Exam 1: Introduction to Taxation

Compare a sales tax to a use tax.

The value added tax is a type of consumption tax.

The Mercury Corporation must decide whether to invest in some new machinery for its business.Which tax rate is the most relevant for making this decision?

Which of the following business entities has no provision that limits some or all of the liability of the owner?

Charlotte is a head of household with taxable income of $40,000.What is her marginal tax rate?

Abigail is married filing separately with taxable income of $200,000.What is her marginal tax rate?

Cragen Corporation has gross income of $625,000 and operating expenses of $418,000.What is its taxable income? What is its income tax liability?

Explain how horizontal equity differs from vertical equity.

In which of the following entities may an owner-employee benefit from all employee tax-free fringe benefits?

John earns $25,000 and pays $2,000 in taxes.Marcy earns $60,000 and pays $4,000 in taxes.How would you characterize this tax system?

A flat tax generally would be considered a regressive tax.

The person giving the gift pays the gift tax.

Jerry and Matt decide to form a business.Jerry will contribute $4,200 for a 35% interest and Matt will contribute $7,800 for a 65% interest.The business will take out a $25,000 loan to cover the balance of their working capital needs.They expect that the business will have a loss of $38,000 for the first year.In the second year,the business will have a profit of $52,000 and it will distribute $5,200 to Matt and $2,800 to Jerry.Jerry is in the 33% marginal tax bracket and Matt is in the 28% marginal tax bracket.Their marginal tax brackets will not change as a result of profit or loss from this business.What is Matt's income tax savings (rounded to the nearest dollar)for the first year if they organize the business as an S corporation?

Kate received $130,000 in salary in 2015.What is her FICA tax if the Medicare rate is 1.45%,the Social Security rate is 6.2% on a maximum of $118,500 in 2015?

All interest paid to a taxpayer must be included in gross income.

When would an individual use the standard deduction instead of itemizing deductions?

Name and describe two other types of taxes other than the income tax.Give example of each.

Jerry and Matt decide to form a business.Jerry will contribute $4,200 for a 35% interest and Matt will contribute $7,800 for a 65% interest.The business will take out a $25,000 loan to cover the balance of their working capital needs.They expect that the business will have a loss of $38,000 for the first year.In the second year,the business will have a profit of $52,000 and it will distribute $5,200 to Matt and $2,800 to Jerry.Jerry is in the 33% marginal tax bracket and Matt is in the 28% marginal tax bracket.Their marginal tax brackets will not change as a result of profit or loss from this business.What is Jerry's stock basis at the end of the second year if they organize the business as an S corporation?

Karen,single with no dependents,wants to set up a business.She will use either a sole proprietorship or incorporate as a regular corporation.She expects the business to earn $45,000 after all expenses and payments to Karen except for federal taxes.Karen will take $25,000 from the business for living expenses (as a distribution from a sole proprietorship or a salary from a corporation).Considering only income taxes for 2015,should she establish the business as a C corporation or as a sole proprietorship?

Ian contributes $9,000 in exchange for a 30 percent interest in a C corporation.For 2014,the corporation reported a total loss of $35,000 and made no cash distributions.For 2015,the corporation reported net income of $45,000 and made a cash distribution to the shareholders.Ian received $5,000 of this cash distribution in 2015.Ian is in the 28% marginal tax bracket in both 2014 and 2015.How much income tax did Ian save for 2014 as a result of his share of loss from this corporation and how much income tax does Ian pay as a result of his ownership in the corporation for 2015?