Taxation of Business Entities Exam Practice Tests
Course Introduction
This course provides an in-depth examination of the federal income tax laws and regulations applicable to business entities, including corporations, partnerships, S corporations, and limited liability companies. Students will explore the tax implications of entity formation, operation, distributions, reorganizations, and liquidations. The course emphasizes both the theoretical and practical aspects of entity taxation, highlighting issues such as income determination, deduction limitations, tax credits, and the interaction between entity and owner taxes. Case studies and real-world examples are used to demonstrate tax planning strategies and compliance requirements, preparing students to navigate the complex tax landscape faced by modern businesses.
Recommended Textbook
Concepts in Federal Taxation 2019 26th Edition Kevin E. Murphy
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16 Chapters
2071 Verified Questions
2071 Flashcards
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Chapter 1: Federal Income Taxation-An Overview
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150 Verified Questions
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Sample Questions
Q1) Which of the following payments meets the IRS definition of a tax?
A)Sewer fee charged added to a city trash collection bill.
B)A special assessment paid to the county to pave a street.
C)A levy on the value of a deceased taxpayer's estate.
D)Payment of $300 to register an automobile. The $300 consists of a $50 registration fee and $250 based on the weight of the auto.
Answer: C
Q2) The return selection program designed to select returns with the highest probability of errors is
A)The TCMP.
B)The DIF program.
C)The special audit program.
D)The document perfection program.
E)The information-matching program.
Answer: B
Q3) All tax practitioners are governed by the AICPA's Code of Professional Conduct.
A)True
B)False
Answer: False
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Page 3
Chapter 2: Income Tax Concepts
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Sample Questions
Q1) Any deduction taken in a prior year that is recovered in a subsequent year is reported as income in the year it is recovered, to the extent that a tax benefit was received from the deduction.
A)True
B)False
Answer: True
Q2) Explain the similarities and differences of the Claim of Right doctrine and the Constructive Receipt doctrine.
Answer: Constructive Receipt applies when the taxpayer has not yet physically received an item of income. Whether the taxpayer has the income within his/her control is the determinative question. Claim of Right applies when the taxpayer has actually received the income. The question is whether the amount is currently taxable. If a binding or legal obligation to return the funds exists, then the income is not currently taxable.
Q3) An individual can legally assign income to another individual, and the assignment relieves the owner of the income from paying tax on the income.
A)True
B)False
Answer: False
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Chapter 3: Income Sources
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Sample Questions
Q1) Ralph and Renee are negotiating a divorce settlement that will be finalized in 2018. Renee has an option of taking a property settlement of $100,000 or alimony payments of $12,000 per year for 10 years. Without considering the time value of money, which of the following statements is true?
I.If Renee expects that she will be in the 32% marginal tax bracket, she should take the property settlement of $100,000.
II.If Renee expects that she will be in the 32% marginal tax bracket, she should take the alimony of $12,000 per year for 10 years.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
Answer: A
Q2) Net collectibles gains are taxed at a maximum rate of 25 percent.
A)True
B)False
Answer: False
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5
Chapter 4: Income Exclusions
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Sample Questions
Q1) No-additional-cost services and employee discounts must be made available to employees on a nondiscriminatory basis and must also be in the same line of business in which the employee works to be excluded from the employee's income.
A)True
B)False
Q2) Hector's employer has a qualified pension plan to which it contributes 6% of his gross salary. Hector's current annual salary is $50,000. The pension plan also earns $2,500 during the current year on contributions made to the plan on behalf of Hector. What is Hector's gross income from these transactions for the current year?
A)$50,000
B)$52,500
C)$53,000
D)$55,500
Q3) Raymond dies on July 8<sup>th</sup> of the current year. Out of love and respect for Raymond, his employer gives his widow $5,000.
A)Fully excluded from gross income.
B)Fully included in gross income.
C)Partially excluded from gross income.
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Chapter 5: Introduction to Business Expenses
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Sample Questions
Q1) Which of the following is/are currently deductible trade or business expenses?
I.Membership dues to an environmental lobbying group.
II.Cost of acquiring a new business automobile.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
Q2) Start-up costs over $5,000.
A)Capitalized and amortized over a number of accounting periods
B)Expensed in the period incurred
C)Not deductible
D)Can be capitalized and amortized or deductible depending on the amount of the expenditure
Q3) Which of the following is not deductible?
A)Expenses related to earning rental income
B)Expenses related to interest income from municipal bonds.
C)Legal expenses related to rental real estate property.
D)Medical expenses of the taxpayer's dependent child.
