Taxation for Financial Planners Study Guide Questions
Course Introduction
This course introduces students to the fundamental principles of taxation as they relate to personal and business financial planning. Topics include the structure of tax systems, income determination, tax compliance, tax planning strategies, and the impact of taxes on investment, retirement, and estate planning decisions. Students will analyze current tax laws, interpret relevant statutes, and explore practical applications of tax concepts to help clients minimize liabilities and maximize financial outcomes. Emphasis is placed on ethical considerations and the role of tax planning in comprehensive financial advising.
Recommended Textbook
South Western Federal Taxation 2019 Comprehensive 42nd Edition by David M. Maloney
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4038 Verified Questions
4038 Flashcards
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Chapter 1: An Introduction to Taxation and Understanding
the Federal Tax Law
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Sample Questions
Q1) Paige is the sole shareholder of Citron Corporation. During the year, Paige leases a building to Citron for a monthly rental of $80,000. If the fair rental value of the building is $60,000, what are the income tax consequences to the parties involved?
Answer: The rent charged by Paige is not "arms length"? as such, Citron Corporation's rent deduction is $60,000 (not $80,000). The $20,000 difference is a nondeductible dividend distribution. For Paige, the change merely requires reclassification. Instead of $80,000 of rent income, she has $60,000 of rent income and $20,000 of dividend income.
Q2) Brayden files his Federal income tax return by April 15, but does not pay the tax. Although he expects to pay interest on the large amount of tax he still owes, he feels that the timely filing has avoided any penalties. Is Brayden's assumption correct?
Answer: Although Brayden has avoided the failure to file penalty, the failure to pay penalty will apply. It is 0.5% per month up to a maximum of 25% of the tax due as shown on the return.
Q3) A major advantage of a flat tax type of income tax is its simplicity.
A)True
B)False
Answer: True
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Page 3
Chapter 2: Working with the Tax Law
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Sample Questions
Q1) Which of the following types of Regulations has the highest tax validity?
A) Temporary
B) Legislative
C) Interpretive
D) Procedural
E) None of these
Answer: B
Q2) The Tax Cuts and Jobs Act of 2017 became part of the Internal Revenue Code of 1986.
A)True
B)False
Answer: True
Q3) Normally, when the Senate version of a tax bill differs from that passed by the House, a Joint Conference Committee drafts a compromise tax bill.
A)True
B)False
Answer: True
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Page 4
Chapter 3: Computing the Tax
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Sample Questions
Q1) In meeting the criteria of a qualifying child for dependency purposes, when if ever, might the child's income become relevant?
Answer: The amount of income earned by the qualifying child normally is of no consequence.
If, however, such income is used to make the child self-supporting, then he or she can no longer be a qualifying child. Such child also would not be a qualifying relative due to the gross income and support tests.
Q2) The additional standard deduction for age and blindness is greater for married taxpayers than for single taxpayers.
A)True
B)False
Answer: False
Q3) Tax Rate Schedule
Answer: h
Q4) A cousin who does not live with taxpayer.
Answer: d
Q5) Basic standard deduction
Answer: a
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Chapter 4: Gross Income: Concepts and Inclusions
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Sample Questions
Q1) Harry and Wanda were married in Texas, a community property state, but moved to Virginia, a common law state. The calculation of their income on a joint return:
A) Will increase as a result of changing their state of residence.
B) Will decrease as a result of changing their state of residence.
C) Will not change as a result of changing their state of residence.
D) Will not be permitted.
E) None of these.
Q2) Jake is the sole shareholder of an S corporation that earned $60,000 in 2018. The corporation was short on cash and therefore distributed only $15,000 to Jake in 2018. Jake is required to recognize $60,000 of income from the S corporation in 2018.
A)True
B)False
Q3) The B & W Partnership earned taxable income of $140,000 for the year. Bryan is entitled to 50% of the profits, but Bryan withdrew only $60,000 during the year. Bryan's gross income from the partnership for the year is $60,000.
A)True
B)False
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Page 6
Chapter 5: Gross Income: Exclusions
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Q1) Jack received a court award in a civil libel and slander suit against National Gossip. He received $120,000 for damages to his professional reputation, $100,000 for damages to his personal reputation, and $50,000 in punitive damages. Jack must include in his gross income as a damage award:
A) $0.
