Test 1 Flashcards
type of goal: allowing taxpayers to reduce their tax liability for making charitable contributions.
Social
type of goal: allowing taxpayers to reduce their tax liability for investing in research and development
Economic
type of goal: reducing the income tax rate applicable to all taxpayers
Revenue Raising
type of goal: imposing a tax on the purchase of cigarettes
Political
Which of the following are criteria commonly used to evaluate a tax system?
Convenience, Certainty, Neutrality, Equity, and Economy
What is the primary purpose of tax planning?
To maximize a taxpayer’s after-tax income
Which of the following tax practices is illegal?
Tax Evasion
A tax structure in which the statutory rate increases as the base increases can best be described as
Progressive
A tax structure in which the statutory rate remains constant as the base increases can best be described as
Proportional/Flat
Individual taxpayers face a ___ income tax rate structure.
Progressive
Corporations face a _____ income tax rate structure.
Proportional/flat
With respect to its marginal rate, a sales tax is best described as _____
Proportional/Flat
With respect to its effective rate, a sales tax is best described as ____
Regressive
Which of the following most likely involves multilataral tax planning?
shifting income across taxpayers
What tax rate is most relevant to the following decisions?: evaluating the relative tax burdens of different taxpayers
Effective rate
What tax rate is most relevant to the following decisions?: measuring the return to building and operating a new manufacturing facility
Marginal rate
The basic tax planning tools we dicussed in class inclue which of the following?
changing the nature/character of income and expenses, shifting income across jurisdictions, shifting income across taxpayers, Changing the timing of when taxes must be paid
Which of the following describes the professional mindset of a tax accounting professional.
Advocacy
Rank the following items from the lowest (1) to highest (6) authority in the Federal tax law system:
1) Letter Ruling, 2) Proposed Regulation, 3) Revenue Ruling, 4) Interpretive Regulation, 5) Legislative Regulation, 6) Internal Revenue Code
Interpretive Regulations are:
Regulations that rephrase and elaborate on what Congress stated in its Committee Reports
Legislative Regulations are:
Regulations prescribed to carry out the details of administration by authority of Congress
Letter Rulings are:
applicable only to the taxpayer addressed, and as such, have no precedence. These would have the least authority
Revenue Rulings are:
official pronouncements of the National Office of the IRS. They typically provide one or more examples of how the IRS would apply a law to specific situations
The Internal Revenue Code:
contains the statutory provisions relating to Federal taxation revenue acts enacted by Congress and, therefore, has the highest authority.
Proposed Regulations:
provide a preview of future final Regulations, but they are not binding on the IRS or on taxpayers. Therefore, most courts ignore Proposed Regulations.
Interpret each of the following citations by selecting the correct answer from each dropdown:
Question Content Area
a. Temp.Reg. § 1.956–2T.
Type of regulation: 1
Related code section: 956
Regulation section number: 2
Temporary: T
What are examples of Primary tax sources?
1) Sixteenth Amendment to the U.S. Constitution, 2) Tax treaty between the United States and India, 3) U.S. District Court decision, 4) Temporary Regulations (issued 2019), 5) U.S. Tax Court Memorandum decision, 6) Revenue Procedure, 7)House Ways and Means Committee report, 8) Notice.
What are examples of Secondary tax sources?
1) An IRS publication, 2) Yale Law Journal article.
What is not an example a tax source?
Small Cases Division of the U.S. Tax Court decision.
taxpayer or a tax reporting (i.e., “flow through”) entity: C corporations
Taxpayer
taxpayer or a tax reporting (i.e., “flow through”) entity: Individuals
Taxpayer
taxpayer or a tax reporting (i.e., “flow through”) entity: Partnerships
Tax Reporting Entity
taxpayer or a tax reporting (i.e., “flow through”) entity: S Corporations
Tax Reporting Entity
An exclusion generally refers to:
- revenues or gains that are not included in gross income and not taxable
- an expense that is subtracted from gross income, reducing taxable income
For a taxpayer wtih a marginal tax rate of 24%, a $100 deduction will reduce their tax liability by _____ while a $100 credit will reduce their liability by _____.
$24; $100
In each of the following independent situations, determine the corporation’s income tax liability.
