Taxation for Business Students Practice Exam
Course Introduction
This course introduces business students to the fundamental principles and practices of taxation, focusing on the Canadian context. Topics include the structure and administration of the Canadian tax system, income determination for individuals and businesses, corporate and personal taxation, GST/HST, and tax planning strategies. Through case studies and practical exercises, students will gain an understanding of tax compliance, the preparation of personal and corporate income tax returns, and the ethical considerations related to tax practice. This course provides essential tax knowledge for future business professionals and forms a foundation for further study in accounting and finance.
Recommended Textbook
Concepts in Federal Taxation 2018 25th Edition by Kevin E. Murphy
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16 Chapters
2096 Verified Questions
2096 Flashcards
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Chapter 1: Conceptual Foundations of Tax Law
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Sample Questions
Q1) Which of the following is/are categorized as itemized deduction(s)?
I.Trade or business expenses.
II.Rental expenses.
III.Property taxes on personal residence.
IV.Investment interest expense.
A)Only statement I is correct.
B)Only statement IV is correct.
C)Statements I and III are correct.
D)Statements III and IV are correct.
E)Statements I,II,and IV are correct.
Answer: D
Q2) How much additional Social Security tax does Elise pay in 2017 on her $10,000 Christmas bonus? Her total earnings for the year (before the bonus)are $140,000.
A)$ 0
B)$ 145
C)$ 620
D)$ 765
Answer: B
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Page 3
Chapter 2: Income Tax Concepts
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Sample Questions
Q1) Robin owns an appliance store.Robin gives Tim a stereo unit to paint the front of her store building.The stereo unit,included in Robin's inventory at a cost of $400,normally retails for $700.If Tim had billed Robin for his work like he charged other customers,he would have sent Robin a bill for $600.Does Tim have income from the receipt of the stereo unit? If so,what amount should Tim report as gross income? Explain in terms of the Income Tax Concepts.
Answer: Under the All-inclusive Income Concept,all income received is taxable unless specifically excluded.Income can be received in any form;it does not have to be received in cash (cash-equivalent approach).Therefore,Tim realized income when he received the stereo unit because it resulted in an increase in his wealth and was the result of an Arms-length Transaction.Tim must include the $700 fair market value of the stereo in his gross income because that is the value he received in exchange for his services.
Q2) Bethany bought a new suit to wear to work.She will not be able to deduct the cost of the suit even though she wears it to work.
A)True
B)False
Answer: True
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Page 4
Chapter 3: Income Sources
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Sample Questions
Q1) One type of imputed income that always escapes taxation is
A)Bargain purchases by employees.
B)Value of growing one's own vegetables for personal consumption.
C)Payment of personal expenses by a corporation in which stock is owned.
D)Interest free loan from parents.
Answer: B
Q2) Hilda,age 11,earns wages of $2,700 from her modeling.Since the funds are collected by Hilda's father and used for Hilda's living expenses,her father intends to include it in his gross income.
I.The Assignment of Income Doctrine prohibits the father from recognizing the $2,700. II.Even if Hilda desired to gift the $2,700 to her father,Hilda must recognize the income she earned.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
Answer: C
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5
Chapter 4: Income Exclusions
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Sample Questions
Q1) David owes $120,000 to Second National Bank.David is having financial difficulties during the current year and Second National agrees to reduce David's debt to $80,000 to help him get his financial affairs in order and avoid bankruptcy.
I.If David's assets were $300,000 and his liabilities were $290,000 before the discharge,he is taxed on $10,000 of the $40,000 debt reduction.
II.If David's assets were $300,000 and his liabilities were $400,000 before the discharge,he is not taxed on any of the $40,000 debt reduction.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
Q2) Marline receives $14 million in punitive damages for a personal physical injury.
A)Fully excluded from gross income.
B)Fully included in gross income.
C)Partially excluded from gross income.
Q3) What are the differences between a cafeteria plan and a flexible benefits (salary reduction)plan?
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Chapter 5: Introduction to Business Expenses
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Sample Questions
Q1) Paul owns a lumber yard in Portland.He has decided to expand his business interests and is considering opening a golf course in Seattle.He has incurred $51,000 of expenses investigating whether to open the new golf course.In January of the current year he finds the perfect location and opens the golf course on July 1.What amount of the investigation expenses can he deduct in the current year?
A)$- 0 -
B)$5,100
C)$5,567
D)$6,533
E)$51,000
Q2) Andy lives in New York and rents his house for two weeks during the U.S.Open Tennis tournament for $3,500.He must include the rent in his income.
A)True
B)False
Q3) Explain the rationale for disallowing the deduction for interest expense attributable to money borrowed to acquire tax-exempt municipal bonds.
