Question 1

According to the entity concept
I.a sole proprietorship is similar to a conduit entity.
II.a sole proprietor cannot convert nondeductible personal items into deductible business items by commingling expenditures.
III.a partnership is an example of a mixture of a taxable and a conduit entity.
IV.an S corporation is a tax paying entity.
​

Accepted Answer

Statements I and II are correct because a sole proprietorship is a conduit entity, meaning that the business's income and expenses are passed through to the owner's personal tax return. This means that the owner cannot convert nondeductible personal items into deductible business items by commingling expenditures.

Question 2

Jerome, a self-employed attorney, is scrambling around to recalculate his estimated 2018 income tax liability, because he needs to mail his third quarter estimated tax payment tomorrow (September 15, 2018). What concept, construct, or doctrine is causing Jerome to scramble?

Accepted Answer

The Pay-As-You-Go Concept requires taxpayers to pay their taxes as they earn or receive income throughout the year, rather than waiting until the end of the year to pay a lump sum. Self-employed taxpayers, like Jerome, must make estimated tax payments quarterly to meet this requirement. Therefore, Jerome is scrambling to recalculate his estimated tax liability because he needs to make his third quarter payment by September 15th.

Question 3

The ability-to-pay concept is fundamental to the income tax structure. Constructs used to implement this concept include
I.Deductions
II.Progressive tax rates
III.Exclusions
IV.Business losses
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Accepted Answer

The ability-to-pay concept is about the idea that the tax liability should be based on a taxpayer's level of income or ability to pay. Deductions, progressive tax rates, and business losses are all constructs used in the income tax structure to implement this concept. Exclusions can also be used to ensure that certain types of income are not counted as taxable income, which can also help to implement the ability-to-pay concept. Therefore, statements I, II, and IV are correct, making option C the best choice.

Question 4

Will is a partner in Oil Exploration Limited Partnership. For the current year, the partnership reports net income of $130,000. Will's share of the income is $1,300. Will reports that amount in his gross income. The partnership pays no income tax on its earnings. What concept, construct, or doctrine applies here?

Accepted Answer

The Entity Concept applies here because it recognizes the partnership as a separate entity for accounting purposes, but not for tax purposes. In this case, the partnership's income is passed through to the partners, who then report their share of the income on their individual tax returns. This is why Will reports his share of the income in his gross income, even though the partnership itself pays no income tax on its earnings.

Question 5

Allowing individuals to deduct a standard deduction amount in lieu of itemizing their allowable personal deductions is an application of the

Accepted Answer

Allowing individuals to deduct a standard deduction amount in lieu of itemizing their allowable personal deductions is an application of the Administrative Convenience Concept. This concept allows for simplification and streamlining of tax processes to reduce administrative burdens on taxpayers and tax authorities.

Question 6

Victor receives a $2,000 tax credit for childcare. The credit was earned because of Victor's expenditures for daycare for his son while Victor worked. What concept, construct, or doctrine helps explain why Victor receives this tax credit?

Accepted Answer

The Ability to Pay Concept explains why Victor receives this tax credit. It is based on the principle that taxes should be levied according to an individual's capacity to pay. In Victor's case, the tax credit for childcare expenses acknowledges the financial burden of childcare on his ability to pay taxes, effectively adjusting his tax liability to reflect his financial situation more accurately.

Question 7

Some discontented taxpayers have suggested that complexity be removed from the income tax structure by applying a flat tax rate to the gross income of all taxpayers. This approach violates which concept?

Accepted Answer

The ability to pay concept states that those with higher incomes should pay a higher percentage of their income in taxes, while those with lower incomes should pay a lower percentage. Applying a flat tax rate to all taxpayers would not take into account their ability to pay and would violate this concept.

Question 8

No income is taxed until the taxpayer is allowed the return of the original investment due to the

Accepted Answer

The statement refers to the Capital Recovery Concept which states that no income is taxed until the taxpayer has recovered their original investment. This concept allows taxpayers to recover the costs of their investment before being taxed on any income. Therefore, the correct choice is D, Capital Recovery Concept.

