production activities deduction is:
A) $180,000
B) $120,000
C) $189,000
D) $335,000
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Page 13
Chapter 12: The Choice of Business Entity
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Sample Questions
Q1) Typical family-owned businesses are operated as passthrough entities.
A)True
B)False
Q2) Both individual general partners and S corporation shareholders must pay self-employment tax on their share of the entity's ordinary business income.
A)True
B)False
Q3) A brother-sister controlled group consists of two or more corporations controlled by the same set of individual shareholders.
A)True
B)False
Q4) Bryan Houlberg expects his C corporation to generate a profit of $200,000. What is Bryan's after-tax cash flow from the corporation if net income after corporate tax is distributed to him as a dividend and his marginal tax rate on ordinary income is 35%?
A) $130,000
B) $90,188
C) $117,937
D) $151,438
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Chapter 13: Jurisdictional Issues in Business Taxation
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Sample Questions
Q1) Transfer pricing issues arise:
A) When tangible goods are transferred between related parties operating in different taxing jurisdictions.
B) When rights to use intangible assets, such as patents or trademarks, are licensed between related parties operating in different taxing jurisdictions.
C) Both of the above situations can create transfer pricing issues.
D) Neither of the above situations creates transfer pricing issues.
Q2) Orchid Inc., a U.S. multinational with a 34% marginal tax rate, owns a foreign subsidiary operating in a country with a 25% income tax. This year, the subsidiary generated $400,000 taxable income. What is the total tax burden (domestic and foreign) on the earnings of the foreign subsidiary if it does not repatriate its after-tax earnings and has no subpart F income?
A) $163,000
B) $136,000
C) $400,000
D) $100,000
Q3) Excess foreign tax credits can only be carried to future tax years.
A)True
B)False
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Page 15
Chapter 14: The Individual Tax Formula
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Sample Questions
Q1) The standard deduction and exemption amount are not deductible in the computation of alternative minimum taxable income.
A)True
B)False
Q2) Linda and Raj are engaged to be married. Linda's 2012 taxable income as a single individual would be $83,500. Raj's 2012 taxable income as a single individual would be $118,000. When they marry before the end of 2012, how much of a marriage penalty will they incur?
A) $0
B) $388
C) $793
D) None of the above
Q3) An individual with $400,000 taxable income has the same marginal rate as a single taxpayer or as a head of household.
A)True
B)False
Q4) A husband and wife are allowed only one exemption on a jointly filed return.
A)True
B)False
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Chapter 15: Compensation and Retirement Planning
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Sample Questions
Q1) Mr. Scott, age 46, quit his job with MNP Inc. and withdrew the $184,000 balance in his Section 401(k) plan. Mr. Scott immediately deposited the withdrawal in a new rollover Roth IRA with a local bank. Which of the following statements is false?
A) Mr. Scott must include the $184,000 withdrawal in gross income.
B) Mr. Scott must pay a 10% premature withdrawal penalty.
C) Future withdrawals from the rollover Roth IRA will be nontaxable.
D) None of the statements is false.
Q2) Olan Inc. provides an on-site day care center free of charge to employees who have pre-school children. Employees who enroll their children may exclude the value of this fringe benefit from gross income.
A)True
B)False
Q3) Ms. Knox, age 34 and single, has $119,800 AGI, $108,200 of which is compensation income. Compute her maximum contribution to her Roth IRA.
A) $0
B) $1,733
C) $3,933
D) $5,000
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Chapter 16: Investment and Personal Financial Planning
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Sample Questions
Q1) At the beginning of the year, Calvin paid $5,000 for 60 shares of Eddington stock. In June, he received a $300 cash distribution with respect to the stock. His Form 1099-DIV reported that $170 was an ordinary dividend and $130 was nontaxable. Compute Calvin's tax basis in his 60 shares at year-end.
A) $4,870
B) $4,700
C) $4,830
D) $5,000
Q2) In 2001, Mrs. Qualley, contributed $100,000 in exchange for 1,000 shares of Little Corporation, which is a qualified small business. This year, Mrs. Qualley's only capital transaction was the sale of the 1,000 shares of Little qualified small business stock for $180,000. Compute Mrs. Qualley's tax on her capital gain from this sale.
A) $6,000
B) $11,200
C) $22,400
D) None of the above.
Q3) All gratuitous transfers of property are subject to gift tax.
A)True
B)False
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Page 18
Chapter 17: Tax Consequences of Personal Activities
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Sample Questions
Q1) 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
Q2) Which of the following is not a tax incentive for individuals to purchase a home instead of renting?
A) Real property taxes on the home are deductible.
B) Premiums paid on homeowner's insurance are deductible.
C) Interest paid on a home mortgage is deductible.
D) All of the above are tax incentives.
Q3) For federal income tax purposes, property transfers pursuant to a divorce are nontaxable events.
A)True
B)False
Q4) Mrs. Hanson's financial support this year consisted of: $14,650 Social Security benefits; $9,600 pension from her former employer's qualified retirement plan, and $15,000 cash gifts from her children. Compute Mrs. Hanson's AGI.
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Chapter 18: The Tax Compliance Process
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Q1) Mr. Braco is an enrolled agent who prepares tax returns for a living. In preparing Mr. and Mrs. Colter's Form 1040, Mr. Braco claimed a deduction based on an unreasonable legal position. Mr. Braco's compensation for the return was $3,800. What is the consequence to Mr. Braco if the IRS disallows the deduction?
A) The IRS can terminate Mr. Braco's status as an enrolled agent.
B) The IRS can impose a $1,900 penalty on Mr. Braco.
C) The IRS can impose a negligence penalty on the Colters but can't penalize Mr. Braco.
D) The IRS can impose a civil fraud penalty on Mr. Braco.
Q2) Ms. Dela filed her unextended 2011 Form 1040 on November 2, 2012, and had no reasonable cause for the delinquency. The return showed a $22,840 balance of tax due. Compute Ms. Dela's late-filing and late-payment penalty.
A) $5,710
B) $7,994
C) $5,938
D) $4,568
Q3) Only the government may appeal a tax case to the U.S. Supreme Court.
A)True
B)False
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