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Tax Exam 2

Terms in this set (58)

Generally, under state law, which of the following is NOT considered an entity separate from its owner(s)?

a. a limited liability company
b. a corporation
c. a general partnership
d. a sole proprietorship
d. a sole proprietorship
Greta is concerned about the level of debt her business has incurred, as she is responsible for its liabilities. Assuming Greta is the sole owner, how could she organize her business to protect herself from the liabilities of the entity? (Check all that apply.)

a. Single member llc
b. sole proprietor
c. corporation
d. limited partnership
e. general partnership
a. single member llc and c. corporation
Which of the following legal entity types does not require the owners to formally organize the entity with the state?

a. Corp
b. LLC
c. Limited Partnership
d. General Partnership
d. General Partnership
A(n) ________ is a separate taxpaying entity unless a valid S election is made for tax purposes.
a. LLC
b. Partnership
c. sole proprietorship
d. Corp
d. Corp
Which business entity is NOT recognized as a specific tax entity by the U.S. tax system?
a. C corp
b. Sole proprietorship
c. Partnership
d. LLC
e. S corp
d. LLC
Select all that apply
Generally, under state law, business partnerships can be classified as: (Check all that apply.)
a. general
b. public
c. limited
d. oral
e. trust
a. general and c. limited
Nolan seeks to protect himself from the debts his business is going to incur. Which of the following entities would be the best entity choice for Nolan?
a. General partnership
b. Sole proprietor
c. Corp
c. Corp
In general, a taxpayer can deduct _____% of the amount of qualified business income allocated to her from a flow-through entity subject to certain limitations
20
Jonas, an individual taxpayer, establishes his business as an LLC, for which he is the only member (owner). By default, his business will be treated as a _________ for tax purposes.
a. sole proprietorship
b. partnership
c. separate taxpaying entity
a. sole proprietorship
Not sure if you need to know this...

The percent of tax assessed on net investment income above a threshold is:
a. 7.65%
b. 92.35%
c. 0.9%
d. 3.8%
3.8%
Which business entity pays tax on their income at the entity level?
a. S corp
b. Sole proprietorship
c. Partnership
d. C corp
d. C corp
To calculate the taxpayer's net earnings from self-employment, 92.35% is multiplied by:
a. Taxpayer's self employment gross receipts
b. Taxpayer's self employment income
c. Taxpayer's self employment tax
d. Deductible portion of taxpayer's self employment tax
b. Taxpayer's self-employment income
The deduction for qualified business income (QBI) for flow-through entities is calculated as what percent of qualified business income?
a. 65%
b. 10%
c. 50%
d. 20%
d. 20%
When an S corporation shareholder does not work for the entity, the _____.
a. income is subject to self-employment taxes
b. business income allocated to the shareholder is considered to be passive income
c. income is still eligible for the qualified business tax deduction
d. shareholder will always be required to pay net investment income tax on the allocated income
b. business income allocated to the shareholder is considered to be passive income
In 2021, a taxpayer (with $26,500 of employee compensation) was allocated $176,000 of self-employment income. Calculate the amount of self-employment tax the taxpayer would owe.
a. $26,928
b. $24,868
c. $17,794
d. $18,336

