Generally income tax accounting methods are designed to result in
I. a proper matching of expenses to the revenues being generated.
II. a denial of a current deduction for costs that will not have to be paid in the near
future.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Ellie, age 12, earns wages of $4,300 from her modeling. Since the fees are collected by
Ellie’s father and used for Ellie’s living expenses, her father intends to include it in his
gross income.
I. Ellie received no cash so does not have to report any income.
II. The Assignment of Income Doctrine prohibits the father from recognizing the
$4,300.
III. Even if Ellie desired to gift the $4,300 to her father, Ellie must recognize the income
she earned.
a. Only statement I is correct.
b. Only statement II is correct.
c. Only statement III is correct.
d. Only statements II and III are correct.
e. Statements I, II, and III are correct.
The information that follows applies to the current year for Revis and Patrica, a married
couple.
” Revis is employed as a shoe salesman; his compensation is $65,000.
” Patrica is employed as an interior designer; her compensation is $90,000.
” Revis and Patrica have total allowable itemized deductions of $15,000.
” Revis and Patrica have two dependent children.
” Revis and Patrica have other economic income as follows:
– Interest on U.S. Treasury bonds $1,000.
– Interest on French government bonds $750.
– Interest on City of Miami, Fla. bonds $1,200.
– Patrica won $500 from the state lottery
– Revis’s wealthy uncle dies and leaves him $10,000.
– Patrica sold Revis’s baseball card collection for $3,000. Revis bought it for $800.
– Patrica sells Revis’s fishing boat for $2,000. Revis had purchased the boat for $2,500.
Based on the above information, what is Revis and Patrica ‘s taxable income?
a. $126,150
b. $129,950
c. $128,650
d. $144,450
e. $159,450
Ward and June are in the 28% tax bracket. Included in their assets is a Dell Computer
Corporation bond with a face value of $10,000. The bond pays $1,000 a year in interest.
Ward and June gift the bond to their son, Wally (age 19), on January 1, 2015. Wally is
in the 15% tax bracket. The 2015 net tax savings for the family unit of Ward, June and
Wally related to the transfer of the bond is
a. $-0-
b. $130
c. $150
d. $280
Mercedes is an employee of MWH company and drives her car 12,000 miles a year for
business and 3,000 miles a year for commuting and personal use. She is not reimbursed
by her employer. She wants to claim the largest tax deduction possible for business use
of her car, before any limitations on itemized deductions. Her total auto expenses for
2015 are as follows:
Gas, oil, and maintenance $4,600
Insurance 720
Interest on car loan 500
Depreciation 2,960
License 80
Parking fees and tolls (100% business) 130
Mercedes’s total 2015 deduction for automobile use is:
a. $6,420
b. $6,818
c. $6,790
d. $7,030
e. $7,250
For each of the following situations, determine whether or not the item is deductible,
how it would be deducted on the taxpayer’s return (if there are alternatives possible,
discuss the conditions which would determine the treatment) and any limitations which
might be placed on the deduction.
a. Rickie, who is 35, pays $1,800 for dental work during the current year.
b. Jamie incurs $1,400 of employee business expenses during the current year. Her
employer reimburses all of the expenses.
Karen owns a vacation home in Door County, Wisconsin. During the year, she rents it
out for two weeks and uses it personally for three weeks. Her expenses directly related
to renting out the property were utilities $300, and maid service $150. The portion of
taxes allocable to the rental activity is $600 and revenue from the rental is $1,000.
Karen will
a. report no income and deduct $50.
b. report no income and deduct no rental expenses related to the vacation home.
c. report income of $1,000 and deduct $450 of expenses for adjusted gross income.
d. report income of $1,000 and $150 of expenses from adjusted gross income.
e. report income of $1,000 and deduct $1,000 of expenses for adjusted gross income.
A passive activity
I. includes an interest in a limited partnership held by a limited partner investor.
II. includes a working interest in an oil and gas deposit.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
The recognition of a loss realized on an involuntary conversion is mandatory.
a. True
b. False
Phi Corporation had the following capital gains and losses for 2013 through 2015:
2013 2014 2015
$15,000 $(40,000) $10,000
I. Phi can deduct a loss of $15,000 in 2015.
II. Phi will carry forward a $15,000 capital loss to 2016.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Wellington Apartments purchases an apartment building on November 9, 2015, for
$1,000,000 (exclusive of the cost allocated to the land). What is the 2015 MACRS
depreciation deduction?
a. $3,970
b. $4,550
c. $7,580
d. $36,364
e. $45,500
Friendly Finance loans Anne $10,000 and she will pay $13,130 at he end of three years.
Since Friendly is on a cash basis, it will recognize the $3,130 interest income when the
loan is repaid.
a. True
b. False
If an individual is not a material participant, a rental activity is considered passive.
