Milroy Company manufactures steering wheels. Its taxable income in 2015 before the
Qualifying Production Activities Deduction (QPAD) is $2,000,000 and its qualified
production activities income is $2,500,000. Milroy’s qualifying W-2 wages paid are
$400,000. How much may Milroy take as it QPAD deduction in 2015?
a. $100,000
b. $180,000
c. $200,000
d. $225,000
e. $280,000
Nora and Nathan work for Cozener Construction Company. Nora is a foreman with an
annual salary of $120,000. Nathan is a carpenter who earned total wages of $52,000
during the current year.
a. How much Social Security tax will Nora and Nathan have to pay?
b. According to the definitions in Chapter 1, is the social security tax regressive,
proportional, or progressive? Explain.
Determine the proper classification(s) of the asset discussed in the following scenario:
“Cher receives a copyright for a new song she has written”
I. Personal use property. IV. Intangible property.
II. Business use property. V. Real estate.
III. Tangible property. VI. Personal property.
a. Statements I and III are correct.
b. Only statement IV is correct.
c. Statements II and IV are correct.
d. Statements II, IV, and VI are correct
e. Statements II and VI are correct.
Charlotte traveled to Annapolis to attend a three-day business conference. After her
meetings concluded, she stays 2 additional days sightseeing. Charlotte’s airfare is $400
and pays $110 per night for lodging, $60 a day for meals, and $20 a day for incidentals.
How much of Charlotte’s costs can be deducted as a business expense?
a. $- 0 –
b. $400
c. $880
d. $970
e. $1,200
Which of the following businesses must use the accrual method of accounting?
I. Champion Mortgage Corporation, which has annual gross receipts of $10,000,000.
II. The Happy Bookworm, a local bookstore with annual gross receipts of $950,000.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
Sarah exchanges investment real estate with Russell. Sarah’s adjusted basis in her
two-year old property is $280,000. The property is encumbered by a mortgage of
$100,000 and has a fair market value of $320,000 when exchanged. Russell assumes
that debt. Russell paid $80,000 cash for his property in 1999 and it is appraised at
$150,000 on the day of the exchange. Russell pays Sarah enough in cash to balance the
exchange. What is Russell’s basis in the new land?
a. $80,000
b. $180,000
c. $250,000
d. $320,000
e. None of the above
Under a nonqualified pension plan
I. The yearly earnings on the pension plan assets are taxable income to the employee.
II. An employer’s contribution is taxable income to the employee at the time of the
contribution.
a. Only I is correct.
b. Only II is correct.
c. Both statements are correct.
d. Neither statement is correct.
The mythical country of Januvia imposes a tax based on the number of titanium coins
each taxpayer owns at the end of each year per the following schedule:
Number of titanium coins Tax
0 ” 200 $500 + $5 per titanium coin
201 ” 500 $1,000 + $6 per titanium coin
> 500 $4,000 + $7 per titanium coin
Marvin, a resident of Januvia, owns 300 titanium coins at the end of the current year.
I. Marvin’s titanium coins tax is $2,800.
II. Marvin’s marginal tax rate is $6.
III. Marvin’s average tax rate is $9.33.
IV. Marvin’s average tax rate is $6.
a. Statements II and III are correct.
b. Statements I, II, and IV are correct.
c. Statements II and IV are correct.
d. Statements I, II and III are correct.
e. Only statement II is correct.
Which of the following itemized deductions is not allowed for AMT purposes?
a. State income taxes.
b. Qualified housing interest.
c. Investment interest.
d. Interest on home equity loan where loan proceeds are used to improve the residence.
e. Charitable contributions.
Carlos had $3,950 of state taxes withheld from his salary this year. If he deducts the full
amount as an itemized deduction and receives a refund in the following year, he must
file an amended return and reduce the deduction he received by the amount of the
refund.
a. True
b. False
The shareholder of an S corporation can reduce income taxes by passing income to the
owner-employee as a dividend rather than paying salary.
a. True
b. False
Given below are Mario’s capital gains and losses for two consecutive years. What is the
effect of the capital gains and losses on Mario’s taxable income for each year?