B) $100,000.
C) $120,000.
D) $270,000.
E) None of these.
Q2) An employee can exclude from gross income the value of meals provided by his or her employer whenever:
A) The meal is not extravagant.
B) The meals are provided on the employer's premises for the employer's convenience.
C) There are no places to eat near the work location.
D) The meals are provided for the convenience of the employee.
E) None of these.
Q3) What Federal income tax benefits are provided for college students?
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Chapter 6: Deductions and Losses: In General
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Q1) The period in which an accrual basis taxpayer can deduct an expense is determined by applying the economic performance and all events tests.
A)True
B)False
Q2) If a taxpayer operates an illegal business, no deductions are permitted.
A)True
B)False
Q3) Bridgett's son, Clyde, is $12,000 in arrears on his residential mortgage payments. Of the $12,000, $7,500 represents interest and $4,500 represents principal.
a. If Bridgett pays the $12,000 to the lender, how much can she deduct? How much can Clyde deduct?
b. If Bridgett pays the $7,500 of interest to the lender and loans or gives $4,500 to Clyde, who pays the $4,500 of principal, how much can Bridgett deduct? How much can Clyde deduct?
c. If Bridgett gives or lends the $12,000 to Clyde who pays the lender, how much can he deduct? How much can Bridgett deduct?
d. Advise Bridgett and Clyde on how the payment should be made.
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Page 8
Chapter 7: Deductions and Losses: Certain Business
Expenses and Losses
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Sample Questions
Q1) Peggy is in the business of factoring accounts receivable. Last year, she purchased a $30,000 account receivable for $25,000. This year, the account was settled for $25,000. How much loss can Peggy deduct and in which year?
A) $5,000 for the current year.
B) $5,000 for the prior year and $5,000 for the current year.
C) $5,000 for the prior year.
D) $10,000 for the current year.
E) None of the above.
Q2) When a nonbusiness casualty loss is spread between two taxable years, the loss in the second year is reduced by 10% of adjusted gross income for the first year.
A)True
B)False
Q3) An individual may deduct a loss on rental property even if it does not meet the definition of a casualty loss.
A)True
B)False
Q4) Identify the factors that should be considered in determining whether a transaction is a business bad debt or a nonbusiness bad debt.
Page 9
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Chapter 8: Depreciation, Cost Recovery, Amortization, and Depletion
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Sample Questions
Q1) On July 17, 2018, Kevin places in service a used automobile that cost $25,000. The car is used 80% for business and 20% for personal use. In 2019, he used the automobile 40% for business and 60% for personal use. Determine the cost recovery recapture for 2019.
A) $0
B) $528
C) $2,000
D) $2,500
E) None of the above
Q2) Hans purchased a new passenger automobile on August 17, 2018, for $30,000. During the year the car was used 40% for business and 60% for personal use. Determine his cost recovery deduction for the car for 2018.
A) $500
B) $1,000
C) $1,200
D) $1,333
E) None of the above
Q3) Discuss the requirements in order for startup expenditures to be amortized under § 195.
Q4) Discuss the reason for the inclusion amount with respect to leased automobiles.
Page 10
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Chapter 9: Deductions: Employee and
Self-Employed-Related Expenses
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Sample Questions
Q1) Logan, Caden, and Olivia are three unrelated parties who claim the standard deduction. All are married and attend Citron University and each pays tuition of $6,100. Of this payment, Logan can claim a deduction of $4,000? Caden a deduction of $2,000? and Olivia no deduction at all. Explain.
Q2) A participant who is at least age 59 1/2 can make a tax-free qualified withdrawal from a Roth IRA after a five-year holding period.
A)True
B)False
Q3) A taxpayer who claims the standard deduction will not be able to claim an office in the home deduction.
A)True
B)False
Q4) A self-employed taxpayer who uses the automatic mileage method to compute auto expenses can also deduct the business portion of automobile club dues.
A)True
B)False
Q5) Sue does not work for other parties.
Q6) Sue charges by the hour for her work.
