Oliver pays sales tax of $7.20 on the purchase of a lamp for $120. Michelle paid sales
tax of $9 on the purchase of a similar lamp for $150. Oliver’s taxable income for the
current year is $40,000. Michelle’s taxable income is $55,000.
I. The structure of the sales tax is regressive if based on taxable income.
II. The structure of the sales tax is proportional if based on sales price.
III. The structure of the sales tax is progressive based on taxable income.
IV. The average sales tax paid on a purchase equals the marginal tax rate for this tax.
a. Only statement I is correct.
b. Only statement II is correct.
c. Statements III and IV are correct.
d. Statements II and IV are correct.
e. Statements I, II, and IV are correct.
The maximum contribution that can be made on behalf of an owner-partner in a Keogh
defined contribution money purchase plan is:
a. The lower of 15% of net-self employment income or $53,000
b. The lower of 13.0435% of net-self employment income or $53,000
c. The lower of 20% of net-self employment income or $53,000
d. The lower of 25% of net-self employment income or $53,000
Jerome owns a farm, which has three separate houses. He rents out two of the houses
and lives in the other house. During the current year, a tornado goes through his
property causing damage to the houses. Rental House A had a fair market value of
$40,000 and an adjusted basis of $20,000, but it is not damaged by the tornado. A local
real estate agent told Jerome that because of the tornado, property values in the area
have declined 10%. Rental House B, which has an adjusted basis of $25,000, is worth
$60,000 before the tornado and $20,000 after the tornado. Jerome’s insurance company
pays him $20,000 for the damage to Rental House B. Jerome’s residence (which has an
adjusted basis of $80,000) was worth $70,000 before it is totally destroyed by the
tornado. Jerome’s insurance company reimburses him $60,000 for the loss of his
residence. Ignore the limitation based on Adjusted Gross Income.
I. Jerome deducts a loss of $5,000 on Rental House A.
II. Jerome deducts a loss of $35,000 on Rental House B.
III. Jerome’s loss on his residence is $9,900.
IV. Jerome cannot deduct a loss on Rental House A.
a. Only statement I is correct.
b. Only statement II is correct.
c. Only statement III is correct.
d. Statements II and IV are correct.
e. Statements III and IV are correct.
Salem Inc. is an electing S corporation with current year operating income of $300,000.
The $300,000 does not include the amount it realized on the sale of a building for
$330,000. The building was purchased in 2004 for $250,000 and $20,000 in
straight-line depreciation had been taken on the building up to the date of its sale. How
should Salem Inc. report these results to its shareholders?
a. Operating income of $320,000 and Section 1231 gain of $80,000.
b. Operating income of $400,000.
c. Operating income of $304,000 and Section 1231 gain of $96,000.
d. Operating income of $380,000 and unrecaptured Section 1250 gain of $20,000.
e. Operating income of $300,000 and Section 1231 gain of $80,000 and unrecaptured
Section 1250 gain of $20,000.
50% of the self-employment tax is deductible as a miscellaneous itemized deduction
from adjusted gross income.
a. True
b. False
Explain why the taxpayer in each of the following situations either does or does not
have taxable income and determine the amount, if any, that the taxpayer would have to
recognize.
a. Cory is an employee of Simmons, Inc. Several years ago Cory purchased a used bus
from Simmons. The bus had an adjusted basis of $30,000. Cory agreed to pay $20,000
(the fair market value of the bus) for the bus if Simmons would finance the purchase
over four years. During the current year, when the debt on the bus was $5,000,
Simmons told Cory that he didn’t have to make any more payments on the bus because
of his perfect safety record over the last five years.
b. Several years ago Lauren’s grandfather gave her $10,000 worth of City of Eau Claire,
Wisconsin bonds. After receiving $400 of interest in the current year, she sells the
bonds for a gain of $800.
c. Portal Corporation employs Berry at an annual salary of $40,000. Portal provides a
qualified pension plan into which all employees are permitted to contribute up to 6% of
their annual salaries. Portal matches contributions dollar-for-dollar. Berry contributes
6%.
d. Carla, a student at State College, receives a $3,000 scholarship for her grades in
previous years. She also earns $6,000 from a part time job. Her annual costs are $6,000
for tuition, books and supplies and $7,000 for room and board. Her parents pay the
remaining $4,000 of her college costs.
