Ross and Reba are both in their 30’s and they are married. Reba earns $64,000 annually,
and Ross earns $1,800 annually working part time. Their adjusted gross income is
$81,500. Reba participates in an employer-sponsored retirement plan. Ross and Reba
contribute the maximum amount allowable annually to their IRAs. What is their
allowable deduction for this year’s contributions?
a. $- 0 –
b. $1,800
c. $5,000
d. $6,800
e. $11,000
Arturo is a 15% partner in the Franklin Group and has net self-employment income of
$250,000 in 2015. The maximum amount that Arturo can contribute to a Keogh money
purchase plan is
a. $40,000
b. $46,000
c. $49,000
d. $50,000
e. $62,500
A Keogh plan must be established as a defined contribution plan, and the rules are
similar to those of a qualified pension plan.
a. True
b. False
Taxpayer A pays tax of $3,300 on taxable income of $10,000 while taxpayer B pays tax
of $6,600 on $20,000. The tax is a
a. proportional tax.
b. regressive tax.
c. progressive tax.
d. horizontal tax.
Larry and Laureen own LL Legal Services Corporation equally. The two owners are
practicing attorneys employed by the corporation. The only business activity of the
entity is the provision of legal services. During the current tax year, the corporation’s
taxable income is $100,000. What is the corporation’s income tax liability?
a. $22,250
b. $34,000
c. $35,000
d. $26,150
Barry has prepared the following 2015 income tax estimate for his sister, Sylvia. Sylvia
is single, age 32, and has no children. Sylvia is an employee of General Motors and
rents an apartment. Her only investment is a savings bank account.
Salary $37,200
Bank interest 750
Taxable income $37,950
Tax on first $37,450 $5,156.25
Tax on next $500 125.00
Income tax liability $5,281.25
Withheld income tax 4,800.00
Balance due $481.75
Identify the errors, if any, in Barry’s income tax estimate. Additional calculations are
not required.
Generally income tax accounting methods are designed to result in
I. a proper application of the wherewithal-to-pay concept.
II. a proper matching of expenses to the revenues being generated.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
c. What are two things that you could expect to find in a Cumulative Bulletin?
According to the entity concept
I. each unit must keep separate records.
II. each unit reports the results of operations separate and apart from owners.
III. every unit is liable for tax on its income.
IV. each unit is classified as one of two basic entity types.
a. Statements I and II are correct.
b. Statements II and III are correct.
c. Only statement IV is correct.
d. Statements I, III, and IV are correct.
e. Statements I, II, and IV are correct.
In June, Catherine receives stock worth $12,000 as a graduation present from her
Grandfather. The following November she receives an $800 cash dividend on the stock.
Catherine must include the $800 dividend in her gross income, but excludes the
$12,000 value of the stock received. The income tax concept(s) that require this
treatment include:
I. Ability-to-Pay Concept.
II. All-inclusive Income Concept.
III. Constructive Receipt Doctrine.
IV. Legislative Grace Concept.
a. Only statement III is correct.
b. Statements III and IV are correct.
c. Statements I and III are correct.
d. Statements II and IV are correct.
e. Only statement I is correct.
Terry gives Brenda 1,000 shares of stock he had purchased several years ago for
$5,000. On the date of the gift, the stock has a fair market value of $4,000. Brenda sells
the 1,000 shares for $5,500 one month after the gift, Brenda realizes a
a. $- 0 – gain or loss
b. $500 short-term capital gain
c. $500 long-term capital gain
d. $1,500 short-term capital gain
e. $1,500 long-term capital gain
Chipper borrowed money from several creditors for personal uses. At a time when his
assets are worth $120,000 and his debts are $140,000, his creditors agree on a
compromise settlement in which they forgive $26,000 of the debt. How much of the
$26,000 is included in Chipper’s Gross Income?
a. $- 0 –
b. $6,000
c. $13,000
d. $20,000
e. $26,000
William has the following capital gains and losses for the current year:
Short-term capital gain $10,000
Short-term capital loss (3,000)
Long-term capital gain 5,000
What is William’s net capital gain or loss position for the year?
a. Short-term capital gain $7,000; Long-term capital gain $5,000.
b. Short-term capital gain $10,000; Long-term capital gain $2,000.
