Ch 3 Federal Tax Process, Procedures, Accounting Flashcards
A company engaged a CPA to perform the annual audit of its financial statements. The audit failed to reveal an embezzlement scheme by one of the employees. Which of the following statements best describes the CPA’s potential liability for this failure?
A.
The CPA’s adherence to generally accepted auditing standards (GAAS) may prevent liability.
B.
The CPA will not be liable if care and skill of an ordinary reasonable person was exercised.
C.
The CPA may be liable for punitive damages if due care was not exercised.
D.
The CPA is liable for any embezzlement losses that occurred before the scheme should have been detected.
A.
The CPA’s adherence to generally accepted auditing standards (GAAS) may prevent liability.
When performing an audit, a CPA must exercise the level of care, skill, and judgment expected of a reasonably prudent CPA under the circumstances. This statement includes the standard that CPAs are held to in performing audits.
CPAs do not have strict liability for discovering fraud. If fraud is discovered in the audit, the CPA must disclose this to the client.
CPAs are liable to their clients if they are negligent in performing the audit.
Which of the following would be considered to impair a CPA’s independence while performing extended audit services?
A.
Confirming of accounts receivable
B.
Performing a separate evaluation of a client’s internal control
C.
Reporting to the board of directors or audit committee on behalf of management or the individual responsible for the internal audit function
D.
Performing a separate evaluation of the client’s ongoing monitoring activities
C.
Reporting to the board of directors or audit committee on behalf of management or the individual responsible for the internal audit function
Interpretation 101-3 of Rule 101 generally notes that a member’s performance of extended audit services would not be considered to impair independence with respect to a client for which the member is also providing services requiring independence, provided the member or his or her firm does not act or does not appear to act in a capacity equivalent to a member of client management or as an employee.
A member’s independence would not be impaired by the performance of separate evaluations of the effectiveness of a client’s internal control, including separate evaluations of the client’s ongoing monitoring activities. Also, performing procedures which are considered extensions of the member’s audit scope applied in an audit of the client’s financial statements, such as confirming of accounts receivable, would not impair independence.
However, reporting to the board of directors or audit committee on behalf of management or the individual responsible for the internal audit function, would be an activity that would impair independence.
Rules of accountancy differ from state to state and are difficult to understand. Where can a candidate find information that will allow him or her to maintain licensure records and view requirements for multiple jurisdictions?
A.
Each state will list requirements for all state licensing programs.
B.
The National Clearinghouse of CPAs
C.
The Federal CPA Exam Center
D.
NASBA tools for accounting compliance
D.
NASBA tools for accounting compliance
Each state has different rules and regulations as they apply to licensing requirements, but the NASBA Tools for Accounting Compliance (www.nasbatools.com) allow a candidate to view a CPE registry, compile credentials in one convenient location, and search jurisdictional requirements.
A CPA works for a large petrochemical company. The CPA has chosen not to file his personal federal tax return for the last three years. The CPA:
A.
may be disciplined by his employer.
B.
has no ethical exposure to anyone other than himself, although he is subject to IRS scrutiny.
C.
may not be disciplined by the AICPA or his state society as he is not in public practice.
D.
has committed an act discreditable to the profession.
D.
has committed an act discreditable to the profession.
The CPA, while an employee of industry, nevertheless is bound by the AICPA rules of professional conduct. A common misperception is that the various rules of professional conduct have no applicability to the member in industry. This is simply false. The answer is that the CPA has committed an act discreditable to the profession as outlined in ET Section 501, “Acts discreditable to the profession,” Interpretation 501-7, “Failure to File Tax Return or Pay Tax Liability.” Accordingly, the CPA may be disciplined by the state board or AICPA for committing an act discreditable to the profession.
If a bill is passed by the U.S. Senate Finance Committee, where does it go from there?
A.
The full Senate
B.
The House Ways and Means Committee
C.
The Joint Conference Committee
D.
The House of Representatives
A.
The full Senate
The process of a bill in the U.S. Congress is as follows:
- The House Ways and Means Committee starts the federal bill.
- The House of Representatives approves the bill (with changes).
- The Senate Finance Committee approves the bill (with more changes).
- The full Senate then votes on the bill.
Since there were changes to the bill, it then goes to a Joint Conference Committee.
