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TAX 4001 Exam 1 Study Guide
TAX 4001 Exam 1 Study Guide
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TAX 4001 Exam 1 Study Guide"Three Martini Lunch" - ANS-Catchphrase for lavish meals and entertainment that
involve more pleasure than business. Can only deduct 50% of most business meals.
Accrual Method of Accounting - ANS-An overall method of accounting under which
revenues are realized in the year the earnings process is complete and expenses are
matched against revenues in the year the liability for the expense incurred.
Administrative Authority - ANS-Department of Treasury and the Internal Revenue
Service (IRS)
All Events Test - ANS-The test for determining if an accrued expense is deductible. The
test is satisfied if the liability on which the accrued expense is based is fixed, the
amount of the liability is determinable with reasonable accuracy, and the economic
performance with respect to the liability has occurred
Allowance Method - ANS-The GAAP method for computing bad debt expense. the
expense is based on the estimated losses from current year receivables.
Arm's Length Transaction - ANS-A transaction occurring between unrelated parties who
are dealing in their own self-interest.
Assignment of Income Doctrine - ANS-Income must be taxed to the entity that renders
the service or owns the capital with respect to which the income is paid
Audit Risk - ANS-Whenever a firm enters into a transaction involving ambiguous tax
issues, it runs the risk that the IRS will challenge the tax treatment on audit.
Average Rate - ANS-The total tax cost divided by the total taxable income.
Business Interest Limitation - ANS-Business interest in excess of 30% of adjusted
taxable income is not currently deductible.
Business Purpose Doctrine - ANS-A transaction should not be effective for tax purposes
unless it is intended to achieve a genuine and independent business purpose other than
tax avoidance
, Capital Gain - ANS-Gain realized on the sale or exchange of a capital asset and that
may be eligible for a preferential tax rate.
Cash Method Expenses - ANS-Firms record expenses in the year the expense is paid,
regardless of when the liability for the expense was incurred.
Cash Method of Accounting - ANS-Firms record revenue from the sale of goods or the
performance of services in the year that payment is received, regardless of when the
sale occurred or the services were performed.
Constructive Receipt Doctrine - ANS-The point at which a cash basis taxpayer has
unrestricted access to and control of income, even if the income item is not in the
taxpayer's actual possession
Deduction - ANS-An offset or subtraction in the calculation of taxable income.
Deduction Shift - ANS-Entities with different marginal rates can save tax not by only
shifting income but also by shifting deductible expenses
Department of Treasury - ANS-is responsible for writing regulations to interpret and
illustrate the rules in the Internal Revenue Code
Direct Write-Off Method - ANS-The method for determining a bad debt deduction
required by the tax law. only receivables that are written off as uncollectible during the
year are deductible.
Distributive Justice - ANS-Taxes redistribute wealth across society. A tax is equitable if it
redresses inequities existing in a capitalistic system.
Economic Substance Doctrine - ANS-A transaction that doesn't change the taxpayer's
economic situation except by the tax savings from the transaction should be
disregarded for tax purposes
Effective Rate - ANS-The total tax cost divided by the total income (tax exempt
included).
Expense Deduction - ANS-Allowed for all ordinary, necessary, and reasonable
expenses paid or incurred during the taxable year in carrying on any business or trade.
Most routine operating expenses can be deducted
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