Thomas has adjusted gross income of $228,000, total itemized deductions of $39,000
and claims 2 personal and 2 dependency exemptions. Which is his filing status?
a. Single.
b. Head of household.
c. Married filing a joint return.
d. Married filing separately.
Cindy exchanges investment real estate with Russell. Cindy purchased her realty two
years ago for $280,000, and it is encumbered by a mortgage of $100,000 and has a fair
market value of $320,000 when exchanged. Russell paid $80,000 cash for his property
in 1999 and it is appraised at $150,000 on the day of the exchange. Russell assumes the
debt on his new land and pays Cindy enough in cash to balance the exchange. What is
Cindy’s recognized gain (loss) on the exchange?
a. $-0-
b. $40,000
c. $100,000
d. $170,000
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. National Corporation receives a $12,000 bill for legal fees from its attorney in
December. National paid the bill promptly and deducted the $12,000 as a legal expense
for its year ending December 31. During the audit of its financial statements, the auditor
determines that the attorney had double billed the corporation for $3,000 of expenses.
National sent a copy of the auditor’s findings in March. The attorney agrees with the
auditor and sends National a check for $3,000 in April.
b. Greta spends a week in Las Vegas. While cashing in some of her chips at the cashier’s
window, she looks down and sees a $1,000 bill lying crumpled on the floor. She picks
up the bill and puts it in her pocket.
c. Akron Living, Inc., an accrual basis corporation, owns an apartment building. On
November 1, it rents an apartment for $400 per month. Per the terms of the rental
agreement, the tenant pays the corporation $1,100 on November. The $1,100 consists of
the first and last months rent and a $300 cleaning deposit. The cleaning deposit will be
rused at the end of the lease and any amount not used for cleaning will be returned to
the tenant. Very little is usually returned.
d. Anthony is an employee of the Channel Company. Channel Company institutes a
computer upgrade and offers its old computers for sale for $700. Anthony offers
Channel $500 for one of the computers. Because they have not been selling well,
Channel accepts Anthony’s offer and sells him a computer for $500.
e. James owns Argyle Co. as a sole proprietorship. In November, James pays a $600 bill
for supplies and deducts it on his tax return. The following February, the supplier sends
James a check for $120. A letter accompanying the check indicated that the supplier had
overcharged Argyle Co. and the check was to adjust for the overcharge.
Twin City Manufacturing Corporation is an accrual basis taxpayer. Twin City
Manufacturing provides medical insurance for its employees through a self-insured
reimbursement plan. Twin City Manufacturing pays $100 per month per employee into
the plan fund. The fund is then used to reimburse employees’ medical expenses. During
the current year, Twin City Manufacturing Corp. pays $12,000 into the fund and pays
medical reimbursement claims of $10,600.
I. If Twin City Manufacturing is an accrual basis taxpayer it can deduct $12,000.
II. If Twin City Manufacturing is a cash basis taxpayer it can deduct $10,600.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Dwight, a single taxpayer, has taxable income of $75,000 from all sources except
capital gains. He has a collectibles gain of $1,000. What is the actual tax saving Dwight
receives because of any special treatment of his $1,000 collectibles gain?
a. $-0-
b. $15
c. $130
d. $150
e. $280
A corporation may reduce trade or business income by a charitable contributions made
by the corporation, but the deduction is limited to 10% of taxable income, as adjusted.
a. True
b. False
Returns of human capital
I. are excluded from gross income.
II. include unemployment compensation benefits.
III. include workers’ compensation payments received for personal injury.
IV. are treated the same for tax purposes as all other forms of capital recovery.
a. Statements I and III are correct.
b. Statements II, III, and IV are correct.
c. Statements I, III, and IV are correct.
d. Only statement II is correct.
e. Statements I, II, III, and IV are correct.
