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TAX 4001 - Final Exam Practice Questions
A business generates profit of $100,000. The owner has a 37% marginal tax rate. What amount of corporate and individual income tax will be paid on this profit if the business is a regular corporation and no income is distributed? Corporate tax, $21,000; individual tax, $37, Corporate tax, $21,000; individual tax, $ Corporate tax, $0; individual tax, $37, Corporate tax, $21,000; individual tax, $15,800 - ANS-Corporate tax, $21,000; individual tax, $ Alan is a general partner in ADK Partnership. His partnership Schedule K-1 reports $50,000 ordinary business income, $22,000 guaranteed payment, $5,000 long-term capital gain, and $400 dividend income. Which of these items are subject to self-employment tax? $50,000 ordinary income $50,000 ordinary business income and $22,000 guaranteed payment $50,000 ordinary business income, $22,000 guaranteed payment, and $5,000 long-term capital gain All income reported on a general partner's Schedule K-1 are subject to self-employment tax - ANS-$50,000 ordinary business income and $22,000 guaranteed payment Chad is the president and sole shareholder of Greenfield, Inc., a regular corporation. The corporation reported taxable income of $575,000 after deducting his $900, salary. If the IRS disallowed $550,000 as unreasonable compensation, Chad's taxable income will: Increase by $550, Decrease by $550,
Increase by $900, Stay the same - ANS-Stay the same Debbie is a limited partner in ADK Partnership. Her partnership Schedule K-1 reports $19,000 ordinary business income, $2,000 long-term capital gain, and $830 dividend income. Which of these items are subject to self-employment tax? None of the items are subject to SE tax because Debbie is a limited partner. $19,000 ordinary business income $19,000 ordinary business income and $2,000 long-term capital gain All income reported on a partner's Schedule K-1 are subject to self-employment tax. - ANS-None of the items are subject to SE tax because Debbie is a limited partner. During the current year, Margie earned wage income of $300,000. If Margie is single, which of the following statements regarding her Medicare tax liability is true? Margie will owe both the regular 1.45 percent Medicare tax and the additional .9 percent Medicare tax on her entire wage income. Margie will owe the regular 1.45 percent Medicare tax on her entire wage income and the additional .9 percent Medicare tax only on her wage income in excess of $200,000. Margie will owe the regular 1.45 percent Medicare tax on her entire wage income and the additional .9 percent Medicare tax only on her wage income in excess of $250,000. Margie's employer is required to withhold both the regular Medicare tax but does not withhold the additional .9 percent Medicare tax. - ANS-Margie will owe the regular 1. percent Medicare tax on her entire wage income and the additional .9 percent Medicare tax only on her wage income in excess of $200,000. Four years ago, Acnex Inc. granted Ms. Cardena an incentive stock option (ISO) to purchase 1,000 shares of Acnex stock at $44 per share. On date of grant, the market price was $42 per share. This year, Ms. Cardena exercised the ISO when the market price was $75 per share. Which of the following statements is true?
(Dependents limited to $1,100 or Earned Income + $350. LIMITED TO $12,400 IN
Jason can deduct the contribution, and Ms. Preston must include the contribution in gross income. Jason can't deduct the contribution, but Ms. Preston must include the contribution in gross income. Jason can deduct the contribution, but Ms. Preston does not include the contribution in gross income. Jason can't deduct the contribution, and Ms. Preston does not include the contribution in gross income. - ANS-Jason can deduct the contribution, but Ms. Preston does not include the contribution in gross income. Kent, an unmarried individual, invited his widowed father, Martin, to move into his home in January of this year. Martin's only income item was a $14,000 taxable pension from his former employer. Kent provides about 75% of his father's financial support. What is Kent's filing status for the year? Single Head of household Married filing separately None of these choices are correct - ANS-Single (Martin is not a qualifying relative because his gross income exceeds $4,300. Therefore, Kent doesn't qualify as a head of household. Therefore, he will file as single.) Kyrsten Haas expects her S corporation to generate a profit of $200,000. What is the effective tax rate on the $200,000 if no cash is distributed? Kyrsten's marginal tax rate on ordinary income is 37%. 21% 58%