A calendar-year individual filed an income tax return on April 1. This return can be amended no later than:
A.
4 months and 15 days after the end of the calendar year.
B.
10 months and 15 days after the end of the calendar year.
C.
3 years, 3 months, and 15 days after the end of the calendar year.
D.
3 years after the return was filed.
C.
3 years, 3 months, and 15 days after the end of the calendar year.
Taxpayers generally have 3 years to file an amended tax return. The 3-year period is measured from the date you filed your original return. If you filed your return before April 15, the 3-year period begins on April 15. If you requested an extension, the 3-year period runs from October 15. Therefore, you would count the 3 months and 15 days from January 1 to April 15, and then the 3 years from April 15.
An individual paid taxes 27 months ago, but did not file a tax return for that year. Now the individual wants to file a claim for refund of federal income taxes that were paid at that time. The individual must file the claim for refund within which of the following time periods after those taxes were paid?
A.
One year
B.
Two years
C.
Three years
D.
Four years
B.
Two years
The claim for refund must be filed within three years from the date on which the tax return that relates to the refund was filed or within two years of the actual payment of the tax, whichever is later. If no return was filed, the claim for refund must be filed within two years from the date of payment.
If an exempt organization is a corporation, the tax on unrelated business taxable income is:
A.
computed at corporate income tax rates.
B.
computed at rates applicable to trusts.
C.
credited against the tax on recognized capital gains.
D.
abated.
A.
computed at corporate income tax rates.
If an exempt organization is a corporation, the tax on unrelated business taxable income is computed using regular corporate income tax rates. Unrelated business income of charitable trusts is taxed at trust rates.
In which type of business organization are income taxes always required to be paid by the entity on profits earned as well as by the owners upon distribution thereof?
A.
General partnership
B.
Limited liability company
C.
Subchapter C corporation
D.
Subchapter S corporation
C.
Subchapter C corporation
A subchapter C corporation pays taxes on profits at the entity level and cannot deduct dividends paid (distributions to shareholders) before calculating the taxable income. Shareholders then pay tax again on those dividends.
A general partnership, a limited liability company (that is taxed as a partnership, a sole proprietor, or an S corporation), and a subchapter S corporation all pass the profits of the entity through to their individual shareholders to be taxed. No tax is paid by the entity. Distributions from these entities are tax free (with some exceptions for a subchapter S corporation).
An individual taxpayer (whose adjusted gross income is above $150,000 in the previous year) may avoid the penalty for failure to pay estimated tax by:
A. paying at least ________ of the tax shown on the current year’s return, or
B. ________ of the tax shown on the prior year’s return (assuming that the prior year’s return was for a full 12-month period).
A.
90%; 100%
B.
110%; 110%
C.
90%; 110%
D.
110%; 90%
C.
90%; 110%
Individuals may generally avoid the penalty for failure to pay estimated tax by:
paying at least 90% of the tax shown on the current year’s return or
paying 110% of the tax shown on the prior year’s return (for individuals with AGIs of more than $150,000 in the previous year).
In which of the following situations will a controlled foreign corporation located in Ireland be deemed to have Subpart F income?
A.
Services are provided by an Irish company in England under a contract entered into by its U.S. parent.
B.
Property is produced in Ireland by the Irish company and sold outside its country of incorporation.
C.
Services are performed in Ireland by the Irish company under a contract entered into by its U.S. parent.
D.
Property is bought from the controlled foreign corporation’s U.S. parent and is sold by an Irish company for use in an Irish manufacturing plant.
A.
Services are provided by an Irish company in England under a contract entered into by its U.S. parent.
IRC Subpart F income includes foreign base company income by a controlled foreign corporation (CFC). If a CFC is deemed to have Subpart F income, that income may need to be currently included in the U.S. parent’s taxable income if there are not enough exceptions or deductions to reduce the Subpart F income to zero.
Specifically in the situations listed in this question, the services provided by the Irish company in England under a contract entered into by its U.S. parent appear to be foreign base company income or, more specifically, foreign base company services income. This is income (whether in the form of compensation, commissions, fees, or otherwise) derived in connection with the performance of technical, managerial, engineering, architectural, scientific, skilled, industrial, commercial, or like services that are performed for or on behalf of any related person (i.e., the U.S. parent) and are performed outside the country (i.e., England) under the laws of which the controlled foreign corporation is created or organized (i.e., Ireland).
