Questions and Answers of Introduction To Federal Income Taxation

Ashley is a shareholder in a calendar year S corporation. At the beginning of the year, Ashley’s basis in her S stock is $18,000. During the year, Ashley loaned the corporation $5,000. During the
Which of the following does not decrease an S shareholder’s basis in S corporation stock?a. The shareholder’s pro rata share of the S corporation’s nondeductible expenses.b. The shareholder’s
An S shareholder’s basis in S corporation stock increases by:a. the shareholder’s share of the increase in S corporation debt during the year.b. the shareholder’s pro rata share of S
The balance sheet of an S corporation is reported where on Form 1120S?a. On Schedule Kb. On Schedule Lc. On Schedule M-1d. On Schedule M-2
Which of the following is not a separately stated item?a. Net rental incomeb. Qualified dividendsc. Tax-exempt incomed. All of the above are separately stated items
An S corporation will lose its S corporation status if it has too much passive investment income for how many years?a. For the last two years, including the current year.b. For two of the past five
A calendar year corporation that wants to become an S corporation effective January 1, 2015 must file a valid S election no later than:a. March 15, 2015.b. December 31, 2014.c. December 31, 2015.d.
A corporation will be treated as having just one class of stock if:a. there is preferred stock with voting rights and nonvoting common stock.b. there is a difference in the rights to receive
To elect S status, a corporation must:a. not have an estate or trust as a shareholder.b. have at least two shareholders.c. have all of the affected shareholders agree to the election.d. all of the
Which of the following count as two shareholders for purposes of making a valid S election?a. A voting trust where the two beneficiaries of the trust are sistersb. Former spousesc. A brother and
An S corporation’s balance in its accumulated adjustments account (AAA) can never be negative.
An S corporation does not recognize a gain or loss on the distribution of property where the fair market value (FMV) of the property differs from the corporation’s adjusted basis in the property.
For an S corporation to be able to treat a distribution as coming first from E&P and then from AAA, all shareholders must agree to this change in ordering.
Once an S corporation's S status is revoked, the corporation normally must wait five years before it can re-elect S status.
An S election is always effective at the beginning of the corporation’s tax year.
Once a corporation elects S status, the only way for it to revert back to a C corporation is to have a majority of its shareholders to revoke the S election.
A C corporation with earnings and profits (E&P) must get rid of all of its E&P before it can become an S corporation.
Once a corporation has elected S status, it can have any number of shareholders during the year, as long as it has no more than 100 shareholders on the last day of its tax year.
A corporation cannot elect S status if it ever had a partnership as a shareholder.
S corporations share the attractive features of both partnerships (single level of taxation) and C corporations (limited liability).
TRX partnership distributes to one of its partners, Tim, $10,000 cash and land worth $35,000(with a basis to TRX of $23,000). Which of the following is a correct statement if Tim’s basis in TRX is
HUV partnership distributes to one of its partners, Helen, $15,000 cash and land worth$30,000 (basis to HUV of $51,000). Which of the following is a correct statement if Helen’s basis in HUV is
Which of the following does not increase a general partner’s basis in a partnership interest?a. The partner’s allocated share of tax-exempt interest.b. The partner’s adjusted basis of property
Al contributes land worth $30,000 to AB partnership in exchange for a 15% partnership interest. Al’s basis in the land is $50,000. Which of the following statements is correct regarding the
Which of the following is subtracted from Net income (loss) per books when reconciling net income (loss) per books with the income (loss) reported in the Analysis of Net Income(Loss) section on the
Which of the following partnerships would not be required to complete Schedule L on Form 1065?a. A partnership with total assets at the end of the year of $250,000.b. A partnership that is required
Which of the following items is included in the calculation of partnership ordinary income but also reported as a separately stated item?a. Investment expenseb. Royalty incomec. Guaranteed paymentsd.
Which of the following is not a separately stated item?a. Tax-exempt interestb. Dividend incomec. Personal expenses of the partner paid for by the partnershipd. Loss from the sale of business
Which of the following statements is correct regarding a partnership’s ability to adopt a year end other than its required tax year?a. To adopt a natural business year, the partnership must have
ABC partnership, which has 60 partners, failed to file a timely tax return. What penalty will be assessed to ABC if its tax return is filed 15 months late?a. $150,000b. $140,400c. $175,500d. $11,700
Partners recognize gain when they receive a cash distribution from the partnership that exceeds the basis in their partnership interest.
A partner’s basis in a partnership interest can never be negative.
Fran performs services for a partnership in exchange for an interest in the partnership. Fran’s basis in the partnership interest she receives is $0.
No gain is recognized by a partner who contributes appreciated property to a partnership solely in exchange for an interest in the partnership.