Page 11
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Chapter 10: Deductions and Losses: Certain Itemized
Deductions
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Sample Questions
Q1) Aaron, age 45, had AGI of $70,000 for 2018. He was injured in a skiing accident and paid $3,600 for hospital expenses and $2,400 for doctor bills. Aaron also incurred medical expenses of $1,200 for his child, who lives with his former wife and is claimed as a dependent by her. In 2019, Aaron was reimbursed $1,300 by his insurance company for the medical expenses attributable to the skiing accident.
a. Compute Aaron's deduction for medical expenses in 2018.
b. Assume that Aaron would have elected to itemize his deductions even if he had no medical expenses in 2018. How much, if any, of the $1,300 reimbursement must be included in gross income in 2019?
c. Assume that Aaron's other itemized deductions in 2018 were $16,900 and that he filed as a head of household. How much of the $1,300 reimbursement must he include in gross income in 2019?
Q2) This year Allison drove 800 miles to volunteer in a project sponsored by a qualified charitable organization in Utah. In addition, she spent $250 for meals while away from home. In total, Allison may take a charitable contribution deduction of $112 (800 miles × $.14) relating to her volunteer work.
A)True B)False
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Chapter 11: Investor Losses
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Sample Questions
Q1) Carl, a physician, earns $200,000 from his medical practice in the current year. He receives $45,000 in dividends and interest during the year as well as $5,000 of income from a passive activity. In addition, he incurs a loss of $50,000 from an investment in a passive activity. What is Carl's AGI for the current year after considering the passive investment?
A) $195,000
B) $200,000
C) $240,000
D) $245,000
E) None of the above
Q2) Bob realized a long-term capital gain of $8,000. In calculating his net investment income, Bob may elect to include the gain in investment income.
A)True
B)False
Q3) Treatment of a sale of a passive activity where all of the realized gain or loss is recognized currently.
Q4) Treatment of suspended credits when passive activity is sold at a loss.
Q5) Material participation.
Q6) Treatment of a disposition of a passive activity by gift.
Page 13
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Chapter 12: Tax Credits and Payments
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Sample Questions
Q1) Cardinal Company incurs $800,000 during the year to construct a facility that will be used exclusively for the care of its employees' pre-school age children during normal working hours. Assuming Cardinal claims the credit for employer-provided child care this year, its basis in the newly constructed facility is $640,000.
A)True
B)False
Q2) The incremental research activities credit is 20% of the qualified research expenses that exceed the base amount.
A)True
B)False
Q3) Both education tax credits are available for qualified tuition expenses, and in certain instances, also may be available for room and board.
A)True
B)False
Q4) The credit for child and dependent care expenses is an example of a refundable credit.
A)True
B)False
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Page 14
Chapter 13: Property Transactions:
Determination of Gain or Loss, Basis Considerations, and Nontaxable Exchanges
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Sample Questions
Q1) Carlton purchases land for $550,000. He incurs legal fees of $10,000 and broker's commission of $28,000 associated with the purchase. He subsequently incurs additional legal fees of $25,000 in having the land rezoned from agricultural to residential. He subdivides the land and installs streets and sewers at a cost of $800,000. What is Carlton's basis for the land and the improvements?
A) $1,350,000
B) $1,378,000
C) $1,385,000
D) $1,413,000
E) None of the above
Q2) A realized loss whose recognition is postponed results in the temporary recovery of more than the taxpayer's cost or other basis.
A)True
B)False
Q3) Casualty losses and condemnation losses on the involuntary conversion of a personal residence receive the same tax treatment.
A)True
B)False
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Chapter 14: Property Transactions: Capital Gains and
Losses, Section 1231, and Recapture Provisions
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Sample Questions
Q1) White Company acquires a new machine for $75,000 and uses it in White's manufacturing operations. A few months after White places the machine in service, it discovers that the machine is not suitable for White's business. White had fully expensed the machine in the year of acquisition using § 179. White sells the machine for $60,000 in the tax year after it was acquired, but held the machine only for a total of 10 months. What was the tax status of the machine when it was disposed of and the amount of the gain or loss?
A) A capital asset and $60,000 gain.
B) An ordinary asset and $60,000 gain.
C) A § 1231 asset and $60,000 gain.
D) A § 1231 asset and $60,000 loss.
E) None of the above.
Q2) Short-term capital losses are netted against long-term capital gains and long-term capital losses are netted against short-term capital gains.