For a cash-basis taxpayer, gain or loss on a year-end sale of listed stock arises on the:
A.
trade date.
B.
settlement date.
C.
date of receipt of cash proceeds.
D.
date of delivery of stock certificate.
A.
trade date.
Taxpayers who sell stock or securities traded on an established securities market (called “Listed Stock”) must recognize gains or losses on the trade date, not on the settlement date. Because of the delay between the day of sale and the day payment is received, the transaction is considered an installment sale. IRC Section 453(k) specifically excludes sales of stock and securities traded on an established market from the installment method.
This rule applies to all taxpayers, whether on the cash or accrual method of accounting.
Edge Corp., a calendar-year C corporation, had a net operating loss and zero tax liability for its Year 3 tax year. To avoid the penalty for underpayment of estimated taxes, Edge could compute its first-quarter Year 4 estimated income tax payment using:
A.
the annualized income method.
B.
the preceding-year method.
C.
both the annualized income method and the preceding-year method.
D.
neither the annualized income method nor the preceding-year method.
A.
the annualized income method.
Even though Edge Corp. had a net operating loss and zero tax liability for its Year 3 tax year, to avoid the penalty for underpayment of estimated taxes, Edge must compute its first-quarter Year 4 estimated income tax payment using the annualized income method only. Edge Corp. cannot use the preceding-year method. A corporation that anticipates a year-end tax bill of $500 or more must estimate its income tax liability for the current tax year and pay four quarterly estimated tax installments during that year.
If the prior year was less than 12 months or there was no tax liability in the prior year, the preceding year exception is not available.
The two equal shareholders of a C corporation are thinking of filing an election to have the company treated as an S corporation. Which of the following consequences is an advantage of this election?
A.
The corporation’s net operating loss carryovers from prior years are immediately deductible by the shareholders.
B.
The corporation’s tax-free fringe benefits for the shareholders will be deductible by the corporation.
C.
The shareholders of the S corporation will be taxed only on distributions from the corporation.
D.
The corporation’s capital losses can be claimed on the tax returns of the shareholders.
D.
The corporation’s capital losses can be claimed on the tax returns of the shareholders.
Pursuant to IRC Section 1371, no carry-forward arising for a taxable year for which a corporation is a C corporation may be carried to a taxable year for which such corporation is an S corporation. Since there is no mention in the question of a built-in gain, any net operating loss carryover deduction does not appear to be immediate and does not appear to be an advantage for an S election.
The S corporation may deduct fringe benefits provided to shareholders to compute ordinary business income; however, fringe benefit expenditures made on behalf of officers and employees owning more than 2% of the S corporation’s stock are included as wages in their IRS Form W-2. There are two equal shareholders, and each member will own 50% of the S corporation stock, which is far more than the 2% required for the fringe benefits to be taxable as wage income, so this does not appear to be an advantage for an S election.
The income and deductions of an S corporation are passed through to shareholders on a per-share, per-day basis regardless of when or if distributions are made. However, as a former C corporation, distributions may be taxed in addition to the taxable income of the S corporation depending on the C corporation’s accumulated earnings and profits. Thus, the S corporation shareholders may not only be taxed on their distributions as a former C corporation; the S corporation shareholders will also be taxed on their share of the taxable income of the S corporation. Therefore, this does not appear to be an advantage for an S election.
A corporation may not carry a capital loss from, or to, a year for which it is an S corporation. However, a careful reading of the consequence that a corporation’s capital losses can be claimed on the tax returns of the shareholders suggests that these capital losses are not carryovers but current capital losses while an S corporation. This would be an advantage going forward once the corporation is an S corporation since the capital losses would flow to the shareholder for their income tax return. A C corporation can only deduct capital losses up to its amount of capital gains; the loss is carried to future tax years. Thus, this does appear to be an advantage for an S election and, compared to the other answer choices, is the only choice that is advantageous.
Which of the following taxpayers is required to use a calendar year?
A.
A taxpayer that keeps no records
B.
A grantor trust
C.
A personal service corporation
D.
An S corporation
A.
A taxpayer that keeps no records
Taxpayers who keep no records must use a calendar year. Generally, trusts must use a calendar year; however, grantor trusts are not required to do so.