Question 9

Carter sold 100 shares of Mitsui, Inc. for $8,000 but he only recognized $2,000 as income because the original purchase price was $6,000. This is due to the

Accepted Answer

The concept behind recognizing only $2,000 as income is the Capital Recovery Concept, which allows taxpayers to recover their original investment before recognizing any profit as taxable income.

Question 10

Which of the following concepts/doctrines state(s) that items may be omitted from the tax base whenever the cost of implementing a concept exceeds the benefit of using it?

Accepted Answer

The doctrine of Administrative Convenience states that items may be omitted from the tax base if the cost of implementing a concept exceeds the benefit of using it. This is done in order to simplify the tax system and make it easier and less costly to administer.

Question 11

The allowance of deductions in calculating taxable income and the use of a progressive tax rate structure are a direct application of the

Accepted Answer

The Ability to Pay Concept states that individuals should be taxed based on their ability to pay. Allowing deductions based on certain expenses (e.g. medical expenses, charitable donations) helps to account for an individual's ability to pay, as they are not taxed on that portion of their income used for those expenses. A progressive tax rate structure also aligns with this concept, as it ensures that those with higher incomes contribute a greater share of their income to taxes, again based on their ability to pay.

Question 12

Thomas had $8,500 withheld from his paycheck, but since he has a large amount of interest and dividends, he is required to make quarterly estimated tax payments due to the

Accepted Answer

The pay-as-you-go concept requires taxpayers to regularly make estimated tax payments throughout the year to avoid underpayment penalties. Since Thomas has a large amount of interest and dividends, he is likely to owe additional taxes beyond what was withheld from his paycheck, making him subject to the pay-as-you-go requirement.

Question 13

Which of the following is/are based on an ability-to-pay concept?
I.A flat tax .
II.Johson City charges all households a flat fee of $25 per month for water usage.
III.Boone County recently established Route 89 as a toll road. All cars traveling from East Johnson City to Appleton pay $1.
​

Accepted Answer

The ability-to-pay principle is a concept in taxation that argues taxes should be levied according to a taxpayer's ability to pay. This principle suggests that individuals or entities with higher income or wealth should pay more taxes relative to those with less. None of the statements (I: flat tax, II: flat fee for water usage, III: flat toll fee) reflect this principle, as they all involve a fixed charge regardless of the payer's income or wealth.

Question 14

Sandra sells a business-use warehouse to her wholly owned corporation. Sandra realizes a loss of $13,000 on the sale. (Sales price, $102,000, less adjusted basis, $115,000). Tax law does not permit Sandra a deduction for the $13,000 loss. Which of the following explain(s) this tax result?
I.Arm's-length Transaction Concept.
II.Pay-As-You-Go Concept.
III.Legislative Grace Concept
IV.Business Purpose Concept.
​

Accepted Answer

The Arm's-length Transaction Concept states that transactions between related parties must be treated as if they were between unrelated parties. In this case, Sandra and her corporation are related parties, so the sale of the warehouse is treated as if it were between two unrelated parties. This means that Sandra cannot deduct the loss on the sale, even though she would be able to if she sold the warehouse to an unrelated party.

Question 15

During the current year, Trane invests $35,000 in each of two separate corporations. Each investment gives him a 20% ownership interest. Brazil Corporation is a regular corporation that has taxable income of $200,000 and pays dividends totaling $50,000. China Corporation is an S corporation that has taxable income of $100,000 and pays $50,000 of dividends. As a result of these two investments, Trane
I.Has $40,000 of taxable income from Brazil Corporation.
II.Has $20,000 of taxable income from China Corporation.
​

Accepted Answer

Trane's taxable income from China Corporation, an S corporation, is based on his share of the corporation's taxable income, which is 20% of $100,000, equaling $20,000. For Brazil Corporation, a regular corporation, Trane's taxable income is not directly affected by the corporation's taxable income or dividends, as he is not taxed on the corporation's income but rather on dividends received, which are not specified as his income in the problem.