A)True
B)False
Q3) Section 1231 property generally does not include artistic compositions.
A)True
B)False
Page 16
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Chapter 15: Taxing Business Income
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Q1) Katherine, the sole shareholder of Penguin Corporation, has the corporation pay her a salary of $300,000 in the current year. The Tax Court has held that $90,000 represents unreasonable compensation. Katherine has avoided double taxation only to the extent of $210,000 (the portion of the salary that is considered reasonable compensation).
A)True
B)False
Q2) What are some of the issues remaining unresolved with the QBI deduction?
Q3) Under the "check-the-box" Regulations, a two-owner LLC that fails to elect to be to treated as a corporation will be taxed as a sole proprietorship.
A)True
B)False
Q4) Rajib is the sole shareholder of Robin Corporation, a calendar year S corporation. In the current year, Robin earned net profit of $350,000 ($520,000 gross income - $170,000 operating expenses) and distributed $80,000 to Rajib. Rajib must report Robin Corporation profit of $350,000 on his Federal income tax return.
A)True
B)False
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Chapter 16: Accounting Periods and Methods
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Q1) A calendar year, cash basis corporation began business on April 1, 2018, and paid $2,400 for a 24-month liability insurance policy. An accrual basis, calendar year taxpayer also began business on April 1, 2018, and purchased a 24- month liability insurance policy. The accrual basis taxpayer must amortize the premiums over 24 months but the cash basis taxpayer may deduct the total premiums in 2018.
A)True
B)False
Q2) Laura Corporation changed its tax year-end from July 31st to December 31st in 2018. The income for the period August 1, 2018 through December 31, 2018 was $35,000. The corporate tax rate in the state where the corporation performs all of its business is 5% on the first $50,000 of income and 7% on income above $50,000. Laura's state tax for the short period is $2,033.
A)True B)False
Q3) If an installment sale contract does not charge interest on the sale of a capital asset, only capital gain will be recognized over the life of the contract.
A)True
B)False
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Chapter 17: Corporations: Introduction and Operating Rules
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Q1) For purposes of the accumulated earnings tax, earnings can be accumulated for reasonable needs of the business.
List several examples of what is included and several examples of what is not included in the reasonable needs of the business.
Q2) Income that is included in net income per books but not included in taxable income is a subtraction item on Schedule M-1.
A)True
B)False
Q3) Canary Corporation, a calendar year C corporation, received an $80,000 dividend from Stork Corporation. Canary owns 18% of the Stork Corporation stock. Assuming it is not subject to the taxable income limitation, Canary's dividends received deduction is $40,000.
A)True
B)False
Q4) Because of the taxable income limitation, no dividends received deduction is allowed if a corporation has an NOL for the current taxable year.
A)True
B)False
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Chapter 18: Corporations: Organization and Capital Structure
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Q1) Ashley, a 70% shareholder of Wren Corporation, transfers property with a basis of $250,000 and a fair market value of $900,000 to Wren Corporation for additional stock. Ashley owns 78% of Wren after the transfer. Two other shareholders in Wren transfer a nominal amount of property to Wren along with Ashley's transfer so that Ashley and the two shareholders own 90% of the Wren stock after the transfer. Does Ashley have taxable gain on the transfer?
Q2) If a transaction qualifies under § 351, any recognized gain is equal to the value of the boot received.
A)True
B)False
Q3) Rhonda and Marta form Blue Corporation. Rhonda transfers land (basis of $55,000 and fair market value of $180,000) for 50 shares plus $20,000 cash. Marta transfers $160,000 cash for 50 shares in Blue Corporation.
A) Rhonda's basis in the Blue Corporation stock is $55,000.
B) Blue Corporation's basis in the land is $55,000.
C) Blue Corporation's basis in the land is $180,000.
D) Rhonda recognizes a gain on the transfer of $125,000.
E) None of the above.
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Chapter 19: Corporations: Distributions Not in Complete
Liquidation
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Q1) If a distribution of stock rights is taxable and their fair market value is less than 15 percent of the value of the old stock, then either a zero basis or a portion of the old stock basis may be assigned to the rights, at the shareholder's option.
A)True
B)False
Q2) If stock rights are taxable, the recipient has income to the extent of the fair market value of the rights.