A partnership wanting to change its year end notifies the IRS of their desire to change by attaching a statement to its first tax return where the new tax year is used.
In determining a partnership’s required tax year, the majority interest rule is applied first, followed by the principal partners rule.
The calendar year is the required tax year for a partnership whose partners are all individuals with a calendar year end.
Jenna is a calendar year taxpayer who is a partner in JKL partnership. JKL has a June 30 fiscal year. Jenna reports her share of JKL’s income (loss) for the fiscal year that runs from July 1, 2013
In a general partnership, all of the partners are general partners, and in a limited partnership, all of the partners are limited partners.
Both general and limited partners are fully liable for the actions of the partnership.
A corporation distributes land (fair market value (FMV), $30,000; basis, $70,000) to a shareholder. As a result of the distribution, the corporation:a. recognizes $40,000 loss and distributes the
A corporation distributes land (fair market value (FMV), $60,000; basis, $45,000) to a shareholder. As a result of the distribution, the corporation:a. recognizes $15,000 gain and distributes the
When completing Schedule M-1, which of the following is added to net income (loss) per books to arrive at the amount reported on page 1, line 28 of the tax return?a. The domestic production
Which of the following corporations is least likely to have a flat 35% tax rate applied to its entire taxable income?a. An accounting firmb. A clothing storec. A law firmd. A medical practice
All taxable income is taxed at a flat 35% rate once a corporation’s taxable income exceeds:a. $335,000.b. $10,000,000.c. $18,333,000.d. $15,000,000.
The tax rate on $50,000 of net capital gains for a corporation with $225,000 of taxable income is:a. 39%.b. 15%.c. 35%.d. 20%.
Which of the following items is deducted last in the calculation of taxable income?a. Short-term capital loss carrybacksb. Domestic production activities (DPA) deductionc. Charitable contributionsd.
Which of the following items is deducted earliest in the calculation of taxable income?a. NOL carrybacksb. Dividend received deductionc. Charitable contributionsd. Cost of goods sold
A corporation that wants its tax year to end on the same day of the week each year should select:a. a fiscal year end.b. a 52-53 week year end.c. a calendar year end.d. none of the above.
When a corporation selects the hybrid method of accounting, it:a. uses the cash method to report income and the accrual method to report expenses.b. uses the accrual method to report income and the
A corporation with $0 earnings and profits (E&P) can distribute property, but not cash, to its shareholders.
When a corporation distributes cash in excess of its earnings and profits (E&P), the shareholders recognize gain equal to the amount of the excess.
Any charitable contributions not deductible in the current year can be carried back two and forward five years.
The dividends received deduction is always 100% when the corporation receiving the dividends owns at least 80% of the stock in the corporation paying the dividends.
The $5,000 immediate deduction for organizational costs is not allowed when the corporation’s organizational costs exceed $55,000.
June performs services to a corporation solely in exchange for stock in the corporation. June’s basis in the stock is $0 since she did not pay anything for the stock.
Edwina transfers property to a corporation in exchange for cash and stock in the corporation.Edwina recognizes gain for the amount of cash she receives.
No gain or loss is recognized when shareholders contribute property to a corporation solely in exchange for stock in the corporation as long as the contributing shareholders own at least 50% of the
When a sole shareholder contributes personal use property to a corporation solely in exchange for stock in the corporation, the corporation’s basis in the property is not necessarily the same as
No gain is recognized by a shareholder who contributes cash to a corporation solely in exchange for stock in the corporation.
Which of the following statements is a correct statement?a. The burden of proof is always on the taxpayer.b. The failure to file penalty is 17.5% of the taxes owed for taxpayers who file their
The due dates for the estimated payments for a calendar year individual taxpayer are:a. March 15, June 15, September 15 and December 15.b. March 15, June 15, September 15 and January 15 of the
Employers report federal payroll tax withholdings and related deposits on:a. Form W-2.b. Form W-3.c. Form W-4.d. Form 941.
Janie has two employees who earned $5,000 and $10,000, respectively. Using the full FUTA tax rate, Janie’s FUTA tax for the year would be:a. $900.b. $744.c. $720.d. $918.
Toni is married but files a separate return from her husband. If Toni’s employer withholds the proper amount of Medicare taxes on her $140,000 of taxable wages, her 2014 Medicare tax withheld and
Tommy is single and employed full-time. If Tommy’s employer withholds the proper amounts of FICA taxes based on $150,000 of taxable wages, the amounts withheld for social security taxes and
In 2014, employers withhold from their employees’ pay for the social security portion of FICA at a rate of:a. 7.65% on the first $117,000 of social security wages.b. 6.2% on the first $117,000 of
Which of the following taxes are not withheld from an employee’s wages?a. State income taxb. Medicare taxesc. Social security taxesd. FUTA taxes
Which of the following is a correct statement?a. When an event causes an employee’s withholding allowances to increase, the employee must file a new Form W-4 to avoid being under withheld.b.