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Chapter 6: Business Expenses
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Sample Questions
Q1) Entertainment,auto,travel,and gift expenses are subject to strict documentation requirements.Taxpayers are required to keep records that show I.The business purpose of the event.
II.The time and place of the event.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
Q2) Brenda travels to Cleveland on business for her employer.She spends 4 days in meetings with a client.Brenda's plane fare for the trip is $400.Meals cost $40 per day.Hotel and incidental costs amount to $150 per day.Brenda receives no reimbursement for any expenses.Brenda's adjusted gross income for the year is $40,000.What is Brenda's deduction for the trip?
A)$- 0 -
B)$280
C)$1,080
D)$1,160
E)$2,320
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Chapter 7: Losses -- Deductions and Limitations
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Sample Questions
Q1) Personal-use loss
A)A loss that is generally not deductible.
B)The borrower is personally liable for the debt.
C)The loss is used to offset income in future periods.
D)A liability that is only secured by the underlying property.
E)The loss may be used to offset income from prior periods.
F)A type of stock that receives some ordinary loss treatment.
G)Involved in a rental activity for more than 500 hours in a year.
H)Cash or other assets contributed plus recourse debts of the activity.
I)Owns at least a 10% interest and is significantly involved in the rental activity.
J)The amount of the loss for fully destroyed property is the property's adjusted basis.
K)The amount of loss is limited to the lower of the property's adjusted basis,or the reduction in fair market value.
L)Management is left to at least one general partner whose liability is not limited and who is responsible for the on-going activities of the business.
Q2) Why did Congress enact the at-risk rules?
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Chapter 8: Taxation of Individuals
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Sample Questions
Q1) Sale of stock results in a loss of $7,000.The only other capital transaction for the year results in a gain of $6,000.Amount: $7,000
A)Not Deductible
B)Deductible - For AGI
C)Deductible - From AGI
Q2) Taxpayer contribution of $250 to the Democratic Party.
A)Not Deductible
B)Deductible - For AGI
C)Deductible - From AGI
Q3) Larry and Louise are both 49 years of age and file a joint return.They provide all of the support for their son,Dylan,who is 20 years old and is at home until he gets called into the army.His income at part-time jobs is $4,500.Their daughter,Phyllis,is a 23-year-old full-time student at State University.She lived at school 9 months and provided two thirds of her own support with a summer job.How many personal and dependency exemptions can Larry and Louise claim on their income tax return?
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Page 10
Chapter 9: Acquisitions of Property
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Sample Questions
Q1) On July 3,2017,Cynthia receives a gift of a collection of books valued at $10,000.The books have an adjusted basis of $6,000 to the donor.They had been purchased in 2005.Several months after receiving the gift,Cynthia sells the books to a professional collector for $9,000.How is Cynthia's holding period for the books determined?
A)It depends on whether a gift tax was paid at the time of the gift.
B)It begins in 2005.
C)It begins in 2017.
D)It is irrelevant because the transfer was a gift.Gifts are always considered to be held long-term.
Q2) Jenny purchased 1,000 shares of Hewlett Corporation preferred stock for $66,000 two years ago.During the current year,Jenny receives a 10% nontaxable stock dividend at a time when the stock has a fair market value of $40.What is Jenny's basis in the stock dividend shares?
A)$- 0 -
B)$6,000
C)$6,600
D)$8,000
E)$8,800
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11
Chapter 10: Cost Recovery on Property: Depreciation, depletion, and Amortization
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Sample Questions
Q1) In most cases,the taxpayer may continue to use percentage (statutory)depletion after the initial basis has been fully recovered.In other words,the taxpayer's depletion deduction can exceed the cost of the depletable asset.
A)True
B)False
Q2) To compute depreciation using MACRS on an asset purchased today,you need to know
I.the asset's depreciable basis.
II.the recovery period of the asset.
III.the first and last year convention that applies to the asset's class.
IV.whether you want to minimize or maximize the current year's depreciation.
A)Only statement II is correct.
B)Statements I and II are correct.
C)Statements I,III,and IV are correct.
D)Statements II and III are correct.
E)Statements I,II,III,and IV are correct.
Q3) Why would a taxpayer ever elect to use the alternative depreciation system (ADS)rather than the MACRS?
Q4) Discuss why listed property gets special attention.
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Chapter 11: Property Dispositions
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Sample Questions
Q1) "Recapture of depreciation" refers to:
A)Downward adjustments of past depreciation charges by IRS review.
B)Increasing depreciation charges by changing accounting method.
C)Filing an amended return where less than maximum depreciation charges have been claimed as deductions.
D)Taxing the smaller of past depreciation or gain as ordinary income on the disposition of equipment.