Although personal service corporations and S corporations are generally required to use a calendar year, if they meet certain requirements they can elect to have a fiscal year.
IRC Section 441(g); Regulation Section 1.444-2T(b)(2)
A corporation would be subject to the uniform capitalization rules if their activities included any of the following except:
A.
produce real or tangible personal property for use in the business activity.
B.
produce real or tangible personal property for sale to customers.
C.
acquire property for resale (exception to this rule is if you have gross receipts that have averaged $10 million or less for the proceeding three tax years).
D.
expenditures for research and experimentation deductible under Section 174.
D.
expenditures for research and experimentation deductible under Section 174.
Under the uniform capitalization rules, you must capitalize direct costs and an allocable portion of most indirect costs that benefit or are incurred because of production or resale activities. Expenditures for research and experimentation are exceptions to the rule and are not required to be capitalized.
IRC Section 263A(c)
A tax preparer has advised a company to take a position on its tax return. The tax preparer believes that there is a 75% possibility that the position will be sustained if audited by the IRS. If the position is not sustained, an accuracy-related penalty and a late-payment penalty would apply. What is the tax preparer’s responsibility regarding disclosure of the penalty to the company?
A.
The tax preparer is responsible for disclosing both penalties to the company
B.
The tax preparer is responsible for disclosing only the accuracy-related penalty to the company.
C.
The tax preparer is responsible for disclosing only the late-payment penalty to the company.
D.
The tax preparer has no responsibility for disclosing any potential penalties to the company, because the position will probably be sustained on audit.
A.
The tax preparer is responsible for disclosing both penalties to the company
A practitioner must inform a client of any and all penalties that are likely to apply to the client with respect to a position taken on a tax return.
Circular 230, Section 10.34(c)(1)
When researching tax law for a client, which committee report would not be used as a source of tax law?
A.
House Ways and Means Committee Report
B.
Accounting and Review Services Committee Report
C.
Senate Finance Committee Report
D.
Joint Conference Committee Report
B.
Accounting and Review Services Committee Report
The Committee on Accounting and Review Services is not a source of information for the tax law. It is concerned with entity accounting rules for unregistered companies and those CPAs providing review services.
The other three committees are actually involved with writing the tax laws of the United States.
Jane Pleasant had property repossessed after making an installment sale. Which of the following statements is true?
A.
Jane must recognize any gain or loss resulting from the repossession.
B.
Jane must recognize any gain resulting from the repossession.
C.
Jane must recognize any loss resulting from the repossession.
D.
Jane does not recognize any gain or loss resulting from the repossession.
A.
Jane must recognize any gain or loss resulting from the repossession.
When property is repossessed after an installment sale, the taxpayer must figure the gain or loss on the repossession and the basis of the repossessed property. The kind of property repossessed determines the rules to follow for figuring these figures. IRS Publication 537 discusses the difference in the rules between repossessed personal property and repossessed real property.
A corporation’s penalty for underpaying federal estimated taxes is:
A.
not deductible.
B.
fully deductible in the year paid.
C.
fully deductible if reasonable cause can be established for the underpayment.
D.
partially deductible.
A.
not deductible.
A corporation’s penalty for underpaying federal estimated taxes is not deductible. No deduction is allowed for a federal tax penalty.
A fine or a penalty paid to any government for the violation of any law is not a deductible business expense.
What is the definition of a writ of certiorari?
A.
The Supreme Court’s denial to hear an appeal from a lower court
B.
The Supreme Court’s decision to hear an appeal from a lower court
C.
A petition for the Supreme Court to review a lower court’s decision
D.
A petition for a lower court to review the Supreme Court’s decision
C.
A petition for the Supreme Court to review a lower court’s decision
A writ of certiorari is a petition from the taxpayer or government asking the Supreme Court to review the decision of a lower court. In a tax case, such a decision will usually involve a case in which the Courts of Appeals have issued conflicting opinions about the case, or a case that concerns a large number of taxpayers or a large amount of tax revenue.
The uniform capitalization method must be used by:
I. manufacturers of tangible personal property.
II. retailers of personal property with $2 million in average annual gross receipts for the three preceding years.
A.
I only
B.
II only
C.
Both I and II
D.
Neither I nor II
A. I only
The uniform capitalization method must be used by manufacturers of tangible personal property.
