CPA Questions: Reg Ch 5

Employee Y, who is 44 years old, is provided with $120,000 of nondiscriminatory group term life insurance by his employer. Based on the IRS uniform premium cost table, the total annual cost of a policy of this type is $1.20 per $1,000 of coverage. Y's required contribution to the cost of the policy is $4.00 per month. Y was covered for the entire year. How much of the cost must Y include in his income? A. $36 B. $0 C. $96 D. $84

A. $36 The includible cost is the total cost minus the cost of the first $50,000, minus the cost paid by the employee. Computation is below: Total ($1.20 × 120) $144 Less: Excludable portion ($1.20 × 50) (60) Less: Employee cost ($4 × 12) (48) Amount included in Y's income $ 36

The following 2020 information pertains to Sam and Ann Hoyt, who filed a joint federal income tax return for the calendar year 2020: Adjusted gross income $34,000 $100 contribution to a recognized political party The Hoyts itemized their deductions. What amount of the $100 political contribution were the Hoyts entitled to claim as a deduction against their 2020 tax? A. $0 B. $25 C. $50 D. $100

A. $0

Phil Armonic is actively engaged in the oil business and owns numerous oil leases in the Southwest. During 2020, he made several trips to inspect oil wells on the leases. As a result of these overnight trips, he paid the following: Plane Fares $4,000 Hotels $1,000 Meals $800 Entertaining lessees $500 Of the $6,300 in expenses incurred, he can claim as deductible expenses A. $6,300 B. $5,400 C. $5,000 D. $4,400

B. $5,400 (4,000 + 1,000 + (50% * 800))

Mock operates a retail business selling illegal narcotic substances. When Mock calculates business income, he may adjust for I Cost of merchandise II Business expenses other than the cost of merchandise A. I only B. II only C. Both I and II D. Neither I nor II

A. I only

Terry, a self-employed laboratory consultant specializing in white mice, provided consulting services at a laboratory in Paris concerning the care and feeding of white mice. Terry's expenses were $1,600 for airfare, $400 for food, and $400 for lodging. Terry spent 5 days at the laboratory and 3 days visiting friends. How much can she deduct for the trip? A. $0 B. $1,375 C. $2,400 D. $1,450

B. $1,375 Airfare ($1,600 × 5 ÷ 8) $1,000 Lodging ($400 × 5 ÷ 8) 250 Meals ($400 × 50% × 5 ÷ 8) 125 Total travel expense deduction $1,375

Nan, a cash basis taxpayer, borrowed money from a bank and signed a 10-year interest-bearing note on business property on January 1 of the current year. The cash flow from Nan's business enabled Naan to prepay the first three years of interest attributable to the note on December 31 of the current year. How should Nan treat the prepayment of interest for tax purposes? A. Deduct the entire amount as a current expense B. Deduct the current year's interest and amortize the balance over the next 2 years C. Capitalize the interest and amortize the balance over the 10 year loan period D. Capitalize the interest as part of the basis of the business property

B. Deduct the current year's interest and amortize the balance over the next 2 years

Juan recently started operating a flower shop as a proprietorship. In its first year of operations, the shop had a taxable income of $60,000. Assuming that Juan had no other employment-related earnings, A. The flower shop must withhold FICA taxes from Juan's earnings. B. Juan must pay self-employment tax on the earnings of the business. C. Juan will be exempt from self-employment taxes for the first three years of operations. D. Juan will be exempt from the Medicare tax because the business earnings are below the threshold amount.

B. Juan must pay self-employment tax on the earnings of the business.

Johnson worked for ABC Co. and earned a salary of $100,000. Johnson also received, as a fringe benefit, group term life insurance at twice Johnson's salary. The annual IRS-established uniform cost of insurance is $2.76 per $1,000. What amount must Johnson include in gross income? A. $100,000 B. $100,276 C. $100,414 D. $100,552

C. $100,414 The cost of group term life insurance up to a coverage amount of $50,000 is excluded from the employee's gross income. Premiums paid by the employer for coverage in excess of $50,000 are included in gross income. As a result, $150,000 ($200,000 life insurance coverage - $50,000 exemption) of the coverage is taxable. Since Johnson must also include his salary in gross income, Johnson has gross income of $100,414 {$100,000 + [($150,000 ÷ $1,000) × $2.76]}.

Mr. Hawk, a factory assembly line worker, received the following benefits from his employer: Medical insurance plan policy $250 Christmas bonus $125 Reimbursement for college undergraduate physics course during the current year under a non-discriminatory written plan $450 $40,000 nondiscriminatory group term life insurance policy $475 Membership in a local health club $550 How much is includible in Mr. Hawk's income for the current year? A. $1,125 B. $925 C. $675 D. $1,050

C. $675 ($125 bonus + $550 membership)

Which one of the following will result in an accruable expense for an accrual-basis taxpayer? A. A repair completed prior to year end and paid upon completion. B. An invoice dated prior to year end but the repair completed after year end. C. A repair completed prior to year end but not invoiced. D. A signed contract for repair work to be done and the work is to be completed at a later date.

