Income Tax Part 2 (8-16)
Match the following deductions with their correct description. Section 1244 Stock A.$100,000 ordinary loss for married filing jointly, excess is capital loss ($50,000 for single filers). B. Assumed worthless at year-end of realization. C. If business and accrual, ordinary loss. If personal, specific write off and short-term capital loss. D. Not deductible except as casualty losses.
$100,000 ordinary loss for married filing jointly, excess is capital loss ($50,000 for single filers).
Match the following deductions with their correct description. Worthless Securities A.$100,000 ordinary loss for married filing jointly, excess is capital loss ($50,000 for single filers). B.Assumed worthless at year-end of realization. C.If business and accrual, ordinary lossIf personal, specific write off and short-term capital loss. D.Not deductible except as casualty losses.
Assumed worthless at year-end of realization.
Steve has been adjusting his portfolio to meet his target asset allocation, and has realized several capital gains and losses this year. $13,000 in short-term capital gains. $9,000 in short-term capital losses. $4,000 in long-term capital gains. $7,000 in long-term capital losses. What is Steve's net gain or loss? $1,000 net short-term capital gain. $1,000 net long-term capital loss. $1,000 net short-term capital loss. $1,000 net long-term capital gain.
Because the $4,000 NSTCG and the $3,000 NLTCL have different signs, they can be combined. The resulting $1,000 is a NSTCG because $4,000 is larger than $3,000. Page 472
Match the following deductions with their correct description. Net Operating Losses A. Ratably written off. B. In year paid, amortized over 60 months, or capitalized. C. Carryforward to offset against 80% of income in future year .
Carryforward to offset against 80% of income in future year .
Joyce, a farmer, has the following events occur during the tax year. Which of the events qualify as an involuntary conversion under § 1033 (non-recognition of gain from an involuntary conversion)? Her farm tractor is hauled to the city dump because it is worn out. She burns her barn because it is infested with termites. Her personal residence, adjusted basis of $100,000, is condemned to make way for an interstate highway. She recovers condemnation proceeds of $175,000. She sells 10 acres of pasture land at a loss of $40,000 because she has reduced the size of her dairy herd due to a reduction in milk prices.
Her personal residence, adjusted basis of $100,000, is condemned to make way for an interstate highway. She recovers condemnation proceeds of $175,000.
Match the following deductions with their correct description. Bad Debts A.$100,000 ordinary loss for married filing jointly, excess is capital loss ($50,000 for single filers). B.Assumed worthless at year-end of realization. C.If business and accrual, ordinary loss if personal, specific write off and short-term capital loss. D.Not deductible except as casualty losses.
If business and accrual, ordinary loss if personal, specific write off and short-term capital loss.
Match the following deductions with their correct description. Research and experimental expenditures A.Ratably written off. B.In year paid, amortized over 60 months, or capitalized. C.Carryforward to offset against 80% of income in future year.
In year Paid, amortized over 60 Months or capitalized
Paula pursued a hobby of making bedspreads in her spare time. During the year she sold the bedspreads for $6,000. She incurred expenses as follows: Supplies - $1,900 Interest on loan to get business started - $600 Advertising - $400 Assuming that the activity is deemed a hobby, that Paula's AGI was $40,000, and she can itemize this year, how should she report these items on her tax return? A.Include $6,000 in income and deduct $2,900 for AGI. B.Ignore both income and expenses since hobby losses are disallowed. C.Include $6,000 in income and deduct nothing for AGI since none of the hobby expenses are deductible. D.Include $6,000 in income and deduct interest of $600 for AGI. E.None of the choices.
Include $6,000 in income and deduct nothing for AGI since none of the hobby expenses are deductible.
Which of the following decreases a taxpayer's at-risk amount? Cash and the adjusted basis of property contributed to the activity. Amounts borrowed for use in the activity for which the taxpayer is personally liable or has pledged as security property not used in the activity. Taxpayer's share of amounts borrowed for use in the activity that is qualified nonrecourse financing. Taxpayer's share of the activity's income. None of the choices
None of the choices
Tom operates an illegal drug-running operation and incurred the following expenses: Salaries - $75,000 Illegal kickbacks - $20,000 Bribes to border guards - $25,000 Cost of goods sold - $160,000 Rent - $8,000 Interest - $10,000 Insurance on furniture and fixtures - $6,000 Utilities and telephone - $20,000 Which of the above amounts reduces his taxable income? $0 $160,000 $279,000 $324,000 None of the choices.