TBH probs gonna just take the L on this one.
d. $18,336
Taxpayer would report $162,536 of net earnings from self-employment ($176,000 .9235) and owe $17,733.84 of self-employment tax [(142,800 - 26,500) .153] + [($162,536 - $142,800) * .029] = $17,793.90 + $572.34 = $18,366.24. Rounded to the nearest dollar ($18,366).
The amount of net earnings from self-employment is used to calculate self-employment tax. A taxpayer's net earnings from self employment equals ____% of self employment income.
92.35
If a single taxpayer had self-employment income (from all sources) of $243,638, then $______ would be subject to an additional Medicare tax of ____percent. (Round-off the answer to the nearest dollar.)
25,000 and 9%. (243638*.9235 is 225,000. Limit is $200,000 so subtract it)
What tax rates do the following types of shareholders have on corporate dividends?
a. Individual
b. Corporate (before the DRD)
c. Pension funds
a. 15% or 20%
b. 21%
c. 0%
In tax year 2021, an unmarried taxpayer had net investment income (NII) of $32,000 and AGI of $215,000. Calculate the amount of net investment income tax the taxpayer is required to pay?
570 (215000-200000 limit)*3.8%
In an effort to avoid the second level of tax, corporations that retain earnings are subject to a _____percent accumulated earnings tax on the retained earnings.
20
In tax year 2021, a married taxpayer with AGI of $300,000 had gross investment income of $6,150 (which included a long-term capital gain of $3,500 and interest income of $2,650), brokerage commissions of $75, and tax preparation fees of $210. Calculate the amount of net investment income tax the taxpayer is required to pay?
231
Reason:
($6,150 - $75) 3.8% = $6,075 3.8% = $231
On their December 31, 2021 tax return, Ecogreen, Inc., a C corporation, suffered a difficult year and generated a loss. What are Ecogreen's options for dealing with the loss for tax purposes?
a. Carry the loss forward to reduce income in future years.
b. No options; the losses are not usable to lower taxes in any other year
c. Carry the loss back to previous three years and offset income from those years
d. Use the loss in the current year to offset other forms of shareholder income
Which entity types can generally use either the cash or accrual method of accounting for tax purposes? (Check all that apply.)
a. Sole proprietorship
b. S corp
c. C corp
d. Partnership
All but C corps
Which of the following taxes does not apply to a C corporation?
a. Corporate income tax
b. Net investment income tax
c. Personal holding company tax
d. Accumulated earnings tax
b. Net investment income tax
Akram owns an S corporation that has generated a $10,000 loss in its first year. Akram has other forms of ordinary income available to offset these losses totaling $80,000. Assuming Akram's tax rate is 35% and a corporate rate of 21%, how much tax will Akram pay on his income assuming there are no other loss limitations?
24500. Reason:
Akram may offset the loss from the S corporation with his other income and will pay tax of $24,500 ($80,000 - $10,000) x 35%.
Match the entity with the description of income or loss allocation.
a. C corp
b. Partnership
c. S corp
d. Sole proprietorship

a. Based on stock ownership percentage
b. No allocation
c. All earnings allocated to owner
d. Based on owner's agreement
a. C corp - b. No allocation
b. Partnership- d. Based on owner's agreement
c. S corp - a. Based on stock ownership percentage
d. Sole proprietorship - c. All earnings allocated to owner
Match the business entity with the tax form used to report taxable income.
Schedule C
Form 1065
Form 1120S
Form 1120

S corp
Partnership
Sole proprietorship
C corp
Schedule C - Sole proprietorship
Form 1065 - Partnership
Form 1120S -S corp
Form 1120- C corp
Which of the following choices constitutes gross income from a business? (Check all that apply.)
a. Revenue less business expenses
b. Gross profit from inventory sales
c. income from renting property
d. income from services provided
b. Gross profit from inventory sales
c. Income from renting property
d. Income from services provided
Which one of the following terms does the Internal Revenue Code use to describe deductible business expenses?
a. Important
b. Crucial
c. Relevant
d. Ordinary
d. Ordinary
The term _______ is used to describe an expense that is helpful or conducive to a business activity.
necessary
Ordinary and necessary business expenses are deductible only to the extent they are ______ in amount.
reasonable
Match the entity with the statement that describes the tax treatment of that entity.
Sole proprietorship
Partnership
C Corp

Income is taxed at the entity level
Entity files a tax return but the profit or loss flows through to owners' individual income tax returns
Revenues and expenses are reported directly on the owner's tax return and the profit or loss is subject to both individual income and self employment taxes
Sole proprietorship -Revenues and expenses are reported directly on the owner's tax return and the profit or loss is subject to both individual income and self employment taxes

Partnership -Entity files a tax return but the profit or loss flows through to owners' individual income tax returns