c. Short-term capital gain $7,000; Long-term capital gain $2,000.
d. Short-term capital gain $10,000; Long-term capital gain $5,000
In July 2015, Hillary sells a stamp from her stamp collection at a gain of $500. Hillary
purchased the stamp in 2010. If Hillary is in the 25% marginal tax rate bracket and has
no other capital asset sales in 2015, what is her tax on the sale of the stamp?
a. $- 0 –
b. $25
c. $50
d. $75
e. $125
Chi is single and an employee of Federal Company. Chi’s adjusted gross income for the
current year is $63,000. Chi would like to make the maximum contribution to his
individual retirement account this year. Which of the following statements about Chi’s
contribution and deduction amounts is (are) true?
I. He is not allowed to make an IRA contribution because his adjusted gross income is
greater than $61,000.
II. If Federal Company does not have a qualified pension plan; Chi can contribute and
deduct a maximum of $5,500 to his IRA account.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Dwight owns an apartment complex that has a $30,000 loss. His adjusted gross income
is $85,000 before the loss. Since he qualifies as an active participant he may deduct
$25,000.
a. True
b. False
Clark Exploration Corporation was organized and began operations on October 1, 2015.
It incurs $41,000 in legal fees to obtain the corporate charter. The corporation elects to
expense its organizational costs over the shortest allowable period. What amount will
Clark report for organizational expenses for 2015?
a. $2,050
b. $4,100
c. $5,000
d. $5,600
e. $41,000
Which of the following taxes paid by Woodhaven Inc. can be deducted during 2015?
I. Special real estate tax assessment for upgrading the sewer.
II. State income taxes paid in 2015 when filing Woodhaven’s 2014 corporate return tax
return.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Bart’s spouse, Carla, dies during the current year. Carla’s life insurance policy names
Bart the sole beneficiary of the $2 million proceeds. Bart invests the $2 million in a
bank certificate of deposit (CD). For the current year, Bart earns $98,000 interest from
the CD. What are the tax effects of these events for Bart?
I. The $2 million is excluded from gross income.
II. Bart has no taxable income from these transactions.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Marjorie starts a new consulting business out of her home. She converts her personal
computer, which cost $3,400, to business use when it is worth $1,200. Which of the
following is correct?
I. The initial basis for determining a gain on the sale of the computer is $1,200.
II. The basis for depreciation purposes is $1,200.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Based on the following information, what is the 2015 taxable income for a married
couple with two children?
Total income $120,000
Excludable income 2,000
Deductions for AGI 5,000
Allowable itemized deductions 8,000
a. $84,400
b. $85,200
c. $86,700
d. $89,800
e. $90,900
Section 1231 property receives preferential tax treatment. The preference(s) include(s)
I. Net Section 1231 losses are deductible as short-term capital losses.
II. Net Section 1231 gains are reportable as long-term capital gains.
III. Net Section 1231 losses are deductible as long-term capital losses.
IV. Net Section 1231 losses are deductible as ordinary losses.
a. Statements I and II are correct.
b. Only statement I is correct.
c. Statements II and IV are correct.
d. Only statement III is correct.
e. Statements II and III are correct.
When calculating AMTI, individual taxpayers must add back the following:
I. Charitable contributions.
II. Qualified home mortgage interest.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Hank realizes Section 1231 losses of $12,000 and Section 1231 gains of $7,000 during
the current year. Hank’s current-year adjusted gross income will increase (decrease) by
what amount?
a. $(12,000)
b. $(5,000)
c. $(3,000)
d. $7,000
Benji hired his three-year-old son to work in his engineering consulting firm. As long as
Benji fills out all the forms and properly deposits the paychecks in his son’s bank
account, he will be able to deduct the expenditure as a business expense.
a. True
b. False
Oscar drives a taxi on weekends. In maximizing the amount of fares he earns, he
occasionally gets tickets for speeding. Oscar figures that as long as he keeps his traffic
violations under $100 over a weekend, he can more than offset those costs with
additional fares. What is/are the tax effect(s) of Oscar’s speeding ticket costs?
a. The costs are deductible because they are ordinary and necessary expenses directly
related to the business.
b. The costs are deductible because they have a business purpose and the business is not
illegal.
c. The costs are not deductible because the business activity is illegal.
d. The costs are not deductible because they are due to violations of law.