A)True
B)False
Q3) A distribution from a corporation will be taxable to the recipient shareholders only to the extent of the corporation's E & P.
A)True
B)False
Q4) If a stock dividend is taxable, the shareholder's basis in the newly received shares is equal to the fair market value of the shares received in the distribution.
A)True
B)False
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Chapter 20: Corporations: Distributions in Complete
Liquidation and an Overview of Reorganizations
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Q1) A subsidiary is liquidated pursuant to § 332. The parent has held 100% of the stock in the subsidiary for the past ten years. The subsidiary has a net operating loss carryover of $400,000. The net operating loss does not carry over to the parent.
A)True
B)False
Q2) As a general rule, a liquidating corporation recognizes gains but not losses on the distribution of property in complete liquidation.
A)True
B)False
Q3) Pursuant to a liquidation, Coral Corporation distributes to Lucinda, a shareholder, land (basis of $90,000, fair market value of $200,000). The land is subject to a $75,000 liability. Lucinda will have a basis of $125,000 in the land.
A)True
B)False
Q4) Since debt security holders do not own stock, they do not fall under the corporate reorganization rules.
A)True
B)False
Page 22
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Chapter 21: Partnerships
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Q1) Aggregate concept
Q2) Jeordie and Kendis created the JK Partnership by contributing $100,000 each. The $200,000 cash was used by the partnership to acquire a depreciable asset. The partnership agreement provides that the partners' capital accounts will be maintained in accordance with Reg. § 1.704-1(b) (the "economic effect" Regulations) and that any partner with a deficit capital account will be required to restore that capital account when the partner's interest is liquidated. The partnership agreement provides that MACRS will be allocated 20% to Jeordie and 80% to Kendis. All other items of partnership income, gain, loss, deduction, and credit will be allocated equally between the partners. In the first year, MACRS is $40,000 and no other operating transactions occur. The property is sold at the end of the year for $160,000 and the partnership is liquidated immediately thereafter.
To satisfy the economic effect test, how much of the $160,000 cash (from the sale) is allocated each to Jeordie and Kendis?
Q3) General partnership
Q4) General Partner
Q5) Partner's capital account
Q6) §704(b) book
Q7) Schedule K-1
Page 23
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Chapter 22: S Corporations
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Q1) Only 51% of the shareholders must consent to an S election.
A)True
B)False
Q2) A calendar year C corporation reports a $41,000 NOL in 2018, but it elects S status for 2019 and generates an NOL of $30,000 in that year. At all times during 2019, the stock of the corporation was owned by the same 10 shareholders, each of whom owned 10% of the stock. Kris, one of the 10 shareholders, holds an S stock basis of $2,300 at the beginning of 2019. How much of the 2019 loss, if any, is deductible by Kris?
A) $0
B) $2,300
C) $3,000
D) $7,100
Q3) An S shareholder's stock basis is reduced by flow-through losses before accounting for distributions.
A)True
B)False
Q4) An S election is made on the shareholder's Form 2553.
A)True
B)False
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Chapter 23: Exempt Entities
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Q1) Even though a church is not required to obtain IRS approval of its exempt status, it still annually must file a Form 990.
A)True
B)False
Q2) Bingo games
Q3) Which of the following statements regarding the unrelated business income tax is correct?
A) Private foundations are subject to the unrelated business income tax.
B) Bingo games are not subject to the unrelated business income tax if they are conducted by an exempt organization.
C) The exchange or rental of membership lists with other exempt and nonexempt organizations is not an unrelated trade or business.
D) All of the above statements are correct.
E) None of the above statements is correct.
Q4) What are the excise taxes imposed on private foundations, and why are they imposed?
Q5) Not an exempt organization
Q6) What is the purpose of the unrelated business income tax?
Q7) Debt-financed income is the net income from investment assets.
Page 25
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Chapter 24: Multistate Corporate Taxation
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Q1) A ________________ tax is designed to complement the local sales tax structure, to prevent the consumer from making no- or low-tax purchases in another state, outside the U.S., or online, and then bringing the asset into the state.
Q2) Politicians frequently use tax credits and exemptions to create economic development incentives.
A)True
B)False
Q3) Typically, state taxable income includes:
A) Apportionable income only.
B) Different terms are used in the computation.