First Second
Year Year
Short-term capital gain $12,000 $ -0-
Long-term capital gain 11,000 16,000
Short-term capital loss (9,000) (2,000)
Long-term capital loss (23,000) (5,000)
First Second
Year Year
a. $(9,000) $ 9,000
b. $ 3,000 $ 1,000
c. $(3,000) $ 3,000
d. $(3,000) $(3,000)
e. $(3,000) $ -0-
Arturo and Josephina are married with salaries of $47,000 and $48,000, respectively.
Their combined AGI is $101,000. Josephina is an active participant in her company’s
qualified pension plan while Arturo is not. Determine Arturo and Josephina’s combined
IRA contribution and deduction amounts?
Maximum Maximum
Contribution Deduction
a. $5,500 $2,750
b. $11,000 $2,750
c. $11,000 $5,500
d. $11,000 $10,175
e. $11,000 $11,000
Marvin and Stacy are retired. During the current year, they receive $10,000 in Social
Security benefits. They have $45,000 of other taxable gross income and receive
$23,000 of municipal bond interest. The taxable portion of the $10,000 Social Security
payment is:
a. $-0-
b. $5,000
c. $8,500
d. $10,000
On March 23, 2015, Saturn Investments Corporation purchases a $5,000 computer
(5-year property) for business-use. On November 27, 2015, it pays $4,000 for new
office furniture (7-year property). It does not wish to use the Section 179 election to
expense. How much depreciation may Saturn deduct on the computer for 2015?
a. $1,000
b. $1,750
c. $2,625
d. $3,325
e. $3,500
Ferris inherited State of Florida general-purpose bonds worth $2,400 from his
grandfather in 2013. He received $120 interest on the bonds in 2013, 2014, and 2015. In
2015, he sells the bonds for a gain of $300. Ferris excludes the value of the bonds
received and the bond interest, but must include a $300 capital gain in his 2015 gross
income. Which of the following Concepts, Constructs, and/or Doctrines form the basis
for this treatment?
I. Capital Recovery Concept
II. Legislative Grace Concept
III. Constructive Receipt Doctrine
IV. Realization Concept
a. Statements I and II are correct.
b. Statements I and IV are correct.
c. Statements II, III, and IV are correct.
d. Statements I, II, and III are correct.
e. Statements I, II, and IV are correct.
Which of the following events is a “casualty” loss?
I. Diamonds stolen by thief, reported to police
II. Florida orange trees killed by a freeze.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
James has three nieces, ages 11, 16, and 19 and is single. His adjusted gross income for
the year is $100,000. The maximum he can contribute to their Coverdell Education
Savings Accounts is
Each Account Total Contribution
a. $1,333 $2,667
b. $1,333 $4,000
c. $2,000 $4,000
d. $2,000 $6,000
e. $6,000 $6,000
Aaron purchases a taxicab (5-year MACRS property) for $20,000 on December 3,
2015. This is the only business asset Aaron acquires in 2015. He does not desire to use
the Section 179 election. What is the maximum amount of depreciation that he can
deduct in 2015?
a. $1,000
b. $3,000
c. $4,000
d. $10,500
e. $14,000
The mid-month convention under MACRS provides that
a. Depreciation is allowable for the month of disposition only if the property is disposed
of in the last one-half of that month.
b. Depreciation is allowable for the month of acquisition of qualified property only if
the property is placed in service in the first one-half of that month.
c. One half of the year-of-acquisition depreciation is allowed regardless of when the
property is placed in service during the year. One-half year’s depreciation is allowable
for the year of disposition.
d. The cost recovery deduction is based on the number of months the property was in
service in the year of acquisition. Therefore, one-half month’s cost recovery is allowable
for the month in which the property is placed in service and for the month of
disposition.
