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Tax Exam 1 Study
General Tax Formula - correct answer regular income tax liability after credits + other taxes = total tax (The tax rate(s) are multiplied by this amount of taxable income to find the regular income tax liability before credits. The regular income tax liability after credits equals the regular income tax liability before credits minus the credits that are assumed. The total tax amount is what the taxpayer pays for the year, found by the general tax formula.) Exclusions - correct answer Exclusions are items that are part of total income, which are realized, but are not "recognized" for tax purposes Deductions - correct answer items the tax law specifically allows to be subtracted from gross income to determine taxable income Credits - correct answer reduce tax liablity dollar for dollar Efficient tax planning - correct answer the process of identifying tax strategies that maximize after-tax profitability in a legal and ethical manner ATCF formula - correct answer BTCF - (BTCF * t) three themes of the Scholes/Wolfson Framework - correct answer (1) all parties to transactions, (2) all tax costs and tax benefits associated with transactions, and (3) all non-tax costs and non-tax benefits associated with transactions At a minimum, business transactions typically have at least how many parties? - correct answer three parties - a buyer, seller, and tax collector.
Time Value Money (TVM) - correct answer a dollar available today is worth more than a dollar available tomorrow because the current dollar can be invested to start earning interest immediately Present value - correct answer the value in the present of a sum of money, in contrast to some future value it will have when it has been invested at compound interest discount rate - correct answer after-tax interest on invested funds for the deferral period Net present value (NPV) of a stream of future cash flows ____________ as the discount rate _______________ - correct answer decreases, increases (inversely related) The marginal tax rate - correct answer the rate at which the increase or decrease would be taxed A constant marginal tax rate over provides... - correct answer a simple computation of tax savings or costs, yet more complex if it is not. As marginal income tax rates ______________, the after-tax cost of a deductable expense ________________. The two factors are ____________ related. - correct answer increase, decrease; inversely related Before-tax cost and after-tax cost of an expenditure are equal when.... - correct answer the expenditure does not result in a current or future tax benefit irm F is negotiating to purchase a multimillion-dollar computer system from the manufacturer. Under applicable state law, Firm F is exempt from sales tax on the purchase. Because the manufacturer discovered this fact, it increased its selling price for the system by $25,000. Is this transaction taking place in a private or a public market? - correct answer This is an example of a private market transaction. Each party evaluates the tax consequences not only to themselves, but to the other party. The manufacturer works with Firm F in order to minimize the aggregate tax cost of the transaction to share the tax savings
What is the purpose of the dependent care credit? - correct answer to provide tax relief to people who must incur these costs to be gainfully employed What are the 2 education tax credits - correct answer American opportunity tax credit and the lifetime learning credit The American opportunity credit has a maximum amount of _________ per eligible student, - correct answer $2, the lifetime learning credit has a maximum amount of ________ per return. - correct answer $2, The objective function for taxpayer's business transactions is best stated as - correct answer Maximizing the after tax rate of return When he accepted his job, Mr. MG instructed his employer to withhold substantially more federal income tax from his monthly paycheck than was indicated by his marital and family situation. As a result, he routinely overpays his tax and receives a refund each spring, which he invests in a mutual fund. Mr. MG views this strategy as an efficient means of enforced savings. Do you agree? - correct answer No, because the extra money he is giving to the federal government receives no interest. The more efficient method would be to not overpay and use the money to invest in mutual funds, which will receive more interest, rather than receiving refunds. He should decrease his witholding to do so. Gross income means - correct answer "all income from whatever source derived." In a business context, gross income consists primarily of revenues from the sale of goods or performance of services in the regular course of a commercial activity What is the difference between a calendar and fiscal year? - correct answer The calendar year runs from January 1 to December 1 of every year, but a fiscal year may start on the first day of any month except January Which is not one of the permissible accounting methods for federal taxation? - correct answer GAAP
