Taxation of Business Entities
Chapter Exam Questions
Course Introduction
This course provides an in-depth exploration of the federal income taxation of business entities, including partnerships, corporations (C and S corporations), and limited liability companies (LLCs). Students will examine the formation, operation, distribution, and dissolution of these entities, with a focus on the unique tax rules, compliance requirements, and planning opportunities associated with each entity type. Topics include entity choice implications, tax consequences of property contributions and distributions, allocation of income and loss, double taxation, transfers of interests, and the impact of tax law changes on business strategies. This course is essential for students pursuing careers in accounting, taxation, and business law.
Recommended Textbook Concepts in Federal Taxation 2017 24th Edition by Kevin E. Murphy
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Chapter 1: Federal Income Taxation-An Overview
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Q1) The period of time during which a taxpayer and/or the IRS can correct a taxpayer's taxable income.
A)Advalorem tax
B)Deduction
C)Excisetax
D)Exclusi on
E)Expense
F)Gain
G)Loss
H)Ordinary income
I)Pay-as-you-go concept
J)Personal property
K)Real property
L)Self-assessment
M)Standard deduction
N)Statute of limitations
O)Taxbase
P)Tax credit
Answer: N
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Chapter 2: Income Tax Concepts
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Q1) The primary difference(s)between the claim-of-right doctrine and the constructive receipt doctrine is/are
I.Claim of right applies when the taxpayer has not yet physically received an item of income.
II.Constructive receipt applies after the taxpayer has received an item of income.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
Answer: D
Q2) Under the Wherewithal to Pay concept,income should be recognized and a tax paid on the income when the taxpayer has the resources to pay the tax.
A)True
B)False
Answer: True
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Chapter 3: Income Sources
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Q1) Chip,a single individual has two sales of stock during the current year.The first sale produces a short-term loss of $10,000 and the second sale results in a long-term gain of $40,000.Chip's taxable income without considering the gain is $150,000.Chip's stock transactions will increase his income tax liability by:
A)$3,200
B)$4,500
C)$6,000
D)$8,000
E)$8,400
Answer: B
Q2) Connie was walking her dog when she came across a paper bag with $20,000 in it.She turned the money into the police.After the appropriate period of time,no one claimed the money and the police returned the money to Connie.Connie does not have to recognize any taxable income since it was not derived from capital or labor.
A)True
B)False
Answer: False
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Chapter 4: Income Exclusions
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Q1) Employer-provided lodging
A)Dues, uniforms, subscriptions.
B)Intended to punish and are taxable.
C)Taxable if from an employer-provided policy.
D)Any personal wrong, such as libel, slander, or assault.
E)Excludable amount limited to gross profit percentage.
F)Gratuitous and not a form of compensation for services.
G)Excludability requires that it must be a condition of employment.
H)Excluded if for compensatory payments for sickness or personal physical injury.
I)To replace lost earnings and is excluded if due to personal physical injury.
J)Excluded if provided on the employer's business premises and for the convenience of employer.
Q2) Robert's employer provides all of its employees a $40,000 group term life insurance policy.The cost of this policy must be included in Robert's income.
A)True
B)False
Q3) Marline receives $14 million in punitive damages for a personal physical injury.
Q4) Jeane's employer pays his medical premiums each month ($130/month).
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Chapter 5: Introduction to Business Expenses
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Q1) Using the tests for deductibility discussed in Chapter 5,explain why the following expenses may not be fully deductible in the current year.
a.Antonio is the owner of a restaurant. His business has been growing, and Antonio determines that he needed to add more seating capacity. He builds a patio garden section onto the back of the restaurant at a cost of $70,000.
b.Tina owns a construction company. Because she is behind schedule on a project, she pays a city building inspector $500 to get him to come out and do his inspection a week before he had scheduled the inspection.
c.Claude is a graduate of State University and an avid supporter of the school's athletic program. During the summer he employed State's star running back in his pool cleaning business. He paid the football player $15 an hour, although other employees doing similar work are only paid $10 per hour.
d.Melody owns a chain of coffeehouses. When she opened a coffeehouse in a new city this year, she spent $20,000 advertising the new store. Even though this is much more than she typically spends on advertising, she felt that it was reasonable because the new coffeehouse has the potential to be a very profitable venture for many years.
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Chapter 6: Business Expenses
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Q1) Walter is a cash basis taxpayer with a drapery cleaning business.In the current year he determines he will never receive payment from Davis for cleaning services provided to Davis.Can Walter record a deduction for the bad debt? Explain.
