Questions and Answers of Income Tax Fundamentals

Both spouses are responsible, jointly and individually, for paying the full amount of any tax, interest, or penalties due on a joint return. a. This does not apply to spouses who have divorced
A taxpayer’s rights are explained in: a. Publication 5 b. Publication 17 c. Publication 556 d. Publication 1 e. None of the above
Taxpayers have the right to have an IRS examination take place at: a. The IRS office.b. Any city of the taxpayer’s choosing.c. A neutral site.d. A reasonable time and place. e. None of
If a U.S. Tax Court agrees with the taxpayer on appeal that the IRS position was largely unjustified, which of the following is correct? a. The taxpayer must still pay administrative and
Glen’s taxable income is $50,000 and he pays income tax of $6,940. If his income were $60,000, he would pay taxes of $9,140. What is Glen’s marginal tax rate? a. 18.23% b.
Melodie’s taxable income is $38,000 and she pays income tax of $4,370. If Melodie’s taxable income increases to $40,000, she would pay income taxes of $4,740. What is Melodie’s marginal tax
Jim has a house payment of $2,000 per month of which $1,700 is deductible interest and real estate taxes with the remaining $300 representing a repayment of the principal balance of the note. Jim’s
Gregory and Lulu Clifden’s Tax Return Gregory R. and Lulu B. Clifden live with their family at the Rock Glen House Bed & Breakfast, which Gregory operates. The Bed & Breakfast (B&B) is
The Taxpayer Bill of Rights lists 10 different rights. Name four of those rights
Which of the following does not result in a minimum $50 fine for an income tax preparer? a. Failure to provide a tax preparer identification number. b. Cashing a refund check for a
Classify each of the following as an enrolled or unenrolled preparer: a. Certified public accountant b. Enrolled agent c. A preparer that has completed the annual filing season
Indicate the date that the statute of limitations would run out on each of the following 2018 individual tax returns: a. A fraudulent tax return that was filed April 15, 2019 b. A tax
If a taxpayer’s 2018 individual income tax return was filed on March 3, 2019, the statute of limitations would normally run out on: a. April 15, 2021 b. March 3, 2020 c. April 15,
Martha inadvertently failed to file her tax return for 11 months. Her failure to file penalty will be: a. 55% of the tax due. b. 25% of the tax due. c. 5.5% of the tax due. d.
In the 2018 tax year, Michelle paid the following amounts relating to her 2016 tax return: Tax deficiency..........................................................$5,000 Negligence
In which of the following ways are tax returns selected for audits? a. Through the Discriminant Function System.b. Through informants. c. Through news sources. d. Through information
The IRS does not have the authority to: a. Examine a taxpayer’s books and records. b. Summon taxpayers to make them appear before the IRS c. Summon third parties for taxpayer
Any corporate AMT credit carryovers that existed at the end of 2017: a. Can be used to offset tax liability generated in 2018 and thereafter. b. Do not expire. c. Can generate a
Which of the following statements is true about the 2018 corporate alternative minimum tax? a. The corporate alternative minimum tax only applies to small corporations. b. The corporate
Boyce Industries, a manufacturing corporation, has accumulated earnings of $325,000 and cannot show any reasonable need for the accumulated earnings. What is Boyce’s accumulated earnings
Which of the following statements regarding personal holding companies is false? a. A personal holding company is one which has few shareholders. b. A personal holding company has income
Carl transfers land with a fair market value of $120,000 and basis of $30,000, to a new corporation in exchange for 85 percent of the corporation’s stock. The land is subject to a $45,000
Cypress Corporation, a calendar year end corporation, has an AMT credit carryforward from 2017 in the amount of $43,000. In 2018, Cypress has $170,000 of taxable income. Assuming Cypress is not a
Bill and Guilda each own 50 percent of the stock of Radiata Corporation, an S corporation. Guilda’s basis in her stock is $21,000. On May 26, 2018, Bill sells his stock, with a basis of $40,000, to
Cedar Corporation has an S corporation election in effect. During the 2018 calendar tax year, the corporation had ordinary taxable income of $200,000, and on January 15, 2018, the corporation paid