Assume that all corporations use a calendar year for tax purposes and that the tax rate is 21%
Taxable Income:
Purple Corporation- $65,000
Azul Corporation- 290,000
Pink Corporation- 12,350,000
Turquoise Corporation- 19,000,000
Teal Corporation (a personal service corporation)- 130,000
Purple Corporation- 13,650
Azul Corporation- 60,900
Pink Corporation- 2,593,500
Turquoise Corporation- 3,990,000
Teal Corporation- 27,300
Most individuals and corporations may use as their tax year
either a calendar or fiscal year
Copp, Inc., a calendar year taxpayer, generated the following taxable income and losses before considering the use of any NOLs. Determine Copp’s final taxable income for each year afer considering the NOLs.
2018- $1,200,000
2019- $300,000
2020- ($1,000,000)
2021- ($600,000)
2022- $500,000
2018- $200000
2019- $300000
2022- $100000
Which of the following may use the cash method of accounting for tax purposes (check all that apply)?
1) An individual wtih $50 million of gross receipts
2) A partnership with $50 million of gross receipts
3) a corporaton with $200,000 of gross receipts
4) A partnership with $200,000 of gross receipts
5) An individual with $200,000 of gross receipts
What is Imputed Interest?
Imputed interest is calculated using the rate the Federal government pays on new borrowings and is compounded semiannually. This Federal rate is adjusted monthly and is published by the IRS. If interest is charged on the loan but is less than the Federal rate, the imputed interest is the difference between the amount that would have been charged at the Federal rate and the amount actually charged.
- Loan has to be less than $100,000
- There has to be no investment income
Bell, Inc., an accrual basis taxpayer, makes and sells personal computing equipment. It includes basic one-year warranty service with most of its products and, for financial reporting purposes, recognizes an estimate of the expenses related to honoring those warranties when the products are sold. Bell reports the following in its financial statements for the year.
Income Statement
Warranty expense - $500,000
Balance Sheet
Allowance for existing warranty contracts 1/1 - $ 30,000
Allowance for existing warranty contracts 12/31 - $ 40,000.
How much warranty expense may Bell deduct for the year?
$490,000
Al is a physician who conducts his practice as a sole proprietor. During 2024, he received cash of $280,000 for medical services. Of the amount collected, $40,000 was for services provided in 2023. At the end of 2024, Al held accounts receivable of $60,000, all for services rendered in 2024. In addition, at the end of the year, Al received $12,000 as an advance payment from a health maintenance organization (HMO) for services to be rendered in 2025.
a. Compute Al’s gross income for 2024 using the cash basis of accounting.
$292,000
Shanna, a calendar year and cash basis taxpayer, rents property to be used in her business from Janice. As part of the rental agreement, Shanna pays $8,400 rent on April 1, 2024, for the 12 months ending March 31, 2025.
Do not round any division.
a. How much is Shanna’s deduction for rent expense in 2024?
_______
b. Assume the same facts, except that the $8,400 is for 24 months’ rent ending March 31, 2026. How much is Shanna’s deduction for rent expense in 2024?
________
$8,400; $3,150
Which of the following are considered related parties under § 267?
An individual taxpayer and their father; An individual taxpayer and their brother; An individual taxpayer and their grandson; A corporation and a 55% shareholder
Which of the following are NOT considered related parties under § 267
An individual taxpayer and their niece; An individual taxpayer and their uncle; An individual taxpayer and their cousin; A corporation and a 45% shareholder
Bell, Inc., an accrual basis taxpayer, makes and sells personal computing equipment. It includes basic one-year warranty service with most of its products and, for financial reporting purposes, recognizes an estimate of the expenses related to honoring those warranties when the products are sold. Bell reports the following in its financial statements for the year.
Income Statement
Warranty expense- $500,000
Balance Sheet
Allowance for existing warranty contracts 1/1- 30,000
Allowance for existing warranty contracts 12/31- 40,000
How much warranty expense may Bell deduct for the year?
$490,000
Lupe, a cash basis taxpayer, owns 55% of the stock of Jasper Corporation, a calendar year accrual basis C corporation. On December 31, 2024, Jasper accrues a performance bonus of $100,000 to Lupe that it pays to him on January 15, 2025.
In which year can Jasper deduct the bonus? In which year must Lupe include the bonus in gross income?
Jasper can deduct the bonus in _____, and Lupe must report the bonus income in ______.
Jasper can deduct the bonus in 2024, and Lupe must report the bonus income in 2025.