C Corp- Income is taxed at the entity level
Which of the following business expenses are deductible for tax purposes? (Check all that apply.)
a. Legal fees incurred to defend the business in a lawsuit
b. Traffic fines incurred by an over-the-road truck driver
c. Contributions to the governor's reelection campaign
d. depreciation expense on a building used to store company vehicles
e. advertising cost for ads placed in the local newspaper
f. interest expense paid on loans to purchase tax exempt securities
a. Legal fees incurred to defend the business in a lawsuit
d. Depreciation expense on a building used to store company vehicles
e.Advertising cost for ads placed in the local newspaper
Which of the following choices is INCORRECT when defining the gross income of a business?
a. Revenues from renting property is included in gross profit for rental businesses
b. Gross income from a business includes gross profit from inventory sales
c. Gross income for a business may be calculated as sales less returns and discounts
d. Gross income for a service business can be calculated as income from services provided
c. Gross income for a business may be calculated as sales less returns and discounts.
Which of the following may qualify as a deductible business expense:
a. Protective clothing for self-employed construction worker
b. Cost of uniforms that include a company logo
c. Monthly mortgage payment for primary residence of a taxpayer who earns a salary as an employee
d. Cost of food for the household
a. Protective clothing for a self-employed construction worker
b. Cost of uniforms that include a company logo
Allison purchased equipment that cost $100,000 for use in her business. She expects the equipment to be useful for the business for the next 8 years. Which of the following choices correctly describes the tax treatment of the cost of the equipment?
a. The equipment should be deducted in the year that it is purchased
b. The equipment should NOT be deducted until the year Allison sells or disposes of it
c. The equipment should be capitalized and depreciated according to the tax code
c. The equipment should be capitalized and depreciated according to the tax code.
Sonny incurred the following expenses last month in his self-employment business: Khaki pants and a blue button-down shirt to wear to work; tuition for a course in marketing to improve his current job skills as a fashion designer; and groceries so that he could take his lunch to work. Which of these expenses is/are deductible business expenses?
a. tuition and clothing
b. khaki pants and blue shirt
c. none are deductible
d. tuition for the marketing course
e. groceries and lunches while at work
d. Tuition for the marketing course
Unless "expressly" authorized by a provision in the law, ______ _______ (2 words) are nondeductible.
Personal expenses
Which of the following criteria is NOT required for a meal to be considered a tax-deductible business meal?
a. The meal must be eaten on the business premises
b. The amount must be reasonable under the circumstances
c. The taxpayer or an employee of the taxpayer must be present for the meal
d. The meal must be directly associated with the active conduct of the business
a. The meal must be eaten on the business premises
Which of the following choices is NOT correct regarding deductible transportation expenses for a taxpayer using her personal vehicle for business purposes?
a. The taxpayer can NOT deduct the costs of commuting from her home to her regular place of business
b. The taxpayer can deduct the business portion of the vehicle operating costs, plus depreciation, plus a standard mileage rate based on business miles
c. The taxpayer can deduct the business portion of the actual costs of operating the vehicle plus depreciation
d. The taxpayer can deduct a standard mileage rate based on the business miles driven
b. The taxpayer can deduct the business portion of the vehicle operating costs, plus depreciation, plus a standard mileage rate based on business miles.
Evan incurred education-related expenditures related to his self-employment job. Under which of the following circumstances will Evan NOT be allowed to deduct these expenditures as a BUSINESS expense?
a. The course qualify Evan for a new trade or business
b. The course only improve Evan's skills in his existing business
c. The course meets the requirements necessary to keep his job
a. The course qualify Evan for a new trade or business
Which of the following criteria is NOT required for a business expense to be considered ordinary and necessary?
a. Appropriate under the circumstances
b. Repetitive in nature
c. Helpful to the business
d. Conducive to the business activities
b. Repetitive in nature
Due to the personal enjoyment element involved with business meals not purchased from a restaurant, taxpayers may only deduct __% of the actual cost.
50
True or false: In order to deduct travel expenses (as opposed to transportation expenses), the taxpayer must be away from home on a trip of sufficient duration to require sleep or rest.
True
Lesa drives her car approximately 18,000 miles per year. During the most recent year, she drove 7,000 miles commuting to and from work, 4,500 miles for business-related conferences and client visits, and 6,500 miles for personal trips. How many miles are considered business miles and can be used to determine the tax deduction for transportation expenses?
4500
Which of the following statements is correct regarding the deductibility of business meals purchased in a restaurant when a taxpayer is traveling for business?
a. One hundred percent of the cost of meals is deductible only if there is a business associate with the taxpayer.
b. The cost of meals is fifty percent deductible if the taxpayer is away from home overnight.
c. One hundred percent of the cost of meals is deductible if the taxpayer is going to be away from home overnight.
d. The cost of meals is NOT deductible because a taxpayer would have to eat whether they were home or away from home.
c. One hundred percent of the cost of meals is deductible if the taxpayer is going to be away from home overnight.
Which of the information listed below is NOT a requirement of the documentation needed to substantiate the business portion of mixed motive expenses?
a. The time and business purpose should be included.
b. The records should include written evidence of personal use.