Solution: The correct answer is B. The cost of goods sold in the amount of $160,000 is treated as a negative item in calculating gross income rather than as a deduction. For a drug dealer, all other deductions are disallowed (per IRS).
Match the following deductions with their correct description. Depreciation A.Ratably written off. B.In year paid, amortized over 60 months, or capitalized. C.Carryforward to offset against 80% of income in future year .
Ratably written off.
John purchased a new car on June 5, of the current year, at a cost of $12,000. John used the car 100% for personal use. Determine John's cost recovery deduction in the current year. A.$0 B.$1,920 C.$2,400 D.$2,960 E.$7,660
Solution: The correct answer is A. No cost recovery is allowed because the car is used 100% for personal use.
Which of the following, if any, correctly characterize the check-the-box Regulations? A one-owner business becomes a sole proprietorship if default (no election is made) occurs. A one-owner business cannot elect to be taxed as a corporation. If default (no election is made) occurs, a limited liability company is taxed as a corporation. The check-the-box Regulations apply to all entities that are already incorporated under state law. None of the choices.
Solution: The correct answer is A. A one-owner business can elect to be taxed as a corporation. If default occurs, (no election is made), a limited liability company is taxed as a partnership. The check-the-box Regulations do not apply to entities that are incorporated under state law.
Five years ago, Bailey purchased 200 shares of Circus Clowns, Inc. for $4,000. Bailey recently gifted those shares of stock to his son Barnum. The value of the 200 shares of stock on the date of the gift was $2,000. Which of the following statements is correct? A.If Barnum subsequently sells the shares of Circus Clowns, Inc. for $4,750, the basis used to calculate his gain or loss will be $4,000. B.If Barnum subsequently sells the shares of Circus Clowns, Inc. for $4,750, the basis used to calculate his gain or loss will be $1,000. C.If Barnum subsequently sells the shares of Circus Clowns, Inc. for $1,600, the basis used to calculate his gain or loss will be $4,000. D.If Barnum subsequently sells the shares of Circus Clowns, Inc. for $1,600, he will not have any gain or loss.
Solution: The correct answer is A. Barnum will have a double basis in the stock, If Barnum subsequently sells the shares of Circus Clowns, Inc. for $4,750 (or greater than the FMV on the date of the gift), the basis used to calculate his gain or loss will be $4,000.
Kevin owns a modified endowment contract. Kevin recently reassessed his insurance needs and decided that he would like to exchange his current modified endowment contract for a different insurance product. Which of the following transactions might result in gain realization? If Kevin trades his modified endowment contract for a life insurance policy. If Kevin trades his modified endowment contract for a different modified endowment contract. If Kevin trades his modified endowment contract for an annuity. None of the above transactions would result in the realization of gain.
Solution: The correct answer is A. If Kevin trades his modified endowment contract for a life insurance policy, the transaction will not be eligible for the deferral of gain under Section 1035 of the Internal Revenue Code.
Which of the following statements concerning hobby activities is correct? A.Any activity which generates a profit within three years is presumed to be a for profit venture, not a hobby activity. B.The IRS must prove that the taxpayer does not have a profit motive to treat an activity as a hobby activity. C.Expenses associated with the hobby activity can offset, without limitation, the income generated from the activity. D.Hobby income is included in gross income above the line, while hobby expenses are deducted below the line and are subject to a 2% hurdle.
Solution: The correct answer is A. Income generated from a hobby activity is included in gross income, and expenses associated with the hobby will no longer be deductible as a miscellaneous itemized deduction. If the activity earns a profit in three out of five years, it is presumed to be a for profit venture and the IRS has the burden of proof of showing that there is no profit motive avoiding taxpayer's above the line deductible business expense. However, if there has not been a profit in three out of the last five years, the taxpayer has the burden of proof to prove it is a "for profit" venture. There are extended timelines for certain specialty businesses, BUT this is the general rule. Keep in mind - There is no "bright line test" that requires an activity to be treated as a hobby activity based on the income trend of an activity, however for exam purposes the 3 out of 5 year is generally followed.