If a taxpayer's annual business operation results in an excess of deductible expenses over gross income, this excess is labeled - correct answer a net operating loss (NOL) AGI involves what ABL deductions? - correct answer 1) rental and royalty expenses
- IRA contributions
- Unreimbursed employee expenses
- alimony paid
- Student loan interest
- SEP deduction
- business expenses Itemized deductions include what...?` - correct answer 1) medical expenses
- Taxes paid (property/state)
- Interest paid (mortgage & investment)
- Charitable contributions
- casualty & theft losses
- Misc ID Taxpayers are allowed to deduct the greater of ...? - correct answer above-the-line deductions or standard deduction. What is the difference between ABL deductions and IDs - correct answer Above-the-line deductions reduce tax liability dollar to dollar, while itemized deductions are multiplied by marginal tax rate and reduce tax liability. Deductions FOR AGI are also known as ...? - correct answer Above the line (ABL) deductions
deductions must be _____________ amounts? - correct answer positive What are the purposes of phasing out IDs? - correct answer raise revenue, make the tax system more fair, only applies to "wealthy" individuals Phaseouts reduce IDs if AGI is what for each type of filer? - correct answer MFJ = 311, HH = 285, S = 259, What is the phaseout (reduction) amount for IDs if AGI > threshold? - correct answer 3% * (AGI excess) Which IDs are not subject to the Phaseout? - correct answer medical expenses, investment interest expense, casualty/theft/gabling loss Taxpayers are guaranteed to receive at least _____% of their itemized deductions - correct answer 20% Exemptions are equal to ________________ per taxpayer in 2016 - correct answer $4, What are the 2016 phaseout AGI thresholds for exemptions? - correct answer MFJ $311, HH $285, S $259, What is the phaseout % for exemptions? - correct answer AGI - threshold/2,500 * 2% What is the exemption deduction equation? - correct answer ($4,050 * No. Exemptions) * (1 - phaseout %)
What are the AGI amounts that trigger the child credit phase-out? - correct answer MFJ 110, MFS 55, HH 75, S 75, What causes a permanent book-tax difference? - correct answer
- the tax law provides for a deduction that never corresponds to a book expense or loss.
- an expense or loss is realized for book purposes but never recognized for tax purposes.
- income or gain is realized for book purposes but never recognized for tax purposes. Example of permanent book-tax difference? - correct answer Prepaid interest expense What cause temporary book-tax differences? - correct answer an item of income, gain, expense, or loss is taken into account in a different year for book purposes than for tax purposes. Examples of temporary book-tax difference? - correct answer
- prepaid service income
- BDE
- Prepaid service expense
- prepaid interest income Income tax expense for financial statement purpose is based on book income adjusted for ...? - correct answer All permanent book-tax differences
The child credit is applicable for children of what ages - correct answer 16 years or younger What are the AGI threshold amounts for child credits? - correct answer MFJ 110, S & HH 75, How do you find the phaseout and total credit amount for child credits? - correct answer AGI - threshold = AGI excess / 1,000 = phaseout % Phaseout % * 50 = phaseout amount Max child credit - phaseout amount = child credit What is the AGI threshold for dependent care credit - correct answer 15, What is the maximum credit % for dependent care credit - correct answer 35% If your AGI is under the threshold, how do you calculate the dependent care credit? - correct answer Take minimum amount between actual costs, $3000 for one child OR $6,000 for 2+ children, lesser of earned income What are expenses limited to with No. of children when determining the minimum amount of expenses - correct answer $3,000 for one child & $6,000 for 2+ children What is the phaseout % when AGI > 43,000 for dependent care credit - correct answer 20% Phaseout % is 20% when AGI > ____________________ - correct answer 43,