c. The records should be written.
d. The records should include the amount.
e. The records should be contemporaneous.
b. The records should include written evidence of personal use.
What are the rules concerning reporting periods for tax purposes?
a. Businesses can file tax returns as often as they want, but must report at least once per year.
b. Businesses must file tax returns reporting income and deductions on a quarterly basis.
c. A business tax year can NOT consist of a period less than 12 months
d. Business must report their income and deductions for a full 12 month year, unless special circumstances apply.
d. Business must report their income and deductions for a full 12 month year, unless special circumstances apply.
In reporting financial statement income, businesses have incentives to select accounting methods that accelerate _______ and defer _______. In reporting taxable income, businesses have incentives to select accounting methods that accelerate ____________ and defer ____________.
Financial: income, deductions
Tax: deductions, income
Accrual methods for tax tend to overstate ____(a)____ and understate _____(b)______ relative to accrual methods for financial accounting.
Expenses, Revenue
The ____ method of accounting recognizes revenues when property is received and recognizes deductions when the expense is paid.
Cash
On December 1 of the current year, Rhianna pays $2,400 for a 12-month advertising contract that will begin on March 1 of next year. Rhianna uses the cash method of accounting for her business. How much will Rhianna be able to deduct in the current year?
0 - Since the contract extends beyond the end of the following year and the effective date doesn't start until March, she can't deduct anything in the current year.
The all-events test generally requires businesses receiving advance payments for services to recognize the income when they receive the payment, rather than when they perform the service. Which of the following statements is INCORRECT regarding this rule?
a. For financial accounting, the prepayment is recorded as a liability and not recognized as income until the service is performed.
b. The tax authorities give the business the option to report the income in the current year or defer it to the period in which the revenue is earned.
c. The IRS provides an exception that allows the recognition of the advance payment of services to be deferred to the tax year following the prepayment.
d. This rule holds for prepayment of interest or rent.
b. The tax authorities give the business the option to report the income in the current year or defer it to the period in which the revenue is earned.
How does the accrual method for tax reporting differ from the accrual method for financial reporting?
a. The reporting rules tend to be structured to recognize less accrued expenses for tax purposes than for financial accounting purposes.
b. The reporting rules tend to be structured to recognize income earlier for financial accounting purposes than for tax reporting purposes.
c. The reporting rules tend to be biased toward understating profitability for tax purposes.
d. The reporting rules for tax purposes are designed to guard against overstating the company's profitability.
a. The reporting rules tend to be structured to recognize less accrued expenses for tax purposes than for financial accounting purposes.
Under which of the following conditions may a taxpayer use the cash method to account for inventory?
a. Primary business activity must be to provide services to customers with sales of products being a secondary source of income.
b. Total assets of the business may not exceed $26 million.
c. Annual gross receipts for the three-year period prior to the current year do not exceed $26 million.
d. Primary business activity must be selling products that were acquired for resale or manufactured by the business.
c. Annual gross receipts for the three-year period prior to the current year do not exceed $26 million.
What two events must have occurred to meet the all-events test? (Check all that apply.)
a. When all events have occurred that determine or fix the business's right to receive the income
b. When the terms and conditions of a job or project have been negotiated and a contract has been signed
c. When the work is over 50 percent completed on a job
d. When the amount of the income can be determined with reasonable accuracy
a. When all events have occurred that determine or fix the business's right to receive the income
d. When the amount of the income can be determined with reasonable accuracy
Which of the following statements are correct regarding inventory capitalization rules? (Check all that apply.)
a. GAAP rules require businesses to capitalize more costs to inventory for financial reporting purposes than they do for tax purposes.
b. Under UNICAP, businesses generally capitalize the inventory costs in one period and deduct them in a subsequent period.
c. Selling, advertising, and research costs must be allocated to inventory under the UNICAP provisions.
d. Under UNICAP rules, businesses capitalize in inventory a portion of the compensation paid to employees in production supporting departments.
e. UNICAP rules require businesses to capitalize more costs to inventory for tax purposes than they do for financial reporting.
b. Under UNICAP, businesses generally capitalize the inventory costs in one period and deduct them in a subsequent period.
d. Under UNICAP rules, businesses capitalize in inventory a portion of the compensation paid to employees in production supporting departments.
e. UNICAP rules require businesses to capitalize more costs to inventory for tax purposes than they do for financial reporting.
Danielle's Diamonds is a jewelry store that is owned and operated as a sole proprietorship by Danielle Dawkins that averages $40 million in gross receipts. Danielle uses the cash method of accounting for tax reporting. Which of the following statements is correct for Danielle's business?
a. Danielle must use the accrual method for reporting gross profit even though she uses the cash method of accounting for everything else.
Businesses who generate income by selling products as a material income-producing factor must use the accrual method for reporting gross income.
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