Which of the following statements related to the Section 179 election to expense is (are)
true?
I. A Section 179 deduction can be claimed on tangible personal property
II. A Section 179 deduction can be claimed on property held for the production of
income.
III. A Section 179 deduction can be claimed on real property.
IV. A Section 179 deduction is allowed only for assets used in trade or business.
a. Only statement I is true.
b. Only statements I and II are true.
c. Only statements I, II, and III are true.
d. Only statements I and IV are true.
e. All of the statements are true.
The Internal Revenue Service is a branch of
a. Congress
b. The Secret Service
c. The Federal Reserve Bank
d. The Treasury Department
e. The Federal Bureau of Investigation
Justin trades an office building located in Michigan to John for an apartment complex
located in North Carolina. Details of the two properties:
Justin John
Michigan N. Carolina
Fair market value $9,000,000 $4,000,000
Adjusted basis 3,000,000 3,000,000
Liabilities transferred with property 2,000,000 -0-
In addition, John pays Justin $3,000,000 cash as part of this transaction. What is the
gain (loss) recognized by John in this transaction and what is his basis in the Michigan
property?
Gain Recognized Adjusted Basis
a. $1,000,000 $9,000,000
b. $ -0- $8,000,000
c. $1,000,000 $6,000,000
d. $ -0- $9,000,000
e. Some other amounts
Claudia owns 10% of the stock of Fitness Design Corporation, an S corporation. She is
also its controller. Fitness Design reports taxable income of $70,000 and pays $60,000
in dividends to shareholders before considering Claudia’s salary. Claudia receives a
$75,000 salary. What is Claudia’s income from Fitness Design?
a. $6,000
b. $74,500
c. $75,000
d. $81,000
e. $82,000
Corporations generally are required to use the accrual method of accounting.
a. True
b. False
Determine the amount of gross income the taxpayer must report in each of the
following situations. Explain why the amount is taxable and how you determined the
taxable amount.
a. Marlon purchased an annuity costing $13,000 that will pay him $300 per month for
life upon reaching age 65. In 2015, when his life expectancy is 14 years, Marlon turns
65 and begins receiving the annuity payments. In 2015, Marlon receives $1,800 (6
payments) from the annuity.
b. Fargo Systems Corporation, an accrual basis taxpayer, leases computer time on its
mainframe computer. In November 2015, Fargo enters into a two-year lease with
Bismarck Processing, Inc. The lease agreement requires Bismarck to pay a $4,800 fixed
fee when the lease is signed and $100 per hour of mainframe use, paid on a monthly
basis. Fargo receives the $4,800 payment on November 1, 2015. Bismarck pays Fargo
$800 on December 15, 2015 for November computer use and $1,200 on January 18,
2016 for December computer use.
c. Maria, a single taxpayer, is retired. During the current year she receives $19,000 from
her employer’s qualified pension plan, $1,000 in interest on a savings account, $30,000
in interest on tax-exempt municipal bonds, and $10,000 in Social Security benefits.
d. Stuart works for Prairie Surveyors of Kansas. During the current year, Prairie
Surveyors replaces all of its computer equipment. Stuart makes a deal with his boss to
purchase one of the old computers for $200. Prairie Surveyors received a $1,000
trade-in allowance on the other computers it replaced.
While most rental activities are classified as passive, an exception is low-income
housing.
a. True
b. False
Byron is a partner in the Dowdy Group. At the close of the current year, Byron’s basis
in the partnership is $34,000. At that time, the partnership distributes cash of $8,000
and property with a basis of $9,000 and a fair market value of $13,000 to each partner.
What is Byron’s basis in the partnership after the distribution?
a. $13,000
b. $17,000
c. $26,000
d. $34,000
Rosanna, a single taxpayer, owns 2,000 shares of qualifying small business stock that
she purchased for $225,000. During the current year, she sells 800 of the shares for
$30,000. If this is the only stock Rosanna sells during the year, what can she deduct as
an ordinary and capital loss?
Ordinary loss Capital loss
a. $58,000 $- 0 –
b. $50,000 $3,000
c. $50,000 $10,000
d. $- 0 – $3,000
e. $- 0 – $60,000
Elrod is an employee of Gomez Inc. During 2015, Elrod receives a salary of $120,000
from Gomez. What amount should Gomez withhold from Elrod’s salary as payment of
Elrod’s social security and medicare taxes?
a. $7,440.00
b. $7,803.40
c. $8,422.65
d. $9,087.00
e. $9,180.00
A flood destroys Owen’s building that cost $100,000 in 2009, which has an adjusted
basis of $80,000. Owen’s insurance company reimburses him $125,000 for his loss.