C. A repair completed prior to year end but not invoiced.

Frank Clarke, an employee was covered under a noncontributory pension plan. Frank died on April 15, 2020, at age 64 and, pursuant to the plan, his widow received monthly pension payments of $500 beginning May 1, 2020. Mrs Clarke also received an employee death payment of 10,000 in May 2020. How much should she include in her gross income for 2020? A. $5,000 B. $9,000 C. $10,000 D. $14,000

D. $14,000 (10,000 + (8 months * 500))

Which of the following expenditures incurred in the operation of a business is not required to be capitalized? A. Cost of replacing an old shingle roof with a new tile roof. B. Cost of changing from one heating system to another. C. Cost of replacing an old truck used for business delivery. D. Cost of replacing small tools.

D. Cost of replacing small tools.

Which of the following individuals who perform services for a business are subject to taxes under the Federal Insurance Contributions Act (FICA) and the Federal Unemployment Tax Act (FUTA)? A. Sole-proprietors with employees. B. Office managers. C. Officers of a corporation. D. Part-time employees

A. Sole-proprietors with employees.

The self-employment tax is A. Fully deductible as an itemized deduction B. Fully deductible in determining net income from self-employment C. Partially deductible from gross income in arriving at adjusted gross income D. Not deductible

C. Partially deductible from gross income in arriving at adjusted gross income

Kant, a cash-basis individual, owns and operates an office building. Kant received the following payments during the current year: Current rents $30,000 Advance rents for the next year 10,000 Security deposits held in a segregated account 5,000 Lease cancellation payments 15,000 What amount is included in gross income? A. $40,000 B. $60,000 C. $30,000 D. $55,000

D. $55,000 Gross income includes $55,000 ($30,000 current rents + $10,000 advance rents + $15,000 lease cancellations). Current rents, advance rents for the next year, and lease cancellation payments are all included in gross income. Prepaid rent is income when received, even under the accrual method of accounting, as long as there are no restrictions on the use of such payments. Lease cancellation payments are payments made in lieu of rent and are therefore included in gross income.

Bobby is a sole proprietor. During 2020, he incurred the following expenses: Rental payments for the next 2 years (i.e., 2021 and 2022) $3,000 Country club dues (Bobby frequently entertains clients at the country club) 7,500 Meal expenses incurred while meeting with clients (costs of meals are reasonable) 1,500 What is the amount of Bobby's expenses that are deductible for 2020? A. $750 B. $8,250 C. $4,500 D. $7,500

A. $750 A deduction from gross income is allowed for meal expenses, up to 50% of the actual expense. However entertainment expenses are not deductible, and advance rental payments may be deducted by the lessee only during the tax periods to which the payments apply. Accordingly, Bobby is entitled to a deduction in 2020 of $750 ($1,500 meal expenses × 50%).

The 50% limit on deductibility of business-related expenses applies to which of the following? A. Meals while traveling away from home on business. B. Employee's unreimbursed meal expense. C. Meals provided to customers at your place of business. D. Meals while traveling away from home on business and meals provided to customers at your place of business.

D. Meals while traveling away from home on business and meals provided to customers at your place of business.

Concerning a pre-2019 divorce, which of the following items may be considered alimony? A. Noncash property settlement. B. Payments Mr. Stone made under a written separation agreement for the mortgage and real estate taxes on a home he owned by himself and in which his former spouse lived rent-free. C. Payments made for the 3-month period after the death of the recipient spouse. D. Payments made to a third party on behalf of the former spouse for the former spouse's medical expenses.

D. Payments made to a third party on behalf of the former spouse for the former spouse's medical expenses.

As a benefit for all of their employees, Company A has a qualified medical reimbursement plan. The cost of the plan is deductible by A. The employee. B. Neither the employee nor the employer. C. Both the employee and the employer. D. The employer.

D. The employer.

George, a sole proprietor, may deduct various taxes imposed by federal, state, local, and foreign governments, if he incurs them in the ordinary course of his business. All of the following are deductible on Schedule C, Form 1040, except A. State and local income taxes on net income. B. Real estate taxes on real property used in his business. C. Gasoline taxes included in the cost of fuel used in his business. D. Personal property taxes on personal property used in his business.

A. State and local income taxes on net income.

Jim Domuch, a calendar-year taxpayer, operates a novelty shop as a sole proprietor. During the current year, he incurred the following expenses in his business. Which is not deductible in the current year? A. Property tax paid on business premises. B. Sales taxes on the purchase of $50,000 of equipment used in the business. C. Sales taxes on the purchase of supplies used in the business. D. Business license tax imposed by the city.

B. Sales taxes on the purchase of $50,000 of equipment used in the business.

The Social Security Act provides for the imposition of taxes and the disbursement of benefits. Which of the following is a true statement regarding these taxes and disbursements in the current year? A. A deduction for federal income tax purposes is allowed the employee for Social Security taxes paid. B. Only those who have contributed to Social Security are eligible for benefits. C. As between an employer and its employee, the tax rates are the same. D. Social Security benefits are fully includible in gross income for federal income tax purposes unless they are disability benefits.

C. As between an employer and its employee, the tax rates are the same.

All of the following individuals are generally subject to the self-employment tax except A. Bricklayer - independent contractor. B. Minister - member of the clergy. C. Grocery store sole proprietor. D. Factory worker - paid on piecemeal basis.