Mansfield Incorporated, a calendar year corporation, is expecting to have a current year tax liability of $100,000. Which best describes the tax payments Mansfield should make to avoid
Mallory Corporation has a calendar year-end. The corporation has paid estimated taxes of $10,000 during 2018 but still owes an additional $5,000 for its 2018 tax year. a. When is the 2018 tax
Which of the following statements is false regarding corporate tax return due dates? a. Corporate tax returns for 2018 calendar-year corporations are due April 15, 2019. b. Corporate tax
Caloundra Corporation has book income of $40,000. Included in the book income is $3,000 of tax-exempt interest, $7,000 of book income tax expense, and a $2,000 nondeductible fine. Also included in
Which of the following would not generally appear on the M-1 reconciliation? a. Federal income tax expense per books. b. Tax-exempt interest income. c. Excess tax over book
The Loquat Corporation has book net income of $50,000 for the current year. Included in this figure are the following items, which are reported on the corporation’s Schedule M-1, Reconciliation of
In Year 1, Citradoria Corporation is a regular corporation that contributes $35,000 cash to qualified charitable organizations during the current tax year. The corporation has net operating income of
Beech Corporation, an accrual basis calendar year taxpayer, was organized and began business on August of the current calendar tax year. During the current year, the corporation incurred the
Walnut Corporation owns 60 percent of Teak Corporation, a domestic corporation. During the current year, Walnut Corporation received $20,000 in dividends from Teak Corporation. Assuming that
Fisafolia Corporation has gross income from operations of $210,000 and operating expenses of $160,000 for 2018. The corporation also has $30,000 in dividends from publicly traded domestic
Mask Corporation generated a net operating loss of $60,000 in 2018 and taxable income of $24,000 in 2019. How much NOL can Mask use in 2019 to reduce taxable income? a. $0 b.
For its current tax year, Ilex Corporation has ordinary income of $260,000, a short-term capital loss of $60,000, and a long-term capital gain of $20,000. Calculate Ilex Corporation’s tax liability
Assume that Olive Corporation, in Comprehensive Problem 1, is an S corporation owned 50 percent by Linda Holiday and 50 percent by Ralph Winston. The corporation is not subject to any special taxes.
Ulmus Corporation is an engineering consulting firm and has $1,120,000 in taxable income for 2018. Calculate the corporation’s income tax liability for 2018.
Tayla Corporation generated $340,000 of taxable income in the 2018. What is Tayla’s corporate tax liability? a. $71,400 b. $119,000 c. $115,600 d. $0 e. None of the above
Olive Corporation was formed and began operations on January 1, 2018. The corporation’s income statement for the year and the balance sheet at year-end are presented below. The corporation
Quince Corporation has taxable income of $485,000 for its calendar tax year. Calculate the corporation’s income tax liability for 2018 before tax credits.
Ironwood Corporation has ordinary taxable income of $50,000 in 2018, and a longterm capital loss of $15,000. What is the corporation’s tax liability for 2018? a. $7,500 b. $5,250 c.
Which of the following properly describes a difference between a partnership and an LLC? a. Partnerships pass income and losses through to the partners while LLCs generally pay an entity level
Gloria is a 30% general partner in the VH Partnership. During the year, VH borrows $40,000 from a bank to fund operations and is able to pay back $10,000 before year end. VH also borrows $100,000
Jay is a 30% partner in the Closet Partnership. In 2018, Closet paid W-2 wages of $24,000 and held qualified property of $600,000. In 2018, Jay’s QBI deduction is subject to the wage limitation due
In 2018, Gloria, a single taxpayer, receives a Schedule K-1 from a partnership she is invested in. The K-1 reports ordinary business income of $40,000, dividend income of $500, tax-exempt interest of
Kendra is an attorney and owns 60 percent of a law partnership. Kendra sells land to the partnership for $50,000 in the current tax year. She bought the land for $100,000 eight years ago when real
Describe ways in which LLCs might differ from partnerships.