Which of the following assets held by a manufacturing business is not a § 1231 asset? Inventory A machine used in the business and held more than one year A factory building used in the business and held more than one year Land used in the business and held more than one year All of the choices
Solution: The correct answer is A. Inventory is an ordinary asset.
If you meet all of the requirements of a 1031 tax-free exchange, which of the following is true? Like-kind exchange treatment is mandatory. Like-kind exchange treatment requires an affirmative election. Like-kind exchange treatment is completely discretionary. None of the above is true.
Solution: The correct answer is A. Like-kind exchange treatment is mandatory if all of the requirements are met. In a non-simultaneous exchange, the target property must be identified within 45 days of release from the original property.
Mitch, who is single and has no dependents, had AGI of $150,000. His potential itemized deductions were as follows: Medical expenses (before percentage limitation) - $20,000 State income taxes - $3,000 Real estate taxes - $7,000 Mortgage (qualified housing and residence) interest - $9,000 Cash contributions to various charities - $4,000 Unreimbursed employee expenses (before percentage limitation) - $4,300 What is the amount of Mitch's AMT adjustment for itemized deductions? $10,000 $13,750 $16,800 $19,300 $25,800
Solution: The correct answer is A. Mitch's adjustment for itemized deductions for AMT purposes are as follows: State income taxes 3,000 Real estate taxes 7,000 Total 10,000 Notes Unreimbursed employee expenses: no longer deductible
Andrew, who operates a laundry business, incurred the following expenses during the year. Parking ticket of $100 for one of his delivery vans that parked illegally. Parking ticket of $50 when he parked illegally while attending a rock concert in Tulsa. DUI ticket of $400 while returning from the rock concert. Attorney's fee of $500 associated with the DUI ticket. What amount can Andrew deduct for these expenses? $0 $50 $150 $550 $1,050
Solution: The correct answer is A. None of these expenses are deductible. The $50 parking ticket, the $400 DUI ticket, and the $500 attorney fee are all personal expenses. The $100 parking ticket, although related to his laundry business, is not deductible because it is a violation of public policy.
Which of the following is not a requirement for claiming the credit for child and dependent care expenses? Payments for employment-related care may not be made to relatives of the taxpayer. Expenses must be incurred for the care of qualifying individuals. The expenses must be incurred to enable the taxpayer to work or to actively look for work. The taxpayer must have earned income.
Solution: The correct answer is A. Payments for employment-related care that are made to relatives of the taxpayer may qualify for the credit, even if the relatives live with the taxpayer (although they cannot be the taxpayer's dependents). All of the other statements correctly describe requirement of the credit for child and dependent care expenses.
On January 1, Andrea reviews her investment portfolio and finds out that she has had a very profitable year. To offset some of her gains, Andrea sells 100 shares of Big Bear Corporation for $10,000. She purchased those shares for $15,000 two years earlier. On January 25 of the same year, Andrea reads a newspaper article indicating that the price of Big Bear Corporation is expected to increase substantially. Second-guessing the wisdom of selling her previous shares of Big Bear stock, she purchases 100 shares of Big Bear Corporation for $8,000. What are the tax consequences to Andrea this year? A.$5,000 realized, but not recognized loss. B.$8,000 realized and recognized loss. C.$5,000 realized and recognized loss. D.$7,000 realized, but not recognized loss.
Solution: The correct answer is A. Since Andrea purchased and sold substantially identical securities within 30 days, a wash-sale occurs. Her realized loss on the sale of the original shares is calculated as follows: Amount Realized: $10,000 Less: Adjusted Basis -$15,000 Equals: Gain or (Loss) ($5,000) Due to the wash sale transaction, however, Andrea will not be permitted to recognize the loss in the year it was incurred. Instead, the realized but unrecognized loss of $5,000 will be added to the basis of the replacement securities. Andrea purchased the replacement securities for $8,000 so adding the unrecognized loss increases her basis to $13,000. By increasing basis in the amount of the unrecognized loss, Andrea will receive that back tax-free when she ultimately sells the stock.
Which of the following is a capital asset? The bicycle of a 10-year old child. The child purchased the bicycle with money inherited from an aunt. The tools used by a self-employed carpenter. The lots owned by a company that is in the business of buying and reselling residential building lots. A "mint" set of 1985 coins owned by a coin dealer and that is for sale on his website. None of the choices.