D. Factory worker - paid on piecemeal basis.

During the examination of the financial statements of Viscount Manufacturing Corporation, the CPAs noted that, although Viscount had 860 full-time and part-time employees, it had completely overlooked its responsibilities under the Federal Insurance Contributions Act (FICA). Under these circumstances, which of the following is true? A. The act does not apply to the part-time employees. B. No liability under the act will attach if the employees voluntarily relinquish their rights under the act in exchange for a cash equivalent paid directly to them. C. If the union that represents the employees has a vested pension plan covering the employees that is equal to or exceeds the benefits available under the act, Viscount has no liability. D. Since employers and employees owe FICA taxes and since the employer must withhold the employees' tax from their wages as paid, Viscount must remit to the government a tax equal to the amount assessed directly against the employer and the employee.

D. Since employers and employees owe FICA taxes and since the employer must withhold the employees' tax from their wages as paid, Viscount must remit to the government a tax equal to the amount assessed directly against the employer and the employee.

John Budd files a joint return with his wife. Budd's employer pays 100% of the cost of all employees' group term life insurance under a qualified plan. Under this plan, the maximum amount of tax-free coverage that may be provided for Budd by his employer is A. $10,000 B. $50,000 C. $5,000 D. $100,000

B. $50,000

Rich is a cash-basis, self-employed air-conditioning repair technician with current-year gross business receipts of $20,000. Rich's cash disbursements were as follows: Air-conditioning parts $2,500 Yellow Pages listing 2,000 Estimated federal income taxes on self-employment income 1,000 Business long-distance telephone calls 400 Charitable contributions 200 What amount should Rich report as net earnings from self-employment? A $13,945 B $14,100 C $14,900 D $15,100

A $13,945 The $20,000 gross receipts would be reduced by the $2,500 for parts, the $2,000 in advertising expense, and the $400 in telephone expense. This $15,100 is net income from self-employment. Net earnings from self-employment is net income from self-employment reduced by the employer's portion of FICA taxes (.0765) times the taxpayer's net income from self-employment. Thus, the $15,100 should be reduced by an additional $1,155 ($15,100 × .0765), resulting in net earnings from self-employment of $13,945.

Zippy worked at the Maxwell Hotel as a desk clerk. Since there was no one to replace him during the dinner hour, the Maxwell Hotel provided Zippy's meal out of the dining room free of charge. Zippy was allowed to go and eat elsewhere but was encouraged to eat at the hotel and mind the desk. The cost of the meals to the Maxwell Hotel was $450, and the fair market value of the meals was $800. How much must Zippy include in gross income? A. $0 B. $350 C. $450 D. $800

A. $0

In 2020, Mr. K had $89,100 in wages subject to Social Security tax and $50,600 in net earnings from self-employment. What is the amount of K's self-employment tax for 2020 (rounded to the nearest dollar)? A. $7,494 B. $7,436 C. $7,742 D. $21,068

A. $7,494 For 2020, the self-employment tax is separated into two components: Social Security and Medicare. The Social Security tax is 12.4% of the first $137,700 (2020) of self-employment income. The Medicare tax is 2.9% of all self-employment income (no ceiling applies). In computing the self-employment tax, taxpayers may reduce the net income from self-employment by the employer's portion of the self-employment tax rate times the net income from self-employment (before this adjustment) to arrive at net earnings from self-employment. Such an adjustment has been made in arriving at the $50,600 amount. Mr. K's employment taxes on wages of $89,100 have already been paid through withholding by his employer. Therefore, he must pay the Social Security portion of the self-employment tax on $48,600 ($137,700 - $89,100). He must pay Medicare tax on the full $50,600. Mr. K's self-employment tax is thus $7,494 [($48,600 × 12.4%) + ($50,600 × 2.9%)].

Sarah owns and operates a retail sporting goods business as a sole proprietor. Her store is located on the ground floor of a two-story building that she owns. Based on the following information regarding 2020, compute her net self-employment income to be put onto Schedule C for that year. Gross profit from sporting goods business $100,000 Rental income from upper level (45%) of building 20,000 Building depreciation expense 10,000 Utilities for ground floor (Tenant pays own utilities.) 4,500 Depreciation on vehicles used in business 3,000 Gain on sale of van used 100% in business 2,000 Contributions to her Keogh retirement plan 5,500 Sarah's health insurance premiums 4,000 Mortgage interest on building 10,000 Other expenses of running her sporting goods business 11,500 A. $70,000 B. $73,500 C. $66,000 D. $64,500

A. $70,000 Gross profits from sporting goods business $100,000 Building depreciation expense ($10,000 × 55%) (5,500) Utilities (ground floor only) (4,500) Listed property depreciation expense (3,000) Mortgage interest ($10,000 × 55%) (5,500) Other expenses (11,500) Net self-employment income $ 70,000

During the examination of the financial statements of Viscount Manufacturing Corporation, the CPAs noted that, although Viscount had 860 full-time and part-time employees, it had completely overlooked its responsibilities under the Federal Insurance Contributions Act (FICA). Under these circumstances, which of the following is true? A. Since employers and employees owe FICA taxes and since the employer must withhold the employees' tax from their wages as paid, Viscount must remit to the government a tax equal to the amount assessed directly against the employer and the employee. B. No liability under the act will attach if the employees voluntarily relinquish their rights under the act in exchange for a cash equivalent paid directly to them. C. If the union that represents the employees has a vested pension plan covering the employees that is equal to or exceeds the benefits available under the act, Viscount has no liability. D. The act does not apply to part-time employees.

