A COMPREHENSIVE INSTRUCTOR-STYLE TEST
BANK FOR **PRINCIPLES OF TAXATION FOR
BUSINESS & INVESTMENT PLANNING — 2026
(2025 RELEASE)** BY SALLY JONES & SHELLEY
RHOADES-CATANACH (28TH ED.). I CHECKED THE
BOOK DETAILS AND EDITION/ISBN TO MATCH
CHAPTER TOPICS SO THE QUESTIONS ALIGN
WITH THE TEXT.
# Test Bank — Principles of Taxation for Business & Investment Planning (2026: 2025 Release)
## Multiple Choice (1–80)
1. The major purpose of federal income tax as discussed in the text is to:
A. Raise only state revenues
B. Redistribute income and finance public goods
C. Eliminate all tax avoidance
D. Replace corporate governance rules
**Answer: B**
2. Which of the following best describes a progressive tax system?
A. Everyone pays the same dollar amount
B. Tax rates fall as income increases
C. Tax rate increases with higher income brackets
D. Taxes are levied only on consumption
**Answer: C**
3. “Taxable income” for an individual is generally:
A. Gross income minus adjustments, deductions, and exemptions where allowed
B. Gross receipts only
1
, C. Net worth at year-end
D. Cash on hand at year-end
**Answer: A**
4. Which of the following is NOT included in gross income under general tax principles?
A. Wages and salaries
B. Gifts received from unrelated third parties
C. Interest income
D. Rental income
**Answer: B**
5. Which principle best captures treating taxes as transaction costs for business decisions?
A. Only statutory law matters
B. Taxes never affect economic decisions
C. Taxes influence the timing, form, and structure of transactions
D. Taxable entities are always individuals
**Answer: C**
6. The “realization” concept in income taxation means:
A. Income is recognized only when cash is in hand
B. Income is recognized when an economic event produces a measurable gain and is realized
through a transaction
C. Unrealized appreciation is always taxed annually
D. Only wages are realized income
**Answer: B**
7. Which method is commonly used to determine basis for purchased property?
A. Fair market value at date of purchase
B. Seller’s cost basis only
C. Tax basis equals zero always
D. Basis equals the purchase price adjusted for certain costs
**Answer: D**
2
,8. The primary difference for tax treatment between a capital asset and ordinary income asset is:
A. Capital assets always generate ordinary income when sold
B. Capital gains may receive preferential rates versus ordinary income
C. Capital assets are never depreciable
D. There is no difference under tax law
**Answer: B**
9. Depreciation for tax purposes is intended to:
A. Create a noncash deduction reflecting allocation of cost over useful life
B. Refund previously paid taxes
C. Increase taxable income
D. Apply only to land
**Answer: A**
10. Which entity uses Form 1120 to report income?
A. Sole proprietorship
B. Partnership
C. Corporation (C corporation)
D. S corporation (default)
**Answer: C**
11. An S corporation’s income flows through to shareholders:
A. Only when distributions are made
B. On the corporation’s tax return only
C. Annually according to shareholder pro rata shares regardless of distributions
D. Never; S corp is taxed as a C corp
**Answer: C**
12. The primary tax advantage of using a flow-through entity (partnership/S corp) is:
A. Entity pays tax twice always
B. Single level of tax at owner level avoids classical corporate double taxation
3
, C. Owners never report income
D. Guaranteed lower tax rates than corporations
**Answer: B**
13. The passive activity rules primarily restrict:
A. Deductions from passive activities against active income in many cases
B. Deducting any losses from any source
C. Claiming depreciation
D. Claiming charitable deductions
**Answer: A**
14. Which of these is a recognized method for making a tax election?
A. Ignore the statute and hope IRS agrees
B. File the proper IRS form or attach a timely election statement to tax return as specified by
regulation
C. Announce election on social media
D. Pay a fee to the IRS to set the election
**Answer: B**
15. A capital loss limitation for individuals means:
A. Capital losses offset ordinary income without limit
B. Capital losses can offset capital gains and up to $3,000 of ordinary income per year (subject to
current law) with carryforwards
C. Capital losses are lost completely
D. Capital losses result in immediate refunds
**Answer: B**
16. Which of the following is a primary objective of tax planning?
A. To evade taxes
B. To legally minimize tax consequences consistent with law and policy goals
C. To ignore compliance requirements
D. To maximize tax liabilities
4
BANK FOR **PRINCIPLES OF TAXATION FOR
BUSINESS & INVESTMENT PLANNING — 2026
(2025 RELEASE)** BY SALLY JONES & SHELLEY
RHOADES-CATANACH (28TH ED.). I CHECKED THE
BOOK DETAILS AND EDITION/ISBN TO MATCH
CHAPTER TOPICS SO THE QUESTIONS ALIGN
WITH THE TEXT.
