Exam 1: Introduction to Taxation

The 13^th Amendment to the US Constitution that provided for an income tax was ratified in 1916.

Which of the following best describes vertical equity?

The lowest tax rate on the tax rate schedules for taxable incomes is the same for individuals and C corporations.

Which of the following are included in Adam Smith's characteristics of a good tax?

Alexander received $80,000 in salary in 2018. What is his FICA tax if the Medicare rate is 1.45%, the Social Security rate is 6.2% on the 2018 maximum of $128,400, and the FUTA rate is 6% on a $7,000 maximum?

Jerry and Matt decide to form a business. Jerry will contribute $4,200 for a 35% interest and Matt will contribute $7,800 for a 65% interest. The business will take out a $25,000 loan to cover the balance of their working capital needs. They expect that the business will have a loss of $38,000 for the first year. In the second year, the business will have a profit of $52,000 and it will distribute $5,200 to Matt and $2,800 to Jerry. Jerry is in the 32% marginal tax bracket and Matt is in the 24% marginal tax bracket. Their marginal tax brackets will not change as a result of profit or loss from this business. How much tax will Matt pay in the second year (rounded to the nearest dollar) due to this business if they organize the business as an S corporation?

The type and degree of connection between a business and a state necessary for a state to impose a tax is referred to as nexus.

Elena owns 25% of a partnership that reported net income of $100,000 for the year. During the year $5,000 was distributed to Elena from the partnership. How much should Elena include in her taxable income for the year?

What is an individual's maximum annual deduction for capital losses?

Crystal invested $8,000 cash in CRK Partnership for a 30% general partnership interest. In its first year of operations, CRK lost $15,000. In its second year of operations, CRK lost an additional $14,000. How much of the second year's losses can Crystal deduct in that year?

Any current changes to the tax laws are now amendments to the Internal Revenue Code of 2018.

John earns $25,000 and pays $2,000 in taxes. Marcy earns $60,000 and pays $4,000 in taxes. How would you characterize this tax system?

All limited liability companies (LLCs) can file their tax returns as partnerships.

Partnerships and S corporations are flow-through entities.

Both sales and use taxes are collected in the state in which the sale takes place.

Why are S corporations and partnerships called flow-through entities?

Karen, single with the standard deduction being the only deduction for her individual tax return, wants to set up a business. She will use either a sole proprietorship or incorporate as a regular corporation. She expects the business to earn $160,000 after all expenses and payments to Karen except for federal taxes. Karen will take $40,000 from the business for living expenses (as a distribution from a sole proprietorship or a salary from a corporation). Considering only income taxes for 2018, should she establish the business as a C corporation or as a sole proprietorship?

Differentiate a wealth tax from a wealth transfer tax and give an example of each.

Sophia owns 20% of a partnership that reported net income of $130,000 for the year. During the year $18,000 was distributed to Sophia from the partnership. How much should Sophia include in her taxable income for the year?

Jerry and Matt decide to form a business. Jerry will contribute $4,200 for a 35% interest and Matt will contribute $7,800 for a 65% interest. The business will take out a $25,000 loan to cover the balance of their working capital needs. They expect that the business will have a loss of $38,000 for the first year. In the second year, the business will have a profit of $52,000 and it will distribute $5,200 to Matt and $2,800 to Jerry. Jerry is in the 32% marginal tax bracket and Matt is in the 24% marginal tax bracket. Their marginal tax brackets will not change as a result of profit or loss from this business. How much tax will Jerry pay in the second year (rounded to the nearest dollar) due to this business if they organize the business as a partnership?