Test #3
Dividends paid to a shareholder by a corporation should be reported on which of the following forms? a. 1099-DIV b. 1099-MISC c. 1099-R d. 1099-INT
a. 1099-DIV
Patricia has taxable income of $40,000 on which she pays income tax of $4,604. If Patricia's taxable income increases by $2,000, she will pay an additional tax of $440. What is Patricia's marginal tax rate? a. 22.00 percent b. 15.00 percent c. 14.84 percent d. 25.00 percent
a. 22.00 percent $440 ÷ $2,000
If taxpayers have too much income tax withheld from their salaries during the tax year, the IRS will pay interest on the excess amount. True False
False A taxpayer is not paid interest on a refund arising from an overpayment of taxes during the current tax year.
A taxpayer with an average tax rate of 20 percent who receives additional income of $20,000 will pay additional taxes of $4,000. True False
False A taxpayer with a marginal tax rate of 20 percent who receives additional income of $20,000 will pay additional taxes of $4,000.
Tax return preparers must enter the annual filing season program (AFSP). True False
False AFSP is voluntary.
An individual who expects to receive more than $500 of income from sources other than wages meets the requirements for having to file quarterly estimated tax payments. True False
False An individual with estimated tax for the year of $1,000 or more, after subtracting withholding, and whose withholding does not equal or exceed the "required annual payment," must make quarterly estimated payments.
Automobiles generally have a 3-year cost recovery period under the Modified Accelerated Cost Recovery System (MACRS). True False
False Automobiles generally have a 5-year cost recovery period under the Modified Accelerated Cost Recovery System. Certain automobiles are subject to limitations on the amount of depreciation that may be deducted each year.
The condemnation of property is a voluntary conversion, even though it is done pursuant to a government decree. True False
False Condemnation of property is an involuntary conversion.
If two spouses both work and decide to complete new Forms W-4 in 2022, they must divide their withholding equally on their W-4 forms. True False
False Employees with two or more jobs or with a spouse who also is employed, can either check the box on Step 2 (c) of the 2022 Form W-4 if their earnings are similar or they can complete the "Multiple Jobs Worksheet" on page 3 of Form W-4 to determine the amount of additional withholding.
The FUTA tax is a voluntary unemployment tax that an employer may or may not wish to contribute toward. True False
False Employers are generally required to pay the FUTA tax.
Expenditures incurred to maintain an asset in good operating condition must be depreciated over the remaining useful life of the asset. True False
False Expenditures incurred to maintain an asset in good operating condition are deductible as maintenance expenses.
The FUTA tax for 2022 is based on 6.2 percent of each employee's wages up to $10,000. True False
False For 2022, the FUTA tax is based on 6.0 percent (less a 5.4 percent credit if the state also assesses an unemployment tax) of employees' wages up to $7,000.
Quinton hires a new employee in 2022 and the employee does not complete a Form W-4. Quinton must withhold tax as if the employee were single with 1 exemption. True False
False For a new employee in 2022 when no Form W-4 is provided by the employee, the employer should withhold based on a single taxpayer with no adjustments.
Taxpayers must use the straight-line method of depreciation for all productive assets. True False
False For property, other than real estate, a taxpayer may elect to use straight-line depreciation or accelerated depreciation.
If an automobile is purchased for 100 percent use in the taxpayer's business, the annual automobile depreciation limitations do not apply. True False
False Generally, automobiles are subject to luxury automobile depreciation limitations.
Interest paid on an underpayment of taxes (other than an underpayment of estimated taxes) is not subject to the consumer interest limitation. True False
False Interest paid on an underpayment of tax is considered consumer interest and, therefore, no deduction is allowed.
In 2022, the maximum amount of wages subject to the Social Security portion of the FICA tax is unlimited. True False
False The Social Security maximum (or "FICA cap") in 2022 is $147,000.
The Wage and Investment Office of the IRS handles small business taxpayers. True False
False The Wage and Investment Office handles taxpayers that do not file business forms.