37% - ANS-37%
(There is only one level of tax.) Last year, Mr. Margot purchased a limited interest in a business partnership, which is his only passive activity. Last year, he was allocated $14,900 of the partnership's ordinary business loss. This year, he was allocated $7,700 of the partnership's ordinary business income. Which of the following statements is false? Last year, Mr. Margot could not deduct any of his allocated partnership loss. This year, Mr. Margot can deduct $7,700 of last year's loss. Mr. Margot has a $7,200 passive activity loss carryforward into next year. None of these statements are false. - ANS-None of these statements are false. Leon died on August 23, 2017, and his wife Mary has not remarried. Since her husband's death, Mary has maintained a home for her two dependent children, who were ages 7 and 4 when their father died. Which of the following describes Mary's filing status for 2018, 2019, and 2020? Surviving spouse for 2018, 2019, and 2020. Surviving spouse for 2018 and 2019; head of household for 2020. Head of household for 2018, 2019, and 2020. Surviving spouse for 2018; head of household for 2019 and 2020. - ANS-Surviving spouse for 2018 and 2019; head of household for 2020. (Mary qualifies as a surviving spouse for two years following the year of her husband's death.) Loretta is the sole shareholder of Country Collectibles, a calendar year S corporation. Although Loretta spends at least 40 hours per week supervising Country Collectible's employees, she has never drawn a salary from the business. Country Collectibles has been in existence for five years and has earned a profit every year. Loretta withdraws
Martha Pim is a general partner in PLF Partnership. This year, Martha received a $48,000 guaranteed payment from PLF, and her distributive share of PLF's ordinary business income was $93,200. Which of the following is accurate? Martha must pay income tax on $141,200 and self-employment tax on $48,000. Martha must pay income tax on $141,200 and self-employment tax on $93,200. Martha must pay both income tax and self-employment tax on $141,200. Martha must pay income tax on $48,000 and self-employment tax on $93,200. - ANS-Martha must pay both income tax and self-employment tax on $141,200. Melissa, age 16, is claimed as a dependent on her parents' tax return. This year, Melissa earned $2,000 from babysitting and $1,280 interest income from a savings account. Compute Melissa's standard deduction. $2, $2, $ $1,100 - ANS-$2, (Dependents limited to $1,100 or Earned Income + $350. LIMITED TO $12,400 IN
Mr. and Mrs. Jelk file a joint return. They provide 65% of the financial support for David, the 14-year old son of a friend who died three years ago. David lives in the home of his aunt Sarah, who provides 35% of his financial support. Which of the following statements is true? David is a qualifying child of the Jelks. If David earns less than $4,300 gross income this year, he is a qualifying child of the Jelks. If David earns less than $4,300 gross income this year, he is a qualifying relative of the Jelks.
David is neither a qualifying child nor a qualifying relative of the Jelks. - ANS-David is neither a qualifying child nor a qualifying relative of the Jelks. (David is not a qualifying relative because he is not a member of the Jelks' household for the year.) Mr. Eddy loaned his solely-owned corporation $3,000,000. The corporation paid a market rate of interest annually. Upon audit, the IRS reclassified some of the debt as equity. Which of the following statements is true? The interest paid by the corporation on the reclassified amount is treated as a dividend. The taxable income of the corporation should stay the same. Mr. Eddy's taxable income will increase by the amount of the reclassified debt. None of these statements are true. - ANS-The interest paid by the corporation on the reclassified amount is treated as a dividend. Mr. Jones and his first wife were legally divorced on February 19, 2020. Mr. Jones remarried the second Mrs. Jones on December 20, 2020. Which of the following describes Mr. Jones' filing status in 2020? Married filing jointly with the second Mrs. Jones Married filing jointly with the first Mrs. Jones Married filing separately (can't file jointly with either spouse) None of the above - ANS-Married filing jointly with the second Mrs. Jones Mr. Sherman incurred $7,000 of employment-related business expenses. Which of the following statements is true? If his employer reimbursed him for these expenses, Mr. Sherman must include the reimbursement in gross income. If his employer reimbursed him for $3,000 of the expenses, Mr. Sherman is allowed a $4,000 above-the-line deduction.