To compute depreciation using MACRS on an asset purchased today, you need to know
I. the asset’s depreciable basis.
II. the recovery period of the asset.
III. the first and last year convention that applies to the asset’s class.
IV. whether you want to minimize or maximize the current year’s depreciation.
a. Only statement II is correct.
b. Statements I and II are correct.
c. Statements I, III, and IV are correct.
d. Statements II and III are correct.
e. Statements I, II, III, and IV are correct.
Carey and Corrine are married and have two children in college. Jason is a sophomore,
and Justine is a senior. They pay $2,000 in tuition and fees for Jason, $600 for his books
and $3,000 for his room and board. Justine’s tuition and fees are $3,000, her book
expense is $800, and her room and board expenses are $2,600. Their adjusted gross
income is $165,000. What amount can they claim as a tax credit for the higher
education expenses she pays?
a. $-0-
b. $1,150
c. $3,450
d. $4,600
e. None of the above
Ramona recognizes a $50,000 Section 1231 loss, a $30,000 Section 1231 gain, and
ordinary income of $35,000 in 2015. Before 2015, Ramona’s only Section 1231
transaction was a $15,000 loss reported in 2011. How should Ramona report her 2015
transactions?
a. $20,000 capital loss and $35,000 ordinary income.
b. $15,000 net Section 1231 gain.
c. $15,000 capital loss.
d. $15,000 ordinary income.
e. $15,000 capital gain.
Section 1245 property is subject to a full recapture of all depreciation taken as ordinary
income.
a. True
b. False
Penelope purchased an annuity contract that cost $45,000. The contract will pay
Penelope $600 per month for 10 years after she reaches the age of 62. During the
current year, Penelope turns 62 and receives 4 payments under the contract. The amount
Penelope may exclude from taxable income as a return of capital on this years
payments is:
a. $692
b. $900
c. $1,500
d. $2,250
e. $2,400
Match each statement with the correct term below.
a. A loss that is generally not deductible.
b. The borrower is personally liable for the debt.
c. The loss is used to offset income in future periods.
d. A liability that is only secured by the underlying property.
e. The loss may be used to offset income from prior periods.
f. A type of stock that receives some ordinary loss treatment.
g. Involved in a rental activity for more than 500 hours in a year.
h. Cash or other assets contributed plus recourse debts of the activity.
i. Owns at least a 10% interest and is significantly involved in the rental activity.
j. The amount of the loss for fully destroyed property is the property’s adjusted basis.
k. The amount of loss is limited to the lower of the property’s adjusted basis, or the
reduction in fair market value.
l. Management is left to at least one general partner whose liability is not limited and
who is responsible for the on-going activities of the business.
Nonrecourse debt
Match each statement with the correct term below.
a. Dues, uniforms, subscriptions.
b. Intended to punish and are taxable.
c. Taxable if from an employer-provided policy.
d. Any personal wrong, such as libel, slander, or assault.
e. Excludable amount limited to gross profit percentage.
f. Gratuitous and not a form of compensation for services.
g. Excludability requires that it must be a condition of employment.
h. Excluded if for compensatory payments for sickness or personal physical injury.
i. To replace lost earnings and is excluded if due to personal physical injury.
j. Excluded if provided on the employer’s business premises and for the convenience of
employer.
Employee discount
Joe Bob operates a gas station/grocery store outside the main entrance to a state park.
Joe Bob is very independent and dislikes government interference in his business. He
pays all his suppliers in cash as they make deliveries. He deposits customer checks to
his bank account but retains cash received in the business to pay his expenses.
Inventories are material to determining income but he “estimates” his inventory. He
keeps a log of daily sales, purchases, and other pay-outs. When preparing his income
tax return, his tax preparer carefully compares his gross profit ratio and net profit to
sales ratio to other clients operating similar businesses. The accountant then adjusts Joe
Bob’s income so that the ratios are greater than those reported by comparable
businesses. In addition, the tax preparer “adds a guess, usually $20,000 to $50,000, of
undisclosed cash sales” that is disclosed on the face of Joe Bob’s tax return. Thus, his
net profit is increased by the same amount. Joe Bob has never objected to the amount of
added income. Has Joe Bob evaded the income tax? Explain.
