Jane is a partner with Smithstone LLP. Smithstone maintains a profit-sharing Keogh
plan for its partners and employees. Determine the maximum deductible contribution
Jane can make to the plan in each of the following situations:
a. Jane’s net self-employment income is $80,000.
b. Jane’s net self-employment income is $280,000.
Gary, a sole proprietor, incurs the following expenses in his record store business. Gary
can deduct the following as business expenses in the current year
I. $3,000 in legal fees to acquire a competing record store.
II. $500 to the local police chief to not write parking tickets to his customers whose
time ran-out on parking meters in front of his store.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Georgia is unmarried and maintains a home in which she and her unmarried daughter
Karla age 34, live. Karla is an engineer and earns $52,000 annually. Karla had some
severe financial difficulties two years ago and Georgia has been helping her out ever
since. Georgia’s spouse died in 2014. What is Georgia’s filing status for 2015?
a. Head of household
b. Surviving spouse
c. Married, filing jointly
d. Single
e. Married, filing separately
Joan purchased her residence in 2010 for $500,000 by borrowing $450,000. In 2015,
she becomes unemployed and can no longer afford to make the full monthly payment
on the mortgage. When the mortgage balance is $430,000, the bank agrees to reduce her
mortgage to avoid foreclosure. How much income would Joan have to recognize if the
bank agrees to reduce the mortgage on the residence to $300,000?
a. $- 0 –
b. $20,000
c. $30,000
d. $50,000
e. $80,000
Alan has the following capital gains and losses during the current year:
Short-term capital loss $(4,000)
Collectibles gain 3,000
Long-term capital gain 8,000
If Alan’s marginal tax rate is 33%, what is the effect of the capital gains and losses on
his taxable income and income tax liability?
Income Tax Liability
a. $7,000 increase $2,310 increase
b. $8,000 increase $1,840 increase
c. $7,000 increase $1,400 increase
d. $8,000 increase $1,200 increase
e. $7,000 increase $1,050 increase
Which of the following is true regarding the Qualified Production Activities Deduction
(QPAD)?
I. The QPAD deduction is limited to 9% of the lessor of taxable income before the
QPAD deduction or qualified production activities income
II. The QPAD deduction cannot exceed 50% of W-2 wages allocated to QPAD
activities.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Sophia, single, is a employee of JWH Consulting Company. She incurs $5,000 of valid
entertaining expenses for which she receives no reimbursement. How much would she
benefit from being reimbursed by JWH rather than deducting the expenses on her tax
return? Her annual salary is $100,000, and she has other itemized deductions of $7,000.
a. $3,600
b. $4,160
c. $4,720
d. $4,860
e. $5,000
Which of the following must be classified as “portfolio income?”
I. Dividend income from an investment in Lincoln Corp. common stock.
II. Royalty income from the ownership of the mineral rights on land. The taxpayer does
not share the expenses with the extraction company.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Phillip owns rental real estate with an adjusted basis of $200,000. During the current
year, he sells the property for $170,000.
I. If Phillip’s rental activity is a trade or business, the loss is a Section 1231 loss.
II. If Phillip’s rental activity is a production-of-income (investment) activity, the loss is
a capital loss.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
No taxable gain or loss is recognized on a like-kind exchange of an investment asset for
a similar asset that will be held for investment if both assets consist of
a. Partnership interests.
b. Convertible debentures.
c. Mortgage notes
d. Rental real estate located in different states.
e. Common stock of companies in the same industry.
Doug, Kate, and Gabe own Refiner Group, Inc., an electing S corporation. The
shareholder’s ownership percentages and fiscal year ends follow:
Ownership Year End
Doug 60% January 31
Kate 20% May 31
Gabe 15% September 30
Which of the following statements is (are) correct?
