Which of the following best describes the tax treatment of a taxpayer’s net Section 1231
loss that resulted from the sale of depreciable equipment used in a business activity?
a. Such losses are not deductible.
b. Such losses are deducted as ordinary losses.
c. Such losses are deducted as long-term capital losses.
d. Such losses are deductible as short-term capital losses.
e. Such losses are deducted as ordinary losses only to the extent that the business
activity produces other ordinary net income.
Which of the following is/are adjustment(s) to the basis of property after the initial
basis is determined?
I. Add the costs of protecting ownership of the property.
II. Add the expenditures for painting the company name on the property.
III. Subtract the capital recovery resulting from collections for easements.
IV. Subtract the capital recovery resulting from depreciation deductions.
a. Only statement IV is correct.
b. Only statements I and III are correct.
c. Only statements III and IV are correct.
d. Only Statements II, and IV are correct.
e. Statements I, II, III, and IV are correct.
An operating loss occurs when an entity’s deductions exceeds the income generated for
the period.
a. True
b. False
Sally is an electrician employed by Bogie Company. Sam is a self-employed electrician.
During the current year, Sally’s salary is $85,000 and Sam’s net self-employment
income is $85,000. Which of the following statements about the Social Security and
self-employment taxes paid is/are correct?
I. Sam’s self-employment tax is greater than the Social Security tax paid on Sally’s
income.
II. Sam and Sally pay the same amount of tax.
a. Only statement I is correct.
b. Only statement II is correct
c. Both statements are correct
d. Neither statement is correct
Julian and Tanya each contribute $50,000 cash to form the M&T Partnership on January
4, 2015. Julian and Tanya share profits and losses in the ratio of 60% and 40%,
respectively. During 2015, the partnership generates ordinary income of $80,000. A
cash distribution of $5,000 is made to Julian in December 2015. How much income
must Julian recognize from the partnership in 2015?
a. $5,000
b. $32,000
c. $45,000
d. $48,000
e. $53,000
The income tax formula for individual taxpayers is unique in that deductions are broken
into classes.
I. This dichotomy of deductions results in an intermediate income number called
adjusted gross income (AGI).
II. One class of deductions is called exclusions from income.
III. One class of deductions is called deductions for adjusted gross income.
IV. Expenses qualifying as deductions for adjusted gross income are not limited by the
income of the taxpayer.
a. Statements III and IV are correct.
b. Statements II and III are correct.
c. Statements I, III and IV are correct.
d. Only statement IV is correct.
e. Statements I, II, III, and IV are correct.
Diane receives a gift of stock from Sue on July 2, 2015, when the stock was trading for
$20,000. Sue paid $4,000 for the stock several years ago. Sue pays a gift tax of $500 on
the transfer. Diane’s basis in the stock is:
a. $4,000
b. $4,100
c. $4,400
d. $20,000
e. $20,400
Clark, a single taxpayer with expected taxable income of $190,000, needs your advice
on an investment decision. Clark wants to invest $10,000 in long-term bonds. Clark can
obtain a 6% return by investing in 10-year Ford Motors’ bonds. What is the minimum
interest rate that Clark should demand from an investment in State of Tennessee bonds
of identical risk and duration?
a. 4.0%.
b. 4.5%.
c. 9.0%.
d. 10.0%.
John decides rather than work late in the office, he does all of his work in an office at
home. His employer approves of this arrangement. Since John uses his home office on a
regular and exclusive basis, he will be eligible to take a home office deduction even
though it was not required as a condition of employment.
a. True
b. False
For each tax treatment described below, explain the income tax concept(s), which is
(are) responsible for the treatment.
a. Amelia owns a 1/4 royalty interest in a uranium mine. Amelia has the owner of the
mine pay 1/3 of her royalties to her son, Joel. During the current year, Amelia receives
$18,000 and Joel receives $9,000 in royalty payments. Amelia has $27,000 of gross
income from the royalty payments. Joel has no income.
b. Mark owns a weekend barbecue business. During the year, he purchases $900 of
wood that he uses in his barbecue operation and in his personal fireplace. Mark can
only deduct $550 of the wood cost as an expense of his barbecue business.
c. Andre is the sole owner of Woods Corporation. Woods sells Andre a parcel of land
that it owned for $30,000. Woods had paid $45,000 for the land. Woods Corporation
cannot deduct the $15,000 loss on the sale.
d. On February 20, 2014, Constance purchases 100 shares of Paris stock for $4,500. At
December 31, 2014, the stock is worth $5,200. On November 8, 2015, Constance sells
the stock for $5,800. Constance has no income from the stock in 2014 and a capital gain
of $1,300 in 2015.
e. Barney is a consultant and is a cash basis taxpayer. On December 31, 2015, a client
calls and offers to drop off a check for $1,000 in payment of his account on his way to
lunch. Barney tells the client not to bother delivering it in person and instructs him to
mail the check. Barney must include the $1,000 in his 2015 gross income.