Western Corporation began operations in 1999. Its fiscal year end is October 31. This
date coincides with its natural business year. On June 2, 2014, Western elects S
corporation status. All of the corporate shareholders consented to the election. The
earliest date the corporation is recognized as an S corporation is
a. November 1, 2016.
b. January 1, 2015.
c. June 2, 2015.
d. November 1, 2015.
e. December 31, 2015.
Jose is an employee of O’Hara Industry and earns $100,000 in 2015. The maximum
amount O’Hara can contribute to a money purchase plan on behalf of Jose is
a. $15,000
b. $20,000
c. $25,000
d. $35,000
e. $40,000
Tax planning refers to the preparation of tax returns and doing research on completed
transactions.
a. True
b. False
Which of the following constitutes a realization?
I. Jamie prepares a will for Wilson. He pays her by painting her house.
II. Jones’ cow gives birth. The calf will become a member of Jones’ feeder cattle herd.
III. Oak Ridge Coal Company’s coal mine reserves were recently appraised at
$5,750,000 more than the previous year’s appraisal.
IV. Lea’s employer gives her (and all other salaried employees) a weekend in Orlando in
recognition of their efforts to make this a successful year.
a. Only statement I is correct.
b. Only statement II is correct.
c. Only statements I and II are correct.
d. Only statements I and IV are correct.
e. Only statements II, III, and IV are correct.
A sole proprietor
I. Can be an employee of the business.
II. Has limited liability for the debts of the business.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
The general mechanism used to defer gains and losses from a transaction includes
certain adjustments to the basis of the replacement property. These adjustments include
I. subtracting deferred losses.
II. adding deferred gains.
a. Only statement I is correct.
b. Only statement II is correct.
c. Both statements are correct.
d. Neither statement is correct.
b. Give two characteristics of each of the trial courts listed in part a.
How much gross income does Ron have from the following items of economic income?
” Received cash gift of $5,000 from parents.
” Received $12,000 in alimony payments and $6,000 in child support from former
spouse.
” Won $4,000 in Indiana lottery scratch off game.
” Investment in IBM stock increased in value by $15,000.
” Collected $12,000 in unemployment benefits.
a. $16,000
b. $28,000
c. $33,000
d. $34,000
e. $54,000
Maria acquired a personal computer to use 100% in her business for $6,000. She took
MACRS deductions of $2,880 before selling it in current year. Determine the amount
and character of the gain (loss) recognized on the sale of the computer, assuming a sales
price that differs in each of the three independent situations:
Amount of
Sales Price Gain (Loss) Character (1231,1245,1250)
a. $2,400 _____________ _______________________
b. $6,350 _____________ _______________________
c. $4,600 _____________ _______________________
Carson and Dan agree to become equal owners in ProClothing, a retailer of golf
apparel. Dan will contribute $5,000 cash and a building worth $85,000 (adjusted basis
of $60,000). The building is encumbered by a $40,000 mortgage that ProClothing will
assume. Carson will contribute $10,000 cash and inventory worth $40,000 (adjusted
basis of $30,000). What are Carson and Dan’s bases in ProClothing if the business is
organized as a
a. Partnership
b. Corporation
John purchases all of the common stock of Clarke Corporation for $280,000. The assets
of the corporation are:
Asset Adjusted Basis Fair Market Value
Inventory $25,000 $50,000
Equipment 60,000 40,000
Supplies 20,000 20,000
Building 80,000 95,000
Land 10,000 20,000
$195,000 $225,000
What is John’s basis in the common stock he acquired?
a. $195,000
b. $215,000
c. $225,000
d. $250,000
e. $280,000
In most cases, the taxpayer may continue to use percentage (statutory) depletion after
the initial basis has been fully recovered. In other words, the taxpayer’s depletion
deduction can exceed the cost of the depletable asset.
a. True
b. False
A buyer’s assumption of the seller’s debt increases the gross sales price and any debt of
the buyer assumed by the seller in the transaction also increases the gross sales price.
a. True
b. False
The common, customary, recurring type of income earned by taxpayers.