I. Refiner Group, Inc. must use a calendar year.
II. Refiner Group, Inc. may elect to use a fiscal year ending January 31.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Three years ago Edna loaned Carol $80,000 to help her get started in the TV repair
business. Carol gave Edna a 5-year, 9% note with semiannual repayment terms. Edna
and Carol have been friends for over 35 years. Edna is a recently retired college
professor with a significant portfolio of investments. During the current year, Carol
became ill and couldn’t continue operating the business. She has repaid $10,000 of the
debt owed Edna. Because Carol has no remaining assets, no additional payments will be
made to any of her creditors. For the current year, Edna realizes a
a. $- 0 –
b. $70,000 ordinary loss
c. $70,000 long-term capital loss
d. $70,000 short-term capital loss
e. $80,000 ordinary loss
Frasier sells some stock he purchased several years ago for $10,000 to his brother,
Niles, for $6,000.
I. If this is Frasier’s only stock transaction, he can deduct only $3,000 of the loss.
II. If Niles sells the stock for $10,000, his taxable gain is $4,000.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Milo contributes a building with a fair market value of $400,000 to a new partnership in
exchange for a 25% interest. His adjusted basis in the building is $125,000, which is
subject to a $100,000 mortgage. The partnership assumes the mortgage. What is Milo’s
basis in his partnership interest?
a. $50,000
b. $75,000
c. $100,000
d. $125,000
e. $400,000
During 2014, Wan-Ying, a lawyer, made a bona fide $5,750 loan to her friend Bill when
he was in a time of need. Bill died in 2015. Wan-Ying has been informed by Bill’s estate
that he was insolvent. What is her deduction ton her 2015 tax return (she has no other
capital transactions)?
a. $- 0 –
b. $1,500
c. $3,000
d. $3,500
e. $5,750
The income tax treatment of damages received from personal physical injuries is an
application of the:
a. Ability-to-Pay Concept.
b. Administrative Convenience Concept.
c. All-inclusive Income Concept.
d. Capital Recovery Concept.
e. Wherewithal-to-Pay Concept.
An individual can legally assign income to another individual, and the assignment
relieves the owner of the income from paying tax on the income.
a. True
b. False
John purchased State of Oklahoma general-purpose bonds at a cost of $3,400 in 2013.
He receives $210 interest on the bonds in 2013, 2014, and 2015. In 2015, he sells the
bonds for $3,800. How much income does John recognize in each of the following
years?
2013 2014 20154
a. -0- -0- -0-
b. -0- -0- 400
c. 210 210 210
d. 210 210 570
The Rector Corporation maintains a SIMPLE-IRA retirement plan for its employees.
The company has notified its employees that in 2015 it will fund the SIMPLE-IRA by
matching an employee’s contribution up to a maximum of 2% of the employee’s salary.
Avis’ salary in 2015 is $240,000 and she contributes $2,800 to the plan. What amount
must Avis contribute on Andorra’s behalf?
a. $2,800
b. $3,000
c. $3,400
d. $4,800
e. $4,900
To be deductible, employee compensation must be for services actually performed by
the employee and the amount must be reasonable.
a. True
b. False
An installment sale
I. occurs whenever property is sold and at least one payment is received in a tax year
subsequent to the year of sale.
II. may be disregarded by a taxpayer who elects to recognize the entire gain in the year
of sale.
III. triggers a method of income recognition based upon the wherewithal-to-pay
concept.
IV. allows businesses that sell inventory on credit to defer recognition of income until
payment is received.
a. Only statement I is correct.
b. Only statements I, and II are correct.
c. Only statements I, II, and III are correct.
d. Only statements I and IV are correct.
e. Only statements II, III, and IV are correct.
Carla changes jobs during the year and moves from Oklahoma City to Orlando. Which
of the following expenses relating to the move can Carla deduct?
I. Upon arriving in Orlando, her apartment is not ready so she spends 2 nights in a local
hotel.