Joe, Ben, and Melissa are partners in Collins Partnership. All three use a calendar year end for their individual taxes. Collins Partnership’s year end is likely to be: a. October 31 since
Van makes an investment in an LLC in 2018. Van’s capital contributions to the LLC consisted of $30,000 cash and a building with an adjusted basis of $70,000, subject to a nonrecourse liability
Karen, 28 years old and a single taxpayer, has a salary of $31,000 and rental income of $33,000 for the 2018 calendar tax year. Karen is covered by a pension through her employer. a. What is the
Which of the following circumstances will not cause a partnership to close its tax year early? a. The partnership terminates by agreement of the partners. b. The business activity of the
Van makes an investment in a partnership in 2018. Van’s capital contributions to the partnership consisted of $30,000 cash and a building with an adjusted basis of $70,000, subject to a nonrecourse
Khushboo’s basis in her 30% interest in the Rishi Partnership is $46,000 at the start of the current year. During the current year, Rishi reports ordinary business income of $70,000. Rishi also
Which of the following donations are not deductible as a charitable contribution? a. A donation of clothing to Goodwill Industries.b. A cash contribution to a church. c. A contribution of
Jessica is a U.S. Army Reservist and in 2018 traveled 130 miles each way to serve duty at a local military installation. She was required to report four times in 2018. Her normal route from home to
Clifford Johnson has a limited partnership investment and a rental condominium. Clifford actively manages the rental condominium. During 2018, his share of the loss from the limited partnership was
Lydia, a married individual, was unemployed for a few months during 2018. During the year, she received $3,250 in unemployment compensation payments. How much of her unemployment compensation
Which of the following is included in gross income?a. Loans b. Scholarships for room and board c. Worker’s compensation d. Health insurance proceeds e. None of the above
Kristen, a single taxpayer, receives two 2018 Forms W-2 from the two employers she worked for during the year. One Form W-2 lists her wages in Boxes 1, 3, and 5 as $18,700. Her other employer’s
Which of the following items would be includable in the gross income of the recipient? a. Insurance payments for medical care of a dependent child b. Insurance payments for loss of the
Skyler is covered by his company’s health insurance plan. The health insurance costs his company $9,500 a year. During the year, Skyler is diagnosed with a serious illness and health insurance pays
George works at the Springfield Nuclear Plant as a nuclear technician. The plant is located 15 miles from the town of Springfield. George likes to take his lunch at the plant’s cafeteria because he
Ellen’s tax client, Tom, is employed at a large company that offers health care flexible spending accounts to its employees. Tom must decide at the beginning of the year whether he wants to put as
During 2018, Carl (a single taxpayer) has a salary of $91,500 and interest income of $11,000. Calculate the maximum contribution Carl is allowed for an educational savings account. a. $0 b.
Jose paid the following amounts for his son to attend Big State University in 2018: Tuition ......................$6,400 Room and board......................
George receives a $1,500 distribution from his educational savings account. He uses $1,200 to pay for qualified higher education expenses. Immediately prior to the distribution, George’s account
In 2018, Van receives $20,000 (of which $4,000 is earnings) from a qualified tuition program. He uses the funds to pay for his college tuition and other qualified higher education expenses. How much
Alicia loses her job part way through 2018. Her employer pays her wages of $15,450 up through her date of termination. After that, she received $3,400 of unemployment compensation from the state
For 2018, the minimum percentage of Social Security benefits that could be included in a taxpayer’s gross income is: a. 0% b. 25% c. 50% d. 75% e. 85%
During the 2018 tax year, Brian, a single taxpayer, received $7,400 in Social Security benefits. His adjusted gross income for the year was $14,500 (not including the Social Security benefits) and he
Which of the following is not a test for the deductibility of a business expense? a. Ordinary and necessary test b. Expectation of profit test c. Reasonableness test d. Business
If a taxpayer has beginning inventory of $25,000, purchases of $175,000, and ending inventory of $45,000, what is the amount of the cost of goods sold for the current year? a. $155,000. b.
The Blacks moved from Maine to Nevada. As a result, they sold their house in Maine on January 4, 2018. They originally paid $76,000 for the home on July 3, 1993, but managed to sell it for $604,000.
A. Dr. George E. Beeper is a single taxpayer born on September 22, 1970. He lives at 45 Mountain View Dr., Apt. 321, Spokane, WA 99210. Dr. Beeper’s Social Security number is 775-88-9531. Dr.