The uniform capitalization rules apply to:
real or tangible personal property produced by the taxpayer for use in a trade or business or in an activity engaged in for profit,
real or tangible personal property produced by the taxpayer for sale to customer, or
real or personal property (both tangible and intangible) acquired by the taxpayer for resale.
The uniform capitalization rules do not apply to tangible or intangible personal property acquired for resale if the taxpayer’s annual gross receipts for the preceding three tax years do not exceed $10 million.
Your firm has the enviable task of auditing the Vladimere Company, a rather large player in the oil and gas arena. You are asked to attend the meetings with the audit partner. Which of the following scenarios should be the proper result?
A.
The audit partner only discusses the matters and does not give alternative treatments.
B.
The audit partner reports only significant matters to the full board of directors.
C.
The audit partner discusses matters of significance with management and provides recommended solutions and ramifications of alternative disclosure and accounting treatments.
D.
The audit partner discusses matters of significance with the employees and provides recommended solutions and ramifications of alternative disclosure and accounting treatments.
C.
The audit partner discusses matters of significance with management and provides recommended solutions and ramifications of alternative disclosure and accounting treatments.
As per Section 204 of the Sarbanes-Oxley Act (SOX), the accounting firm must report to the audit committee all critical accounting issues and alternative treatments. There is no prohibition from discussing these items with management and/or the full board. In the other answer choices, the audit committee was not involved. Worse, no discussion had occurred with the board or the audit committee.
Chris, a freelance photographer, uses the cash method for business. The tax year ends on December 31. Which of the following should not be included in the determination of Chris’s gross income for the current year?
A.
Chris owns controlling shares of a closely-held corporation and is planning to delay the bonus payment from the corporation until January of the next year. The bonus was authorized on December 15 of the current year and may be drawn at any time.
B.
Chris received a check from a client on December 28 of the current year for a family portrait produced on December 22 of the current year. The check was dated December 23 of the current year but was not deposited until January 4 of the following year.
C.
A client notified Chris on December 27 of the current year that a check was ready. The check was not picked up until January 4 of the following year.
D.
Chris received a dividend check on January 4 of the following year. The dividends were declared payable on December 30 of the current year.
D.
Chris received a dividend check on January 4 of the following year. The dividends were declared payable on December 30 of the current year.
A cash-basis taxpayer should report income for the year in which it is either actually or constructively received. Income is constructively received by a taxpayer in the taxable year during which it is credited to his account, set apart for him, or otherwise made available so that he may draw upon it at any time. Income is not constructively received if the taxpayer’s control of its receipt is subject to substantial limitations or restrictions. The dividends declared on December 30 of the current year by an unrelated corporation would not be deemed constructively received.
Regulation Section 1.451-2(a) and (b)
In the case of a corporation that is not a financial institution, which of the following statements is correct with regard to the deduction for bad debts?
A.
Either the reserve method or the direct charge-off method may be used, if the election is made in the corporation’s first taxable year.
B.
On approval from the IRS, a corporation may change its method from direct charge-off to reserve.
C.
If the reserve method was consistently used in prior years, the corporation may take a deduction for a reasonable addition to the reserve for bad debts.
D.
A corporation is required to use the direct charge-off method rather than the reserve method.
D.
A corporation is required to use the direct charge-off method rather than the reserve method.
A corporation (which is not a financial institution) is required to use the direct charge-off method rather than the reserve method to calculate the bad debts deduction regardless of whether the corporation is a cash-basis or accrual-basis corporation.
The “reserve method” for computing and deducting bad debts on securities may only be used by small banks and thrift institutions.
The direct charge-off method must be used by nearly all cash and accrual-basis taxpayers, not just corporations.
Blink Corp., an accrual-basis, calendar-year corporation, carried back a net operating loss from the tax year ended December 31, Year 3. Blink’s gross revenues have been under $500,000 since inception. Blink expects to have profits for the tax year ending December 31, Year 4. Which methods of estimated tax payment can Blink use for its quarterly payments during the Year 4 tax year to avoid underpayment of federal estimated taxes?
I. 100% of the preceding tax year method
II. Annualized income method
A.
I only
B.
Both I and II
C.
II only
D.
Neither I nor II
C.
II only
Generally, a corporation must make installment payments equal to the lesser of (1) 100% of the tax shown on its return for the current year, or (2) 100% of the tax shown on its return for the preceding year.