During 2015, Silverado Corporation has the following Section 1231 gains and losses:
Casualty loss $(10,000)
Section 1231 gains 12,000
Section 1231 losses (3,000)
During the period 2010 – 2014, the corporation recognized $8,000 of net Section 1231
losses as ordinary losses that have not been recaptured. How much of the 2015 Section
1231 gains and losses are recognized as long-term capital gains?
a. $- 0 –
b. $1,000
c. $9,000
d. $10,000
e. $12,000
At what three points in time might a given expenditure be deductible?
a. ______________________
b. ______________________
c. ______________________
Martha is single and graduated from Ivy Tech in May of 2014. In January of 2015, she
begins repaying her student loans and pays interest on the loans of $2,600 in 2015 and
$1,200 in 2016. Her adjusted gross income in 2015 is $63,000 and is $80,000 in 2016.
Martha can deduct student loan interest of
2015 2016
a. $- 0 – $-0-
b. $2,000 $1,200
c. $2,500 $1,200
d. $2,000 $-0-
e. $2,500 $-0-
Norman exchanges a machine he uses in his pool construction business for a used
machine worth $6,000 to use in the same business. He purchased the machine 3 years
ago for $22,000 and has taken depreciation of $9,000 on the machine. In the exchange,
Norman also receives $3,000 of cash. As a result of the exchange,
I. Norman’s basis in the acquired machine is $10,000.
II. Norman recognizes a loss of $3,000 on the exchange.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Tax planning involves the timing of income and deductions. General rules of thumb to
follow when planning include
I. putting income into the year with the lowest marginal tax rate.
II. deferring recognition of income.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
A taxpayer must begin withdrawals from any type of retirement plan (except a Roth
IRA) no later than April 1 of the tax year after the taxpayer reaches age 701/2 or, if later,
the year they retire.
a. True
b. False
Clay incurs $5,000 of investment expenses related to purchasing Renco Company stock
and New Orleans municipal bonds. He receives $6,000 of dividends on the stock and
$14,000 of interest on the bonds. The amount of investment expense Clay can deduct is:
a. $- 0 –
b. $1,500
c. $2,500
d. $3,500
e. $5,000
Residential rental real estate placed in service on July 17, 2015, is depreciated over
a. 39 years, straight-line method, mid-month convention.
b. 40 years, straight-line method, mid-month convention.
c. 27.5 years, 150%-declining-balance method, mid-year convention.
d. 27.5 years, straight-line method, mid-month convention.
e. 39 years, 150%-declining-balance method, mid-year convention.
Leon is allowed to deduct all the current and suspended losses on his passive activity if
he sells his entire interest in the passive activity during the year.
a. True
b. False
In the current year, Darlene purchases a 20% interest in the Grant Partnership (GP) for
$10,000. During the current year, GP has a taxable income of $80,000 and Darlene
withdraws $5,000 of cash from the partnership. Darlene’s income to be reported from
her investment in GP and her basis in GP at the end of the year is:
Income Basis
a. $16,000 $21,000
b. $5,000 $26,000
c. $16,000 $10,000
d. $5,000 $10,000
Determine the amount of income that must be recognized by the taxpayer(s) in the
current year for each of the following situations. Explain how you determined the
amount that was taxable.
a. Tien sells a parcel of land she held as an investment for $50,000. Tien purchased the
land four years ago for $28,000. She spent $2,000 grading the land and $6,000 putting
in utility lines. Tien receives $16,000 upon closing the sale. The remaining $40,000 is to
be received in four annual payments of $10,000 over the next four years, with interest at
8% on the outstanding balance.
b. Randy receives a $10,000, 6%, bond from his grandfather, Kenneth, for his birthday
on September 30. Annual interest is paid on December 31. Randy receives the $600
payment on December 31.
c. David is an employee of Fern Leaf Company. David is robbed and knocked
unconscious while coming out of a basketball game on December 29. His $550
paycheck is available to be picked up at Fern Leaf on December 30, but David does not
regain consciousness until January 3. He picks up the check and deposits it on January
8.
d. Angie was shopping at a “flea market” when she saw a painting with a frame that
appeared to be quite old. Although the painting was uninteresting, she paid the $35
asking price just to get the frame. When she returned home, she took the old painting
out of the frame, intending to throw it away. However, she noticed what appeared to be
another painting behind the one she bought. Curious, she took the painting to a friend
who is a local art expert. The friend thought the second painting was a lost “Monet” and
could be worth millions. Angie sends the painting to a museum in Boston, which
confirms that the painting is indeed a lost “Monet.” Similar paintings have been selling
for $650,000 to $800,000, although the art market is in a down cycle. Angie decides to
wait until the art market picks up a bit to sell the painting.