# Test Bank — Principles of Taxation for Business & Investment Planning (2026: 2025 Release)
## Multiple Choice (1–80)
1. The major purpose of federal income tax as discussed in the text is to:
A. Raise only state revenues
B. Redistribute income and finance public goods
C. Eliminate all tax avoidance
D. Replace corporate governance rules
**Answer: B**
2. Which of the following best describes a progressive tax system?
A. Everyone pays the same dollar amount
B. Tax rates fall as income increases
C. Tax rate increases with higher income brackets
D. Taxes are levied only on consumption
**Answer: C**
3. “Taxable income” for an individual is generally:
A. Gross income minus adjustments, deductions, and exemptions where allowed
B. Gross receipts only
1
, C. Net worth at year-end
D. Cash on hand at year-end
**Answer: A**
4. Which of the following is NOT included in gross income under general tax principles?
A. Wages and salaries
B. Gifts received from unrelated third parties
C. Interest income
D. Rental income
**Answer: B**
5. Which principle best captures treating taxes as transaction costs for business decisions?
A. Only statutory law matters
B. Taxes never affect economic decisions
C. Taxes influence the timing, form, and structure of transactions
D. Taxable entities are always individuals
**Answer: C**
6. The “realization” concept in income taxation means:
A. Income is recognized only when cash is in hand
B. Income is recognized when an economic event produces a measurable gain and is realized
through a transaction
C. Unrealized appreciation is always taxed annually
D. Only wages are realized income
**Answer: B**
7. Which method is commonly used to determine basis for purchased property?
A. Fair market value at date of purchase
B. Seller’s cost basis only
C. Tax basis equals zero always
D. Basis equals the purchase price adjusted for certain costs
**Answer: D**
2
,8. The primary difference for tax treatment between a capital asset and ordinary income asset is:
A. Capital assets always generate ordinary income when sold
B. Capital gains may receive preferential rates versus ordinary income
C. Capital assets are never depreciable
D. There is no difference under tax law
**Answer: B**
9. Depreciation for tax purposes is intended to:
A. Create a noncash deduction reflecting allocation of cost over useful life
B. Refund previously paid taxes
C. Increase taxable income
D. Apply only to land
**Answer: A**
10. Which entity uses Form 1120 to report income?
A. Sole proprietorship
B. Partnership
C. Corporation (C corporation)
D. S corporation (default)
**Answer: C**
11. An S corporation’s income flows through to shareholders:
A. Only when distributions are made
B. On the corporation’s tax return only
C. Annually according to shareholder pro rata shares regardless of distributions
D. Never; S corp is taxed as a C corp
**Answer: C**
12. The primary tax advantage of using a flow-through entity (partnership/S corp) is:
A. Entity pays tax twice always
B. Single level of tax at owner level avoids classical corporate double taxation
3
, C. Owners never report income
D. Guaranteed lower tax rates than corporations
**Answer: B**
13. The passive activity rules primarily restrict:
A. Deductions from passive activities against active income in many cases
B. Deducting any losses from any source
C. Claiming depreciation
D. Claiming charitable deductions
**Answer: A**
14. Which of these is a recognized method for making a tax election?
A. Ignore the statute and hope IRS agrees
B. File the proper IRS form or attach a timely election statement to tax return as specified by
regulation
C. Announce election on social media
D. Pay a fee to the IRS to set the election
**Answer: B**
15. A capital loss limitation for individuals means:
A. Capital losses offset ordinary income without limit
B. Capital losses can offset capital gains and up to $3,000 of ordinary income per year (subject to
current law) with carryforwards
C. Capital losses are lost completely
D. Capital losses result in immediate refunds
**Answer: B**
16. Which of the following is a primary objective of tax planning?
A. To evade taxes
B. To legally minimize tax consequences consistent with law and policy goals
C. To ignore compliance requirements
D. To maximize tax liabilities
4