Norris owns a passive activity that has a suspended loss of $12,000. The activity has a
fair market value of $42,000 and his adjusted basis in the activity is $27,000.
I. If Norris gifts the property, he is allowed to deduct $3,000 of the suspended loss.
II. If Norris dies, none of the suspended loss is deductible.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Sergio purchases $3,000-worth of supplies from a local vendor. The supplies are
delivered on April 1, 2015. The supplies are fully used up on December 31, 2015.
Because of unusual circumstances, a bill for the supplies arrives from the vendor on
February 1, 2016, and is promptly paid. When can Sergio deduct the expenses?
I. In 2015, if he is an accrual basis taxpayer.
II. In 2015, if he is a cash basis taxpayer.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Regarding a partnership, which of the following statements is/are always correct?
I. If a partnership is an active trade or business and it has a $65,000 loss from its
business operations that is passed-through as an active loss to its partners, each active
partner can deduct his full share of loss for the year to the extent they have basis that is
at-risk.
II. Salaries and bonuses paid to partner-employees (other than guaranteed payments) are
a deductible business expense.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
An ordinary expense
I. is normal, common, and accepted under the circumstances of the business
community.
II. is an expense commonly incurred in an income-producing activity.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Carson, age 34 and single, is an electrical engineer employed by Summit Corporation.
Carson’s annual salary is $84,000. Summit 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, Carson contributes the $4,200 maximum to the plan, which is
matched by Summit. 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. Carson elects to have $2,500 paid into the plan. Carson uses the
plan to purchase medical insurance costing $2,100. Carson spends an additional $650
from the plan on eyeglasses and dental costs. Carson has asked you to prepare his tax
return. Your initial interview with him discloses that he has $1,050 of allowable
deductions for adjusted gross income and $3,700 of allowable itemized deductions.
a. Compute Carson’s taxable income and his tax liability.
b. After your initial interview, Carson calls you and says that he just received two
statements concerning sales of investments that he had forgotten about. On January 15,
he sold shares of stock for $5,500. Carson purchased the stock in November for $4,500.
He also received $2,000 on March 15 from the sale of some land that he had received as
an inheritance from his grandfather in 2000. He has a statement from the executor of his
grandfather’s estate listing his basis in the land at $10,000. Explain the effect of these
two sales on Carson’s taxable income and his tax liability.
Marilyn sells 200 shares of General Motors stock for $80 per share. She pays a $100
commission on the sale and has an adjusted basis of $8,000 on the stock.
I. The amount realized from the sale is $15,900.
II. Marilyn has a recognized gain of $8,000.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Which of the following people is currently engaged in a trade or business?
I. Barry spends 4 hours a day 5 days a week managing his investment portfolio. He
watches the market and buys and sells securities when he thinks the market is right. His
investment strategy is to realize income from dividends and long-term gains from
holding investments for appreciation in value.
II. Jennifer is a full-time realtor, and she owns a house that she rents to Barry and his
family for $900 a month. Jennifer provides for the repairs and maintenance of the
house, and she stops by monthly to collect the rent and visit with Barry and his family.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Thomas had $8,500 withheld from his paycheck, but since he has a large amount of
interest and dividends, he is required to make quarterly estimated tax payments 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.
Annie owns a mine, which cost her $460,000 several years ago. In prior years she had
claimed depletion in the amount of $140,000. It is estimated that 800,000 tons of
minerals remained in the mine at the beginning of the year. During the current year,
Annie mined and sold 180,000 tons. What is the amount of Annie’s cost depletion
deduction for the current year?
a. $56,000
b. $72,000
c. $80,500
d. $103,500
e. $180,000
Ronald, a single taxpayer, purchased 300 shares of Jasmine Inc., stock on October 14,
2013, for $4,000. He sells the stock on August 22, 2015, for $2,000. Ronald has no
other capital asset transactions in 2015.
I. If Ronald’s taxable income without considering the stock sale is $93,000, the sale of
the stock will decrease his income tax liability by $560.
II. If Ronald’s taxable income without considering the stock sale is $13,000, the sale of
the stock will decrease his income tax liability by $300.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Frank’s wife died in 2013. He has not remarried and maintains a home for himself and
his dependent daughter. What is Frank’s filing status for 2015?
a. Single.
b. Head of household.
c. Married, filing separately.
d. Surviving spouse.
The wash sale provisions apply to which of the following?
I. Jim bought 500 additional shares of Alfa Gamma stock for $4,000 on December 2,
2015. Jim owned 2,500 shares after that purchase. On December 26, 2015, Jim realizes
a loss of $1,500 on the sale of 250 shares of Alfa Gamma stock.