Question 16

During the current year, Walter invests $35,000 in each of two separate corporations. Each investment gives him a 20% ownership interest. Corporation X is a C corporation that has taxable income of $200,000 and pays dividends totaling $50,000. Corporation Z is an S corporation that has taxable income of $100,000 and pays $50,000 of dividends. As a result of these two investments, Walter
I.Has $10,000 of taxable income from Corporation X.
II.Has $10,000 of taxable income from Corporation Z.
​

Accepted Answer

Statement I is correct because Walter's 20% ownership in Corporation X, a C corporation, would not directly affect his personal taxable income from the corporation's earnings, except through dividends received. Since he receives $50,000 in dividends and owns 20% of the corporation, his taxable income from Corporation X would indeed be $10,000 (20% of $50,000). Statement II is incorrect because, for an S corporation like Corporation Z, the corporation's income passes through to the shareholders. Thus, Walter would have $20,000 of taxable income from Corporation Z (20% of $100,000), not $10,000, regardless of the dividends paid.

Question 17

Which of the following is a taxable entity?

Accepted Answer

A C Corporation is a taxable entity as it is considered a separate legal entity from its owners (shareholders), and therefore it pays taxes on its income. Sole Proprietorship, Partnership and S Corporation are pass-through entities where the profits and losses are reported on the owners' personal tax returns and are not taxed at the entity level.

Question 18

According to the entity concept
I.each unit must keep separate records.
II.each unit reports the results of operations separate and apart from owners.
III.every unit is liable for tax on its income.
IV.each unit is classified as one of two basic entity types.
​

Accepted Answer

The entity concept states that each unit must keep separate records (I), report the results of operations separate and apart from owners (II), and can be classified as one of two basic entity types (IV) - either a separate legal entity or a flow-through entity. While the entity concept does not necessarily dictate that every unit is liable for tax on its income, it is generally true that each entity is taxed separately (not necessarily each unit within an entity). Therefore, statements I, II, and IV are correct, making answer choice E the best option.

Question 19

Sanchez Company allows its employees to make personal copies without charge on the company copy machines. What concept, construct, or doctrine helps explain why the benefit received is not taxable to Sanchez employees?

Accepted Answer

The Administrative Convenience Concept allows for certain small or difficult-to-track benefits, like personal copies made on a company's machine, to be excluded from taxable income due to the impracticality of accounting for them.

Question 20

The IRS has a penalty for underpayment of estimated taxes. This penalty exists because of which of the following concepts, constructs, or doctrines?

Accepted Answer

The penalty for underpayment of estimated taxes exists because of the Pay-As-You-Go concept, which requires taxpayers to pay their taxes throughout the year as they earn income rather than just at the end of the year. Failure to pay estimated taxes throughout the year can result in a penalty assessed by the IRS.

Quiz 2: Income Tax Concepts

Jerome, a self-employed attorney, is scrambling around to recalculate his estimated 2018 income tax liability, because he needs to mail his third quarter estimated tax payment tomorrow (September 15, 2018) . What concept, construct, or doctrine is causing Jerome to scramble?

The ability-to-pay concept is fundamental to the income tax structure. Constructs used to implement this concept include I.Deductions II.Progressive tax rates III.Exclusions IV.Business losses

Allowing individuals to deduct a standard deduction amount in lieu of itemizing their allowable personal deductions is an application of the

Victor receives a $2,000 tax credit for childcare. The credit was earned because of Victor's expenditures for daycare for his son while Victor worked. What concept, construct, or doctrine helps explain why Victor receives this tax credit?

Some discontented taxpayers have suggested that complexity be removed from the income tax structure by applying a flat tax rate to the gross income of all taxpayers. This approach violates which concept?

No income is taxed until the taxpayer is allowed the return of the original investment due to the

Carter sold 100 shares of Mitsui, Inc. for $8,000 but he only recognized $2,000 as income because the original purchase price was $6,000. This is due to the

Which of the following concepts/doctrines state(s) that items may be omitted from the tax base whenever the cost of implementing a concept exceeds the benefit of using it?