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Page 7
Chapter 6: Business Expenses
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Sample Questions
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) Byron loaned $5,000 to his friend Alan in 2011. They drew up a formal loan agreement that called for a reasonable rate of interest. Alan used the loan proceeds to pay expenses during his last year in college. Byron was recently informed that his friend Alan was struck by lightning and died. Byron will never be able to collect the proceeds of this loan because Alan died with no assets. What tax benefit, if any, will Byron will be able to claim in 2018, the year that the loan became worthless.
A)$5,000 tax credit.
B)$5,000 ordinary loss.
C)$5,000 short-term capital loss.
D)This is a personal non-deductible loss.
Q3) Discovery, Inc., a cash-basis consulting firm, can deduct a twelve-month insurance premium in the year the premium is paid even though the policy remains in effect into the following year.
A)True
B)False
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Chapter 7: Losses-Deductions and Limitations
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Sample Questions
Q1) A passive activity
I.includes an interest in a limited partnership held by a limited partner investor.
II.includes a working interest in an oil and gas deposit.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
Q2) In addition to his salary, Peter realizes a $1,000 short-term capital gain and a $5,000 long-term capital loss. The net effect of the capital asset transactions on Peter's adjusted gross income is
A)$-0-
B)$1,000
C)$(3,000)
D)$(4,000)
E)$(5,000)
Q3) A transaction loss occurs when an asset is disposed of at less than its basis.
A)True
B)False
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Page 9
Chapter 8: Taxation of Individuals
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Sample Questions
Q1) Rosa is a single parent who maintains a home in Durham in which she and her 16-year-old daughter, Maria, reside. She also provides most of the support for her son, Carmelo, age 25, who is a full-time student at Duke Law School, lives at home, and earns $3,500 as a part-time waiter at a local diner. Which of the following statements is true related to Rosa's tax return?
A)Neither Maria or Carmelo is a qualifying child of Rosa's.
B)Both Maria and Carmelo are qualifying children of Rosa's.
C)Maria is a qualifying relative while Carmelo is a qualifying child of Rosa's.
D)Carmelo is a qualifying relative while Maria is a qualifying child of Rosa's.
Q2) Shannon is 16 years old and is a qualified dependent of her mother. Shannon earns $1,500 as a counselor at a church summer camp and receives $2,500 of interest on a savings account established by her grandparents. Shannon's 2016 taxable income is:
A)$- 0 -
B)$1,500
C)$2,150
D)$2,500
E)$2,950
Q3) Explain the non-support test and the principle residence test to be a qualifying child.
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10
Chapter 9: Acquisitions of Property
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Sample Questions
Q1) Brad, an engineering consultant, was given stock valued at $3,000 for services rendered. His basis in the stock he received for the services is zero since he received no cash.
A)True
B)False
Q2) Sammy buys a 20% interest in Duvall Corporation paying $100,000 cash on January 1, 2017. During 2017, Duvall Corporation reports a loss of $60,000 and pays cash dividends to shareholders of $5,000. For 2018, Duvall Corporation has income of $200,000 and pays cash dividends of $40,000. If Duvall Company is organized as an S Corporation, Sammy's basis in the Duvall Corporation stock at the end of 2018 is:
A)$88,000
B)$89,000
C)$100,000
D)$119,000
E)$128,000
Q3) Personal property consists of any property that is held by an individual.
A)True
B)False
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Page 11
Chapter 10: Cost Recovery on Property: Depreciation, Depletion,
and Amortization
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Sample Questions
Q1) Weston purchases equipment classified as 7-year property on January 5, 2017, at a cost of $80,000. Section 179 was not elected. He sells the equipment on February 12, 2018. What is Weston's 2017 depreciation deduction?
A)$- 0 -
B)$3,498
C)$6,996
D)$9,794
E)$13,992
Q2) Why might a taxpayer elect to depreciate assets using the Alternative Depreciation System (ADS)?
I.The taxpayer desires rapid write off of assets.
II.The taxpayer may be close to being subject to the alternative minimum tax.
III.The taxpayer is experiencing a low income time period.
A)Statements I and III are correct.
B)Only statement I is correct.
C)Statements II and III are correct.
D)Statements I and II are correct.
E)Statements I, II, and III are correct.
Q3) Discuss why listed property gets special attention.
Page 12
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Chapter 11: Property Dispositions
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Sample Questions
Q1) Collectible gain (loss)
A)Stocks, bonds, options.
B)Depreciable real property.
C)All or part of any gain on sale is excluded.
D)Taxed at a maximum rate of 25%.