Penny, age 45, purchased an annuity contract that cost $45,000. The contract will pay
Penny $600 per month for 10 years after she reaches age 62. During the current year,
Penny turns 62 and receives 4 payments under the contract. Penny’s taxable income
from the annuity payments is:
a. $900
b. $1,500
c. $1,708
d. $2,250
e. $2,400
Under current law, taxpayers must use regular MACRS.
a. True
b. False
Ira sells two of his personal automobiles, a Dodge and an Edsel, during the current tax
year. The Dodge cost Ira $8,000, and the Edsel’s cost was $3,000 when they were
acquired five years ago. The Dodge is sold for $1,000 on April 20, and the Edsel is sold
for $15,000 on July 15. What is the tax treatment of these sales?
I. Both cars are capital assets.
II. The net income tax effect of these sales is zero.
III. Ira must recognize a long-term capital gain of $12,000.
IV. Ira must recognize a net long-term capital gain of $5,000.
a. Only statement I is correct.
b. Only statement II is correct.
c. Only statements I and III are correct.
d. Only statements I and IV are correct.
e. Only statements I, II, and IV correct.
Nora receives a salary of $55,000 during the current year. She sells some land that she
held as an investment at a loss of $15,000 and some stock at a gain of $10,000. Nora’s
adjusted gross income is:
a. $50,000
b. $52,000
c. $55,000
d. $62,000
e. $65,000
Elizabeth sells a painting that has a fair market value of $9,000 to Jonathan for $6,000.
Which of the following statements about the tax effect of the sale is/are correct?
I. If Elizabeth is an art dealer and she sold the painting to Jonathan because she needed
cash quickly, Jonathan does not recognize any income from the sale.
II. If Jonathan owns 60% of Elizabeth’s company, Jonathan does not recognize any
income from the sale.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Ordinary income is
I. the common type of income that individuals and businesses earn.
II. receives no special treatment under tax laws.
III. the character of the gain from the sales of shares of stock held more than one year
a. Only statement I is correct.
b. Only statement II is correct.
c. Statements I and II are correct.
d. Statements I and III are correct.
e. Statements I, II, and III are correct.
Some discontented taxpayers have suggested that complexity be removed from the
income tax structure by applying a flat tax rate to the gross income of all taxpayers.
This approach violates which concept?
a. Ability to Pay Concept.
b. All-inclusive Income Concept.
c. Entity Concept.
d. Pay-as-You-Go Concept.
e. Wherewithal to Pay Concept.
Oscar buys a 10% interest in Britanny Corporation paying $92,000 cash on January 1,
2014. During 2014, Britanny Corporation reports a loss of $30,000 and pays cash
dividends to shareholders of $10,000. For 2015, Britanny Corporation has a loss of
$60,000 and pays cash dividends of $20,000. If Britanny Company is organized as an S
Corporation, Oscar’s basis in the Britanny Corporation stock at the end of 2015 is:
a. $80,000
b. $86,000
c. $92,000
d. $98,000
e. $104,000
During the Chili Company Christmas party, Alex is given a goose after her name was
drawn from Santa’s hat. The goose only cost Chili Company $40 because it was
purchased from a wholesale grocer client. The price of a goose at a local supermarket is
$55. Alex’s gross income is
a. $- 0 –
b. $15
c. $40
d. $55
e. $95
Passive activity loss limitation rules do not apply to
I. Publicly-held corporations.
II. Personal service corporations.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
To be a qualifying relative, an individual must meet certain tests. These tests include,
I. the gross income test.
II. the age test.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Jacob is experiencing cash flow problems during the current year. Rather than put the
$80,000 business loan in default, his bank agrees to reduce the debt to $50,000. Prior to
the debt reduction, Jacob’s total assets were $500,000 and his total liabilities were
$490,000. How much income must Jacob recognize from the reduction of his bank
loan?