Match each statement with the correct term below.
a. A loss that is generally not deductible.
b. The borrower is personally liable for the debt.
c. The loss is used to offset income in future periods.
d. A liability that is only secured by the underlying property.
e. The loss may be used to offset income from prior periods.
f. A type of stock that receives some ordinary loss treatment.
g. Involved in a rental activity for more than 500 hours in a year.
h. Cash or other assets contributed plus recourse debts of the activity.
i. Owns at least a 10% interest and is significantly involved in the rental activity.
j. The amount of the loss for fully destroyed property is the property’s adjusted basis.
k. The amount of loss is limited to the lower of the property’s adjusted basis, or the
reduction in fair market value.
l. Management is left to at least one general partner whose liability is not limited and
who is responsible for the on-going activities of the business.
Recourse debt
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.
Deductions from AGI
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.
Personal injury
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.
Tax home
Match each statement with the correct term below.
a. Automobile used 75% for business.
b. Investment expenses on municipal bonds.
c. Cost of investigating a new trade or business that the taxpayer enters.
d. Can be separated into two classifications.
e. Safety-deposit box for taxable investments.
f. Expenditure to influence legislation.
g. Cost of a new roof for office building.
h. Relates to an income producing activity mainly carried on for recreation or personal
enjoyment.
i. Deductibility depends on income and amount of personal and rental use.
j. Deductibility depends on whether the area is used exclusively for trade or business
activities.
Mixed-use asset
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.
Support test
Office building for office equipment.
Rodrigo and Raquel are married with 2 dependent children, age 18 and 20, and reported
the following items on their 2015 tax return:
Adjusted gross income $190,000
Less: Deductions from adjusted gross income
Home mortgage interest $9,500
Home equity loan interest (for college education) 5,000
State income taxes 12,000
Property taxes 6,800
Charitable contributions 4,400
Miscellaneous itemized deductions $4,800
Less: 2% $190,000 (3,800) 1,000 (38,700)
Less: Exemptions (4 $4,000) (16,000)
Determine Rodrigo and Raquel’s regular tax liability and, if applicable, the amount of
their alternative minimum tax.
Each of the numbered items below is accorded only one of the following lettered
treatments. Use the existing law as it applies to the current year, match the best answer
to the statements below.
a. Fully excluded from gross income.
b. Fully included in gross income.
c. Partially excluded from gross income.
Jeane’s employer pays his medical premiums each month ($130/month).
Match each statement with the correct term below.
a. Automobile used 75% for business.
b. Investment expenses on municipal bonds.
c. Cost of investigating a new trade or business that the taxpayer enters.
d. Can be separated into two classifications.
e. Safety-deposit box for taxable investments.
f. Expenditure to influence legislation.
g. Cost of a new roof for office building.
h. Relates to an income producing activity mainly carried on for recreation or personal
enjoyment.
i. Deductibility depends on income and amount of personal and rental use.
j. Deductibility depends on whether the area is used exclusively for trade or business
activities.
Profit motivated business expenses
Dustin, Dan, and Dennis operate Heritage Hills dry cleaners as an S corporation. Dustin
owns 50% of the business, Dan 30%, and Dennis 20%. For the current year, Heritage
Hills reports the following:
Sales revenues $400,000
Trade and business expenses (185,000)
Charitable contributions (5,000)
Short-term capital losses (4,000)
Long-term capital gains 12,000
Taxable income $218,000
How must Heritage Hills report its results to each of the owners?
Match the proper deduction method with the correct expenditures.
a. Capitalized and amortized over a number of accounting periods
b. Expensed in the period incurred
c. Not deductible
d. Can be capitalized and amortized or deductible depending on the amount of the
expenditure
Investment expenditures related to earning interest from municipal bonds