E)Gain or loss on the sale of artwork.
F)Depreciable tangible personal property.
G)Subject to full recapture as ordinary income of all depreciation taken.
H)Gain on real property attributable to excess depreciation is ordinary income.
Q2) Unrecaptured Section 1250 gain
I.applies to real property owned by individuals and corporations.
II.is the gain on the sale of real estate not already classified as ordinary income if the property were Section 1245 property.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
Q3) Discuss the general differences between Section 1245 and Section 1250 recapture provisions.
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Chapter 12: Non-Recognition Transactions
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Sample Questions
Q1) Coke-Cola bonds for General Foods bonds.
A)qualifies as a like-kind exchange
B)does not qualify as a like-kind exchange
Q2) Gain deferral is fundamental to the nonrecognition transactions. In which of the following is gain deferral mandatory?
I.Involuntary conversion of business real estate.
II.Like-kind exchange of business real estate.
A)Only statement I is correct.
B)Only statement II is correct.
C)Both statements are correct.
D)Neither statement is correct.
Q3) A personal residence for a vacation home.
A)qualifies as a like-kind exchange
B)does not qualify as a like-kind exchange
Q4) The mechanism for effecting a deferral in a nonrecognition transaction is an adjustment of the replacement asset's basis.
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) Gomer is admitted to the Mouton Partnership on July 1, 2018. Gomer contributes ABC common stock purchased in 1991 for $20,000 with a fair market value of $100,000 on July 1, 2018, for a 25% interest in the partnership. After Gomer's admission to the partnership, Mouton's net asset fair market value is $400,000. What is Gomer's taxable gain or income due to the exchange of ABC stock for the Mouton Partnership interest?
A)$- 0 -
B)$80,000 long-term capital gain.
C)$80,000 ordinary income.
D)$80,000 short-term capital loss.
E)$100,000 ordinary income.
Q2) Milo contributes a building with a fair market value of $400,000 to a new partnership in exchange for a 25% interest. His adjusted basis in the building is $125,000, which is subject to a $100,000 mortgage. The partnership assumes the mortgage. What is Milo's basis in his partnership interest?
A)$50,000
B)$75,000
C)$100,000
D)$125,000
E)$400,000
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Chapter 14: Choice of Business Entity-Operations and Distributions
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Sample Questions
Q1) Sean Corporation's operating income totals $200,000 for the current year, including a deduction of $30,000 for actual charitable contributions. Dividend income of $10,000 was received from unaffiliated corporations and is not included in the $200,000. The related dividend received deduction has yet to be determined. To calculate the maximum allowable deduction for contributions, Sean should apply the percentage limitation to the base amount of
A)$200,000
B)$220,000
C)$230,000
D)$240,000
E)$242,000
Q2) Corporations that sell depreciable real property are not subject to depreciation recapture rules
A)True
B)False
Q3) Double taxation
A)Sole Proprietorship.
B)Partnership.
C)Corporation.
D)S Corporation.
Page 16
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Chapter 15: Choice of Business Entity-Other Considerations
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Sample Questions
Q1) The maximum contribution that can be made on behalf of an owner-partner in a Keogh defined contribution money purchase plan is:
A)The lower of 15% of net-self employment income or $55,000
B)The lower of 13.0435% of net-self employment income or $55,000
C)The lower of 20% of net-self employment income or $55,000
D)The lower of 25% of net-self employment income or $55,000
Q2) Concerning individual retirement accounts (IRAs),
I.A single taxpayer that is an active participant in a qualified plan and has adjusted gross income of $66,000 may contribute and deduct up to $5,500 of the annual contribution.
II.A taxpayer who is not an active participant and whose spouse does not work may contribute $11,000 into two separate IRAs but can only deduct $5,500 for AGI.
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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Sample Questions
Q1) A disadvantage of electing to use the small claims division of the Tax Court is that
A)it is a more formal proceeding.
B)the decision is final and can not be appealed.
C)it tends to be more expensive.
D)it can cause many delays.
E)All of the above.
Q2) All of the following are advantages of computer-assisted tax research (CATR), except
A)CATR sources use search engines that allow quick retrieval of sources.
B)CATR sources are available on the Internet.
C)CATR sources contain only secondary sources of tax law.
D)CATR sources require less space and maintenance than print services.
Q3) What body prepares a compromise version of tax legislation when the House and Senate versions are not in agreement?
A)Arbitration Committee.
B)Joint Committee on Taxation.
C)House Ways and Means Committee.
D)Judiciary Committee.
E)Joint Conference Committee.
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Page 18