However, certain rental activities are not deemed to be rentals for passive loss purposes
even if the individual is not a material participant. Which of the following is not
excluded from the passive loss rules?
a. Golf cart rentals.
b. Hotel rooms.
c. Jet ski rentals.
d. Apartment rentals.
e. Construction equipment rentals.
Cheryl purchased 500 shares of Qualified Small Business Stock (QSB) for $900,000 on
March 2, 2010. On November 29, 2015, she sells the stock for $1,000,000. Cheryl also
sells 100 shares of stock she acquired two years ago realizing a loss of $10,000. Cheryl
has $100,000 of other income. Which of the following statements about the stock sale
is/are true?
I. The tax paid on Cheryl’s two stock sales is $6,300.
II. Cheryl can only deduct $3,000 of the $10,000 loss on the sale of the stock.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
An exception to the economic performance test allows the deduction of year-end
accruals if
I. The liability exists and the amount of the liability can be reasonably estimated.
II. Economic performance occurs within the shorter of 8 1/2 months after the close of
the tax year or a reasonable time after the close of the tax year
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
In which of the following circumstances will income of the child be taxed at the
marginal tax rate of the child’s parent?
I. Martin, age 6, earns $14,000 this year by acting in television commercials.
II. Allen, age 22 and a full time college student, has $4,000 of interest income on
municipal bonds that he inherited from his grandfather last year.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Harold, a cash basis taxpayer, borrows $65,000 for his business on a 2-year note from
First City Bank on December 1, 2015. To close on the loan agreement, Harold is
required to prepay interest of $4,800 on December 1. How much interest can Harold
deduct in 2015?
a. $- 0 –
b. $200
c. $400
d. $2,400
e. $4,800
The earliest date that condemned property can be replaced and still qualify for
involuntary conversion (nonrecognition) treatment is
a. The date of the actual condemnation.
b. The date of the threat of condemnation.
c. Two years before the actual condemnation.
d. Two years before the threat of condemnation.
e. Three years after the date of the condemnation.
Which of the following is a currently deductible trade or business expense.
a. $ 5,000 trustee fees paid to a bank to manage tax-exempt securities.
b. $ 12,000 fee paid to a marketing firm for a market analysis for a new business.
c. $15,000 fee paid to a TV station to advertise a new product.
d. $20,000 to an attorney to defend title to a new patent.
e. All of the above are currently deductible expenses.
Discovery, Inc., a cash-basis consulting firm, can deduct a twelve-month insurance
premium in the year the premium is paid even though the policy remains in effect into
the following year.
a. True
b. False
Which of the following exchanges of property are like-kind exchanges?
I. Convenience store owner trades several cases of potato chips for a cash register.
II. A completely rented apartment building traded for a parts supply warehouse to use in
business.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
A company that maintains a SIMPLE-401(k) has the option of funding the plan by
I. Contributing 2% of an employee’s salary up to a maximum of $5,300.
II. Match the employee’s contribution up to a maximum of 3 percent of the employee’s
compensation with a maximum contribution of $12,000.
a. Only I is correct.
b. Only II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Philip has been working in Spain for the last three years. He and his wife Barbara
adopted Juan who will not qualify as a dependent since he is not a U.S citizen.
a. True
b. False
Which of the following is not part of the modified accelerated cost recovery system
(MACRS)?
a. Salvage value is ignored.
b. Used property can use MACRS.
c. Straight-line depreciation is allowed.
d. Sum-of-the-years digits depreciation is allowed.
e. All of the above are part of MACRS.
Heidi and Anastasia are residents of the mythical country of Wetland. Heidi pays $1,500
income tax on taxable income of $6,000. Anastasia pays income tax of $21,000 on
taxable income of $72,000. The income tax structure is
I. Progressive.
II. Proportional.
III. Regressive.
IV. Value-added.
V. Marginal.
a. Only statement I is correct.
b. Only statement II is correct.
c. Only statement III is correct.
d. Only statement V is correct.
e. Statements II and IV are correct.
Which of the following would not be considered to be Listed Property for depreciation
purposes?
a. A camera owned and used by a taxpayer in his real estate business.
b. Computer owned and used by a taxpayer at his home office.
c. Taxpayer’s automobile that he uses 30% for business purposes.
d. All of the above are listed property
A necessary expense is one that is appropriate and helpful to the taxpayer’s income
activity.
a. True
b. False
Andrea has the following capital gains and losses during the current year:
Short-term capital loss $(4,000)
Collectibles gain 6,000
Long-term capital gain 2,000
For tax calculation purposes, the net result of the above is:
a. Long-term gain $8,000; short-term capital loss $4,000.
b. Net long-term capital gain $4,000.
c. Collectibles gains $2,000; long-term capital gain $2,000
d. Collectibles gains $6,000; short-term capital loss $2,000.