A. Since employers and employees owe FICA taxes and since the employer must withhold the employees' tax from their wages as paid, Viscount must remit to the government a tax equal to the amount assessed directly against the employer and the employee.

Midwest Department Stores allows all its employees to purchase goods worth up to $1,000 in retail value each year at a 50% discount. Mark, an employee of Midwest, took full advantage of this policy one year and received a $500 discount. Midwest's gross profit percentage on sales to customers is 45%. The normal industry discount was only 30%. How much must Mark include in gross income? A. $200 B. $50 C. $0 D. $500

B. $50 Section 132(a)(2) provides an exclusion from gross income for qualified discounts provided by an employer to an employee. The amount of the discount must not exceed the employer's gross profit percentage based on the price normally sold to customers. Since Midwest's gross profit percentage is normally 45%, any discount in excess of 45% must be included in the employee's gross income. Here the excess discount is 5% (50% - 45%). Accordingly, Mark must include $50 in his gross income ($1,000 × 5%).

Flora Corporation made the following awards of tangible personal property to employees during the current year under a written, qualified, nondiscriminatory plan: Name/Reason for Award/Value Received Mike/20 years' employment/$250 Kurt/20 years' employment/250 Steve/35 years' employment/450 Casey/40 years' employment/550 George/5-year safety award/200 No other safety awards were awarded during the current year. The amount Flora can deduct related to these awards is A. $1,500 B. $1,700 C. $1,300 D. $400

B. $1,700 Section 274(j) limits the deduction for employment achievement awards (tangible personal property awarded to an employee by reason of length of service or safety achievement) to $400 per employee per year or $1,600 per employee per year if it is a qualified plan award. An item may not be treated as a qualified plan award if the average cost of all items awarded exceeds $400. Under Sec. 274(j)(4), further limitations on employee awards are provided whereby length-of-service awards must not be awarded until after the recipient has worked over 5 years. Also, the recipient must not have received any such award during the applicable year or any of the 4 prior years. Safety achievement awards are also not deductible if, during the taxable year, such awards have previously been awarded to more than 10% of the other employees or to a manager, clerical employee, or other professional employee. Here, since all the requirements of a qualified plan award are met, the full amount of each award, or a total of $1,700, is deductible.

Dr. Merry, a self-employed dentist, incurred the following expenses: 1) Investment expenses: $ 700; 2) Custodial fees related to Dr. Merry's Keogh plan: $40; 3) Work uniforms for Dr. Merry and Dr. Merry's employees: $320; 4) Subscriptions for periodicals used in the waiting room: $110; 5) Dental education seminar: $1,300. What is the amount of expenses the doctor can deduct as business expenses on Schedule C, Profit or Loss from Business? A. $1,620 B. $1,730 C. $1,770 D. $2,430

B. $1,730 (320 + 110 + 1,300)

Howard, an employee of Ogden Corporation, died on June 30, 2020. During July, Ogden made employee death payments of $10,000 to his widow and $10,000 to his 15 year old son. What amounts should be included in gross income by the widow and son in their respective tax returns for 2020? Widow//Son A. $0//$0 B. $10,000//$10,000 C. $5,000//$5,000 D. $7,500//$7,500

B. $10,000//$10,000

On December 1, 2019, Michael, a self-employed cash-basis taxpayer, borrowed $100,000 to use in his business. The loan was to be repaid on November 30, 2020. Michael paid the entire interest of $12,000 on December 1, 2019. What amount of interest was deductible on Michael's 2020 income tax return? A. $12,000 B. $11,000 C. $1,000 D. $0

B. $11,000 (Michaels may deduct $11,000 on her current year return.Rule: Interest that is prepaid is deductible in the tax year to which, and to the extent that the interest is allocable―i.e., as it accrues. This allocation is required even by cash basis taxpayers. Term of loan=12 months (December 1, prior year −November 30, current year) Interest paid − $12,000 on December 1 of the prior year. Allocated interest per month=$12,000 ÷ 12=$1,000/month Interest deductible in current year=$1,000 × 11$=11,000)

ABC Corp. leases two buildings. The first lease started January 1, 2020, and was for 3 years at $10,000 per year rent. ABC paid $30,000 in January for the entire 3-year term. The second lease started July 1, 2020, and was for 5 years at $6,000 per year rent. ABC paid $30,000 in June for the entire 5-year term. What is the total rent expense ABC Corp. may deduct in 2020? A. $13,500 B. $13,000 C. None of the answers are correct. D. $60,000

B. $13,000 Assuming that ABC Corp. is a cash-basis taxpayer, generally, rental expenses are deductible by a cash-basis taxpayer-lessee in the tax year in which they are paid. However, the general rule does not apply to advance rental payments. Advance rental payments made by a cash-basis taxpayer-lessee are generally not deductible in the tax year in which they are made but must be allocated over the period of time for which the premises may be used as a result of such payments. ABC will deduct $13,000 as rent expense in the current year [($10,000 × 1 year) + ($6,000 × 1/2 year)].