He recognizes $34,000 ordinary income and $13,500 cap - ANS-He recognizes $47, ordinary income and zero capital gain on sale of the stock. On March 1, 2016, Bema Inc. issued 600 shares of its publicly traded stock as compensation to its employee, Ms. McPhee. On date of issuance, the stock's fair market value was $12,000. Under the terms of her employment contract, Ms. McPhee couldn't dispose of the stock before July 1, 2020, and if she terminated her employment with Bema before that date, she had to forfeit the stock back to Bema. Ms. McPhee made a timely election in 2016 to accelerate income recognition with respect to the 600 shares of restricted stock. On July 1, 2020, Ms. McPhee, who was still employed by Bema, sold all 600 shares for $26,000. What are the 2020 tax consequences to Ms. McPhee? She recognizes $26,000 ordinary income and zero capital gain on sale of the stock. She recognizes zero ordinary income and $14,000 capital gain on sale of the stock She recognizes zero ordinary income and $26,000 capital gain on sale of the stock. She recog - ANS-She recognizes zero ordinary income and $14,000 capital gain on sale of the stock Randolph Scott operates a business as a sole proprietorship. This year his net profit was $10,570. For tax purposes this amount should be reported on: Schedule C, Statement of Profit or Loss from Business The first page of Form 1040 as other income A separate tax return prepared for the business operation Schedule E, Statement of Rent and Royalty Income - ANS-Schedule C, Statement of Profit or Loss from Business Samantha died on January 18, 2019. Her husband Dave lived by himself until he remarried in 2021. What was Dave's filing status in 2019 and 2020? Married filing jointly in 2019; surviving spouse in 2020. Married filing jointly in 2019; single in 2020.
Surviving spouse in 2019 and 2020. Surviving spouse in 2019; single in 2020. - ANS-Married filing jointly in 2019; single in
(Dave can file jointly with his wife in the year of her death. Because he lives alone [not maintaining a home for a dependent child] he can't file as a surviving spouse but must file as a single taxpayer.) This year, Ms. Kwan recognized a $16,900 net long-term capital loss. Which of the following statements is true? Ms. Kwan has a $16,900 long-term capital loss carryforward into future years. Ms. Kwan has a $16,900 nondeductible loss that she can carry back three years and forward five years. Ms. Kwan can deduct $3,000 of the loss as an itemized deduction. None of these choices are true. - ANS-None of these choices are true. (Ms. Kwan has a $3,000 above-the-line deduction and a $13,900 long-term capital loss carryforward into future years.) Wallace Corporation needs an additional worker on a multiyear project. It could hire an employee for a $30,000 annual salary. Alternatively, it could engage an independent contractor for a $35,000 annual fee. Which of the following is true? Wallace must withhold payroll tax from the salary or the fee. Wallace must withhold federal and state income tax from the salary or the fee. Wallace must issue a Form W-2 to the employee or the independent contractor. None of these choices are true. - ANS-None of these choices are true. (Wallace would not withhold any taxes from the fee paid to the independent contractor and would issue a Form 1099 instead of a Form W-2.)
An S corporation has unlimited liability. An S corporation is a flow-through entity for federal income tax purposes. S corporations can only have 75 shareholders. S corporations can have several classes of stock. - ANS-An S corporation is a flow-through entity for federal income tax purposes. Which of the following statements about the individual capital gains and losses is false? Gain on sale of Section 1231 depreciable real property is taxed at a 25% maximum rate. Short-term capital gains are taxed as ordinary income. Capital losses are deductible only against capital gains. Nondeductible capital losses are carried forward for deduction against future capital gains. - ANS-Capital losses are deductible only against capital gains. ($3,000 net capital loss is deductible against ordinary income.) Which of the following statements concerning partnerships is false? A properly-drafted partnership agreement is crucial. A general partner's basis in a partnership includes his share of partnership debt. Limited partnerships must have at least one general partner. A partner is taxed annually on only that portion of a partnership's taxable income that is actually distributed. - ANS-A partner is taxed annually on only that portion of a partnership's taxable income that is actually distributed. Which of the following statements concerning the differences in operating a business as a partnership or as an S corporation is true? The S corporation form offers greater flexibility in allocating the income or loss among the owners.
