Question 1

Which of the following statements about tax policy objectives regarding business expenses is false?

Accepted Answer

The statement that the business interest expense limitation increases the disparity between the tax treatment of debt and equity financing is true. Therefore, the statement is false.

Question 2

Which of the following statements about the cash method of accounting is false?

Accepted Answer

Under the cash method, annual taxable income does not necessarily equal annual net cash inflow because not all cash inflows are taxable income, and not all cash outflows are deductible expenses.

Question 3

Which of the following statements about methods of accounting is false?

Accepted Answer

Taxpayers can use different methods of accounting for financial statement income and taxable income, as long as the taxable income is calculated using methods allowed by the tax code.

Question 4

Village Inc.has average gross receipts of $100 million annually.This year,Village incurred $25 million of net business interest and has adjusted taxable income of $42 million.Village's current deduction for business interest is:

Accepted Answer

The Tax Cuts and Jobs Act (TCJA) introduced new business interest expense limitation rules, which limit the current deduction for business interest to 30% of the taxpayer's adjusted taxable income (ATI) plus the taxpayer's business interest income for the year. However, for taxable years beginning in 2019 and 2020, the CARES Act increased the limitation from 30% to 50% of ATI. In this case, Village Inc.'s limitation is calculated as: 
$42m (ATI) x 50% = $21m
Therefore, Village can currently deduct up to $21 million of its net business interest expense. However, Village's net business interest expense is $25 million, so the deduction is limited to $12.6 million (the full $21 million limitation minus the excess interest expense of $3.9 million). Therefore, the correct answer is C.

Question 5

JKL Inc.and Matthew Inc.enter into a business transaction.The two corporations are related parties for tax purposes.Which of the following statements is true?

Accepted Answer

When related parties enter into a business transaction, the IRS has the right to reallocate income from the transaction to prevent any distortions or tax avoidance. The choice of accounting method (cash or accrual) is determined by each corporation's individual accounting policies and does not necessarily have to be the same for both parties. There is no requirement to request permission from the IRS to engage in related party transactions, but failure to disclose such transactions may result in penalties.

Question 6

Pozzi Company,a cash basis business,received $16,930 cash as payment on a loan Pozzi made to a business associate two years ago.The payment consisted of a $15,000 principal payment and $1,930 interest.On receipt of the cash,Pozzi recognizes:

Accepted Answer

Only the interest payment of $1,930 is taxable income for Pozzi Company. The principal payment of $15,000 is not taxable income since it is simply a return of the original loan amount.

Question 7

On December 12,2019,Hook Company,a calendar year,cash basis business,mailed a $5,600 bill to Mrs.Gilder for professional services rendered during the month of November.Mrs.Gilder dropped off her $5,600 check at Hook's office on December 28,but the company secretary did not deposit the check in Hook's bank account until January 3.Which of the following statements is true?

Accepted Answer

According to the constructive receipt doctrine, income is recognized when it is made available to the taxpayer without restriction. Since the check was received in 2019, Hook must recognize the income in 2019.

Question 8

Stack Inc.owns a $1 million insurance policy on the life of Mary Stack,the corporate CEO.The corporation is the policy beneficiary.Stack's annual premium on the policy is $3,160.Which of the following statements is true?

Accepted Answer

Premiums paid on a life insurance policy where the payer is also the beneficiary are not deductible as a business expense. However, the proceeds from such a policy are generally received tax-free by the beneficiary.

Question 9

For its first taxable year,UY Products Inc.generated a $124,950 net operating loss.The loss resulted in a deferred tax liability that will reverse over future years in which UY is allowed an NOL carryforward deduction.

Accepted Answer

A net operating loss (NOL) results in a deferred tax asset, not a liability, as it represents future tax savings when the loss is carried forward to offset future taxable income.

Question 10

Jethro Company,an accrual basis taxpayer,had a $10,000 overdue account payable to a major supplier.The supplier agreed to settle the account for $9,000 cash from Jethro.Which of the following statements is true?