On December 1, 2020, Krest, a self-employed cash-basis taxpayer, borrowed $200,000 to use in her business. The loan was to be repaid on November 20, 2021. Krest paid the entire interest amount of $24,000 on December 1, 2020. What amount of interest was deductible on Krest's 2020 income tax return? A. $0 B. $2,000 C. $22,000 D. $24,000

B. $2,000 (24,000 * 1/12)

Alt Partnership, a cash-basis, calendar-year entity, began business on October 1, 2020. Alt incurred and paid the following in 2020: Legal fees to prepare the partnership agreement $12,000 Accounting fees to prepare the representations in offering materials 15,000 Alt elected to amortize costs. What was the maximum amount (ignoring any immediate expensing allowed) that Alt may deduct on the 2020 partnership return? A. $6,750 B. $200 C. $0 D. $3,000

B. $200 the partnership may recognize a maximum of 3 months of amortization expense this year, or $200 ($12,000 ÷ 180 × 3).

Mr. White is a self-employed artist, his wife is a self-employed designer, and they file calendar-year joint returns. During the current year, Mr. White gave four of his clients gifts costing $40 each. In addition, he gave his accountant, Marianne (who is not his employee), a gift costing $95. During the current year, Mrs. White gave nine of her clients gifts costing $50 each. None of Mrs. White's clients were Mr. White's clients and vice versa. However, Mrs. White used the same accountant, Marianne, and gave her a gift costing $65. What is the amount of the Whites' deductible business gift expense in the current year? A. $375 B. $350 C. $770 D. $485

B. $350 Section 274(b) limits the deduction for gifts to $25 per recipient per year. Husbands and wives are considered to be a single taxpayer and are subject to a single $25 limit. Therefore, the $160 of gifts given to Marianne is limited to $25. The total deduction allowable is $350 (Mr. White's 4 gifts × $25) + (Mrs. White's 9 gifts × $25) + (Marianne's $25).

Nina's Boutique sells baby clothes and related merchandise. Nina's inventory is as follows: Product/BeginningInventory/Purchases/EndingInventory Clothes/$15,000/$120,000/$20,000 Diapers/5,000/40,000/10,000 Furniture/20,000/160,000/30,000 Toys/10,000/80,000/10,000 Additionally, Nina had $30,000 in labor expense for assembling the furniture in inventory and $10,000 for other materials and supplies. All costs were related to the production of inventory. There is no depreciation. What is Nina's cost of goods sold? A. $410,000 B. $420,000 C. $370,000 D. $390,000

B. $420,000 the amount of $420,000 is calculated as follows: Beginning inventory $ 50,000 Inventory-related purchases 400,000 Costs to produce inventory 40,000 Less: Ending inventory (70,000) Cost of goods sold $420,000

Mr. B paid the following amounts in the current year in connection with his business property: New motor purchased in December for a truck that extended its useful life by 3 years $ 600 Replacement parts to maintain machinery in efficient operating condition 3,000 Labor to maintain the above equipment 1,800 Cost of replacing gravel driveway with heavy-duty concrete 12,000 Cost of repainting factory building 1,400 What is Mr. B's allowable deduction for repairs and maintenance expense on his current year Schedule C, Form 1040? A. $2,400 B. $6,200 C. $6,800 D. $18,800

B. $6,200 Repairs and maintenance that do not materially add to the value of property or prolong its life may be deducted. All other expenditures should be capitalized and depreciated (Reg. 1.162-4). The expenditures made for a new truck motor with a useful life of 3 years and the cost of replacing the driveway should be capitalized. The $3,000 cost of replacement parts and the $1,800 in labor costs to maintain the equipment in operating condition are deductible. The $1,400 cost of repainting the factory building is also deductible as a repair and maintenance item. These costs total $6,200 for repair and maintenance expenses, which are deductible in the current year.

Clyde operated a food distribution business. He leased a small warehouse in 2018 for $60,000 per year for a 3-year term. The lease was to start on July 1, 2018. Clyde paid the first 2 years' rent in advance in May 2018. Clyde then began to make monthly payments of $5,000 starting on July 1, 2020, and continuing on the first of the month for the balance of 2020. What rent expense may Clyde claim in 2020? A. $50,000 B. $60,000 C. $30,000 D. None of the above are correct

B. $60,000 Advance rental payments made by a cash-basis taxpayer-lessee are generally not deductible in the tax year in which they are made but must be allocated over the period of time for which the premises may be used as a result of such payments. Clyde will be able to deduct $60,000 of rent because he can deduct the allocated portion of the $30,000 prepaid rent and the $30,000 of current rent expenses paid. Because the prepayment extends beyond the tax year following prepayment, the exception in Reg. 1.263(a)-4(f)(8) (i.e., the 12-month rule) does not apply.