Herb is in the process of filling out his W-4. Herb is married and the couple estimates their total income will be $90,000. The couple claims their three children, ages 7, 10 and 12, as dependents.
For purposes of filing Form 1040X, any tax return filed prior to the original due date is considered to have been filed on April 15th.
A tax preparer will be assessed a $1,000 penalty if he fails to give 10 of his clients copies of their tax returns.
The 30-day letter gets its name because when the taxpayer receives a 30-day letter from the IRS after an audit, and the taxpayer does not agree with the IRS’s findings, the taxpayer has 30 days to
Dan’s AGI last year was $100,000. Dan will avoid an underpayment penalty if he makes four timely estimated payments each equal to 25% of his last year’s tax liability.
When a husband and wife make joint estimated payments, but file separate tax returns, they can decide for themselves how to divide up and report their joint estimated payments on their respective tax
Once the one-day rule applies and a monthly depositor becomes a semiweekly depositor, the employer will always be a semiweekly depositor.
Jessie has never filed a tax return before. When filling out Form W-4 at his very first job, Jessie can claim exemption from withholding since he had no federal income tax liability last year.
When filling out Form W-4, any employee with more than one job must complete the Two-Earners/Multiple Jobs Worksheet.
Claiming an additional withholding allowance on Form W-4 will decrease the amount of federal income tax withheld.
Until a child has taxable income, there is no need for a parent to apply for a social security number for the child.
If Dan invested $100,000 in a qualified community development entity (CDE) in 2011, his 2014 new markets credit is:a. $3,000.b. $4,000.c. $5,000.d. $6,000.
During 2013, Bentley & Associates hired a veteran with service-related disabilities. Qualified first-year wages paid to the veteran were $21,000, with $10,000 paid in 2013 and $11,000 paid in 2014.
During 2013, Troy Manufacturing hired a veteran who, for the year leading up to his hire date, had been unemployed for seven months. Qualified first-year wages were $15,000, with$8,000 paid in 2013
The work opportunity tax credit (WOTC) is available for qualified second-year wages paid to which one of the following?a. Qualified veteranb. Long-term family assistance recipientc. Qualified
During the year, a corporation paid $20,000 to a qualified childcare facility that provides childcare services for its employees. The corporation's childcare credit is:a. $2,000.b. $3,000.c.
During the current year a corporation pays $8,000 to install ramps to the entrance of the corporation's office building that will allow disabled individuals better access to the building.If the
On September 20, 2010, a taxpayer places in service a certified historical structure that qualified for the rehabilitation credit. If on May 5, 2014, the taxpayers sells the property, what percentage
How many years can an NOL and any unused general business credit can be carried back to a previous tax year?a. 2 and 1, respectivelyb. 0 and 2, respectivelyc. 1 and 2, respectivelyd. 2 and 0,
Ryan is unmarried and files as head of household. If Ryan’s AMTI for 2014 is $176,800, his AMT exemption is:a. $0.b. $14,875.c. $52,800.d. $37,925.
Ryan is married, but files separately from his spouse. Ryan’s AMTI is $75,650, and his regular tax liability on taxable income is $5,940. Ryan’s AMT for 2014 is:a. $0.b. $3,056.c. $13,729.d.
Taxpayers taking the new markets credit reduce their investment by the amount of the credit claimed on their tax returns.
In order for investors to get the full tax benefits of the new markets credit, they must hold on to their investments in the qualified CDE for at least 7 years.
Wages paid to workers who either live or work in an empowerment zone qualify for the empowerment zone employment credit.
Only wages of workers who perform at least 400 hours of services for the employer during the year are used in computing the work opportunity tax credit (WOTC).
Starting in 2014, the credit for small employer health insurance premiums is available for only two years.
The credit for small employer health insurance premiums is not available to businesses that have more than 10 full-time equivalent (FTE) employees.
For purposes of the rehabilitation credit, only expenditures made within the 24-month test period count in determining whether a building has been substantially rehabilitated.
To qualify for the rehabilitation credit, the taxpayer need not meet the substantial rehabilitation test if the building is a certified historic structure.
For an unmarried taxpayer filing as head of household, the AMT is a two-tier tax where the first $182,500 of AMTI is taxed at 26% and any excess over that amount is taxed at 28%.
When computing AMTI, all tax-exempt interest from state and local government (municipal)bonds must be added back to taxable income.

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