C) Both a. and b.
D) Neither a. nor b. Different terms are used in the computation.
Q4) A typical U.S. state piggybacks its collections of the corporate income tax, by letting the Federal government collect and remit the corresponding tax to the state.
A)True
B)False
Q5) Fees paid to an accounting firm for the conduct of a financial audit.
Q6) A textbook purchased by a State University student.
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Chapter 25: Taxation of International Transactions
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Q1) LocalCo merges into HeirCo, a non-U.S. entity, in a transaction that would qualify as a "Type A" reorganization.
The resulting realized gain is tax-deferred under U.S. income tax law, using §§ 351 and 368.
A)True
B)False
Q2) The transfer of the assets of a U.S. corporation's foreign branch to a newly formed foreign corporation is always tax deferred under § 351.
A)True
B)False
Q3) Mitch, an NRA, sells a building in Omaha for $1 million. His basis in the building is zero for both regular tax and AMT purposes. Mitch has no other contact with the U.S. other than the ownership of the building. How much Federal income tax is due from Mitch on the sale?
A) $0, as Mitch is an NRA.
B) The amount realized times the top individual tax rate.
C) The net gain times the top capital gains tax rate.
D) The net gain taxed at the lesser of the applicable regular or AMT rates.
Q4) Portfolio income treated as Subpart F income.
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Chapter 26: Tax Practice and Ethics
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Sample Questions
Q1) Currently, the IRS charges a ________________ % interest rate on taxes that the taxpayer underpays.
Q2) An IRS letter ruling might determine that an employee's compensation is unreasonable in amount.
A)True
B)False
Q3) The chief executive of the IRS is the _________________________.
Q4) The Treasury issues "private letter rulings" and other determinations, usually in response to a taxpayer request. What is the purpose of the rulings program? Answer from both the taxpayer and the government points of view.
Q5) The general statute of limitations regarding Federal tax returns extends for ________________ years. It is________________years if a substantial understatement of income is found, and ________________years with respect to worthless securities.
Q6) In a criminal tax fraud case, the burden is on the taxpayer to show that he or she was innocent "beyond the shadow of any reasonable doubt."
A)True
B)False
Q7) Preparer penalty for reckless conduct.
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Chapter 27: The Federal Gift and Estate Taxes
Available Study Resources on Quizplus for this Chatper
141 Verified Questions
141 Flashcards
Source URL: https://quizplus.com/quiz/7734
Sample Questions
Q1) A surviving spouse's share of the community property is not included in the deceased spouse's gross estate.
A)True
B)False
Q2) Some states impose inheritance taxes, but the Federal tax system does not.
A)True
B)False
Q3) Which of the following is not a characteristic of both the Federal gift tax and the Federal estate tax?
A) A deduction for state death taxes may be available.
B) A charitable deduction is available.
C) A marital deduction is available.
D) An exclusion amount is available in computing the tax.
Q4) In most cases, the gross estate of a decedent is larger than the probate estate.
A)True
B)False
Q5) Selling expenses incurred to sell estate assets in order to pay administration expenses.
Q6) Mortgage on land included in gross estate and willed to decedent's children.
Q7) Payment of unpaid gift taxes.
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Chapter 28: Income Taxation of Trusts and Estates
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161 Verified Questions
161 Flashcards
Source URL: https://quizplus.com/quiz/7735
Sample Questions
Q1) For a calendar-year entity, the Form 1041 has an unextended due date of April 15.
Q2) This year, the Nano Trust reported $50,000 entity accounting income and $40,000 distributable net income (DNI). Nano distributed $60,000 cash to Horatio, its sole income beneficiary. Nano is a simple trust. Nano's distribution deduction is:
A) $60,000.
B) $50,000.
C) $40,000.
D) $0.
Q3) The Federal income taxation of a trust or estate can be described as a "modified pass-through" system. Compare fiduciary income tax rules to those that apply to LLCs and to individuals.
Q4) Which of the following restrictions applies concerning distributions to trust beneficiaries?
A) Special allocations are not allowed under Subchapter J.
B) Special allocations are allowed, but only in the trust's termination year.
C) Special allocations are allowed, but only for portfolio income items.
D) Special allocations of income types are allowed, assuming that they carry a substantial economic effect.
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