What is the maximum amount for American Opportunity Credit - correct answer 2500 American opportunity credit is limited to the first ______ ___________ of ____________ _____________________ - correct answer 4 years of higher education American Opportunity credit is limited to the first ____________ and ___________ of the next _________________ - correct answer 2,000 and 25% of the next 2, What are the AGI thresholds for American Opportunity credit - correct answer S 80,001 < AGI < 90, MFJ 160,0001 < AGI < 180, Lifetime Learning credit has a time limit of - correct answer no time limit Lifetime credit is applicable to what types of education? - correct answer degree, educational credential, or job skill lifetime learning credit is limited to _______ of the first ________________ - correct answer 20% of the first 10, What are the AGI thresholds for lifetime learning credit - correct answer S/HH 55,001 < AGI < 65, MFJ 110,001 < AGI < 130, What is the 12 month rule for cash based accounting - correct answer deduct the cost AT THE TIME OF PAYMENT, IF the expense will be used up in 12 months before the following tax year How is prepaid interest accounted for in cash basis accounting - correct answer Uses accrual method for prepaid interest
In accrual based accounting, tax deductions for bad debts will equal - correct answer actual write-offs of accounts receivable In accrual based accounting, for bad debt expense, you generally must use what method? - correct answer direct write-off method What is the summary of exceptions for accrual? - correct answer
- prepaid service income - 1 yr deferral
- prepaid interest/rent/royalty income - taxed when received
- prepaid service expense - 12 month rule
- Accrued expense - all events / economic performance
- BDE - only actual uncollectables There are ___ exceptions for accrual accounting? - correct answer 5 There are ____ exceptions for cash accounting? - correct answer 2 What are the two exceptions for cash accounting? - correct answer Prepaid service expense - 12 month rule Prepaid interest expense - accrual method Cash accounting uses the accrual method for what? - correct answer prepaid interest expense 12 month rule applies to cash, accrual, or both? - correct answer both 12 month rule applies to cash and accrual for what type of expense? - correct answer prepaid service expense
What is the difference between NI and TI - correct answer book-tax difference What causes book-tax differences? - correct answer rule differences between GAAP and tax law EXAMPLE: Firm's NI = 150 and TI = 120, what is book-tax diff? - correct answer 30 You can compute ____ if you know NI and book-tax diffs - correct answer TI If the IRS accepts book-tax diff and NI is correctly audited, then the IRS will accept _______ as correct - correct answer TI There are no "______ _______" - correct answer tax books _______________ differences - NI and TI recognize diff amounts of total income or expense/deduction - correct answer permanent ____________________ differences - NI and TI include same total income or deduction/expenses, BUT the rules for WHEN to include the income or deduction/expense differ - correct answer temporary Temporary differences net to.... - correct answer 0/2+ taxable years For temporary differences, some years NI will... - correct answer exceed book income and in other years this relation will reverse What is an example of a temporary difference - correct answer book and tax depreciation rules differ, but they still allocate the cost of the asset over a useful life. So, overtime, total depreciation expense will equal the total depreciation deduction
When TI < NI, it is ______________ to the taxpayer - correct answer favorable DTA are ______________, while DTL are ______________________-to taxpayers - correct answer unfavorable, favorable TI < NI for DTL/DTA (choose) - correct answer DTL TI > NI for DTL/DTA (choose) - correct answer DTA A major exception to the general rule regarding prepaid income applies to - correct answer advanced payments received for future sales of inventory With advanced payments received for future sales of inventory. Firms can elect to include - correct answer such advanced payments in taxable income either in the year of receipt or in the year in which the payments are included in income for financial reporting purposes When book-tax difference is negative, this means TI ___ book, TI ___ NI, and it is _______________ to the taxpayer - correct answer TI < Book, TI < NI, favorable Book-tax difference = - correct answer tax - book What is the key difference between 'Level 1 MTR (marginal tax rate)' and 'Level 2 MTR'? In other words, which concept is added to 'Level 2 MTR', that is not in 'Level 1 MTR'? - correct answer PV When does Level 2 MTR decline? - correct answer as the discount rate rises and as tax saving is received in a further future.