The lookback recapture rule nets the current-year net Section 1231 gain against Section
1231 ordinary loss deductions taken in the previous three years.
a. True
b. False
Sylvia is a United States citizen who has established legal residency in Japan. She has
been teaching school there for several years. Her annual salary is $60,000. Anne’s tax
situation is
a. She is not subject to U.S. tax law.
b. She can elect to exclude her foreign income from U.S. taxation and take a tax credit
for foreign taxes paid.
c. She can elect to exclude her foreign income from U.S. taxation, or take a tax credit
for foreign taxes paid.
d. She is not eligible to take a tax credit for foreign taxes paid or exclude her foreign
income from her U.S. gross income.
e. Only one jurisdiction, either the U.S. or Japan, not both, can tax Sylvia on her income
while in Japan.
Felix purchases the franchise rights to a new sports team and will be able to amortize
the cost over the 15-year amortization period for intangibles.
a. True
b. False
Hilliard receives a gift of stock from Martha on June 1 of the current year. Martha paid
$15,000 for the stock several years ago. Martha pays a gift tax of $400 on the transfer.
I. If the fair market value of the stock on June 1 of the current year is $20,000, Hilliard
has a basis in the stock of $15,100.
II. If the fair market value of the stock on June 1 of the current year is $14,000, and
Hilliard sells the stock for $13,000 on June 2 of the current year, Hilliard realizes a loss
on the sale of $1,000.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Discuss what limited liability means. What type of entity (or entities) offers this
characteristic to its owners? What type(s) of entity (or entities) do not provide this
characteristic?
Ways and Means Committee
Match each statement with the correct term below.
a. Not deductible.
b. Short-term capital loss.
c. Limited to $25 per person.
d. Deductible as an ordinary loss
e. Only 50% of the cost is deductible.
f. Must be away from tax home overnight to be deductible.
g. General area where a taxpayer conducts principal activity.
Business meals
Personal residence for an apartment building.
Match each statement with the correct term below.
a. An entity with conduit tax characteristics that provides limited liability to its owners.
b. An organization of two or more persons operating a business that is not taxed.
c. A general partnership that offers limited liability to the partners.
d. An association created under the laws of a state giving owners limited liability.
e. Retains legal characteristics while obtaining tax characteristics of a conduit.
f. A partnership in which the liability of at least one partner is limited.
Corporation
The excess of an asset’s tax basis over its selling price.
Match the primary source to its reporter.
a. Tax Court Reports
b. United States Tax Cases
c. Internal Revenue Code
d. Cumulative Bulletin
e. Not a primary source
Appeals Court decision
Isabel, age 51 and single, is an electrical engineer employed by Regis Corporation.
Isabel’s annual salary is $80,000. Regis Corporation’s qualified pension plan matches
employee’s contributions to the plan up to 5% of the employee’s annual salary. During
the current year, Isabel contributes the $4,000 maximum to the plan, which is matched
by Regis. Due to high cost of medical insurance, the corporation does not provide any
medical insurance to its employees. Instead, it offers a flexible benefits plan that
employees can use to pay for medical insurance, unreimbursed medical costs, and
childcare costs. Isabel elects to have $2,500 paid into the plan. Isabel uses the plan to
purchase medical insurance costing $2,200. Isabel spends an additional $150 from the
plan on eyeglasses and dental costs. Regis Corporation also provides group-term life
insurance at twice the employee’s annual gross salary. The cost of Isabel’s insurance
was $600. Regis also provides engineers in Isabel’s department with free parking in the
company’s parking garage. Non-employees pay $3,060 per year to park in the garage.
Isabel’s $250 dues to the Electrical Engineer’s Association and her $1,560 health club
membership are also paid by Regis. Compute Isabel’s taxable compensation from Regis
Corporation.
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.
Taxable entity
The Corinth Corporation is incorporated in 2012 and had no capital asset transactions
during the year. From 2012 through 2015, the company had the following capital gains
and losses:
2012 2013 2014 2015
Capital Gains $18,000 $12,000 $20,000 $21,000
Capital Losses (7,000) (16,000) (26,000) (31,000)
If Corinth’s marginal tax rate during each of these years is 34%, what is the effect of
Corinth’s capital gains and losses on the amount of tax due each year?
Land held as an investment for an office building and land used in a business.
Tax statute
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.
Constructive Receipt Doctrine
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.
Conduit entity
Match each statement with the correct term below.
a. Unmarried without dependents.
b. Generally used when financial disagreement exists.
c. Unmarried and provides a household for a dependent.
d. Use the same tax rate schedule as married, filing jointly.
e. Determines which tax rate schedule and standard deduction amount is applicable.
Head of household