Owen promptly reconstructs the building for $115,000. What is the minimum amount
of gain that Owen must recognize and his basis in the new building?
Recognized New
Gain Basis
a. $-0- $80,000
b. $-0- $115,000
c. $10,000 $80,000
d. $10,000 $115,000
e. $10,000 $150,000
Savings incentive match plan for employees (SIMPLE) were created to encourage small
businesses to establish retirement plans for their employees.
a. True
b. False
Ormont Corporation owed Landry Inc., $250,000. Ormont became pressed for cash and
was unable to pay the Landry debt when it came due. Rather than force Ormont into
bankruptcy, Landry agrees to reduce the debt to $200,000. In which of the following
cases will Ormont be required to recognize income from the discharge of the Landry
debt?
Total Liabilities Total Assets Before Discharge
a. $2,000,000 $2,020,000
b. $2,000,000 $3,000,000
c. $3,000,000 $3,300,000
d. $3,000,000 $3,050,000
Which of the following regulations deals with Estate Tax?
a. Reg. Sec. 1.165-1
b. Reg. Sec. 20.2014-5
c. Reg. Sec. 25.2518-5
d. Reg. Sec. 301.7002-5
Rafael bought an apartment building on March 27, 1998, at a cost of $2,000,000
(exclusive of the cost allocated to the land). He sells the building on November 3, 2015.
What is Rafael’s cost recovery deduction on the building for 2015 if he wants to take
the maximum deduction allowable on the building?
a. $44,870
b. $63,630
c. $66,660
d. $69,690
e. $72,740
Jim and Anna are married and have a 2015 taxable income of $280,000. They also
received $20,000 of tax-exempt income. Their effective tax rate is:
a. 22.7%
b. 22.6%
c. 24.8%
d. 33.0%
e. 35.0%
Sam coaches a little league baseball team. He makes 15 copies of the team’s schedule to
give to the players on his employer’s copy machine. The cost of the copies is not
income to Sam due to the
a. Ability to Pay Concept.
b. Administrative Convenience Concept.
c. Arm’s-Length Transaction Concept.
d. Capital Recovery Concept.
e. Pay-as-You-Go Concept.
Amy borrowed $25,000 for her business from a local bank two years ago. To increase
her deductions for 2015, she pays December interest of $400 and prepays January and
February interest totaling $800 on December 30, 2015. The maturity date of the note is
November 30, 2016. How much of the interest that she paid in December is deductible
in 2015?
I. If she is a cash-basis taxpayer, Amy’s interest deduction is $1,200.
II. If she is an accrual-basis taxpayer, Amy’s interest deduction is $400.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
During the current year, Alyssa incurred a net loss of $27,500 from a 5 percent interest
in a partnership that operated and managed an office building. Alyssa had adjusted
gross income from other sources of $110,000 and spent 67 hours assisting in the
management of the building. Determine Alyssa’s total adjusted gross income for the
current year.
a. $82,500
b. $90,000
c. $100,000
d. $105,000
e. $110,000
Chase, Marty and Barry form a partnership. Barry will contribute a building worth
$240,000 (adjusted basis of $110,000), inventory worth $55,000 (adjusted basis of
$30,000) and $15,000 in cash for a 25% interest in the partnership. How much gain will
Barry have to recognize from the exchange of his property for the partnership interest?
a. $-0-
b. $125,000 ordinary gain.
c. $130,000 long-term capital gain.
d. $5,000 ordinary gain.
e. $130,000 long-term capital gain and $5,000 ordinary loss.
Sarah is single and retires in 2015. During 2015, Sarah’s income consists of a $24,000
taxable pension and $10,000 in Social Security benefits.
a. How much of the Social Security benefits must be included in Sarah’s 2015 gross
income?
b. If Sarah also receives $7,000 in tax-exempt interest in 2015, how much of the Social
Security benefits must be included in her 2015 gross income?
Tyrone is the president of JWH Manufacturing and owns 30% of its stock. JWH is
organized as an S corporation. During 2015, JWH has a loss of $240,000. At the
beginning of 2015, Tyrone’s amount at-risk in JWH is $60,000.
a. What is Tyrone’ deductible loss in 2015? What is Tyrone’s at-risk amount at the end
of 2015?
b. In 2016, JWH has a taxable income of $100,000. What is the effect on Tyrone’s 2016
income? What is Tyrone’s at-risk amount at the end of 2016?