However, a corporation cannot base its estimated tax payments for the tax year on the prior tax year if (1) it filed a return for the prior year showing zero tax (due to a net operating loss (NOL)), (2) the prior year was less than 12 months, or (3) it is a large corporation (taxable income of $1,000,000 or more for any of the three immediately preceding tax years).
A treaty in multinational tax matters is defined as:
A.
an informal contract or agreement between states under U.S. law.
B.
a formal contract or agreement between states under U.S. law.
C.
a formal contract or agreement between countries under international law.
D.
an informal contract or agreement between countries under international law.
C.
a formal contract or agreement between countries under international law.
A treaty is a formal contract or agreement between countries under international law. The treaty usually is for peace, commerce, or other international relations.
Dart, a C corporation, distributes software over the Internet and has had average revenues in excess of $20 million per year for the past three years. To purchase software, customers key in their credit card number to a secure website and receive a password that allows the customer to immediately download the software. As a result, Dart does not record accounts receivable or inventory on its books. Which of the following statements is correct?
A.
Dart may use either the cash or accrual method of accounting as long as Dart elects a calendar year-end.
B.
Dart may utilize any method of accounting Dart chooses as long as Dart consistently applies the method it chooses.
C.
Dart must use the accrual method of accounting.
D.
Dart may utilize the cash basis method of accounting until it incurs an additional $10 million to develop additional software.
C.
Dart must use the accrual method of accounting.
A C corporation with sales over $5 million must use the accrual method of accounting. Therefore, because Dart is a C corporation with sales over $20 million per year for the past three years, Dart must use the accrual method.
Which of the following organizations would generally qualify for exemption from federal income tax?
A.
Title holding organization organized as a corporation
B.
Civic organization benefiting its members
C.
Labor organization consisting of entrepreneurs and self-employed individuals
D.
Business association for a particular brand or franchise
A.
Title holding organization organized as a corporation
Under IRC Section 501(c)(2), a title holding company organized as a corporation will qualify for exemption from federal income tax if it is organized for the following activities: (1) holding title to property, (2) collecting income from such property, and (3) turning over the entire amount collected, less expenses, to an organization that itself is exempt under Section 501(a).
In order to be tax exempt under IRC Section 501(c)(4), a civic organization must operate for the promotion of social welfare. This means it must promote the common good and general welfare of the people of the community. By benefiting only its members, the organization is not benefiting all residents of a particular community.
A labor organization’s members must primarily be employees in order to be tax exempt under IRC Section 501(c)(5).
The activities of a business league must promote common business interests, not the performance of specific individuals or companies.
In the current year, Essex sold land with a basis of $80,000 to Yarrow for $100,000. Yarrow paid $25,000 down and agreed to pay $15,000 per year, plus interest, for the next 5 years, beginning in the 2nd year. Under the installment method, what gain should Essex include in gross income for the year of sale?
A.
$25,000
B.
$20,000
C.
$15,000
D.
$5,000
D.
$5,000
Under the installment sales method, a taxpayer is allowed to report the gain from an installment sale each year that payments are received. Essex owned land with a tax basis of $80,000 and sold it for $100,000. The gain on the sale is $20,000 (including the down payment and the future installment payments). The gain of $20,000 divided by the sale price of $100,000 results in a 20% profit margin. In the first year, $25,000 was received; $25,000 × 0.20 profit margin = $5,000 in gain for the first year.
hich of the following entities may adopt any tax year-end?
A.
C corporation
B.
S corporation
C.
Limited liability company
D.
Trust
A.
C corporation
A C corporation may adopt any tax year-end. An S corporation is generally required to adopt a calendar year-end. An LLC with two or more members is taxed as a partnership in the absence of an election otherwise. The partnership’s taxable year must correspond to the partner’s taxable year and they are, therefore, generally calendar years. A trust may only adopt a calendar year.
IRC Sections 444(e), 706(b), and 644; Regulation Section 301.7701-2(c)(1)
Which one of the following will result in an accruable expense for an accrual-basis taxpayer?
A.
An invoice dated prior to year-end but the repair completed after year-end
B.
A repair completed prior to year-end but not invoiced
C.
A repair completed prior to year-end and paid upon completion
D.
A signed contract for repair work to be done and the work is to be completed at a later date
B.