Q2) Tracey sells General Electric stock (owned 10 years)for a $40,000 gain in the current year.In addition,she has a loss of $20,000 on the sale of one acre of land used in her trade or business.The land was purchased five years ago.Tracey's net capital gain (loss)for the current year is:
A)$(20,000)
B)$- 0 -
C)$20,000
D)$40,000
Q3) Unrecaptured Section 1250 gain is taxed at a maximum rate of 25%.
A)True
B)False
Q4) What incentive provisions or preferential treatments exist for capital gains?
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Chapter 12: Nonrecognition Transactions
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Sample Questions
Q1) Natural Power Corporation owns a warehouse with an adjusted basis of $195,000 and an appraised fair market value of $185,000.The city of Springfield condemns the property for a new airport.The condemnation award is $185,000.Natural Power invests the $185,000 in a new warehouse on the other side of the city.What is the gain or loss that Natural Power Corporation must recognize due to the transactions?
A)No gain or loss
B)$10,000 gain
C)$10,000 loss
D)$185,000 gain
Q2) Dominic and Lois sell their home for $775,000,incurring selling expenses of $40,000.They had purchased the residence in 1990 for $185,000 and made capital improvements totaling $45,000.They buy a new residence for $310,000.What is their realized gain and recognized gain on the sale? What is their basis in the new house?
Q3) Nancy purchased her houseboat six years ago for $35,000.She has lived in the houseboat since she purchased it.A friend has offered $62,000 for the houseboat.If she sells it,she will be able to exclude the gain.
A)True
B)False
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Chapter 13: Choice of Business Entity -- General Tax and
Nontax Factorsformation
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Sample Questions
Q1) A limited partner
I.Can lose any or all of their investment in the partnership.
II.Can participate in the management of the partnership.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
Q2) Dewey and Louie agree to combine their sole proprietorships into one business.They will be equal partners in the Dewlou Diner.Dewey will contribute a building worth $100,000 (adjusted basis of $80,000),and $10,000 in cash.Louie will contribute inventory worth $80,000 (adjusted basis of $85,000)and $30,000 cash.What are Dewey and Louie's basis in the partnership?
Dewey Louie
A)$80,000 $85,000
B)$90,000 $115,000
C)$90,000 $110,000
D)$110,000 $110,000
Q3) Discuss the characteristics of a personal service corporation (PSC).
Page 15
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Chapter 14: Choice of Business Entity -- Operations and Distributions
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Sample Questions
Q1) Lavery Corporation has two equal shareholders,and has been an electing S corporation since its inception.In the current year,Lavery has taxable income of $60,000.This amount includes $50,000 from operations and $10,000 from investment interest income.Because of these events,each shareholder's adjusted basis in the stock will increase by
A)$- 0 -
B)$10,000
C)$25,000
D)$30,000
E)$50,000
Q2) Hammond Inc. ,sells a building that it purchased in 2001 for $1,500,000.The building cost $1,000,000 and had an adjusted basis of $700,000 at the date of the sale.
I.Hammond has an $800,000 Section 1231 gain on the sale.
II.Hammond must report $300,000 of Unrecaptured Section 1250 gain.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
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Chapter 15: Choice of Business Entity -- Other
Considerations
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Sample Questions
Q1) To obtain the rehabilitation expenditures tax credit certain criteria must be satisfied.Which of the following are correct statements about the credit?
I.Rehabilitation of business-use,investment-use,and personal-use residential real estate that is certified as historic qualifies for the historic structures rehabilitation credit.
II.The rehabilitation work cannot remove more than 25% of the internal walls and framework.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
Q2) Savings incentive match plan for employees (SIMPLE)were created to encourage small businesses to establish retirement plans for their employees.
A)True
B)False
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Chapter 16: Tax Research
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Sample Questions
Q1) Citators
A)are primary authorities.
B)are not necessary for effective tax research.
C)refer to the case being evaluated as the citing case.
D)give information on the history of a court case.
Q2) Rewrite each of the following citations in proper form:
a.Subsection (b)of the third treasury regulation issued under Code Section 614 (Income Tax).
b.Revenue Ruling 72-151,found on page 88 of the second cumulative bulletin of 1972.
c.Metropolitan Laundry Co. ,case 52-1 USTC 9129 Vol 100 Federal Supplement at page 803 District Court of California.
d.Henry M.Rodney (Tax Court 1969),volume 53 Reports of the U.S Tax Court,page 287.
e.Paragraph 3 of subsection b,Section 217 of the Internal Revenue Code of 1986.
Q3) Which of the following regulations deals with Estate Tax?
A)Reg.Sec.1.165-1
B)Reg.Sec.20.2014-5
C)Reg.Sec.25.2518-5
D)Reg.Sec.301.7002-5
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