Rosen Group has a company health-care plan for all employees. Will, an employee,
owns 10% of Rosen. The cost to Rosen for Will’s health plan is $2,500. What amount
must Will report as income if Rosen is a
Regular
Corporation Partnership
a. $2,500 $2,500
b. $-0- $-0-
c. $-0- $2,500
d. $2,500 $-0-
Matthew exchanges an investment apartment building for a parcel of land. The
apartment building has a fair market value of $80,000 and an adjusted basis of $95,000.
The land’s value is $60,000. Matthew receives $20,000 cash in the exchange. What is
Matthew’s recognized gain or (loss) on the exchange and his basis in the land?
Gain (Loss) Recognized Basis
a. $ – 0 – $75,000
b. $(15,000) $65,000
c. $(35,000) $85,000
d. $20,000 $30,000
e. $15,000 $35,000
Craig Corporation realizes $150,000 from sales during the current year. Craig also
receives $20,000 of dividends from a 3% owned corporation. Operating expenses totals
$155,000. Craig’s dividends-received deduction is
a. $10,500
b. $12,000
c. $14,000
d. $16,000
e. $20,000
Jackie recently retired from the U.S. Coast Guard after 30 years of service. She would
like to open a boat shop to operate in her retirement years. Jackie incurs $3,800 of
expenses while investigating sites for her shop and while checking out boat franchises.
What are the tax effects of the expenses Jackie incurs?
I. If Jackie enters the boat business, she can deduct the costs only by capitalizing them
and amortizing them over 180 months.
II. They are not deductible if Jackie does not enter the ski and boat business.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Rosilyn trades her old business-use car with an adjusted basis of $13,000 and an
outstanding loan liability balance of $2,000 for a new business-use car valued at $9,000
plus $3,000 cash from Bob’s Auto Sales and Loan Company. Bob assumes Rosilyn’s
loan balance. What is Rosilyn’s basis in her new car?
a. $- 0 –
b. $9,000
c. $11,000
d. $12,000
e. $14,000
In June 2014, Chase purchases a new car for $37,000. He uses the car 75% for business
purposes. What is Chase’s maximum depreciation deduction for the car in 2014?
a. $5,550
b. $2,960
c. $4,200
d. $8,370
e. $11,160
Dan is the owner of VHS Video’s Inc. VHS rents videos for overnight use and also sells
videos from stock. In accounting for VHS transactions, Dan
I. May use either the cash or the accrual method.
II. Must use the cash method to account for video rentals.
III. Must use the accrual method for video sales and purchases.
IV. May elect to use the accrual method for all sales and rental revenues and the cash
method for purchases of videos and all other business expenses.
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. Only statement IV is correct.
Which of the following will prevent a couple from filing as married filing joint in 2015?
I. One spouse dies on June 6, 2015.
II. The couple is legally married, but is living apart throughout the year.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
A taxpayer can deduct multiple gifts to a single customer as long as the total value of all
gifts to that customer does not exceed $25.
a. True
b. False
Hillside Group, a partnership, purchased a building for $60,000 that was originally
placed in service in 1929. The partnership incurs $180,000 rehabilitating the building.
The building serves as the partnership’s headquarters. The rehabilitation is completed in
November 2015. What amount can the Hillside Group claim on their partnership return
as a rehabilitation tax credit?
a. $2,000
b. $3,000
c. $6,000
d. $18,000
e. $24,000
Darnel owns 10% of the stock in Allison Company. During the current year, Allison has
operating income of $200,000 and distributes $80,000 to its owners.
I. If Allison is a corporation, Darnel has $8,000 of income from Allison.
II. If Allison is a partnership, Darnel has $20,000 of income from Allison.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Manu bought Franklin’s ownership interest in Antoine Company on July 1 of the current
year. Manu pays Franklin $30,000 cash not to compete or interfere with Manu’s
business activities over the next three years. How much cost recovery can Manu claim
in the current year because of the covenant not to compete?
a. $1,000
b. $2,000
c. $3,000
d. $6,000
e. $30,000
Iris’ personal residence, located in a plush suburban area, is condemned to facilitate the
construction of a new freeway artery. Iris receives a condemnation award of
$1,000,000. She uses the award to purchase a new residence for $1,150,000. The
adjusted basis of the former residence was $1,100,000 at the date of the condemnation.