In applying the statutory depreciation percentages from the MACRS tables, the cost of the asset must first be reduced by the prior year's depreciation. True False
False The cost of the property to which the percentages from the MACRS tables are applied is not reduced for prior years' depreciation.
The IRS charges a fixed 10 percent interest rate on underpayments of taxes. True False
False The interest rate applicable to underpayments and overpayments of taxes is adjusted each quarter based on the short-term federal rate.
The statute of limitations for the deduction of a worthless security is 5 years. True False
False The statute of limitations for the deduction of a bad debt or a worthless security is 7 years.
Assuming a taxpayer has no other gains or losses for the year, a loss from the theft of a Section 1231 asset is treated as a capital loss. True False
False The tax treatment of a loss from the theft of a Section 1231 asset is generally treated as an ordinary loss.
The taxpayer generally has only 1 year to replace involuntarily converted property in order to postpone the recognition of gain. True False
False The taxpayer generally has 2 years after the close of the tax year in which the gain was realized to replace involuntarily converted property in order to postpone the recognition of gain.
Usually, employers must provide employees with their Form W-2 by February 15 of the year following the calendar year of payment of the wages. True False
False Usually, employers must provide employees with their Form W-2 by January 31 of the year following the calendar year of payment of the wages
A "correspondence audit" by the IRS is conducted through the mail. True False
True
A net long-term gain from the theft of a Section 1231 asset is treated as a Section 1231 gain. True False
True
A nondeductible penalty may be imposed on underpayments of estimated taxes. True False
True
A tax preparer may be subject to a penalty for failing to provide a copy of the taxpayer's tax return to the client. True False
True
A taxpayer's average tax rate is determined by dividing the total tax paid by the total income of the taxpayer. True False
True
All paid tax return preparers must obtain a preparer tax identification number (PTIN). True False
True
Bonus depreciation in 2022 generally permits taxpayers to deduct 100 percent of the cost of the qualified property in the year placed in service. True False
True
Gain recognized on the sale of a Section 1245 asset is classified as ordinary income up to the amount of depreciation claimed. True False
True
If actual business use of an automobile is less than 100 percent, the annual automobile depreciation limitations must be reduced to reflect the actual business use only. True False
True
If insurance proceeds exceed the taxpayer's basis in property destroyed by fire and the proceeds are not invested in similar property, the taxpayer may be required to recognize a gain. True False
True
If taxpayers fail to provide their bank with a taxpayer identification number, they are subject to backup withholding on interest payments. True False
True
Tax evasion involves the use of illegal methods to reduce or avoid income tax. True False
True
Tax penalties are not deductible by taxpayers. True False
True
Taxpayers with self-employment income who also have Form W-2 wage income from employment may be able to avoid making estimated tax payments by filing a Form W-4 and increasing the amount of their withholding. True False
True
The IRS may issue summons for a taxpayer's bank account records. True False
True
The original copy of all Forms W-2 and Form W-3 must be filed with the Social Security Administration by January 31 of the year following the calendar year in which the wages were paid, regardless of the tax year of the employer. True False
True
The tax law contains a penalty for filing a "frivolous" tax return. True False
True
The two most common methods of determining federal income tax withholding are the percentage method and the wage bracket method. True False
True
Under MACRS, the same method of depreciation (accelerated or straight-line) must be used for all property in a given class placed in service during a tax year. True False
True
Under a defined contribution plan, the contribution made on behalf of the employee is determined using a formula dependent on the employee's current compensation. True False
True
Taxpayers with large amounts of deductions may reduce the amount of withholding using their Form W-4. True False
True Taxpayers with large deductions can use Line 4(b) and the related worksheet to compute reduced withholding.