Rob operates a small plumbing supplies business as a sole proprietor. In 2018, the plumbing business has gross business income of $421,000 and business expenses of $267,000, including wages paid of
Lyndon, age 24, has a nonworking spouse and earns wages of $36,000 for 2018. He also received rental income of $5,000 and dividend income of $900 for the year. What is the maximum amount Lyndon can
Martha and Rob, a married couple, under 50 years of age, have adjusted gross income on their 2018 joint income tax return of $45,000, before considering any IRA deduction. Martha and Rob have no
What is the maximum amount a 55-year-old taxpayer and 52-year-old spouse can put into a Traditional or Roth IRA for 2018, assuming they earn $70,000 in total and are not participants in pension plans?
Eliza is a kindergarten teacher for Alexander Hamilton Elementary School. Eliza decorates her classroom with new artwork, posters, bulletin boards, etc. In 2018, she spends $470 on materials and
Helen paid the following amounts of interest during the 2018 tax year: Mortgage interest on Dallas residence (loan balance $50,000) ..............$1,585 Automobile loan interest (personal
Which of the following interest expense amounts is not deductible in the current year? a. Education loan interest of $2,000, assuming the taxpayer has income of $30,000. b. Home equity loan
Mark owns his home and has a $250,000 mortgage related to his purchase of the residence. When his daughter went to college in the fall of 2018, he borrowed $20,000 through a home equity loan on his
Go to the U.S. General Services Administration (GSA) website. For the month of September 30, 2018, what is the per diem rate for each of the following towns: a. Flagstaff, AZb. Palm Springs,
Under the high-low method, the federal per diem amount is a. The same in every city in the U.S. b. Different for every city in the U.S. c. The same for most cities but higher in
Joan is a self-employed attorney in New York City. Joan took a trip to San Diego, CA, primarily for business, to consult with a client and take a short vacation. On the trip, Joan incurred the
Heather drives her minivan 953 miles for business purposes in 2018. She elects to use the standard mileage rate for her auto expense deduction. Her deduction will be a. $510 b. $515 c.
Teresa is a civil engineer who uses her automobile for business. Teresa drove her automobile a total of 11,965 miles during 2018, of which 80 percent was business mileage. The actual cost of
Business with gross receipts of $25 million or less may treat inventory as nonincidental materials and supplies. Find Regulation Section 1.162-3 and read paragraphs (a)(1) and (a)(2) to help answer
Janie owns a 40% interest in Chang Partnership. Chang has W-2 wages of $50,000 and qualified property of $450,000 in 2018. a. When computing the W-2 wages limitation, what is the amount of wages
Which of the following items is generally reported separately on a partnership return? a. Ordinary income from the operations of the partnership business. b. Typical MACRS depreciation.c.
Feela is a one-third partner in Alchemy LLC, which is taxed as a partnership. Her basis prior to Alchemy paying Feela a $11,000 cash distribution is $27,000. How much income does Feela recognize from
Quince Interests is a partnership with a tax year that ends on September 30, 2018. During that year, Potter, a partner, received $3,000 per month as a guaranteed payment, and his share of partnership
When calculating taxable income, partnerships are not allowed which of the following deductions? a. Miscellaneous expenses. b. Qualified business income deduction. c.
Which of the following items is generally reported separately on a partnership return? a. Ordinary income from the operations of the partnership businessb. Bonus depreciation.c. Interest expense
L&J Interests is a partnership with two equal partners, Linda and Joanne. The partnership has income of $75,000 for the year before guaranteed payments. Guaranteed payments of $45,000 are paid to
A. Russell (birthdate February 2, 1967) and Linda (birthdate August 30, 1972) Long have brought you the following information regarding their income and expenses for the current year. Russell owns
Kevin owns a retail store, and during the current year he purchased $610,000 worth of inventory. Kevin’s beginning inventory was $67,000, and his ending inventory is $77,200. During the year, Kevin
Which of the following items do not have to be reported separately on a partnership return? a. Tax-exempt income b. Casualty gains and lossesc. Interest on business loan d. Capital

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