Broadbill Corporation, a calendar year C corporation, has two unrelated cash method shareholders: Marcia owns 51% of the stock, and Zack owns the remaining 49%. Each shareholder is employed by the corporation at an annual salary of $240,000. During 2024, Broadbill paid each shareholder-employee $220,000 of their annual salary, with the remaining $20,000 paid in January 2025.
Determine how much of the 2024 salaries for Marcia and Zack is deductible by Broadbill in 2024 if the corporation is (a) a cash method taxpayer and (b) an accrual method taxpayer.
Question Content Area
a. If a cash method taxpayer: In 2024, Broadbill can deduct:
b. If an accrual method taxpayer: In 2024, Broadbill can deduct
$440,000; $460,000
Jesse completes the following capital asset transactions. By how much does Jesse’s AGI increase/decrease as a result of these gains/losses?
Long-term gain $10,000
Short-term gain 4,000
Short-term loss 25,000
Jesse’s net result is
_______
of _______.
Short-term capital loss; $11,000
Before any debt cancellation, the insolvent KuhnCo holds business equipment, its only asset, with a fair market value of $1,000,000 and related liabilities of $1,250,000. The lender agrees to cancel $400,000 of the liabilities. KuhnCo has no other liabilities.
a. How much gross income does KuhnCo report as a result of the debt cancellation?
b. How would your answer change, if at all, had the lender canceled $200,000 of the debt?
a. $150,000 b. $0
Hazel’s receipts for the year are as follows:
Gain on sale of Augusta County bonds $800
Interest on U.S. government savings bonds 400
Interest on state income tax refund 200
Interest on Augusta County bonds 700
The patronage dividend was received in March of the current year for amounts paid for her (nondeductible) garden and lawn supplies.
a. Classify the following items as “Included” in or “Excluded” from Hazel’s gross income.
1) Gain on sale of Augusta County bonds
2) Interest on U.S. government savings bonds
3) Interest on state income tax refund
4) Interest on Augusta County bonds
b. Hazel’s gross income is _______
a. Included, Included, Included, Excluded b.$1,400
Danny received the following interest and dividend payments this year. What amount should Danny include in his gross income?
City of Atlanta bond interest- $1,200
U.S. Treasury bond interest- 500
State of Georgia bond interest- 1,000
Ellis Company common stock dividend- 400
Row Corporation bond interest- 600
$1,500
Marsha and Brad, married taxpayers filing jointly, had the following transactions during year 9:
Gain on sale of stock purchased in year 1 and sold in June, year 9- $3,000
Ordinary income from employers- 80,000
Loss on sale of stock purchased in January, year 9 and sold in March, year 9- 20,000
What is the amount of the capital loss carryover to year 10?
$14,000
Barrett’s parents provided him with a $25,000 zero-interest loan for a down payment on a house. Barrett’s net investment income for the current year is $500. The current applicable federal rate (AFR) is 3%. What is the amount of the imputed (foregone) interest on the loan?
$0; For gift loans between individuals of $100,000 or less, the imputed (foregone) interest is limited to the amount of the borrower’s net investment income for the year. If the borrower’s net investment income is $1,000 or less, the imputed interest is treated as zero.
On January 1, year 1, Bridgett loaned her nephew $6,000 at 1% interest to help him pay for some unexpected personal expenses. Her nephew repaid the loan with interest on December 31, year 1. The current applicable federal rate (AFR) is 2.5%. What amount must Bridgett include in her year 1 taxable interest income?
$60
Gold, Inc. has taxable income from operations of $215,000 before considering a net long-term capital gain of $50,000. What is Gold’s taxable income and tax liability for the year?
Taxable income: _____
Tax liability: ______
$265,000 ; $55,650
George Jetson earned $175,000 related to a business conducted as a sole proptietorship. He also realized a net long-term capital gain of $20,000.
Assuming George has no other sources of income, his gross income is _____
Assuming George’s marginal tax rate is 32%, the net capital gain will increase his tax liability by ____
$195,000; $3,000
Barney Rubble, a sole proprietor, has gross income of $175,000 before considering a $20,000 net capital loss. Assuming he has no other income during the year, Barney’s gross income for the year is ____
$172,000
nk, Inc. earned $175,000 of operating income during the year. It also realized a net long-term capital gain of $20,000. Assuming Ink has no other sources of income, its taxable income is ____
and its tax liability is _____
.
$195,000 ; $40,950
Rubble, Inc earned $175,000 of operating income during the year. It also realized a $20,000 net capital loss. Rubble’s taxable income for the year is _____
$175,000