Carlota owns 4% of Express Corporation and has a basis of $5,000 in her stock. During
the year, Express distributes a $300,000 dividend. As a result of the dividend, Carlota
has
a. $12,000 of dividend income.
b. $5,000 of dividend income and $7,000 of capital gain.
c. $7,000 of dividend income and a $5,000 tax-free return of capital.
d. $5,000 of dividend income, $5,000 tax-free return of capital, and a $2,000 capital
gain.
e. $7,000 capital gain.
The tax advantage of a Roth IRA is that although the contributions are not deductible,
the distributions of contribution and income are tax-free.
a. True
b. False
Hector’s employer has a qualified pension plan to which it contributes 6% of his gross
salary. Hector’s current annual salary is $50,000. The pension plan also earns $2,500
during the current year on contributions made to the plan on behalf of Hector. What is
Hector’s gross income from these transactions for the current year?
a. $50,000
b. $52,500
c. $53,000
d. $55,500
Limited liability refers to
a. whether the entity ceases to exist with a change in ownership.
b. who manages the entity.
c. whether the owners are risking any more than they invested in the firm.
d. the ease with which ownership can be transferred.
Henritta is the sole shareholder of Quaker Corporation. Quaker’s income from
operations for the current year is $600,000. Included in the $600,000 amount are
dividends of $10,000 from the stock of a 4%-owned corporation. Also included in the
$600,000 is a $4,000 long-term loss realized on the sale of a stock investment in an
unaffiliated corporation. To compute taxable income for the current year, Henritta
should deduct a capital loss of
a. $- 0 –
b. $4,000
c. $3,000
d. $2,000
e. $1,000
The Reed CPA Firm places the following property in service during the 2015 tax year:
Property Placed in
Description Service MACRS Life Cost Basis
Computers Feb 6 5 years $40,000
Office furniture June 24 7 years $80,000
Switchboard system Nov 3 5 years $130,000
Reed wants to obtain the maximum possible depreciation deduction for these property
acquisitions including full utilization of the election to expense property under Section
179. Reed will report 2015 taxable income in the amount of $5,000 before
consideration of depreciation on their 2015 property acquisitions. What is Reed”
maximum depreciation from these additions?
a. $5,000
b. $45,432
c. $25,000
d. $39,780
e. $34,780
A qualified distribution from a Roth IRA must meet which of the following
requirements:
I. The distribution must be made on or after the taxpayer reaches age 591/2.
II. The distribution is for qualified education expenses.
III. The taxpayer must begin distributions after reaching age 701/2.
a. Only statement I is correct.
b. Only statement II is correct.
c. Only Statements I and II are correct.
d. Only statement III is correct.
e. Only statements II and III are correct.
Mario is an employee of Flores Company. The company regularly pays its employees
by direct deposit on or before the last day of each month. Mario’s regular paycheck is
deposited on December. 31, 2015, but Mario was away on vacation and didn’t return
until January 15, 2016. The gross amount of the check is included in Mario’s 2015
income. Which of the following concepts or doctrines best explains this treatment?
a. Wherewithal-To-Pay Concept.
b. All-inclusive Income Concept.
c. Capital Recovery Concept.
d. Claim of Right Doctrine.
e. Constructive Receipt Doctrine.
What is the MACRS recovery period for an office desk?
a. 3 years.
b. 5 years.
c. 6 years.
d. 7 years.
e. 10 years.
Milton has the following transactions related to his investments and his business during
2015:
(1) Stock purchased in 2003 is sold at a gain of $2,000.
(2) Bonds purchased in 2015 are sold at a loss of $7,000.
(3) A building used in his business is sold at a loss of $6,000. The building had been
purchased in 1996 and $18,000 of depreciation had been taken on the building.
(4) Equipment purchased in 2009 is sold at a gain of $12,000. Depreciation of $9,000
had been taken before the sale.