Q2) Caroline is a doctor in Little Rock.She travels to Atlanta to attend a two-day seminar for health professionals about investing in real estate.Transportation expenses are $400,the hotel cost $104/day,and meals cost $50/day.How much can Caroline deduct for travel to the seminar?
A)$- 0 -
B)$258
C)$308
D)$658
E)$708
Q3) Which of the following expenses is not deductible for AGI?
A)Alimony paid.
B)Contributions to an IRA.
C)Moving expenses.
D)Interest on qualified student loans.
E)Interest expense related to an investment.
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8
Chapter 7: Losses-Deductions and Limitations
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Q1) Travis is a 30% owner of 3 rental houses.He spends 625 hours a year managing the properties.In addition,he owns a 20% interest in a real estate business to which he devotes 1,800 hours a year.The rental units generate a total loss of $22,000,and Travis' adjusted gross income in the current year,before considering the rental properties,is $120,000.How much of the loss can Travis deduct?
A)$- 0 -
B)$4,500
C)$6,600
D)$15,000
E)$22,000
Q2) All of the following are capital assets,except
A)Personal residence.
B)Land used for business parking lot.
C)Pickup truck used for personal transportation..
D)Corporate bonds held for investment purposes.
E)A hand-written letter by Dwight Eisenhower held in a private collection.
Q3) Why do the wash sale rules apply to the sale of stock at a loss but not to the sale of stock at a gain?
Q4) Why did Congress enact the at-risk rules?
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Chapter 8: Taxation of Individuals
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Q1) Home equity loan interest
A)Prepaid interest.
B)An amount that each taxpayer who is neither a qualifying child nor a qualifying relative, and who files a return, is allowed to deduct.
C)One test for a qualifying relative.
D)The minimum amount a taxpayer can deduct for personal expenditures.
E)A deduction in this category is always allowed. That is, there is no minimum allowable amount and generally no income limitation placed on these deductions.
F)Generally, these deductions are for specifically allowed personal expenditures.
G)An exception to this test is a custodial parent.
H)Interest paid on debt used to buy securities.
I)Interest paid on credit cards, personal loans, car loans, etc.
J)Interest paid on a mortgage secured by the taxpayer's residence. The proceeds of the loan can be used for any purpose and the interest is still deductible.
K)A tax designed to prevent the shifting of unearned income to children of the taxpayer.
Q2) Explain the support test and the gross income test to be a qualifying relative.
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Chapter 9: Acquisitions of Property
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Q1) Oscar buys a 10% interest in Britanny Corporation paying $92,000 cash on January 1,2015.During 2015,Britanny Corporation reports a loss of $30,000 and pays cash dividends to shareholders of $10,000.For 2016,Britanny Corporation has a loss of $60,000 and pays cash dividends of $20,000.If Britanny Company is organized as an S Corporation,Oscar's basis in the Britanny Corporation stock at the end of 2016 is:
A)$80,000
B)$86,000
C)$92,000
D)$98,000
E)$104,000
Q2) Dana purchases an automobile for personal use for $27,000.After using it for three years,Dana converts the automobile to business use when the fair market value is $19,000.What is Dana's basis for depreciation purposes?
A)$- 0 -
B)$19,000
C)$27,000
D)The automobile cannot be depreciated.
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Chapter 10: Cost Recovery on Property: Depreciation, depletion,
and Amortization
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Q1) During 2016,Duncan Company purchases and places in service office equipment with a cost of $40,000.The equipment is 7-year MACRS property with an ADS recovery period of 10 years.Duncan desires to avoid the AMT.What is its minimum 2016 depreciation deduction?
A)$2,000
B)$2,857
C)$3,000
D)$4,000
E)$5,714
Q2) In 2016,Steve purchases $975,000 of equipment.The taxable income of the business is $10,000.What is Steve's maximum Section 179 deduction in 2016?
A)$10,000
B)$- 0 -
C)$25,000
D)$975,000
E)$500,000
Q3) The mid-year convention is used for personal property only.
A)True
B)False
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Chapter 11: Property Dispositions
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Q1) George's wife sells stock she purchased 10 months ago at a gain of $212.
Q2) The lookback recapture rule nets the current-year net Section 1231 gain against Section 1231 ordinary loss deductions taken in the previous three years.