Accepted Answer

The answer of Jethro Company,an accrual basis taxpayer,had a $10,000...

Question 11

Which of the following methods of accounting is never permissible for computing taxable income?

Accepted Answer

All of the methods listed, including the cash receipts and disbursements method, the accrual method, and the hybrid method, are permissible for computing taxable income under various circumstances and for different types of taxpayers.

Question 12

Why does the federal tax law disallow a business deduction for political contributions?

Accepted Answer

Allowing a deduction for political contributions would result in the government subsidizing partisan political activities, which could potentially give certain businesses an unfair advantage in the political process. This goes against the principle of fairness and neutrality in taxation.

Question 13

Lawes Company,a cash basis business,mailed a $24,500 invoice to MWQ Partnership for professional services rendered.MWQ offered to pay the invoice by transferring 250 shares of ConAgri common stock to Lawes.The shares are selling on the NYSE at $98 per share.If Lawes accepts the shares in payment,it recognizes:

Accepted Answer

Since Lawes Company is a cash basis business, it recognizes income when it is received, regardless of the form in which it is received. Accepting 250 shares of ConAgri common stock valued at $98 per share results in receiving $24,500 (250 shares * $98 per share), which is equivalent to the invoice amount. Therefore, Lawes recognizes $24,500 as taxable income upon receipt of the shares.

Question 14

Tonto Inc.has used a calendar year as its taxable year since its incorporation in 1990.Tonto has an excellent business reason for changing to a fiscal year ending May 31.Which of the following statements is true?

Accepted Answer

The answer of Tonto Inc.has used a calendar year as...

Question 15

Which of the following statements most accurately defines taxable income from business operations?

Accepted Answer

The answer of Which of the following statements most accurately...

Question 16

Which of the following business expenses always results in a difference between taxable income and book income?

Accepted Answer

Client entertainment expenses often result in differences between taxable income and book income because the IRS limits the deductibility of these expenses for tax purposes, whereas for financial accounting purposes, the full expense is typically recorded.

Question 17

Pim Inc.operates a business with a natural annual operating cycle ending August 31.Which of the following can Pim adopt as its taxable year?

Accepted Answer

Pim Inc. can adopt a calendar year or any fiscal year as its taxable year because businesses are generally allowed to choose their taxable year as long as it reflects their natural business cycle. Since Pim's natural business cycle ends on August 31, it can choose a fiscal year that aligns with this cycle or opt for the standard calendar year.

Question 18

Why does the federal tax law disallow a business deduction for a fine or penalty paid to any government?

Accepted Answer

A deduction for the payment of a fine or penalty would effectively mean the public is subsidizing the penalized behavior, which is against public policy principles aiming to deter such behavior.

Question 19

Welch Inc.has used a fiscal ending September 30 as its taxable year since its incorporation in 1988.The shareholders have decided to shut down Welch's business and dissolve the corporation on March 31.Which of the following statements is false?

Accepted Answer

A corporation's final tax return should cover the period from the beginning of its fiscal year to the date of dissolution. Since Welch Inc. has a fiscal year ending September 30, its final tax return should include income from October 1 to March 31, not January 1 to March 31.

Question 20

Toro Inc.has average gross receipts of $30 million annually.This year,Toro incurred $5 million of net business interest and has adjusted taxable income of $12 million.Toro's current deduction for business interest is:

Accepted Answer

According to the Tax Cuts and Jobs Act (TCJA), corporations with average gross receipts above $25 million are subject to a limitation on business interest deductions. The limitation is calculated as 30% of adjusted taxable income (ATI), which for Toro would be $3.6 million (30% of $12 million). Since Toro incurred $5 million of net business interest, they would be able to deduct $3.6 million of that interest expense, making choice B the correct answer.

Quiz 6: Taxable Income From Business Operations