Solution Manual for McGraw Hill's
Taxation of Individuals and
Business Entities
Which of the following is not a requirement for an expense to be considered
deductible for tax purposes?
A) The expense must be ordinary and necessary.
B) The expense must be incurred in the course of business.
C) The expense must be paid in the current year.
D) The expense must be directly related to earning taxable income.
Answer: C) The expense must be paid in the current year.
Which of the following is considered a capital asset for tax purposes?
A) Inventory held for sale
B) Equipment used in a business
C) Shares of stock held for investment
D) Accounts receivable
Answer: C) Shares of stock held for investment.
For tax purposes, which method of accounting recognizes revenue when it is earned
and expenses when they are incurred, regardless of when cash is received or paid?
A) Cash basis
B) Accrual basis
C) Hybrid basis
D) Modified cash basis
Answer: B) Accrual basis.
What is the tax treatment of a loss on the sale of a personal residence?
,A) The loss is deductible as an ordinary loss.
B) The loss is deductible as a capital loss.
C) The loss is not deductible.
D) The loss can be carried forward to future years.
Answer: C) The loss is not deductible.
Which of the following is true about the taxation of a partnership?
A) A partnership is taxed as a separate entity.
B) The partners are individually taxed on their share of the partnership’s income.
C) The partnership does not file a tax return.
D) The partnership income is taxed at the entity level and then again at the partner
level.
Answer: B) The partners are individually taxed on their share of the partnership’s
income.
What is the maximum amount of income that can be excluded from tax as a gain on
the sale of a principal residence under current tax law?
A) $250,000 for single filers and $500,000 for married couples filing jointly.
B) $100,000 for single filers and $200,000 for married couples filing jointly.
C) $300,000 for single filers and $600,000 for married couples filing jointly.
D) $200,000 for single filers and $400,000 for married couples filing jointly.
Answer: A) $250,000 for single filers and $500,000 for married couples filing jointly.
Which of the following items would be classified as taxable income for an individual?
A) Gifts received from family members
B) Interest income from savings accounts
C) Inheritances received
D) Life insurance proceeds received upon the death of a spouse
, Answer: B) Interest income from savings accounts.
Which of the following is considered taxable income for a business?
A) Interest income from a business savings account
B) Cash gifts received from customers
C) Proceeds from the sale of capital assets
D) All of the above
Answer: D) All of the above.
What type of income is typically subject to self-employment tax?
A) Wages from an employer
B) Rental income from real estate
C) Net earnings from a sole proprietorship
D) Interest income from bonds
Answer: C) Net earnings from a sole proprietorship.
How is a distribution from an S corporation generally taxed?
A) As ordinary income to the shareholder
B) As a capital gain
C) As a tax-free return of capital
D) As a dividend subject to double taxation
Answer: C) As a tax-free return of capital.
Which of the following expenses is deductible for a self-employed individual?
A) Commuting expenses between home and a regular place of business
B) Meals and entertainment expenses related to business activities
C) Personal insurance premiums
D) Costs of a vacation home used for personal purposes
Taxation of Individuals and
Business Entities
Which of the following is not a requirement for an expense to be considered
deductible for tax purposes?
A) The expense must be ordinary and necessary.
B) The expense must be incurred in the course of business.
C) The expense must be paid in the current year.
D) The expense must be directly related to earning taxable income.
Answer: C) The expense must be paid in the current year.
Which of the following is considered a capital asset for tax purposes?
A) Inventory held for sale
B) Equipment used in a business
C) Shares of stock held for investment
D) Accounts receivable
Answer: C) Shares of stock held for investment.
For tax purposes, which method of accounting recognizes revenue when it is earned
and expenses when they are incurred, regardless of when cash is received or paid?
A) Cash basis
B) Accrual basis
C) Hybrid basis
D) Modified cash basis
Answer: B) Accrual basis.
What is the tax treatment of a loss on the sale of a personal residence?
,A) The loss is deductible as an ordinary loss.
B) The loss is deductible as a capital loss.
C) The loss is not deductible.
D) The loss can be carried forward to future years.
Answer: C) The loss is not deductible.
Which of the following is true about the taxation of a partnership?
A) A partnership is taxed as a separate entity.
B) The partners are individually taxed on their share of the partnership’s income.
C) The partnership does not file a tax return.
D) The partnership income is taxed at the entity level and then again at the partner
level.
Answer: B) The partners are individually taxed on their share of the partnership’s
income.
What is the maximum amount of income that can be excluded from tax as a gain on
the sale of a principal residence under current tax law?
A) $250,000 for single filers and $500,000 for married couples filing jointly.
B) $100,000 for single filers and $200,000 for married couples filing jointly.
C) $300,000 for single filers and $600,000 for married couples filing jointly.
D) $200,000 for single filers and $400,000 for married couples filing jointly.
Answer: A) $250,000 for single filers and $500,000 for married couples filing jointly.
Which of the following items would be classified as taxable income for an individual?
A) Gifts received from family members
B) Interest income from savings accounts
C) Inheritances received
D) Life insurance proceeds received upon the death of a spouse
, Answer: B) Interest income from savings accounts.
Which of the following is considered taxable income for a business?
A) Interest income from a business savings account
B) Cash gifts received from customers
C) Proceeds from the sale of capital assets
D) All of the above
Answer: D) All of the above.
What type of income is typically subject to self-employment tax?
A) Wages from an employer
B) Rental income from real estate
C) Net earnings from a sole proprietorship
D) Interest income from bonds
Answer: C) Net earnings from a sole proprietorship.
How is a distribution from an S corporation generally taxed?
A) As ordinary income to the shareholder
B) As a capital gain
C) As a tax-free return of capital
D) As a dividend subject to double taxation
Answer: C) As a tax-free return of capital.
Which of the following expenses is deductible for a self-employed individual?
A) Commuting expenses between home and a regular place of business
B) Meals and entertainment expenses related to business activities
C) Personal insurance premiums
D) Costs of a vacation home used for personal purposes