Mr. C, a calendar-year taxpayer, uses the accrual method of accounting. He pays his employees on the third day of each month. As of December 31 of the current year, accrued wages for the month of December were $30,000. Wages paid October 3 totaled $20,000; November 3, $25,000; and December 3, $22,000. Mr. C's fourth-quarter return, Form 941, should show total wages of A. $75,000 B. $67,000 C. $97,000 D. $45,000

B. $67,000 Paid October 3 $20,000 Paid November 3 25,000 Paid December 3 22,000 Total wages in fourth quarter $67,000

Mr. Pine, a self-employed engineer in Boston, traveled to Chicago in order to attend a course on new engineering techniques. He spent 2 weeks attending the course and remained in Chicago for an additional 6 weeks on personal matters. The air flight cost $200, hotel $600, meals $320, and the tuition for the course $500. How much of these expenses may Mr. Pine deduct on his return? A. $500 B. $690 C. $714 D. $890

B. $690 A deduction for adjusted gross income is allowed for travel expenses while away from home in connection with a trade or business [Sec. 162(a)]. However, transportation is deductible only if the trip is primarily related to the taxpayer's trade or business (Reg. 1.162-2). If more days are spent for personal purposes than for business purposes, none of the transportation is deductible. Since Mr. Pine spent 6 out of his 8 weeks in Chicago on personal matters, the cost of the flight to Chicago is not deductible. Meals and lodging must always be allocated between personal and business. Under Sec. 274(n), business meals are deductible at only 50% of their cost. The expenses for 2 weeks out of 8 weeks are deductible. Educational expenses are deductible if the education maintains or improves skills required in the taxpayer's business (Reg. 1.162-5). Hotel ($600 × 2 ÷ 8) $150 Meals ($320 × 50% × 2 ÷ 8) 40 Tuition 500 Total deduction $690

Gary Judd is an individual proprietor trading as Lake Stores, an accrual basis enterprise that had been using the allowance method for determining bad debt expense for both book and tax purposes. At December 31, 2019, Lake's allowance for doubtful accounts ("bad debt reserve") was $20,000. In Lake's 2020 budget, it was estimated that $3,000 of trade accounts receivable would become worthless in 2020. However, actual bad debts amounted to $4,000 in 2020. In Lake's 2020 Schedule C of Form 1040, Lake is allowed A. A $4,000 deduction for bad debts but must also include $5,000 of the "reserve" in taxable income B. A $4,000 deduction for bad debts and does not have to include any portion of the "reserve" in taxable income C. No deduction for bad debts since these bad debts should be charged against the "reserve" D. A $1,000 deduction for bad debts, which is the excess of actual bad debts over the amount estimated

B. A $4,000 deduction for bad debts and does not have to include any portion of the "reserve" in taxable income

All of the following expenses incurred in the course of operating a business are deductible business expenses except A. Advertising in a concert program the local church is sponsoring. B. Advertising in a convention program of a political party. The proceeds from the publication of the program are for the local use of the political party. C. Public service advertising that keeps the name of the business before the public. D. Advertising sponsorship at public school sporting events.

B. Advertising in a convention program of a political party. The proceeds from the publication of the program are for the local use of the political party.

The Social Security tax does not apply to which of the following? A. Compensation paid in forms other than cash. B. Medical and hospital reimbursements by the employer that are excluded from gross income. C. Bonuses and vacation time pay. D. Self-employment income of $1,000.

B. Medical and hospital reimbursements by the employer that are excluded from gross income.

Which of the following statements about business meals is true? A. Meals while traveling for business are not deductible. B. No deduction is allowed for meals that are lavish or extravagant. C. The meal is deductible whether or not the taxpayer or their employee is present at the meal. D. The IRS denies deductions for any meal expense for which substantiating evidence is not provided.

B. No deduction is allowed for meals that are lavish or extravagant.

A cash-basis taxpayer made a bona fide, nonbusiness loan to an acquaintance in Year 1. At the end of Year 2, it is determined that the taxpayer will likely be able to collect only 20% of the principal, and no interest has been or will be collected. How should the loss be treated for tax purposes in Year 2? A. Eighty percent of the principal, but none of the interest, is deductible in Year 2. B. None of the loss is deductible in Year 2. C. Eighty percent of the principal, up to $3,000, is deductible in Year 2. D. Eighty percent of the principal and 80% of the interest are deductible in Year 2

B. None of the loss is deductible in Year 2.

Which one of the following statements about the self-employment tax is false for 2020? A. In addition to deducting one-half of the self-employment taxes for income tax purposes, self-employment net income can be reduced by the product of the net income from self-employment times one-half of the self-employment tax rate. B. The maximum self-employment tax that can be owed by a self-employed individual is 15.3% times $137,700, or $21,068. C. Self-employed individuals may deduct one-half of their self-employment taxes for income tax purposes. D. The old-age, survivors, and disability insurance (OASDI) portion of the self-employment tax has a $137,700 net earnings ceiling, while the hospital insurance (Medicare) portion of the self-employment tax has no ceiling.

B. The maximum self-employment tax that can be owed by a self-employed individual is 15.3% times $137,700, or $21,068.

All of the following payments made to employees would be currently deductible as business expenses except A. Reasonable salary paid to a corporate officer owning a controlling interest for services she rendered. B. Wages paid to employees for constructing a new building to be used in the business. C. Vacation pay paid to an employee when the employee chooses not to take a vacation. D. Lump-sum payment made to the beneficiary of a deceased employee that is reasonable in relation to the employee's past services, i.e., payment equivalent to compensation.