Determine Iris’s recognized gain or loss and the basis in the new residence. Discuss in
terms of the concepts of taxation how you arrived at your answers.
A personal residence for a vacation home.
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.
Business Purpose Concept
Match each statement with the correct term below.
a. Prepaid interest.
b. An amount that each taxpayer who is neither a qualifying child nor a qualifying
relative, and who files a return, is allowed to deduct.
c. One test for a qualifying relative.
d. The minimum amount a taxpayer can deduct for personal expenditures.
e. A deduction in this category is always allowed. That is, there is no minimum
allowable amount and generally no income limitation placed on these deductions.
f. Generally, these deductions are for specifically allowed personal expenditures.
g. An exception to this test is a custodial parent.
h. Interest paid on debt used to buy securities.
i. Interest paid on credit cards, personal loans, car loans, etc.
j. Interest paid on a mortgage secured by the taxpayer’s residence. The proceeds of the
loan can be used for any purpose and the interest is still deductible.
k. A tax designed to prevent the shifting of unearned income to children of the taxpayer.
Points
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.
Legislative Grace Concept
On December 1, 2013, George paid $17,500 for a painting. On October 31, 2015, he
sells the painting for $26,750.
Section 1250 recapture
Indicate the proper treatment in the current year for the underlined amounts. Treat
each item as an independent event. Indicate whether the amount is deductible or not; if
deductible whether it is deductible FOR or FROM AGI; and indicate the amount of the
deduction for the current year considering any relevant limitations. Assume the
taxpayer has deductions greater than the standard deduction, has AGI of $69,000
without regard to the following transactions and has no “total” income limitations
related to itemized deductions.
a. Not Deductible
b. Deductible – For AGI
c. Deductible – From AGI
Federal quarterly estimate of $3,000 paid by a self-employed taxpayer.
Third-party exchange
Match each statement with the correct term below.
a. Stocks, bonds, options.
b. Depreciable real property.
c. Taxed at an effective rate of 14%.
d. Taxed at a maximum rate of 25%.
e. Gain or loss on the sale of artwork.
f. Depreciable tangible personal property.
g. Subject to full recapture as ordinary income of all depreciation taken.
h. Gain on real property attributable to excess depreciation is ordinary income.
Capital Asset
Explain the support test and the gross income test to be a qualifying relative.
The result when two differently situated taxpayers are taxed differently but fairly.
Fowler sells stock he had purchased for $22,000 to his brother, Phil, for $15,000. What
is the tax consequence of the sale to Fowler and Phil? Explain the three possible tax
consequences if Phil sells the stock two years later to his neighbor?
Taxpayers may choose one of several different courts in which to initiate litigation.
Discuss the pros and cons of the different trial level courts.
Jerry recently graduates with an MBA degree from a leading university and will be
going to work as an employee of a major stock brokerage firm. Jerry is unsure of the
circumstances under which he can legitimately deduct the costs of entertaining and
dining with clients and prospective clients. Jerry will spend approximately $5,000 a
year on such activities for which he will not be reimbursed. It is important that he be
able to derive tax benefit for these costs. Advise Jerry of the general rules in this area of
the tax law. Include a brief discussion of substantiation requirements for such business
expenses.
Match each statement with the correct term below.
a. Specifically disallowed.
b. Appropriate and helpful.
c. Considered a trade or business.
d. Not considered a trade or business.
e. Problems with this generally arise with related parties.
f. This is met when services or property are provided to the taxpayer.
g. Normal, common, and accepted but not necessarily regularly recurring.
h. This is met when the existence and the amount of a liability have been established.
Active Investor
Match each statement with the correct term below.
a. Prepaid interest.
b. An amount that each taxpayer who is neither a qualifying child nor a qualifying
relative, and who files a return, is allowed to deduct.
c. One test for a qualifying relative.
d. The minimum amount a taxpayer can deduct for personal expenditures.
e. A deduction in this category is always allowed. That is, there is no minimum
allowable amount and generally no income limitation placed on these deductions.
f. Generally, these deductions are for specifically allowed personal expenditures.
g. An exception to this test is a custodial parent.
h. Interest paid on debt used to buy securities.
i. Interest paid on credit cards, personal loans, car loans, etc.
j. Interest paid on a mortgage secured by the taxpayer’s residence. The proceeds of the
loan can be used for any purpose and the interest is still deductible.
k. A tax designed to prevent the shifting of unearned income to children of the taxpayer.
Investment interest
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.
Damage payments