On June 1, 2022, Sandalwood Corporation purchases a passenger automobile for 100 percent use in its business. The automobile is in the 5-year cost recovery class and has a basis for depreciation of $60,000. Assuming that the corporation elects the accelerated method of cost recovery for the asset and does not elect to expense any of its cost or take bonus depreciation, what is the total tax depreciation deduction for the 2022 calendar tax year (Year 1)? a. $11,200 b. $19,200 c. $12,000 d. $11,160
a. $11,200 Lesser of $60,000 × 20% = $12,000, or $11,200 limitation
ABC Corp bought a production machine on January 1, 2020, for $31,250. The company did not elect Section 179 expensing, elected out of claiming bonus depreciation in 2020, and is depreciating the machine using the MACRS accelerated depreciation tables for 5-year property, half-year convention. What is the 2022 depreciation (Year 3) deduction for the machine? a. $6,000 b. $10,000 c. $12,500 d. $6,250
a. $6,000 $6,000. ($31,250 × 19.2%)
Oliver has two employees who earned the following amounts during 2022: June$17,000 Eric$5,000 If Oliver timely pays 5.4 percent for state unemployment tax, what is the amount of his 2022 FUTA after the state tax credit? a. $72 b. $112 c. $0 d. $176
a. $72 ($7,000 + $5,000) × (6.0% − 5.4%)
A taxpayer places a $75,000 5-year recovery period asset (not an auto) in service in 2022. This is the only asset placed in service in 2022. Assuming half-year convention, an election to expense under Section 179 (no bonus depreciation), and taxable income after all deductions except Section 179 of $8,000, what is the amount of Section 179 immediate expensing? a. $8,000 b. $0 c. $75,000 d. $4,000
a. $8,000 Section 179 immediate expensing is limited to the amount of taxable income after all deductions except Section 179 immediate expensing. Thus, the limit is $8,000.
Which of the following is true regarding estimated income tax payments? a. If they are inadequate, they may result in nondeductible penalties. b. They are made in four installments on April 15, June 15, September 15, and December 15 of the tax year. c. They may be based on the average of the tax liability for the prior three years. d. They should be paid if the estimated tax, after subtracting withholding, is expected to be more than $750.
a. If they are inadequate, they may result in nondeductible penalties. They should be paid if estimated tax is expected to be more than $1,000 and may be based on the tax liability for the current or prior year. Estimated payment dates for individuals are April 15, June 15, and September 15 of the current tax year and January 15 of the following years
Which of the following is the best definition of tax planning? a. Planning taxpayers' financial affairs in an effort to minimize tax liability b. Preparing a client's tax return c. Planning taxpayers' financial affairs to find the best way to avoid tax by successfully bending tax law d. Researching complex tax issues
a. Planning taxpayers' financial affairs in an effort to minimize tax liability
Which of the following is true regarding the return audit process? a. Returns may be selected for audit through related examinations. b. The lower the DIF score a return gets, the higher the likelihood for audit. c. Seventy-five percent of taxpayers are audited every year. d. An office audit is performed at tax preparer's office.
a. Returns may be selected for audit through related examinations.
Krista is a CPA who helps her clients minimize their overall tax liability. What function is she performing? a. Tax planning b. Tax preparation c. Tax evasion d. Tax deferral
a. Tax planning
A tax return with a large casualty loss would be most likely selected for audit through which method? a. The Discriminant Function System b. The National Research Program c. Information from another governmental agency d. Information from an informant
a. The Discriminant Function System
Which of the following is true of a like-kind exchange? a. The properties exchanged cannot be personal property. b. There must be no cash exchanged to qualify. c. Office furniture can be exchanged for computers. d. A new holding period for capital gains treatment starts on the day the exchange is completed.
a. The properties exchanged cannot be personal property.
Which of the following is true regarding Section 197 intangibles? a. They include non-compete covenants. b. They qualify for bonus depreciation. c. They can be capitalized rather than depreciated. d. They can be characterized as a Section 1231 gain.
a. They include non-compete covenants.