B. Wages paid to employees for constructing a new building to be used in the business.

Sabrina is a cash-basis self-employed accountant. During 2020, she had the following income and expense items: Gross receipts $164,500 Operating expenses 31,000 Guaranteed payments from partnership for service to partnership 6,000 Share of income from general partnership that operates bakery 10,000 Net operating loss carryover (6,000) Share of S corporation's ordinary income 7,000 Gain on sale of a computer used in the business 500 What is the amount of earnings on which Sabrina will have to pay the Medicare portion of the self-employment tax for 2020? A. $144,528 B. $137,700 C. $138,063 D. $149,500

C. $138,063 The Medicare portion of the self-employment tax has no ceiling. Thus, Sabrina will pay the hospital insurance portion of the tax on her earnings from self-employment of $138,063. The calculation is net income of $149,500 [($164,500 gross receipts - $31,000 operating expenses) + $6,000 guaranteed payments + $10,000 partnership income] reduced to net earnings from self-employment of $138,063 [$149,500 - ($149,500 × 0.0765)].

Mr. T has been a night watchman at Y Company for 10 years. During the current year, he received the following payments from Y Company: Salary$15,000 Hospitalization insurance premiums 3,600 Required lodging on Y's premises for Y's convenience as a condition to T's employment 2,400 Reward for preventing a break-in 1,000 Christmas ham (value) 15 What amount is includible in Mr. T's gross income in the current year? A. $15,000 B. $16,015 C. $16,000 D. $17,400

C. $16,000 The hospitalization insurance premiums paid by Mr. T's employer are excluded from gross income under Sec. 106. Since Mr. T was required to live on Y's premises both for Y's convenience and as a condition for his employment, the cost of such lodging is excluded from gross income under Sec. 119. The Christmas ham is excluded from gross income under Sec. 132 as a de minimis fringe. Therefore, Mr. T's salary of $15,000 and the reward of $1,000 are the only items included in gross income as compensation for services rendered (Sec. 61).

Which of the following fringe benefits is not excludable from an employees wages? A. Qualified employee discount B. Educational assistance expenses of $5,250 provided through an educational assistance program C. $2,500 of group term life insurance covering the death of an employee's spouse or dependent D. Qualified transportation benefits

C. $2,500 of group term life insurance covering the death of an employee's spouse or dependent

AMJ Enterprises is a small book publisher. It incurred the following as its miscellaneous expenses: Bank service charges $ 70 Office supplies 100 Advertising 600 Fees to attorneys and CPAs 2,400 Interest for the entire period of a 5-year loan taken out on January 12,500 How much of the above may AMJ Enterprises deduct for the current year? A. $770 B. $3,570 C. $3,670 D. $5,670

C. $3,670 Professional fees are deductible under Sec. 162, the same as compensation to an employee, provided they are reasonable in amount. Advertising and bank service charges are deductible as general expenses. Office supplies are also deductible under Reg. 1.162-3. Sec. 461(g) requires prepaid interest to be capitalized and allocated to the periods to which it relates. Since the interest was prepaid for 5 years, only one-fifth of the interest may be deducted in the current year. Bank service charges $ 70 Office supplies 100 Advertising 600 Professional fees 2,400 Interest (1/5 × $2,500) 500 Deductible business expenses $3,670

You are the accountant for Company R, and you are requested to file Form 941, Employer's Quarterly Federal Tax Return for Federal Income Tax Withheld from Wages and for Federal Insurance Contributions Act Taxes, for the third quarter of 2020. Given the following information, what is the total FICA tax due for the third quarter (rounded to the nearest dollar)? Employee/Wages Paid Third Quarter/Wages Paid First 2 Quarters X/$5,000/$5,000 Y/$20,000/$118,700 Z/$5,000/$0 A. $3,596 B. $3,720 C. $4,466 D. $4,590

C. $4,466 The two components of the FICA tax [Social Security (SS) and Medicare] must be reported separately on Form 941. The rate for SS is 6.2% for employers and employees on wages up to $137,700 (in 2020). The rate for Medicare is 1.45% each for employers and employees, with no wage ceiling. With respect to the SS component, the tax is paid until the wage ceiling is reached. Then no SS tax is paid for the rest of the year; i.e., it is not paid ratably over the year. The total wages subject to the SS component in the third quarter of 2020 amount to $29,000 since Y's wages exceed the SS limitation before the end of the quarter. The total FICA tax is 7.65% in 2020. However, the employee and the employer are each required to pay the 7.65%, and the combined percentage of 15.3% is reported on Form 941, separated into its two components. Wages Employee Social Security Medicare Total X $ 5,000 $ 5,000 Y 19,000 20,000 Z 5,000 5,000 Total $29,000 $30,000 Times: Rate × 0.124 × 0.029 Tax Liability $ 3,596 $ 870 $ 4,466

Under a "cafeteria plan" maintained by an employer, A. Participation must be restricted to employees and their spouses and minor children B. At least 3 years of service are required before an employee can participate in the plan C. Participants may select their own menu of benefits D. Provision may be made for deferred compensation other than 401(k) plans

C. Participants may select their own menu of benefits

In 2016, Ross was granted an incentive stock option (ISO) by his employer as part of an executive compensation package. Ross exercised the ISO in 2018 and sold the stock in 2020 at a gain. Ross's profit was subject to the income tax for the year in which the A. ISO was granted B. ISO was exercised C. Stock was sold D. Employer claimed a compensation deduction for the ISO

C. Stock was sold

Recasto owns a second residence that is used for both personal and rental purposes. During 2020, Recasto used the second residence for 50 days and rented the residence to Louis for 200 days. Which of the following statements is true? A. Depreciation may not be deducted on the property under any circumstances B. A rental loss may be deducted if rental related expenses exceeded rental income C. Utilities and maintenance on the property must be divided between personal and rental use D. All mortgage interest and taxes on the property will be deducted to determine the property's net income or loss