a. – 0 –
b. $10,000
c. $20,000
d. $30,000
Wilson Corporation purchases a factory building on September 29, 2015, for
$4,000,000 (exclusive of the amount allocated to the land). It elects the alternative
depreciation system (ADS). What is the 2015 depreciation deduction?
a. $29,167
b. $30,000
c. $42,424
d. $70,833
e. $100,000
Carlotta pays $190 to fly from Santa Fe to Denver. She spends three days finalizing a
contract with the management of El Rancho Restaurant for the delivery of green chili in
the upcoming year. Because she finalized the contract, Carlotta spends two-days
attending the National Western Stock Show. Hotel costs are $108 per night and meals
are $22 per day. How much can Carlotta deduct as business expenses from her trip?
a. $190
b. $514
c. $547
d. $580
e. $763
Higlo Paints is a partnership that reports an operating income of $50,000 in the current
year. Higlo also has a $20,000 Section 1231 gain from the sale of a building and
$10,000 in nondeductible expenses. Bernice owns 20% of Higlo and withdraws $5,000
from the partnership during the current year. Bernice’s basis will increase by:
a. $5,000
b. $7,000
c. $9,000
d. $10,000
e. $12,000
Certain interest expense can be carried forward if not deductible in the current year.
Which of the following types of interest can be carried forward and deducted in a future
year?
a. Credit card interest.
b. Personal car loan interest.
c. Interest on a loan to buy common stock.
d. Home equity loan interest.
Chicago Cleaning Services provides nightly janitorial services at a monthly rate of
$300. Customers have three payment options:
Month-by-month payments $300
One year advance payment 3,360 ($280 per month)
Two year advance payment 6,480 ($270 per month)
If Chicago Cleaning is an accrual basis taxpayer:
I. All cash payments are taxable when they are received.
II. One-year advance payments must be included in income in the year they are
received.
III. Two-year advance payments attributable to service in two years; hence, must be
included in income in the year they are received.
IV. One-year advance payments may be deferred: $280 would be included in income for
each month of service provided.
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.
A state sales tax levied on all goods and services sold is an example of a
a. progressive tax.
b. regressive tax.
c. proportional tax.
d. value added tax.
Jason and Mark exchange equipment each use in their business. In the trade, Jason
receives Mark’s equipment that is worth $20,000. Mark also assumes the $10,000 loan
Jason had on the equipment. Jason purchased his equipment for $25,000 and had taken
$12,000 of depreciation on the equipment up to the date of the exchange. Mark’s
adjusted basis in his equipment is $16,000 on the date of the exchange.
a. What is Jason’s realized gain on the exchange?
b. What are the amount and the character of the gain Jason must recognize on the
exchange?
c. What is Jason’s basis in the equipment acquired in the exchange?
Fanny’s employer has a qualified pension plan. The employer makes all payments into
the plan; employees do not contribute to the plan. During the current year, the employer
pays $4,000 into the plan on Fanny’s behalf. The plan also earns $3,000 during the year
on the balance in Fanny’s retirement account. Which of the following statements is
true?
I. Fanny is not taxed on the $4,000 in the current year.
II. Fanny is not taxed on the $3,000 in the current year.
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 types of taxes rely solely on “income” as the tax base for
determining the amount of tax liability?
I. Sales Tax
II. Property Tax
III. Gift Tax
IV. Social Security Tax
V. Excise Tax
a. Statements I, II, III, IV, and V are correct.
b. Statements I, III, and IV are correct.
c. Statements II and IV are correct.
d. Only statement IV is correct.
e. None of the above types of taxes relies on income for its tax base.
What is the Alternative Depreciation System (ADS) recovery period for a light general
purpose truck?
a. 3 years.
b. 5 years.
c. 6 years.
d. 10 years.
e. 12 years.
In order for a taxpayer to reduce taxable income with a deduction, the tax law must
allow it, and it must meet all statutory requirements.
a. True
b. False
As a limited partner in Technonics, Ltd., Dave is allowed to participate in the
management of the business.
a. True
b. False