Intro to Federal Tax Exam 2 UPDATED
ACTUAL Exam Questions and CORRECT
Answers
Gross income - CORRECT ANSWER - gross 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. -
CORRECT ANSWER - True
What is a ordinary Expense - CORRECT ANSWER - if it is customary for a particular type of
trade or business and is commonly or frequently incurred.
What is a necessary expense - CORRECT ANSWER - if it is appropriate and helpful for the
development of the business and the generation of revenue
Calendar year - CORRECT ANSWER - If 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 - CORRECT ANSWER - If 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 - CORRECT
ANSWER - Firms 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) - CORRECT ANSWER - True
,Can a firm change its reporting year? - CORRECT ANSWER - No, 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? - CORRECT ANSWER -A
short period return
Business interest limitation - CORRECT ANSWER - Business interest in excess of 30% of
adjusted taxable income is not currently deductible.
Cash method accounting - CORRECT ANSWER - an 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 - CORRECT ANSWER - gross income - allowable deductions
Are receipts taxable? - CORRECT ANSWER - Receipts are taxable unless a specific rule
states that the receipt is nontaxable
Are all expenses deductible? - CORRECT ANSWER - No, Expenses are deductible only if a
specific rule states that the expense is deductible..
What is a taxable year? - CORRECT ANSWER - Generally its a 12-month calendar year
When should we all file our taxes by? - CORRECT ANSWER - April 15th
Can corporations decide when their fiscal year starts? - CORRECT ANSWER - Yes, they can
start their fiscal year.
The internal revenue code permits firms to use the following accounting methods - CORRECT
ANSWER - Cash
, accrual
combined (hybrid)
Are deductions affected by public policy? - CORRECT ANSWER - Yes, heavily
Can you deduct fines or penalties, political contributions, or lobbying expenses from your
taxable income? - CORRECT ANSWER - No, we don't want to reward companies for fines.
Can you deduct 50% of meals and zero entertainment expenses? - CORRECT ANSWER - Yes
Can you deduct payment for payments related to sexual harassment if subject to nondisclosure
agreement? - CORRECT ANSWER - No
Economic incentives:
State and local bond interest income is tax-exempt (T or F) - CORRECT ANSWER - True
Can business write off equipment faster than for tax purposes than Gaap usefule life? -
CORRECT ANSWER - yes
Business interest limitation: Can you deduct interest from your taxable income - CORRECT
ANSWER - You can only deduct 30% of adjusted income
What is the 12-month rule - CORRECT ANSWER - The 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.
If the expenditure results in a benefit with a duration of more than 12 months is must be
capitalized
ACTUAL Exam Questions and CORRECT
Answers
Gross income - CORRECT ANSWER - gross 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. -
CORRECT ANSWER - True
What is a ordinary Expense - CORRECT ANSWER - if it is customary for a particular type of
trade or business and is commonly or frequently incurred.
What is a necessary expense - CORRECT ANSWER - if it is appropriate and helpful for the
development of the business and the generation of revenue
Calendar year - CORRECT ANSWER - If 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 - CORRECT ANSWER - If 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 - CORRECT
ANSWER - Firms 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) - CORRECT ANSWER - True
,Can a firm change its reporting year? - CORRECT ANSWER - No, 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? - CORRECT ANSWER -A
short period return
Business interest limitation - CORRECT ANSWER - Business interest in excess of 30% of
adjusted taxable income is not currently deductible.
Cash method accounting - CORRECT ANSWER - an 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 - CORRECT ANSWER - gross income - allowable deductions
Are receipts taxable? - CORRECT ANSWER - Receipts are taxable unless a specific rule
states that the receipt is nontaxable
Are all expenses deductible? - CORRECT ANSWER - No, Expenses are deductible only if a
specific rule states that the expense is deductible..
What is a taxable year? - CORRECT ANSWER - Generally its a 12-month calendar year
When should we all file our taxes by? - CORRECT ANSWER - April 15th
Can corporations decide when their fiscal year starts? - CORRECT ANSWER - Yes, they can
start their fiscal year.
The internal revenue code permits firms to use the following accounting methods - CORRECT
ANSWER - Cash
, accrual
combined (hybrid)
Are deductions affected by public policy? - CORRECT ANSWER - Yes, heavily
Can you deduct fines or penalties, political contributions, or lobbying expenses from your
taxable income? - CORRECT ANSWER - No, we don't want to reward companies for fines.
Can you deduct 50% of meals and zero entertainment expenses? - CORRECT ANSWER - Yes
Can you deduct payment for payments related to sexual harassment if subject to nondisclosure
agreement? - CORRECT ANSWER - No
Economic incentives:
State and local bond interest income is tax-exempt (T or F) - CORRECT ANSWER - True
Can business write off equipment faster than for tax purposes than Gaap usefule life? -
CORRECT ANSWER - yes
Business interest limitation: Can you deduct interest from your taxable income - CORRECT
ANSWER - You can only deduct 30% of adjusted income
What is the 12-month rule - CORRECT ANSWER - The 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.
If the expenditure results in a benefit with a duration of more than 12 months is must be
capitalized
