Income Quiz

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1. Income may be realized from the Your Answer: All of the above. Receipt of cash, property and services, as well as cancellation of indebtedness, can all result in income realization. ________________________________________ 2. Which of the following situations would NOT be considered constructive receipt of income by a cash basis taxpayer? Your Answer: Cash surrender value of life insurance policy. The income is not available to the taxpayer without significant restrictions (e.g. surrendering the policy) so the doctrine of constructive receipt does not apply to the cash surrender value of a life insurance policy. ________________________________________ 3. Taxes on income are normally paid by the party earning the…show more content…
Note that punitive damages would be taxable. ________________________________________ 6. Which of the following items is NOT subject to federal income tax? Your Answer: Interest on New York State bonds Except for interest on municipal bonds (bonds issued by state and local governments) and except for a limited exclusion for Series EE bonds used for college education, all interest is subject to tax. ________________________________________ 7. Bob Fox, a cash basis taxpayer, earned a $140,000 salary as president of Jasper Corp. in 2010. In addition, on December 2 he was granted a $50,000 bonus by the board for his excellent performance in 2010. Bob asked the payroll manager to "hold" the bonus check until 2011. What is Bob's gross income for 2010? Your Answer: $190,000 All $190,000 (the $140,000 salary and the $50,000 bonus) was available to Bob so the bonus must be recognized in 2010 under the doctrine of constructive receipt. When the bonus is physically received in 2011, the $50,000 will have already been taxed and will therefore not be subject to tax again in…show more content…
Note that accrual-basis taxpayers are limited in their ability to use the installment sale method with respect to routine business transactions. ________________________________________ 9. Joe, a plumber, received a $4,000 payment for services performed in November 2010. The customer complained about the quality of the work, and in December, filed a claim with a local court for refund. In February 2011, the case is settled, and Joe refunds $2,500 to the customer. When Joe prepares his 2010 tax return in April 2011, he will include only $1,500 of net revenues from that customer. Your Answer: False The claim of right doctrine requires the recipient of disputed funds to recognize the income. Joe will include the full $4,000 in his 2010 taxable income because he had full control over the funds. He will be allowed to take a deduction on his 2011 tax return for the $2,500 repaid the customer. ________________________________________ 10. Chong recently received repayment on a loan that he had deducted as a bad debt two years earlier. Chong must include the loan repayment in this year's gross income. Your Answer:

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