C. Utilities and maintenance on the property must be divided between personal and rental use

On September 18, 2020, Dennis was killed in an automobile accident. In October 2020, his widow received a lump-sum death benefit from his employer in the amount of $15,000. Dennis had no right to the $15,000 prior to death. For 2020, what amount should his widow include in adjusted gross income, assuming a joint tax return was filed? A. $0 B. $10,000 C. $14,000 D. $15,000

D. $15,000

Bob, a calendar-year, cash-basis taxpayer, owns an insurance agency. Bob has four people selling insurance for him. The salesmen incur ordinary and necessary meal expenses for which Bob reimburses them monthly. During the current year, Bob reimbursed his agents $36,000 for meals. How much of the reimbursement can Bob deduct for meal expenses on his current-year federal income tax return? A. $28,800 B. $36,000 C. $27,000 D. $18,000

D. $18,000 Bob's deduction for meal expenses is $18,000 ($36,000 × 50%).

Baum, an unmarried optometrist and sole proprietor of Optics, buys and maintains a supply of eyeglasses and frames to sell in the ordinary course of business. In 2020, Optics had $350,000 in gross business receipts and its year-end inventory was not subject to the uniform capitalization rules. Baum's 2020 adjusted gross income was $90,000 and Baum qualified to itemize deductions. During 2020, Baum recorded the following information: Business expenses: Optics cost of goods sold $35,000 Optics rent expense 28,000 Liability insurance premium on Optics 5,250 Other expenditures: Baum's self-employment tax 24,620 Baum's self-employment health insurance 8,750 Insurance premium on personal residence. In 2020, Baum's home was totally destroyed by fire. The furniture had an adjusted basis of $14,000 and a fair market value of $11,000. During 2020, Baum collected $3,000 in insurance reimbursement and had no casualty gains during the year. 2,625 Qualified 2020 mortgage interest on a loan to acquire a personal residence 52,500 Annual interest on a $70,000 5-year home equity loan. The loan was secured by Baum's home, obtained on January 2, 2020. The fair market value of the home exceeded the mortgage and the home equity loan by a substantial amount. The proceeds were used to purchase a car for personal use. 3,500 Points prepaid on January 2, 2020, to acquire the home equity loan 1,400 Real estate taxes on personal residence 2,200 Estimated payments of 2020 federal income taxes 13,500 Local property taxes on the car value, used exclusively for personal use 300 What amount should Baum report as 2020 net earnings from self-employment? A. $273,000 B. $248,380 C. $257,130 D. $260,196

D. $260,196 The net profit or (loss) from self-employment is the gross business receipts reduced by the business expenses. The net profit or (loss) therefore should be $281,750 ($350,000 gross business receipts - $35,000 cost of goods sold - $28,000 rent expense - $5,250 liability insurance premium). Line 4 on Schedule SE requires the tax preparer to multiply the net profit or (loss) by 0.9235 ($281,750 × 0.9235 = $260,196) to determine the net earnings from self-employment [also calculated as NI from self-employment - (0.0765 × NI from self-employment)]. The net earnings from self-employment should be $260,196.

Basic Partnership, a cash-basis calendar-year entity, began business on February 1, Year 1. Basic incurred and paid the following in Year 1: Filing fees incident to the creation of the partnership $3,600 Accounting fees to prepare the representations in offering materials $12,000 Basic elected to amortize costs. What was the maximum amount that Basic could deduct on the Year 1 partnership return? A. $5,000 B. $3,300 C. $0 D. $3,600

D. $3,600

Michael operates his health food store as a sole proprietorship out of a building he owns. Based on the following information regarding Year 6, compute his net self-employment income (for SE tax purposes) for Year 6. Gross receipts $100,000 Cost of goods sold 49,000 Utilities 6,000 Real estate taxes 1,000 Gain on sale of business truck 2,000 Depreciation expense 5,000 Sec. 179 expense 1,000 Mortgage interest on building 7,000 Contributions to Keogh retirement plan 2,000 Net operating loss from Year 5 10,000 A. $14,000 B. $16,000 C. $24,000 D. $31,000

D. $31,000 100,000 (49,000) (6,000) (1,000) (5,000) (1,000) (7,000)

George owns a cabin in the Colorado mountains. Last year, the cabin was rented for 120 days at market value. Additionally, George and his family used the cabin for 45 days. Within parameters, George can deduct expenses related to the production of rental income. Which of the following statements is false? A. The allocable portion of mortgage interest and property taxes are deducted first. B. Expenses must be allocated between personal use and rental use. C. Repairs, maintenance, and depreciation are allowable deductions. D. All deductions may be taken and a loss is allowed.

D. All deductions may be taken and a loss is allowed.

The federal Social Security Act A. Does not apply to self-employed persons. B. Excludes professionals such as accountants, lawyers, and doctors. C. Provides for a deduction for Social Security taxes paid by the employee that is available against his or her federal income tax. D. Provides that bonuses and commissions paid as compensation are included as wages in the calculation of employer-employee contributions.

D. Provides that bonuses and commissions paid as compensation are included as wages in the calculation of employer-employee contributions.