The allowance of deductions in calculating taxable income and the use of a progressive tax rate structure are a direct application of the

Thomas had $8,500 withheld from his paycheck, but since he has a large amount of interest and dividends, he is required to make quarterly estimated tax payments due to the

Which of the following is/are based on an ability-to-pay concept? I.A flat tax . II.Johson City charges all households a flat fee of $25 per month for water usage. III.Boone County recently established Route 89 as a toll road. All cars traveling from East Johnson City to Appleton pay $1.

Which of the following is a taxable entity?

According to the entity concept I.each unit must keep separate records. II.each unit reports the results of operations separate and apart from owners. III.every unit is liable for tax on its income. IV.each unit is classified as one of two basic entity types.

Sanchez Company allows its employees to make personal copies without charge on the company copy machines. What concept, construct, or doctrine helps explain why the benefit received is not taxable to Sanchez employees?

The IRS has a penalty for underpayment of estimated taxes. This penalty exists because of which of the following concepts, constructs, or doctrines?

Quiz 2: Income Tax Concepts

Jerome, a self-employed attorney, is scrambling around to recalculate his estimated 2018 income tax liability, because he needs to mail his third quarter estimated tax payment tomorrow (September 15, 2018) . What concept, construct, or doctrine is causing Jerome to scramble?

The ability-to-pay concept is fundamental to the income tax structure. Constructs used to implement this concept include I.Deductions II.Progressive tax rates III.Exclusions IV.Business losses ​

Allowing individuals to deduct a standard deduction amount in lieu of itemizing their allowable personal deductions is an application of the

Victor receives a $2,000 tax credit for childcare. The credit was earned because of Victor's expenditures for daycare for his son while Victor worked. What concept, construct, or doctrine helps explain why Victor receives this tax credit?

Some discontented taxpayers have suggested that complexity be removed from the income tax structure by applying a flat tax rate to the gross income of all taxpayers. This approach violates which concept?

No income is taxed until the taxpayer is allowed the return of the original investment due to the

Carter sold 100 shares of Mitsui, Inc. for $8,000 but he only recognized $2,000 as income because the original purchase price was $6,000. This is due to the

Which of the following concepts/doctrines state(s) that items may be omitted from the tax base whenever the cost of implementing a concept exceeds the benefit of using it?

The allowance of deductions in calculating taxable income and the use of a progressive tax rate structure are a direct application of the

Thomas had $8,500 withheld from his paycheck, but since he has a large amount of interest and dividends, he is required to make quarterly estimated tax payments due to the

Which of the following is/are based on an ability-to-pay concept? I.A flat tax . II.Johson City charges all households a flat fee of $25 per month for water usage. III.Boone County recently established Route 89 as a toll road. All cars traveling from East Johnson City to Appleton pay $1. ​

Which of the following is a taxable entity?

According to the entity concept I.each unit must keep separate records. II.each unit reports the results of operations separate and apart from owners. III.every unit is liable for tax on its income. IV.each unit is classified as one of two basic entity types. ​

Sanchez Company allows its employees to make personal copies without charge on the company copy machines. What concept, construct, or doctrine helps explain why the benefit received is not taxable to Sanchez employees?

The IRS has a penalty for underpayment of estimated taxes. This penalty exists because of which of the following concepts, constructs, or doctrines?

The ability-to-pay concept is fundamental to the income tax structure. Constructs used to implement this concept include I.Deductions II.Progressive tax rates III.Exclusions IV.Business losses

Which of the following is/are based on an ability-to-pay concept? I.A flat tax . II.Johson City charges all households a flat fee of $25 per month for water usage. III.Boone County recently established Route 89 as a toll road. All cars traveling from East Johnson City to Appleton pay $1.

According to the entity concept I.each unit must keep separate records. II.each unit reports the results of operations separate and apart from owners. III.every unit is liable for tax on its income. IV.each unit is classified as one of two basic entity types.