The owners of an S corporation have unlimited personal liability for the debts of the business. The owners of a general partnership have unlimited personal liability for the debts of the business. All of these choices are true statements. - ANS-The owners of a general partnership have unlimited personal liability for the debts of the business. Which of the following statements describing individual tax deductions is false? Individuals can take both above-the-line and the standard deduction in the same year. Individuals elect to itemize deductions in a tax year in which total itemized deductions exceed the standard deduction. In a year in which an individual takes the standard deduction, any itemized deductions yield no tax benefit. Individuals who pay self-employment tax can deduct the tax as an itemized deduction. - ANS-Individuals who pay self-employment tax can deduct the tax as an itemized deduction. (Individuals can deduct one half of their self-employment tax as an above-the-line deduction.) Which of the following statements is false? The determination that an individual is a qualifying child of the taxpayer has the potential to impact the availability of certain credits for the taxpayer. A qualifying child must be the natural child, the adopted child, or the stepchild of the taxpayer. A qualifying relative may include an unrelated individual who is a member of the taxpayer's household for the year.
The IRS has a higher probability of collecting income and payroll taxes from an independent contractor than from an employee. If the IRS reclassifies a worker from independent contractor to employee, the employer can become liable for the employee's share of unpaid payroll taxes. - ANS-The IRS has a higher probability of collecting income and payroll taxes from an independent contractor than from an employee. Which of the following statements regarding Keogh plans is false? Keogh plans provide a tax-deferred retirement savings option for self-employed individuals. Keogh plans must be administered by an independent trustee. Keogh plans can be either defined-benefit or defined-contribution plans. A self-employed person with a Keogh plan is not required to provide retirement benefits to his or her employees through the plan. - ANS-A self-employed person with a Keogh plan is not required to provide retirement benefits to his or her employees through the plan. Which of the following statements regarding sole proprietorships is false? A sole proprietorship has no legal identity separate from that of its owner. Sole proprietorships are the most common form of business entity in the U.S. The cash flow generated by a sole proprietorship belongs to the owner. The assets and liabilities of a sole proprietorship are held in the name of the business, not the owner. - ANS-The assets and liabilities of a sole proprietorship are held in the name of the business, not the owner. Which of the following statements regarding the accumulated earnings tax is true? The accumulated earnings tax is imposed instead of the regular corporate income tax. The accumulated earnings tax is intended to coerce corporations to pay dividends.
The accumulated earnings tax is calculated by the corporation and paid on its annual corporate income tax return. All of these choices statements are true. - ANS-The accumulated earnings tax is intended to coerce corporations to pay dividends. Which of the following statements regarding the basis limitation on deduction of partnership losses is false? If a partner's share of partnership losses exceeds the partner's tax basis in the partnership interest, the excess is not deductible in the current year. Partnership losses that are not deductible due to the basis limitation can be carried forward indefinitely. Partners can increase tax basis in their partnership interest only by making additional capital contributions. If a partnership becomes profitable in the future, the partner's share of such future income will create basis against which loss carryforwards can be deducted. - ANS-Partners can increase tax basis in their partnership interest only by making additional capital contributions. Which of the following statements regarding the calculation of taxable income is false? The first step in the calculation of taxable income is determining the taxpayer's total income. Adjusted gross income is equal to total income less above-the-line deductions. Adjusted gross income can be reduced by the greater of the standard deduction or itemized deductions. Taxpayers are allowed to deduct the greater of itemized deductions or above-the-line deductions in calculating taxable income. - ANS-Taxpayers are allowed to deduct the greater of itemized deductions or above-the-line deductions in calculating taxable income. Which of the following statements regarding the tax burden imposed on business entities is true?
Mr. and Mrs. West were legally divorced on December 21, 2020. Mrs. West has not remarried and maintains a home for three dependent children. All of the above taxpayers qualify for married filing jointly filing status. - ANS-Mr. and Mrs. West were legally divorced on December 21, 2020. Mrs. West has not remarried and maintains a home for three dependent children. Which of the following would not be a successful means of avoiding double tax on the earnings of a closely-held corporation? Having a shareholder lend money to the corporation at a reasonable rate of interest. Having a shareholder lease warehouse space to the corporation at a reasonable rental rate. Having the corporation pay the shareholder a fixed percentage of the par value of the stock the shareholder owns. Having the corporation employ the shareholder at a reasonable compensation. - ANS-Having the corporation pay the shareholder a fixed percentage of the par value of the stock the shareholder owns.
