Exam 1: Introduction to Taxation

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 a partnership?

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

Which of the following is not a characteristic of an S corporation?

Which of the following statements describes the correct relationship between marginal and average tax rates in a progressive tax system?

_____ 4. The value added tax is a type of consumption tax.

_____ 6. The 13^th Amendment to the US Constitution that provided for an income tax was ratified in 1916.

Ethan and Mia are married and file a joint tax return. Their taxable income is $200,000. What is their marginal tax rate?

Which of the following is a tax?

Differentiate a wealth tax from a wealth transfer tax and give an example of each.

_____ 3. The person receiving the gift pays the gift tax.

Hoku Corporation (a C corporation) had the following history of income and loss: Year Income (Loss) 2015 \ 40,000 2016 \ 70,000 2017 (\ 10,000) How much of a tax refund can Hoku Corporation receive by carrying back its 2017 loss?

Emily is a 20% shareholder in an S corporation. Emily acquired her interest on January 1 of the current year by investing $10,000 for 20% of the corporation's stock. In March, the corporation took out a bank loan for $100,000. The corporation reported a net loss for the current year of $200,000. How much of this loss can Emily deduct on her current year's tax return?

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 is never included in computing gross income?

Walter is married and files a joint return. If his adjusted gross income is $64,000 and he has $32,850 of deductions in 2017 what is his taxable income? What is his income tax liability?

Why are S corporations and partnerships called flow-through entities?

Which of these entities is taxed directly on its income?

_____ 2. Both sales and use taxes are collected in the state in which the sale takes place.

Which of the following is a type of wealth 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 Jerry's stock basis at the end of the second year if they organize the business as an S corporation?