If taxpayers make all of their income from a job and various investments, which division of the IRS would likely investigate their returns if they were audited? a. Wage and Investment Division (W&I) b. Criminal Investigation Office c. Large and Midsize Business Office d. Small Business Office
a. Wage and Investment Division (W&I)
At which of the following IRS locations are tax returns processed? a. Regional offices b. Campus Processing Sites c. Local offices d. The national office
b. Campus Processing Sites
Steve is single and lives alone. He has one job as a computer technician and takes the standard deduction. What is his 2022 Form W-4 likely to report? a. Check the box in Step 2(c) to reflect his job b. Check the single box in Step 1 only c. Claim two allowances d. Check the single box and report himself as a single dependent on Step 3
b. Check the single box in Step 1 only Steve appears to have no dependents, no additional income, and no additional deductions. He's likely to check the single box to complete his 2022 Form W-4. Beginning in 2020, the Form W-4 no longer reports allowances.
Paul earns $55,000 during the current year. His employer contributes $3,000 during the year to a qualified retirement plan on behalf of Paul. The amount of the contribution for the year is based on Paul's desire to have a monthly retirement benefit of $3,500. What type of retirement plan is this? a. Employee earnings plan b. Defined benefit plan c. Profit sharing plan d. Defined contribution plan
b. Defined benefit plan
Which of the following will still fall under the general rule of a 3-year statute of limitations on a tax return? a. Failure to file a tax return b. Failure to pay the tax due with the tax return c. Filing a fraudulent tax return d. Omission of a significant amount of gross income
b. Failure to pay the tax due with the tax return
In which of these situations are payors required to use backup withholding? a. Taxpayers certify that they are not subject to backup withholding. b. The IRS informs the payor that the taxpayer gave an incorrect identification number. c. The IRS informs the payor the taxpayer is entitled to a refund. d. Taxpayers give the payor a taxpayer identification number.
b. The IRS informs the payor that the taxpayer gave an incorrect identification number.
Which of the following is true regarding FICA taxes? a. They are 7.65 percent of all earned income with no limitations. b. They are paid by the employee and by the employer. c. They are not subject to cost-of-living adjustments each year. d. They are 7.65 percent of earned income up to $150,000.
b. They are paid by the employee and by the employer.
Which characteristic of tax planning involves deferring payment of taxes to a future year? a. Entity b. Timing c. Jurisdiction d. Character
b. Timing
What is the maximum amount of depreciation including bonus depreciation on a passenger auto placed in service in 2022? a. $8,000 b. $18,000 c. $19,200 d. $11,200
c. $19,200 Including $8,000 bonus depreciation on autos, it increases the original limit of $11,200 to $19,200.
On January 1, 2022, Aniyah, a sole proprietor, purchased for use in her business a used production machine (7-year property) at a cost of $4,000. Aniyah does not purchase any other property during 2022 and has net income from her business of $80,000. If the standard recovery period table would allow $572 of depreciation expense on the $4,000 of equipment purchased in 2022, what is Aniyah's maximum depreciation deduction including the Section 179 election to expense (but not bonus depreciation) for 2022? a. $572 b. $2,000 c. $4,000 d. $800
c. $4,000 Section 179 is applied prior to any MACRS depreciation; thus, the entire cost basis would be recovered using Section 179.
A taxpayer places a $53,000 5-year recovery period asset (not an auto) in service in 2022. This is the only asset placed in service in 2022. Assuming no special elections (e.g., election to expense), what is the amount of total cost recovery deduction? a. $17,490 b. $5,300 c. $53,000 d. $10,600
c. $53,000 Bonus depreciation is the default position unless elected out. $53,000 × 100%.
In 2022, Ship Shop had three employees. Two of the employees worked full time and earned salaries of $25,000 each. The third employee worked part time and earned $4,000. The employer paid state unemployment tax equal to 5.4 percent of each employee's wages up to $7,000. How much unemployment tax was paid to the state from Ship Shop for 2022? a. $168 b. $136 c. $972 d. $918
c. $972 ($7,000 + $7,000 + $4,000) × 5.4%
Which of the following is not a possible result of an audit by the IRS? a. Payment of a refund to the taxpayer b. Payment of a deficiency by the taxpayer c. A fine levied against the tax preparer d. No change in the liability
c. A fine levied against the tax preparer
Which one of the following is true about the Modified Accelerated Cost Recovery System (MACRS)? a. Buildings and autos both have the same depreciation life. b. Most business furniture has a 10-year recovery period. c. A light duty business truck is depreciated using accelerated depreciation. d. A building is depreciated using 200 percent declining balance depreciation.
c. A light duty business truck is depreciated using accelerated depreciation.
