Taxation MCQs

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1.Individual proprietors report their business income and deductions on:

Form 1065
Form 1120S
Schedule C
Schedule A

Form 1041

2.According to the Internal Revenue Code §162, deductible business expenses must be one of the following?

incurred for the production of investment income
ordinary and necessary
minimized
appropriate and measurable
personal and justifiable

3.Which of the following is NOT likely to be allowed as a current deduction for a landscaping and nursery business?
cost of fertilizer
accounting fees
cost of a greenhouse
cost of uniforms for employees
a cash settlement for trade name infringement

4.The IRS would most likely apply the arm’s length transaction test to determine which of the following?

whether an expenditure is related to a business activity

whether an expenditure will be likely to produce income

timeliness of an expenditure

reasonableness of an expenditure

All of these

5.Which of the following business expense deductions is most likely to be unreasonable in amount?

Compensation paid to the taxpayer’s spouse in excess of salary payments to other employees.

Amounts paid to a subsidiary corporation for services where the amount is in excess of the cost of comparable services by competing corporations.

Cost of entertaining a former client when there is no possibility of any future benefits from a relation with that client.

None of these is likely to be unreasonable in amount.

Compensation paid to the taxpayer’s spouse in excess of salary payments to other employees, amounts paid to a subsidiary corporation for services where the amount is in excess of the cost of comparable services by competing corporations, and cost of entertaining a former client when there is no possibility of any future benefits from a relation with that client are all likely to be considered unreasonable in amount.

6.Which of the following is a true statement?

Interest expense is not deductible if the loan is used to purchase municipal bonds.

Insurance premiums are not deductible if paid for “key man” life insurance.

One half of the cost of business meals is not deductible.

All of these are true.

None of these is true.
7.Which of the following expenditures is most likely to be deductible for a construction business?

A fine for a zoning violation.

A tax underpayment penalty.

An “under the table” payment to a government representative to obtain a better price for raw materials.

A payment to a foreign official to expedite an application for a business permit.

An arm’s length payment to a related party for emergency repairs of a sewage line.

8.Which of the following is an explanation for why insurance premiums on a key employee are not deductible?

The insurance deduction would offset taxable income without the potential for the proceeds generating taxable incom0065.

The federal government does not want to subsidize insurance companies.

It is impractical to trace insurance premiums to the receipt of proceeds.

Congress presumes that all expenses are not deductible unless specifically allowed in the Internal Revenue Code.

This rule was grandfathered from a time when the IRC disallowed all insurance premiums deductions.

9.Paris operates a talent agency as a sole proprietorship, and this year she incurred the following expenses in operating her talent agency. What is the total deductible amount of these expenditures?

$1,000 dinner with a film producer where no business was discussed
$500 lunch with sister Nicky where no business was discussed
$700 business dinner with a client but Paris forgot to keep any records (oops!)
$900 tickets to the opera with a client following a business meeting

$450

$900

$1,100

$1,200

$800

10.Dick pays insurance premiums for his employees. What type of insurance premium is not deductible as compensation paid to the employee?

Health insurance with benefits payable to the employee.

Whole life insurance with benefits payable to the employee’s dependents.

Group term life insurance with benefits payable to the employee’s dependents.

key man life insurance with benefits payable to Dick.

All of these are deductible by Dick.

11.Tax cost recovery methods do not include:

Amortization

Capitalization

Depletion

Depreciation

All of these are tax cost recovery methods

12.Which of the following is not depreciated?

Automobile

Building

Patent

Machinery

All of these are depreciated

13.Which of the following is not usually included in an asset’s tax basis?

Purchase price

Sales tax

Shipping

Installation costs

All of these are included in an asset’s tax basis

14.Which of the following would be considered an improvement rather than a routine maintenance?

Oil change

Engine overhaul

Wiper blade replacement

Air filter change

15.Tax depreciation is currently calculated under what system?

Sum of the years digits

Accelerated cost recovery system

Modified accelerated cost recovery system

Straight line system

None of these

16.Which is not an allowable method under MACRS?

150 percent declining balance

200 percent declining balance

Straight line

Sum of the years digits

All of these are allowable methods under MACRS

17.Which of the allowable methods allows the most accelerated depreciation?

150 percent declining balance

200 percent declining balance

Straight line

Sum of the years digits

None of these allow accelerated depreciation

18.How is the recovery period of an asset determined?

Estimated useful life

Treasury regulation

Revenue Procedure 87 – 56

Revenue Ruling 87 – 56

None of these

19.Which of the following depreciation conventions are not used under MACRS?

Full-month

Half-year

Mid-month

Mid-quarter

All of these are used under MACRS
20.

Which depreciation convention is the general rule for tangible personal property?

Full-month

Half-year

Mid-month

Mid-quarter

None of these are conventions for tangible personal property
21.

Which of the following is not true regarding an asset’s adjusted basis?

Tax adjusted basis is usually greater than book adjusted basis.

Tax adjusted basis is usually less than book adjusted basis.

Adjusted basis is cost basis less cost recovery deductions.

Tax adjusted basis may change over time.
22.

Which of the following is not usually included in an asset’s tax basis?

Purchase price

Sales tax

Shipping costs

Installation costs

None of these
23.

Which of the following is how gain or loss realized is calculated?

Cash less selling costs.

Cost basis less cost recovery.

Cash less cost recovery.

Amount realized less adjusted basis.

None of these.
24.

Which of the following realized gains results in a recognized gain?

Farm machinery traded for farm machinery.

Sale to a related party.

Involuntary conversion.

Iowa cropland exchanged for a Minnesota warehouse.
25.

Leesburg sold a machine for $2,200 on November 10th of the current year. The machine was purchased for $2,600. Leesburg had taken $1,200 of depreciation deductions. What is Leesburg’s gain or loss realized on the machine?

$800 gain.

$1,000 gain.

$1,200 loss.

$1,400 loss.

None of these.
26.

The sale of land held for investment results in the following type of gain or loss?

Capital.

Ordinary.

§1231.

§1245.

None of these.
27.

The sale of machinery at a loss that was used in a trade or business and held for more than one year results in the following type of loss?

Capital.

Ordinary.

§1231.

§1245.

None of these.
28.

The sale of computer equipment used in a trade or business for 9 months results in the following type of gain or loss?

Capital.

Ordinary.

§1231.

§1245.

None of these.
29.

The sale of machinery for more than the original cost basis (before depreciation), used in a trade or business, and held for more than one year results in the following types of gain or loss?

Capital and Ordinary.

Ordinary only.

Capital and §1231.

§1245 and §1231.

None of these.
30.Which of the following results in an ordinary gain or loss?

Sale of a machine at a gain.

Sale of stock held for investment.

Sale of a §1231 asset.

Sale of inventory.

None of these.

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