(5) A delivery van is destroyed in an accident. Milton realizes a loss of $5,000 on the
van. He uses the $13,000 of insurance proceeds as a down payment on a new van
costing $28,000.
a. Determine the amount and character of each gain or loss.
b. Determine the effect of the gains and losses on Milton’s 2014 adjusted gross income.
You must present the calculations in proper form to receive full credit.
Amanda is an employee of the Kiwi Corporation with a yearly salary of $80,000. The
company maintains a noncontributory profit-sharing plan. During the year the company
contributes $24,000 to the plan on her behalf in recognition of her outstanding work.
The Kiwi Corporation is subject to an excess contribution penalty of
a. $-0-
b. $400
c. $1,000
d. $2,000
e. $3,750
In 2015, Henry purchases $210,000 of equipment with a useful life of 7 years. The
taxable income of the business is $100,000. What is Henry’s maximum depreciation
deduction in 2015?
a. $15,000
b. $42,865
c. $27,865
d. $30,009
e. $34,212
Which of the following intangible assets is not subject to the 15-year amortization
period?
a. Purchased goodwill.
b. A professional football franchise purchased and relocated to Indianapolis.
c. A covenant not to compete.
d. A purchased customer list for mail order clothing.
e. A trademark.
Used by persons who do not itemize deductions on their return.
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.
Split basis
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 Trader
Match each statement with the correct term below.
a. An employee may exclude up to $5,000 annually of these employer-provided
services.
b. If cash is received under this program, taxpayers are taxed on the amount of cash
received.
c. A salary reduction plan that allows employees to pay for medical and child care costs
with before-tax dollars.
d. A transfer of property without any profit motivation with an intention that includes
affection, charity, and respect.
e. Payments made into an employee’s account are not taxable in the current period;
taxation is deferred until funds are withdrawn.
f. Employer provided benefit that may be excluded from income because the dollar
amounts are too small for a reasonable accounting.
Flexible benefits plan
George sells his personal use automobile at a loss of $4,300.
Why would a taxpayer ever elect to use the alternative depreciation system (ADS)
rather than the MACRS?
On January 4, 2015, Owen died and left ranch land with a value of $300,000 to his
brother, Victor. This transfer was purely donative with no expectation of anything in
return. Victor transferred all of this land to his corporation, Circle C Ranch, Inc. Victor
is the president and an active employee of the corporation. Victor’s salary from the
corporation is $40,000 per year. The ranch land is located in Torrent County, Texas. The
Torrent Appraisal District appraises the property.
From the above facts name six different types of federal, state, or local taxes that might
have to be paid and name the entity that is liable to pay them.
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.
Capital Recovery Concept
Property settlement
During the year Wilbur has the following capital gains and losses:
Short-term capital gains $4,500
Short-term capital losses (6,000)
Long-term capital gains 4,200
Long-term capital losses (7,500)
What is the effect of the capital gains and losses on Wilbur’s taxable income?
George sells land purchased in 1989 that he used to park construction equipment at a
gain of $16,500.
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 bad debt expense
A Cadillac automobile used 100% for business for a Ford Mustang automobile used
100% for business.
Original issue discount security
Simon Leasing, Inc., an accrual basis taxpayer, owns and leases residential, business,
and industrial properties. During the current year it collects $800,000 in rents on its
various properties. Included in the $800,000 in rents is $80,000 of the last month’s rent
payments it requires on new rentals. The company also receives $30,000 of security
deposits on new residential rentals. In addition, one of its business tenants pays $40,000
to cancel a long-term lease during the year.
Simon Leasing, Inc., also sold one of its industrial buildings for $1,700,000. Simon
Leasing had purchased the building for $900,000 in 1986. The tenant made
improvements to the building valued at $100,000 in 1986. At the termination of the
original lease last year, the building was worth $1,600,000 ($150,000 of that was
attributable to the improvements made by the tenant) and the adjusted basis was
$500,000. The adjusted basis at the date of sale is $460,000. How much income must
Simon Leasing, Inc., recognize in the current year? Explain how you arrived at the
gross amount in terms of the income tax concepts.
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.
Entity Concept
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
Sale of stock results in a loss of $7,000. The only other capital transaction for the year
results in a gain of $6,000. Amount: $7,000
Limited Liability Company
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.
Reasonable Expense
Capital recovery