A repair completed prior to year-end but not invoiced
Expenses are accruable for an accrual-basis taxpayer in the tax year in which all the events have occurred to establish the liability, the amount of the liability can be determined with reasonable accuracy, and economic performance has occurred. All events to establish the liability would not have occurred where an invoice was dated in one year but the repair completed after year-end. All events to establish the liability would not have occurred where a contract is signed with the work to be completed at a later date. A repair completed prior to year-end and paid upon completion would be paid prior to year-end as well and would not require accruing.
IRC Section 461(h)(2); Regulation Section 1.461-1(a)(2)
One of the elections a new corporation must make is its choice of an accounting period. Which of the following entities has the most flexibility in choosing an accounting period?
A.
C corporation
B.
S corporation
C.
Partnership
D.
Personal service corporation
A.
C corporation
A C corporation can adopt any tax year. Generally, C corporations could choose the last day of any month to end their year. S corporations must use the calendar year for tax reporting. Trusts and personal service corporations must use a calendar year. Generally, partnerships will use a calendar year.
Permanent differences between taxable income and pre-tax accounting income affect:
A.
both interperiod and intraperiod income tax allocation.
B.
interperiod income tax allocation.
C.
neither interperiod nor intraperiod income tax allocation.
D.
intraperiod income tax allocation.
C.
neither interperiod nor intraperiod income tax allocation.
FASB ASC 740-10-10, “Income Taxes,” notes: “Certain revenues are exempt from taxation and certain expenses are not deductible.”
Tax communications to an IRS agent should:
A.
only address the tax accountant.
B.
be much less detailed than communications with the taxpayer.
C.
include the IRS agent’s name.
D.
be much more precise that communications with the taxpayer.
D.
be much more precise that communications with the taxpayer.
Communication to an IRS agent should be much more detailed than to a taxpayer. The communication should include details of why the position is being held and any other material to make the issue understandable.
What is a use tax?
A.
A tax used to finance public services
B.
A tax on gasoline and diesel fuel collected by the distributor
C.
A tax imposed on the transfer of property after the owner’s death
D.
A tax imposed for the storage, use, or purchase of personal property not covered under sales tax
D.
A tax imposed for the storage, use, or purchase of personal property not covered under sales tax
A use tax is a tax imposed for the storage, use, or purchase of personal property. It is similar to the sales tax, but is imposed on items not covered by sales tax.
Which of the following organizations would not qualify for exemption from federal income tax?
A.
College alumni association
B.
Social clubs that allow only limited usage by general public
C.
Fraternal society not operating under a lodge system
D.
Political organization
C.
Fraternal society not operating under a lodge system
Under IRC Section 501(c)(10), domestic fraternal societies must operate under the lodge system to be exempt from federal income taxation.
College alumni associations generally qualify for exemption from federal income tax under IRC Section 501(c)(3). If it does not meet the characteristics required by IRC Section 501(c)(3), it may still be exempt as a social club if it meets the requirements described by IRC Section 501(c)(7).
A social or recreation club under IRC Section 501(c)(7) is allowed to receive up to 35% of its gross receipts from sources outside of its membership without losing its status as a tax-exempt organization. The club must have an established membership, which must be limited in some manner.
Under IRC Section 527, a political organization is considered a tax-exempt organization. It is subject to tax only on nonexempt income. Examples of exempt income include contributions, membership dues, and proceeds from a political fund-raising event.
IRC Section 263A requires the capitalization of certain indirect costs related to inventory when a qualifying business is manufacturing tangible personal property. Which of the following costs is not required to be capitalized as part of this adjustment?
A.
Marketing
B.
Recruiting
C.
Payroll
D.
Securities services
A. Marketing
In the case of a business manufacturing tangible personal property that is inventory in the hands of the taxpayer, costs associated with the property directly—direct materials, direct labor (e.g., payroll), direct production, indirect production, and service costs (e.g., recruiting and securities services)—are capitalized to the inventory. Administrative, selling, distribution, warranty, and excise costs are expensed and not capitalized to the property.
In this situation, the taxpayer would have capitalized recruiting, payroll, and securities services because these costs are associated with the inventory. Marketing, on the other hand, is an administrative and selling cost that is expensed in the period incurred and, as such, it is not a capitalizable cost.