A)True
B)False
Q3) Hurst Company purchased a commercial building in 2001 for $700,000.The building is sold in 2016 for $900,000.The actual depreciation deducted on the building as of the sale date was $600,000.Straight-line depreciation for the same period would have been $400,000.What is the amount and character of the gain recognized on the sale?
A)$900,000 Section 1231 gain.
B)$200,000 ordinary income, and $100,000 Section 1231 gain.
C)$400,000 ordinary income, and $400,000 Section 1231 gain.
D)$200,000 ordinary income, and $400,000 long-term capital gain.
E)$200,000 ordinary income, and $600,000 Section 1231 gain.
Q4) Explain why a taxpayer would ever consider using accelerated depreciation methods on personal property,given the provisions of Section 1245.
Q5) What incentive provisions or preferential treatments exist for capital gains?
Q6) George sells his personal use automobile at a loss of $4,300.
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Chapter 12: Non-Recognition Transactions
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Q1) Belinda exchanges investment real estate with Russell.Belinda's adjusted basis in her two-year old property is $280,000.The property is encumbered by a mortgage of $100,000 and has a fair market value of $320,000 when exchanged.Russell assumes that debt.Russell paid $80,000 cash for his property in 1999 and it is appraised at $150,000 on the day of the exchange.Russell pays Belinda enough in cash to balance the exchange.What is Belinda's basis in the new land?
A)$20,000
B)$150,000
C)$280,000
D)$320,000
Q2) Office building for office equipment.
A)qualifies as a like-kind exchange
B)does not qualify as a like-kind exchange
Q3) When two qualified assets are exchanged and their fair market values are not equal,additional nonqualifying property referred to as "boot" can be used to equalize the transaction without disqualifying the nonrecognition transaction.
A)True
B)False
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Chapter 13: Choice of Business Entity-General Tax and
Nontax
Factorsformation
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Q1) Nontax characteristics that should be considered in choosing an entity form include which of the following?
I.Number of owners.
II.Limited liability for owners.
III.Ability to participate in management.
IV.Transferability of ownership interests.
A)Only statement I is correct.
B)Only statement II is correct.
C)Statements II and IV are correct.
D)Statements I, II, and IV are correct.
E)Statements I, II, III, and IV are correct.
Q2) Start-up and organizational costs can be expensed or capitalized and amortized over 60 months based on the election of the taxpayer.
A)True B)False
Q3) Discuss the characteristics of a personal service corporation (PSC).
Q4) Corporations generally are required to use the accrual method of accounting. A)True B)False
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Chapter 14: Choice of Business Entity-Operations and Distributions
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Q1) Since Wisher,Inc.owns 80% of Patriot,Inc.(a U.S.corporation)the dividend received deduction rate is 100%.
A)True
B)False
Q2) William,a CPA,owns a 75% interest in Burglar Concrete Company (BCC).BCC is organized as a partnership.During the current year,William prepares BCC's tax return and receives his normal $300 fee for the preparation of the return.
I.BCC cannot deduct the $300 fee because of the related party rules.
II.William must recognize the $300 fee as income.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
Q3) Discuss two tax-planning techniques that can be used by a 100% owner-employee to reduce his/her tax liability.
Q4) Withdrawals of cash by a partner are taxable.
A)True
B)False
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Chapter 15: Choice of Business Entity-Other Considerations
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Q1) Ken is a 15% partner in the Robinson & Sons and has net self-employment income of $98,000,$100,000 and $102,000 in his highest three consecutive years.The maximum amount that Ken can receive under a Keogh defined benefit plan is
A)$13,045
B)$75,000
C)$100,000
D)$160,000
E)$205,000
Q2) When calculating AMTI,individual taxpayers must add back the following:
I.Charitable contributions.
II.Qualified home mortgage interest.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
Q3) Any structure over 100 years old is eligible for the rehabilitation tax credit.
A)True
B)False
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Chapter 16: Tax Research
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Q1) In planning situations,tax research is undertaken
I.To always attempt to minimize taxes.
II.Considering the client's nontax objectives.
III.To find the best way to accomplish a desired result.
IV.Considering the client's tax objectives.
A)Only statement I is correct.
B)Only statement IV is correct.
C)Statements II and III are correct.
D)Statements II, III, and IV are correct.
E)Statements I, II, III, and IV are correct.
Q2) Revenue Ruling 86-457
A)Tax Court Reports
B)United States Tax Cases
C)Internal Revenue Code
D)Cumulative Bulletin
E)Not a primary source
Q3) Citators provide the full text of court decisions.
A)True
B)False
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