II. Calvin realizes a $8,000 loss on the December 29, 2015, sale of Sloan corporate
bonds. Each bond has a face value of $1,000. He replaces the Sloan corporate bonds
with the same number of Jackson corporate bonds, each with a face value of $1,000 on
January 16, 2016. The Jackson bonds have a different interest rate and maturity date
then the Sloan bonds but have the same bond rating (AAA).
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Adjusted gross income (AGI)
I. is used to provide limitations on certain deductions from AGI.
II. is unique to the individual income tax formula.
III. is the result before subtracting certain allowable personal expenditures from gross
income.
a. Only statement I is correct.
b. Only statement II is correct.
c. Only statement III is correct.
d. Statements I and II are correct.
e. Statements I, II, and III are correct.
Fred and Flossie are married and their adjusted gross income is $194,000. Both Fred
and Flossie are active participants in their company’s qualified pension plan and have
never established an Individual Retirement Account. What is the maximum combined
amount they can contribute to Roth IRAs?
a. $- 0 –
b. $2,000
c. $5,500
d. $8,000
e. $11,000
Micaela owns all the shares of the Madison Corporation that operates as an S
corporation. Micaela’s basis in the stock is $40,000. During the year she receives a cash
distribution of $10,000 from Madison. What must Micaela and Madison report as
income from the cash distribution?
Micaela Madison
a. $-0- $-0-
b. $10,000 $-0-
c. $-0- $10,000
d. $10,000 $10,000
Larry is a self-employed insurance salesperson. He decides to take his best customer to
a Pacers basketball game. Larry is able to buy two floor seat tickets for $500 each. The
face amount of the tickets is $200 each. How much of the total cost can Larry deduct?
a. $- 0 –
b. $ 200
c. $ 400
d. $ 500
e. $1,000
The mythical country of Woodland imposes two taxes:
Worker tax: Employers withhold ten percent of all wages and salaries. If taxable income
as reported on the employee’s income tax return is greater than $40,000, an additional
5% tax is levied on all income.
Business tax: All businesses pay a tax on invested capital based on a valuation formula.
The tax computed for three different amounts of invested capital is provided below:
Invested Capital Tax
$100,000 $12,000
$200,000 $16,000
$300,000 $20,000
According to the definitions in the text:
I. The worker tax is a regressive tax rate structure.
II. The business tax is a progressive tax rate structure.
III. The worker tax is a progressive tax rate structure.
IV. The business tax is a regressive tax rate structure.
a. Statements I and III are correct.
b. Statements II and III are correct.
c. Only statements III is correct.
d. Statements I and IV are correct.
e. Statements III and IV are correct.
Unrecaptured Section 1250 gain
I. is taxed at a maximum rate of 15%.
II. is a term that does not apply to corporations.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Tom, Dick, and Harry operate Quality Stores. Based on advice from Tom’s sister, a
CPA, the three form a partnership. Tom owns 50%; Dick and Harry each own 25%. For
the year, Quality Stores reports the following:
Sales revenues $800,000
Business expenses (440,000)
Investment expenses (4,000)
Short-term capital gains 26,000
Long-term capital losses (14,000)
Taxable income $368,000
By how much will Tom’s adjusted gross income increase because of the above?
a. $178,000
b. $180,000
c. $183,000
d. $184,000
e. $186,000
A taxable entity has the following capital gains and losses in 2015:
Short-term capital loss $(20,000)
Long-term capital gain 13,000
I. If the entity is an individual, a $7,000 deduction is allowed in 2015.
II. If the entity is a corporation, no deduction is allowed in 2015.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
When calculating AMTI, individual taxpayers must add back the following:
I. Miscellaneous itemized deductions subject to the 2% limitation.
II. Personal exemption amounts.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Landis is a single taxpayer with an adjusted gross income of $280,000. In addition to
his personal residence, Landis owns a vacation home in Beaver Creek, Colorado. He
uses the vacation home for 21 days during the current year and rents it out to unrelated
parties for 63 days. After making the appropriate allocation between rental and personal
use, the following rental loss is determined:
Rental income $14,000
Mortgage interest and property taxes (3,200)
Utilities, maintenance, and repairs (6,000)
Depreciation (8,000)
Rental loss $(3,200)
What is the correct reporting of the rental income and expenses?
I. Because the rental shows a loss, Landis reports no income and deducts the mortgage
interest and property taxes as an itemized deduction.
II. Landis must report the $14,000 in rental income but he can deduct only $14,000 of
the expenses.
III. Landis’s depreciation deduction is limited to $4,800.
IV. Because the vacation home is a qualified second residence, Landis can deduct the
$1,600 loss for adjusted gross income.
a. Only statement II is correct.
b. Only statement IV is correct.
c. Only statement I is correct.
d. Statements II and III are correct.
e. Statements II and IV are correct.