CPA Taxation & Business Law 3 — Questions and Answers
Question 1: Under federal tax law, the standard deduction for a single filer is adjusted annually for inflation. Which code section governs this adjustment?
- IRC § 162
- IRC § 63 (Correct answer)
- IRC § 151
- IRC § 61
Correct answer: IRC § 63
IRC Section 63 defines taxable income and contains the standard deduction provisions including inflation adjustments.
Question 2: A general partnership is formed when:
- Partners file articles of partnership with the state
- Two or more persons agree to carry on a business for profit as co-owners (Correct answer)
- The partnership registers with the SEC
- Partners contribute equal amounts of capital
Correct answer: Two or more persons agree to carry on a business for profit as co-owners
Under the Uniform Partnership Act, a partnership is formed by the association of two or more persons to carry on as co-owners a business for profit, and no formal filing is required.
Question 3: Which of the following payments is deductible as a business expense under IRC § 162?
- Fines paid to a government agency for regulatory violations
- Bribes paid to foreign officials
- Ordinary and necessary expenses of operating a trade or business (Correct answer)
- Capital expenditures for equipment
Correct answer: Ordinary and necessary expenses of operating a trade or business
IRC Section 162 allows deductions for all ordinary and necessary expenses paid or incurred during the taxable year in carrying on a trade or business.
Question 4: Under the Statute of Frauds, which of the following contracts must be in writing to be enforceable?
- A contract for the sale of goods worth $250
- A two-year employment contract
- A contract to sell real property (Correct answer)
- A contract for services completed in two weeks
Correct answer: A contract to sell real property
The Statute of Frauds requires contracts for the sale of real property to be evidenced by a writing signed by the party to be charged.
Question 5: The self-employment tax rate that applies to net self-employment income up to the Social Security wage base is:
- 7.65%
- 15.3% (Correct answer)
- 12.4%
- 2.9%
Correct answer: 15.3%
The self-employment tax rate is 15.3%, consisting of 12.4% for Social Security and 2.9% for Medicare, applied to net self-employment earnings up to the wage base (for the Social Security portion).
Question 6: A limited liability company (LLC) with two members is taxed as which of the following by default?
- S corporation
- C corporation
- Partnership (Correct answer)
- Sole proprietorship
Correct answer: Partnership
By default, a multi-member LLC is classified as a partnership for federal tax purposes unless it elects to be taxed as a corporation.
Question 7: Which of the following best describes the concept of 'constructive receipt' in tax law?
- Income is taxable only when cash is physically received
- Income is taxable when it is credited to an account or made available without substantial restrictions (Correct answer)
- Income is taxable when it is earned regardless of receipt
- Income is taxable when the taxpayer chooses to recognize it
Correct answer: Income is taxable when it is credited to an account or made available without substantial restrictions
Under the constructive receipt doctrine, income is taxable when it is credited, set apart, or made available to the taxpayer, even if not actually received.
CPA Taxation & Business Law 3
Under federal tax law, the standard deduction for a single filer is adjusted annually for inflation.
Which code section governs this adjustment?