Bcom Bachelor of Commerce Bachelor of Commerce: Income Tax Laws 3 — Questions and Answers
Question 1: Which IRS form is used by individuals to report their federal income tax return?
- Form W-2
- Form 1099-MISC
- Form 1040 (Correct answer)
- Form 941
Correct answer: Form 1040
Form 1040 is the standard US Individual Income Tax Return used to report income, deductions, credits, and calculate tax owed or refund due.
Question 2: What is the concept of 'basis' in tax law?
- The market value of an asset at the time of sale
- The original cost of an asset used to calculate gain or loss on disposition (Correct answer)
- The annual depreciation deduction allowed for an asset
- The tax rate applied to investment income
Correct answer: The original cost of an asset used to calculate gain or loss on disposition
Basis is generally the original cost paid for an asset and is subtracted from the sales price to determine the taxable gain or deductible loss upon disposition.
Question 3: Under the 'constructive receipt' doctrine, when is income generally taxable to a cash-basis taxpayer?
- When payment is actually deposited in the taxpayer's bank account
- When the income is earned, regardless of receipt
- When the funds are made available to the taxpayer without restriction (Correct answer)
- When the taxpayer invoices the payer
Correct answer: When the funds are made available to the taxpayer without restriction
The constructive receipt doctrine holds that income is taxable when it is credited to the taxpayer's account or made available without substantial limitation, even if not yet physically received.
Question 4: Which of the following retirement account contributions is made with pre-tax dollars, reducing current taxable income?
- Roth IRA
- Traditional IRA (deductible) (Correct answer)
- Roth 401(k)
- Non-deductible IRA
Correct answer: Traditional IRA (deductible)
A deductible Traditional IRA contribution reduces adjusted gross income in the year of contribution; taxes are deferred until distributions are taken in retirement.
Question 5: What is the 'wash sale' rule?
- A rule requiring businesses to account for inventory using the FIFO method
- A rule disallowing a loss deduction when substantially identical securities are repurchased within 30 days before or after the sale (Correct answer)
- A rule limiting deductions for hobby losses
- A rule requiring installment sale reporting for certain property dispositions
Correct answer: A rule disallowing a loss deduction when substantially identical securities are repurchased within 30 days before or after the sale
The wash sale rule (IRC §1091) disallows a loss deduction if substantially identical securities are purchased within 30 days before or after the sale generating the loss.
Question 6: Which entity type is generally subject to 'double taxation' on its profits?
- S Corporation
- Partnership
- C Corporation (Correct answer)
- Sole Proprietorship
Correct answer: C Corporation
A C Corporation pays corporate income tax on its profits, and shareholders pay individual income tax again when dividends are distributed, creating double taxation.
Question 7: What does the term 'AGI' stand for in US income tax law, and why is it significant?
- Adjusted Gross Income; it is the base used to calculate many deduction and credit phase-outs (Correct answer)
- Annual Gross Income; it equals total wages before any deductions
- Allowable Gross Income; it represents the maximum income exempt from tax
- Alternate Gross Income; it is used only for self-employed taxpayers
Correct answer: Adjusted Gross Income; it is the base used to calculate many deduction and credit phase-outs
Adjusted Gross Income (AGI) is gross income minus above-the-line deductions, and it serves as the threshold for determining eligibility and limits for many credits, deductions, and phase-outs.
Bcom Bachelor of Commerce Bachelor of Commerce: Income Tax Laws 3
Which IRS form is used by individuals to report their federal income tax return?