Taxable Income From Business Operations

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Questions Bank

Taxes and Taxing Jurisdictions
Policy Standards for a Good Tax
Taxes as Transaction Costs
Maxims of Income Tax Planning
Tax Research
Taxable Income from Business Operations
Property Acquisitions and Cost Recovery Deductions
Property Dispositions
Nontaxable Exchanges
Sole Proprietorships
The Corporate Taxpayer
The Choice of Business Entity
Jurisdictional Issues in Business Taxation
The Individual Tax Formula
Compensation and Retirement Planning
Investment and Personal Financial Planning
Tax Consequences of Personal Activities
The Tax Compliance Process

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Question 1

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For federal tax purposes, gross income from the sale of tangible goods is reduced by the seller's cost of goods sold.

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Question 2

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True/False

Taxable income is defined as gross income minus allowable deductions and credits.

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Question 3

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A taxpayer that wants to change its taxable year from a fiscal year to a calendar year is not required to receive permission from the IRS to make the change.

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Question 4

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True/False

A firm's choice of taxable year is usually dictated by the annual operating cycle of the firm's business.

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Question 5

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When an individual taxpayer begins a new business as a sole proprietorship and wants to keep records on a fiscal year basis, permission to change taxable years is not required because this is a new business.

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Question 6

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A taxpayer that operates more than one business may use a different method of accounting for each business.

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Question 7

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PPQ Inc. wants to change from a hybrid method of accounting to the accrual method of accounting for tax purposes. PPQ can't make this change without receiving permission from the IRS.

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Question 8

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Taxpayers may adopt the cash receipts and disbursements method, the accrual method, or a hybrid method of accounting for tax purposes.

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Question 9

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Accurate measurement of taxable income is the only objective of the federal income tax laws.

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Question 10

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Political lobbying expenses are nondeductible.

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Question 11

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The after-tax cost of a dollar of business meal expense is 79 cents for a taxpayer with a 21% marginal tax rate.

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Question 12

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Poole Services, a calendar year taxpayer, billed a client for $1,675 of services on November 30, 2018, and received a check in full payment from the client on January 12, 2019. If Poole is a cash basis taxpayer, it reports $1,675 taxable income in 2018.

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Question 13

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Poole Company, a calendar year taxpayer, incurred $589 of long-distance telephone charges in December 2018 and mailed a check to the telephone company on January 4, 2019. If Poole is a cash basis taxpayer, it reports a $589 tax deduction in 2019.

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Question 14

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Mr Stern, a cash basis taxpayer, was notified by his bank that he earned $1,193 of interest on his savings account in 2018. Mr Stern has not withdrawn any funds from this account for eight years and did not receive the notification until January 26, 2019. Mr Stern does not recognize the interest as income in 2018.

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Question 15

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A cash basis taxpayer must account for any prepayment of interest expense under the accrual method.

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Question 16

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Elcox Company, a calendar year, cash basis taxpayer, paid a $6,340 premium to purchase a casualty insurance policy with a 36-month term. Elcox can deduct $6,340 in the year of payment.

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Question 17

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Taxpayers that sell merchandise to their customers must use the accrual method to account for purchases and sales of merchandise.

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Question 18

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Taxpayers that sell merchandise to their customers must use the accrual method as their overall method of accounting.

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Question 19

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Marz Services Inc. is a personal service corporation with $60 million average annual gross receipts. Marz must use the accrual method of accounting for tax purposes.

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Question 20

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Laine Services, a calendar year taxpayer, billed a client for $8,450 of services on November 30, 2018, and received a check in full payment from the client on January 12, 2019. If Poole is an accrual basis taxpayer, it reports $8,450 taxable income in 2018.

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