Question 1

When income is taxed in a different period than it is accrued for financial accounting, there is a timing difference.

Accepted Answer

This is because tax laws and financial accounting principles can have different recognition criteria for income and expenses, resulting in differences in the timing of when they are recognized for tax purposes versus financial accounting purposes. This creates a timing difference that can impact the company's financial statements and tax liabilities.

Question 2

Qualified dividends are dividends that are eligible for the reduced tax rates for dividend income.

Accepted Answer

Qualified dividends meet certain criteria set by the IRS, such as being paid by a U.S. corporation or qualified foreign corporation and being held for a minimum length of time, and are taxed at lower rates than non-qualified dividends.

Question 3

All taxpayers may use the accrual method of determining income but certain taxpayers may not use the cash method.

Accepted Answer

While all taxpayers may use the accrual method of determining income, there are certain taxpayers who may not use the cash method, such as C-corporations with gross receipts over $25 million and partnerships with a C-corporation partner that has gross receipts over $25 million.

Question 4

If a beneficiary of a life insurance policy receives the insurance proceeds over time in installments, then each installment received is fully taxable.

Accepted Answer

If the beneficiary receives the insurance proceeds over time in installments, only the portion of the proceeds that represents interest or any other earnings on the proceeds is subject to income tax. The portion of the proceeds that represents the original death benefit is not taxable.

Question 5

The installment method of income recognition is an application of the wherewithal to pay concept.

Accepted Answer

The installment method of income recognition recognizes income over time as payment is received, based on the wherewithal to pay concept. This concept recognizes that income should be recognized in the period when the seller has the ability to collect payment, rather than when the cash is received.

Question 6

Constructive receipt requires an accrual basis taxpayer to recognize income when the taxpayer has an unrestricted right to a payment that is to be received.

Accepted Answer

Constructive receipt is a concept that applies to cash basis taxpayers, requiring them to recognize income when it is made available to them without restrictions, not accrual basis taxpayers.

Question 7

Multiplying the annuity amount received by the ratio of the investment in the annuity to the expected return determines the annuity's taxable portion.

Accepted Answer

Multiplying the annuity amount received by the ratio of the investment in the annuity to the expected return does not determine the annuity's taxable portion. The taxable portion of an annuity is calculated based on a complex formula that takes into consideration factors such as the age and life expectancy of the annuitant, the annuity contract terms, and the amount of any investment gain or loss. It is advisable to consult a tax professional or financial advisor for guidance on the taxation of annuity payments.

Question 8

All stock dividends are nontaxable.

Accepted Answer

Stock dividends may be taxable, depending on the type of dividend, the amount received, and the individual's tax situation.

Question 9

When a corporation lends money to an employee at below-market interest rates, the imputed interest is additional compensation to the employee.

Accepted Answer

This is because the employee is essentially receiving a benefit (the difference between the below-market interest rate and a market interest rate) that is not included in their salary or wages, and therefore counts as additional compensation. The imputed interest is the amount of interest that the employee would have had to pay if they had borrowed the same amount from a third party at market rates.

Question 10

The completed contract method requires income to be recognized annually based on the costs incurred in that year.

Accepted Answer

The completed contract method allows for the deferral of all income and costs until the project is completed, therefore income is not recognized annually based on costs incurred.

Question 11

Up to 85 percent of a person's Social Security benefits may be included in gross income.

Accepted Answer

Up to 85 percent of a person's Social Security benefits may be included in their gross income, depending on their total income level.

Question 12

The completed contract method allows the taxpayer to defer taxes on the contract income.

Accepted Answer

The completed contract method allows the taxpayer to postpone paying taxes on the contract income until the contract is complete. This is considered a deferral of taxes.

Question 13

Income must be realized before it can be recognized.

Accepted Answer

Income can be recognized only when it is earned and not before that. Realization of income is the process of earning it. Therefore, income must be realized before it can be recognized.

Question 14

Community property states allow income to be taxed to a person who did not earn the income.

Accepted Answer

In community property states, income earned by one spouse can be considered community income and taxed equally to both spouses, even if only one spouse earned the income.

Question 15

All government bonds are exempt from the application of the OID rules.

Accepted Answer

Not all government bonds are exempt from the application of the Original Issue Discount (OID) rules. While some government bonds, like U.S. Treasury bonds, might have specific exemptions, the OID rules can apply to various government or municipal bonds if they are issued at a discount to their face value.

Question 16

A calendar year always ends on December 31.

Accepted Answer

A calendar year is comprised of 12 months and ends on December 31st, making option A true.

Question 17

The assignment of income doctrine allows one taxpayer to assign income to another taxpayer for tax purposes.

Accepted Answer

The assignment of income doctrine prevents a taxpayer from avoiding taxation by assigning income to another person or entity; the income is taxed to the individual or entity that earns it.

Question 18

The recipient's basis in a gift always carries over from the gift's donor.

Accepted Answer

The recipient's basis in a gift is generally the same as the donor's adjusted basis, plus or minus any gift tax paid on the net increase in value of the gift. However, for determining loss, the basis is the lower of the donor's basis or the fair market value of the gift at the time of the gift.

Question 19

When a taxpayer has a tax year of less than 12 months, the taxpayer must always annualize income.

Accepted Answer

A taxpayer with a tax year of less than 12 months (a short tax year) may need to annualize income for certain purposes, such as calculating estimated taxes, but it's not a blanket requirement for all tax reporting purposes. The need to annualize depends on specific tax rules and the taxpayer's situation.

Question 20

Beginning in 2018, the cash method may be used by all taxpayers whose average annual gross receipts for the three prior years do not exceed $25 million.

Accepted Answer

The Tax Cuts and Jobs Act of 2017 increased the gross receipts threshold for businesses to use the cash method of accounting from $5 million to $25 million, beginning in 2018.

Quiz 3: Determining Gross Income