Which of the following statements is true of a distribution rollover (not a trustee-to-trustee transfer) from a retirement plan? a. No withholding is required. b. The taxpayer must instruct the trustee of the retirement plan to transfer assets to the trustee of another plan. c. Assuming there are no unusual events, the taxpayer has a maximum of 60 days in which to transfer funds to a new plan to avoid current taxes and penalties. d. In one year, there is no limit to the number of times a taxpayer can request a distribution rollover from one IRA to another IRA.
c. Assuming there are no unusual events, the taxpayer has a maximum of 60 days in which to transfer funds to a new plan to avoid current taxes and penalties.
In which type of audit are taxpayers required to bring their records to an IRS office? a. Field audit b. Correspondence audit c. Office audit d. Operational audit
c. Office audit
Sabrina's salary was $149,000 in 2022. What is the total FICA tax (Social Security & Medicare) that would be withheld from her salary for the year? a. $11,245.50 b. $9,114.00 c. $11,398.50 d. $11,274.50
d. $11,274.50 ($147,000 × 6.2%) + ($149,000 × 1.45%)
On June 1, 2022, TreePro Corporation purchased a passenger automobile for 100 percent use in its business. The automobile is in the 5-year cost recovery class and has a basis for depreciation of $45,000. TreePro elects the accelerated method of cost recovery for the asset and takes bonus depreciation. What is the total tax depreciation deduction for the 2022 calendar tax year (Year 1)? a. $14,400 b. $9,000 c. $45,000 d. $19,200
d. $19,200 Lesser of $45,000 × 100% = $45,000 or $19,200 limitation
An asset (not an automobile) put in service in June 2022 has a depreciable basis of $2,075,000, has a recovery period of 5 years, and is the only asset placed in service this year. Assuming bonus depreciation is used, a half-year convention, and the expensing election is not made, what is the maximum amount of cost that can be deducted in 2022? a. $1,050,000 b. $415,000 c. $1,255,000 d. $2,075,000
d. $2,075,000 Bonus depreciation of 100 percent of the cost can be deducted
An asset is placed in service on May 15, 2022, and has a depreciable basis of $40,000. The asset is in the 7-year recovery class, and the half-year convention applies. What is the maximum depreciation deduction that may be claimed for 2022, assuming no election to expense and no bonus depreciation? a. $5,144 b. $2,572 c. $25,000 d. $5,716
d. $5,716 $5,716. ($40,000 × 14.29%)
What percentage of gross food and beverage sales is used in determining the amount of tips that an employer must report as allocated to employees? a. 12 percent b. 10 percent c. 15 percent d. 8 percent
d. 8 percent
Pear Corporation pays its employees every 2 weeks. During the look-back period, in each pay period the total withholding and FICA tax (employees' and employer's share) amounted to $750. How often must Pear Corporation deposit payroll taxes? a. Daily b. Quarterly c. Annually d. Monthly
d. Monthly
Piper has taxable income of $30,000 on which the income tax is $4,500. If Piper's taxable income increases to $35,000, the income tax will increase to $5,100. Which of the following is true? a. Piper's average tax rate 12 percent. b. Piper's marginal tax rate is 15% percent. c. Piper's average and marginal tax rates are the same. d. Piper's average tax rate is higher than the marginal rate.
d. Piper's average tax rate is higher than the marginal rate.
Which of the following statements is true? a. A distribution from a retirement plan can only be done as a direct rollover from one account to another account. b. If a taxpayer decides to roll over an IRA to a new account, then the whole IRA must be rolled over. c. The trustee must withhold 10 percent of the amount distributed whenever assets are transferred from one retirement plan to another retirement plan. d. There are no current-year tax consequences for a direct transfer.
d. There are no current-year tax consequences for a direct transfer.
