Exam 1: Introduction to Taxation

Sophia owns 20% of a partnership that reported net income of $130,000 for the year. During the year $18,000 was distributed to Sophia from the partnership. How much should Sophia include in her taxable income for the year?

What is an individual's maximum annual deduction for capital losses?

Mason owns 45% of an S corporation that reported net income of $105,000 for the year. During the year, $20,000 was distributed to Mason from the corporation. How much should Mason include in his taxable income for the year?

What is a corporation's annual deduction for capital losses?

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. How much tax will Matt pay in the second year (rounded to the nearest dollar) due to this business if they organize the business as a partnership?

Susie is single, has salary income of $26,000, and $10,400 of deductions in 2017. What is her taxable income? What is her income tax liability?

Briefly compare a sole proprietorship to a corporation as a business entity.

What is George's gross income if he has the following: $78,000 salary, $4,000 dividend income, $2,000 interest income on city of San Francisco bonds, a gain of $14,000 on a stock sale, and a $4,000 operating loss on a small sole proprietorship that he owns?

Current changes to the federal tax law are amendments to which of the following?

Alexander received $80,000 in salary in 2017. What is his FICA tax if the Medicare rate is 1.45%, the Social Security rate is 6.2% on the 2017 maximum of $127,200, and the FUTA rate is 6% on a $7,000 maximum?

_____ 13. The lowest tax rate on the tax rate schedules for taxable incomes is the same for individuals and C corporations.

_____ 9. Adam Smith's four canons of taxation are Equity, Certainty, Economy and Convenience.

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

Jordan is the sole proprietor of Adams Company that reported net income of $57,000 for the year. During the year he withdrew $11,000 from the business for personal use. Jordan is in the 25% marginal tax bracket. How much income from the above must Jordan include in his taxable income for the year?

_____ 8. A flat tax generally would be considered a regressive tax.

Terri owns a 50 percent interest in the TT Partnership. At the beginning of the year, her basis in her partnership interest was $75,000. The partnership reports a $40,000 loss for the year and distributes $4,000 cash to Terri. What is her basis in her partnership interest at the end of the year?

Which of the following are included in Adam Smith's characteristics of a good tax?

_____ 10. Vertical equity asserts that persons in similar circumstances should face similar tax burdens.

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 income tax savings (rounded to the nearest dollar) for the first year if they organize the business as an S corporation?

Karen, single with $10,400 in total deductions, 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 2017, should she establish the business as a C corporation or as a sole proprietorship?