II. Gas and tolls during the move to Orlando.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
After major legislation is enacted, a general explanation of the law or “blue book” may
be issued by which of the following:
a. House Ways and Means Committee.
b. Joint Committee on Taxation.
c. Treasury Department
d. Senate Finance Committee.
For each tax treatment described below, indicate which tax concept(s) that is (are)
responsible for the treatment.
a. Kimberly, an accrual basis taxpayer, validly took a bad debt deduction of $850 in
2013 for an account receivable due from Cathy. In 2015, Cathy sent Kimberly a check
for $500. Kimberly must include the $500 in her 2015 taxable income.
b. Randall, a cash basis taxpayer, receives $1,400 from Craig in December 2015. The
$1,800 was for payment of the first and last month’s rent ($700 per month) and a $400
cleaning deposit on a building Craig rented from Randall. Randall includes $1,400 in
his 2015 taxable income.
c. Matt pays $14,000 rent on the office he uses in his computing firm. Matt is allowed
to deduct the $14,000 on his tax return.
d. Samantha sells stock for $9,000 that she purchased two years earlier for $8,000.
Samantha must report a capital gain of $1,000 on the sale.
e. Rosanne sells jewelry and some old clothes during the year. The jewelry cost $750
and is sold for $800. The clothes cost $500 and are sold for $150. Rosanne must include
the $50 gain on the sale of her jewelry in her taxable income, but is not allowed to
deduct the loss.
Health Savings Accounts are available only to self-employed individuals or small
businesses.
a. True
b. False
If a taxpayer has a choice of receiving income in the current year versus the following
year, which of the following tax rates is important in determining the year in which he
should include the income?
a. Average.
b. Effective.
c. Composite.
d. Marginal.
Marta finds a chest inscribed “Jack Sparrow” that contains $750,000 of cash while
diving among the coral reefs off Key West, Florida. The US Customs and the DEA
denied knowledge of the cash, so Marta keeps it.
I. Recognition will not occur because the windfall would not be considered as “derived
from capital or from labor.”
II. The All-inclusive Income Concept explains the recognition of the cash as income.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Rhonda and Ralph are married. Rhonda earns $81,000 annually, and Ralph earns
$6,000 annually working part-time. Their AGI is $108,000. Rhonda participates in an
employer-sponsored retirement plan. Ralph’s company does not have a pension plan.
Rhonda and Ralph contribute the maximum amount allowable annually to their IRAs.
What is their allowable deduction for this year’s contributions?
a. $0 –
b. $2,200
c. $5,500
d. $8,000
e. $11,000
Which of the following legal expenses paid by the Sutton Corporation can be deducted
in the current year?
I. Legal fees to initiate a lawsuit against a competitor who is using its patent.
II. Legal fees to settle a lawsuit filed by a delivery person who slipped on the ice
delivering a package to Sutton’s office.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
If the total amount paid for a business is greater than the sum of the net fair market
values of the assets of the business, the excess
a. Is currently deductible.
b. May be amortized over the period of 15 years.
c. May be characterized as goodwill and amortized over a period of not more than 60
months.
d. May be allocated to a noncompetition covenant and amortized over the period of
time of the covenant.
e. Is never deductible.
With regard to the alternative minimum tax (AMT),
I. the AMT rate equals the highest individual income tax rate.
II. the AMT is separate and distinct from, yet parallel to, the regular income tax system.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
The accrual method
I. is permitted for the advance receipt of rent income.
II. is never permitted under the deferral method.
III. is permitted for the advance receipt of payments for goods to be delivered within
the next tax year if the payment is less than the cost of goods sold and the payment is
deferred for financial accounting purposes.
IV. is permitted for the advance receipt of interest income.
a. Only statement I is correct.
b. Only statement III is correct.
c. Only statements I and II are correct.
d. Only statements II and III are correct.
e. Only statements II, III, and IV are correct.
A partner’s basis is increased by the amount of deductible loss that flows through from
the partnership.
a. True
b. False