Intro to Federal Tax Exam 2 Questions &
Answers 100% Correct!!
Gross income - ANSWERSgross income consist primarily of revenues from the sale of
goods or performance of services in the regular course of commercial activity.
(T or F) The Internal Revenue Code allows a deduction for all the ordinary and
necessary expenses paid or incurred during the taxable year in carrying on any trade or
bussiness. - ANSWERSTrue
What is a ordinary Expense - ANSWERSif it is customary for a particular type of trade
or business and is commonly or frequently incurred.
What is a necessary expense - ANSWERSif it is appropriate and helpful for the
development of the business and the generation of revenue
Calendar year - ANSWERSIf a firm keeps its financial books on records on a calendar
year, it measures taxable income over the same January through December period
Fiscal Year - ANSWERSIf a firm keeps its financial records on a fiscal year, (any 12-
month period ending on the last day of any month except December), it uses this fiscal
year as its taxable year.
Why would a firm consider keeping their books on a fiscal or calendar year -
ANSWERSFirms want to close their books and calculate their profit at the end of a
natural cycle of business activity.
A new business entity establishes its taxable year by filing an initial tax return on the
basis of such year (t or f) - ANSWERSTrue
Can a firm change its reporting year? - ANSWERSNo, unless it formally request and
receives permission to do so from the IRS
What does a firm file if they are allowed to change their tax year? - ANSWERSA short
period return
Business interest limitation - ANSWERSBusiness interest in excess of 30% of adjusted
taxable income is not currently deductible.
Cash method accounting - ANSWERSan overall method of accounting under which
revenue is accounted for when payment is received and expenses are accounted for
when a payment is made
, Taxable income - ANSWERSgross income - allowable deductions
Are receipts taxable? - ANSWERSReceipts are taxable unless a specific rule states that
the receipt is nontaxable
Are all expenses deductible? - ANSWERSNo, Expenses are deductible only if a specific
rule states that the expense is deductible..
What is a taxable year? - ANSWERSGenerally its a 12-month calendar year
When should we all file our taxes by? - ANSWERSApril 15th
Can corporations decide when their fiscal year starts? - ANSWERSYes, they can start
their fiscal year.
The internal revenue code permits firms to use the following accounting methods -
ANSWERSCash
accrual
combined (hybrid)
Are deductions affected by public policy? - ANSWERSYes, heavily
Can you deduct fines or penalties, political contributions, or lobbying expenses from
your taxable income? - ANSWERSNo, we don't want to reward companies for fines.
Can you deduct 50% of meals and zero entertainment expenses? - ANSWERSYes
Can you deduct payment for payments related to sexual harassment if subject to
nondisclosure agreement? - ANSWERSNo
Economic incentives:
State and local bond interest income is tax-exempt (T or F) - ANSWERSTrue
Can business write off equipment faster than for tax purposes than Gaap usefule life? -
ANSWERSyes
Business interest limitation: Can you deduct interest from your taxable income -
ANSWERSYou can only deduct 30% of adjusted income
What is the 12-month rule - ANSWERSThe 12-month rule for determining whether an
expenditure is currently deductible or must be capitalized to an intangible asset account.
If the expenditure results in a benefit with a duration of 12 months or less and that
benefit doesn't extend beyond the end of the taxable year following the year of payment,
the expenditure is deductible in the year of payment.
Answers 100% Correct!!
Gross income - ANSWERSgross income consist primarily of revenues from the sale of
goods or performance of services in the regular course of commercial activity.
(T or F) The Internal Revenue Code allows a deduction for all the ordinary and
necessary expenses paid or incurred during the taxable year in carrying on any trade or
bussiness. - ANSWERSTrue
What is a ordinary Expense - ANSWERSif it is customary for a particular type of trade
or business and is commonly or frequently incurred.
What is a necessary expense - ANSWERSif it is appropriate and helpful for the
development of the business and the generation of revenue
Calendar year - ANSWERSIf a firm keeps its financial books on records on a calendar
year, it measures taxable income over the same January through December period
Fiscal Year - ANSWERSIf a firm keeps its financial records on a fiscal year, (any 12-
month period ending on the last day of any month except December), it uses this fiscal
year as its taxable year.
Why would a firm consider keeping their books on a fiscal or calendar year -
ANSWERSFirms want to close their books and calculate their profit at the end of a
natural cycle of business activity.
A new business entity establishes its taxable year by filing an initial tax return on the
basis of such year (t or f) - ANSWERSTrue
Can a firm change its reporting year? - ANSWERSNo, unless it formally request and
receives permission to do so from the IRS
What does a firm file if they are allowed to change their tax year? - ANSWERSA short
period return
Business interest limitation - ANSWERSBusiness interest in excess of 30% of adjusted
taxable income is not currently deductible.
Cash method accounting - ANSWERSan overall method of accounting under which
revenue is accounted for when payment is received and expenses are accounted for
when a payment is made
, Taxable income - ANSWERSgross income - allowable deductions
Are receipts taxable? - ANSWERSReceipts are taxable unless a specific rule states that
the receipt is nontaxable
Are all expenses deductible? - ANSWERSNo, Expenses are deductible only if a specific
rule states that the expense is deductible..
What is a taxable year? - ANSWERSGenerally its a 12-month calendar year
When should we all file our taxes by? - ANSWERSApril 15th
Can corporations decide when their fiscal year starts? - ANSWERSYes, they can start
their fiscal year.
The internal revenue code permits firms to use the following accounting methods -
ANSWERSCash
accrual
combined (hybrid)
Are deductions affected by public policy? - ANSWERSYes, heavily
Can you deduct fines or penalties, political contributions, or lobbying expenses from
your taxable income? - ANSWERSNo, we don't want to reward companies for fines.
Can you deduct 50% of meals and zero entertainment expenses? - ANSWERSYes
Can you deduct payment for payments related to sexual harassment if subject to
nondisclosure agreement? - ANSWERSNo
Economic incentives:
State and local bond interest income is tax-exempt (T or F) - ANSWERSTrue
Can business write off equipment faster than for tax purposes than Gaap usefule life? -
ANSWERSyes
Business interest limitation: Can you deduct interest from your taxable income -
ANSWERSYou can only deduct 30% of adjusted income
What is the 12-month rule - ANSWERSThe 12-month rule for determining whether an
expenditure is currently deductible or must be capitalized to an intangible asset account.
If the expenditure results in a benefit with a duration of 12 months or less and that
benefit doesn't extend beyond the end of the taxable year following the year of payment,
the expenditure is deductible in the year of payment.
