Federal Taxation Chapters 1 - 4 Test Terms Exam Questions with Correct Answers

Sixteenth Amendment Correct Answer The Congress shall have the power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration (ratified in 1913) Internal Revenue Code Correct Answer (1939) The primary legislative source and authority for tax research, planning, and compliance activities Progressive Tax Correct Answer is one where the rate of tax increases as the tax base increases. Example: federal income tax Flat or Proportional Tax Correct Answer is one where the rate of tax is the same for all taxpayers, regardless of the level of their tax base. Examples: Real estate taxes, state and local sales taxes, personal property taxes, customs duties, and excise taxes Regressive Tax Correct Answer rate decreases with an increase in the tax base. Examples: Social Security Tax C Corporation Correct Answer Normal corporation S Corporation Correct Answer Is a passthrough entitity (LLC, partnerships, estates and trusts) You incorporate within a state, but request S corp status at a federal level; can have up to 100 different share holders Marginal tax rate Correct Answer is the tax rate applied to an incremental amount of taxable income that is added to the tax base Average tax rate Correct Answer is computed by dividing the total tax liability by the amount of taxable income; the average rate of tax for each dollar of taxable income Effective tax rate Correct Answer is the total tax liability divided by total economic income (includes all types of economic income that a taxpayer has for the year) Leasehold improvements Correct Answer is not construed as an income to the landlord; improvements made by the tenant Exclusion Correct Answer Any item of income that the tax law says is not taxable Royalties Correct Answer Shows up on the schedule E, another form of income for patents and copyrights