Central Washington University US Tax Exam Questions
1. After working in accounting for fifteen years, you and two friends have decided, you would really like to start your own firm. Some of the initial consultations you have had in your meetings have brought up a number of issues. Please answer the following issues being brought up. You are trying to decide what kind of entity you want to use for your business. You have the option of using the C-Corporation, Partnership and the S-Corporation. Which entity would you argue to use and provide at least three reasons in support of this choice and one potential problem you might have for this choice? You all are trying to decide whether you want to use a cash method or accrual method of accounting for your business. Please provide three reasons in support of accrual methods and three in support of cash methods of accounting. After discussion, the decision is to choose to operate as a C-Corporation. As a part of this organization, you all decide you want to set up a retirement plan for the company, so each partner can save for his or her retirement. Provide 3-5 sentences of discussion of the difference between the Roth 401k option and the traditional defined contribution plan.After several years, your firm is rather successful and, in an effort, to expand, the company is trying to decide if it should keep the current 401k (defined contribution) plan or switch to a defined benefit plan. Provide 3-5 sentences of discussion making the argument of moving from a 401k plan to a defined benefit plan. 2. You have a client and they formed a corporation with 5 of their friends. All of the people were required to put in $50,000 or assets valued at the same into the company, but only 1 was going to work full time for the company. What is the tax effect to the contributors and what rate would they be taxed at for this transaction?3. Gusto Cars, Inc. has been having a terrible year this year. In the current year, they are scheduled to make only $1.5 million net income, but the heads of the company realize this is primarily due to an accounting change costing them roughly 30 million in income. Sales are going well and the company expects to rebound from this going forward, however, Gusto has held a constant 3.5% payout on its dividend, and without a significant market drop, this means they will have to pay out roughly 5 million in dividends. They have an accumulated earnings and profit of 20 million. What will be the tax effect to shareholders assuming the entire dividend is paid out? 4. Assume the same facts above, but the company has no accumulated earnings and profits. Also assume all shareholders have sufficient basis in their stock. 5. A-Co, Inc has acquired a 40% interest in New-Co, Inc. as a result of its deal exiting out of the Northeastern market. New-Co, Inc. operates in the Southwest, where A-Co, Inc. is seeking to expand its operations of fast food chains. New-Co is expecting to pay out dividends in at around $1 million each year, as it has done so in previous years. What is the dividends received deduction (percentage and actual amount assuming he 1 million dividends holds). What code section is the primary source of the dividends received deduction?
6. What are five common book to tax differences in determining tax income from book income? 7. During 2020, Sienar Systems, Inc purchased Correalian Drives, Inc. (one of its suppliers) using the assets method. As a part of this business, it was determined the company purchased 1,200,000 of Goodwill. In 2022, it was determined the goodwill was impaired to the tune of about $200,000. How much is the book to tax difference with this purchase in 2020 and is it temporary or permanent? What is the book effect of the impairment in 2022? What is the book to tax difference of the impairment? Is it temporary or permanent? In2020, Bespin Gas Systems, Inc (a C-Corporation), made a charitable donation of $100,000 to the Wookie Relief Fund (a qualifying charity). For 2020, they reported net income of $550,000, which included the $100,000 donation, a $50,000 dividends received deduction and a $10,000 Net Operating Loss carryover, from the previous year. What is the permitted charitable deduction allowed in 2020? What is the effect of the remaining amount (both amount and time of the carryover). 8. in 2020, Geonosis Industries, Inc (GII). reported taxable income of $500,000 from operations this year. During the year the company made a distribution of land to its sole shareholder, Sly Tyranus. The Land’s FMV as $75,000 and its E&P Basis to GII was $125,000. Sly assumed a mortgage attached to the land of $15,000. The company had accumulated E&P of $750,000. Compute GII’s Taxable Income and income tax. Computer Tiger’s Current E&PCompute Tiger’s Accumulated E&P at the beginning of the year for 2021. Compute the amount of dividend income Sly recognizes as a result of the distribution. What is Sly’s tax basis in the land he received from GII? 9. Kevin, Gerald and Robb formed HyperTech Systems, LLC. No election was made as to the status of this entity, as they wanted to leave it as a partnership. Kevin and Robb contributed $245,000 to the partnership. Gerald contributed the following assets:AssetBasisFair Market ValueCash$15,000$15,000Land$120,000$440,000$135,000$445,000What is the tax basis of Kevin and Robb in the partnership? Assume Gerald is asking for an equal part in the partnership in terms of capital? What will be the tax effects to Gerald? Assume Gerald is asking for an equal share in the partnership in terms of profits and losses only. What are the tax effect to Kevin, Robb and Gerald? 10. Jack, Jill and James own a CPA firm (Smith, Smith, Bond and Co., LLC), which is taxed as a partnership, and where each work full-time. Each contributed cash of $100,000 to the firm in 2019 at its beginning. The firm in the first year made $40,000 in profit in its first year. Profits and losses are split three ways. The partnership has the following forms of debt: Nonrecourse: $30,000Recourse: $150,000 (The recourse debt was secured 100% by James)Qualified Nonrecourse Mortgage: $600,000Calculate the total basis (including debt basis) for each partner.Calculate the at-risk amount limitationCalculate the passive loss limitation for each partner.
11. Kim, James and Paul own an accounting firm, but Kim is reaching retirement age after her ownership in the firm for more than 25 years. She decides to sell her interest in the partnership. She is a 1/3 member of the firm and as of the end of the year, these are the following stats for the firm:AssetsAccounts Receivable: $75,000Equipment: $150,000 ($400,000 in total and $250,000 in accumulated depreciation)Kim had the following stats: Total basis in the partnership at the end of 2020: $350,000Recourse Debt to Kim: $130,000Nonrecourse debt: $0There is no qualified mortgage debtJames and Paul are not interested in acquiring more of the firm, but Alice, who is a manager in the company is interested in purchasing Kim’s interest. She is willing to purchase it for $500,000 (using a loan from her 401k and the bank to finance it). Calculate the total realized gain to Kim, when she sells it.Calculate the following types of gains/losses: Ordinary Gains/LossCapital Gains/LossCharacter of the gains/losses