The period of time during which a taxpayer and/or the IRS can correct a taxpayer’s
taxable income.
Does the selection of a corporate entity ever make sense based on a desire for lower
marginal tax rates? Discuss.
Todd, age 26 and single, is an employee of the Ice Corporation. Todd’s annual salary is
$50,000. Ice has a qualified pension into which employees may contribute 5% of their
annual salary (Todd contributes the maximum). The corporation also offers employees a
flexible benefits plan. Todd pays $500 into the plan and is reimbursed for $500 of
medical expenses not covered by his medical insurance. Ice also provides Todd with the
following benefits:
Medical insurance $3,200
Group-term life insurance ($80,000 of coverage) 900
Free-parking 3,180
Dues to professional organizations 300
Health club membership 860
What is Todd’s taxable income from his employment?
Amanda is the president and 60% owner of ANR, a closely held corporation. During the
year, she is paid a salary of $650,000. Her salary is 40% higher than that for executives
of comparably sized companies in the industry. ANR has experienced 4 straight years of
increased sales growth, at 3% per year, while other companies in the industry have
experienced decreasing or level sales. Discuss what factors are used to determine
whether Amanda’s salary represents reasonable compensation.
Limited Liability Partnership
Losses flow-through limited to basis plus the amount of any direct loans
Match the proper deduction method with the correct expenditures.
a. Capitalized and amortized over a number of accounting periods
b. Expensed in the period incurred
c. Not deductible
d. Can be capitalized and amortized or deductible depending on the amount of the
expenditure
Illegal gambling operation expenses
Defined contribution plan
The tax rate obtained by dividing total tax liability by economic income.
Abraham establishes a Roth IRA at age 45 and contributes $5,500 per year for the next
25 years. Assume he meets the income limits during this period. The account balance is
now $364,500 ($137,500 contributions, $227,000 earnings). Abraham would like to
draw out the entire amount this year. How much tax would Abraham have to pay as a
result of this decision?
Why do the wash sale rules apply to the sale of stock at a loss but not to the sale of
stock at a gain?
Match each term with the correct statement below.
a. Allocates income, losses, and deductions to its owners for inclusion in their personal
returns.
b. Each tax unit must keep separate records and report the results of its operations
separate and apart from other tax units.
c. Income from services must be taxed to the taxpayer rendering the service and income
from property must be taxed to the owner of the property.
d. Any tax year that ends on the last day of a month other than December.
e. All taxpayers must report the results of their operations on an annual basis.
f. A tax year that ends on December 31.
g. A tax entity that is liable for the payment of tax.
Calendar year
Discuss why the distinction between deductions for adjusted gross income and
deductions from adjusted gross income is important for individual taxpayers.
Match each statement with the correct term below.
a. Income is subject to tax when it is received without restrictions as to its use or
disposition.
b. Income is considered received when it is credited to the taxpayer’s account or made
unconditionally available to the taxpayer.
c. A concept that is fundamental to the progressive tax rate structure.
d. To be deductible, an expenditure must be made for a business or economic purpose
that is greater than any tax avoidance motive of the taxpayer.
e. The amount of a deduction may not exceed its cost.
f. Income should be recognized and a tax paid when the taxpayer has the resources to
pay the tax.
g. A type of deductible expenditure that embodies the profit motive requirement.
h. Allows the omission of items from the tax base for which the costs of compliance
exceeds the revenue generated.
i. A category of expenses that is specifically disallowed.
Personal Expense
Match each statement with the correct term below.
a. Begins on the day after acquisition and ends on the day of disposition.
b. The initial investment in an asset.
c. An asset’s basis transfers from one owner to another.
d. The capital investment remaining in an asset at the date of its disposition.
e. Sales price less expenses of disposition.
f. A purchase of all of the assets of a business.
g. Amount realized is less than adjusted basis.
h. A purchase of all of the assets of a business by buying the stock of a corporation.
i. A term used to identify a situation in which an asset has a different basis for
determining gain than for determining loss.
j. The date of death used to value a decedent’s estate in the absence of any special
election.
k. Six months after the date of death, used to value a decedent’s estate when the
executor of the estate makes election.
l. Amount realized is greater than adjusted basis.Basis
An airplane for a duplex apartment.