Solution: The correct answer is A. The bicycle is a personal use asset and, therefore, a capital asset. The manner in which the child acquired the bicycle is not relevant. All of the other items are excluded from being a capital asset under § 1221.
Shontelle received a gift of income-producing property with an adjusted basis of $50,000 to the donor and fair market value of $40,000 on the date of gift. Gift tax of $6,000 was paid by the donor. Shontelle subsequently sold the property for $45,000. What is the recognized gain or loss? A.$0. B.$5,000. C.$4,000. D.($5,000). E.($11,000).
Solution: The correct answer is A. The gain basis for Shontelle is $50,000 and the loss basis is $40,000. Because the sales price is within this range, no gain or loss is recognized. In this case, the gift tax paid of $6,000 has no effect on the gain basis
Shontelle received a gift of income-producing property with an adjusted basis of $50,000 to the donor and fair market value of $40,000 on the date of gift. Gift tax of $6,000 was paid by the donor. Shontelle subsequently sold the property for $45,000. What is the recognized gain or loss? A.$0 B.$5,000 C.$4,000 D.($5,000) E.($11,000)
Solution: The correct answer is A. The gain basis for Shontelle is $50,000 and the loss basis is $40,000. Because the sales price is within this range, no gain or loss is recognized. In this case, the gift tax paid of $6,000 has no effect on the gain basis.
Eighteen-year residential real property owned by an individual has accumulated accelerated depreciation of $150,000 at January 1 of the current year. If depreciation had been computed under the straight-line method, accumulated depreciation would be $140,000. The property is sold on January 1 of the current year, with a recognized gain of $175,000. What is the amount of ordinary income depreciation recapture? A.$10,000 B.$140,000 C.$150,000 D.$175,000 E.None of the choices
Solution: The correct answer is A. The recapture is calculated under § 1250. Therefore, only the additional depreciation of $10,000 is recaptured as ordinary income ($150,000 - $140,000).
Copper Corporation sold machinery for $27,000 on December 31 of the current year. The machinery was purchased several years ago for $30,000 and had an adjusted basis of $21,000 at the date of the sale. For the current year, what should Copper Corporation report? A.Ordinary income of $6,000 B.A § 1231 gain of $3,000 and $3,000 of ordinary income C.A § 1231 gain of $6,000 D.A § 1231 gain of $6,000 and $3,000 of ordinary income E.None of the choices
Solution: The correct answer is A. The recognized gain from the disposition of the machinery is $6,000 ($27,000 sale price - $21,000 adjusted basis). Since the recognized gain is less than the depreciation taken of $9,000 ($30,000 cost - $21,000 adjusted basis) and the asset is depreciable equipment used in a business, § 1245 depreciation recapture applies.
Kate sells property for $120,000. The buyer pays $2,000 in property taxes that had accrued during the year while the property was still legally owned by Kate. In addition, Kate pays $6,000 in commissions and $2,000 in legal fees in connection with the sale. How much does Kate realize from the sale of her property? A.$112,000 B.$114,000 C.$116,000 D.$120,000 E.None of the choices.
Solution: The correct answer is B. The amount realized is calculated as follows: Sales price $120,000 Taxes paid by buyer on behalf of seller 2,000 Less: Commissions (6,000) Legal fees (2,000) Amount realized $114,000
Britney owned an office building in Los Angeles that she rented out to several production companies. The building was destroyed by a fire and was a complete loss. Britney received a settlement from her insurance company in the same year and would like to reinvest in a new property. Britney wants to make sure that she is eligible for like-kind exchange treatment. Which of the following is not correct regarding the requirements for like-kind exchange treatment on Britney's transaction? Because Britney rented out the building instead of using the property directly, the replacement property must meet the functional use test. Britney must invest the proceeds in a replacement property that has a similar use to the property that was destroyed in the fire. Britney must reinvest the insurance proceeds within two years from the end of the year in gain was realized from the conversion. Since Britney received cash as a result of the involuntary conversion, nonrecognition treatment is not mandatory even if she meets all of the requirements.
Solution: The correct answer is A. The replacement property must meet the taxpayer use test, not the functional use test, since Britney did not use the property directly. The taxpayer use test requires replacement property to be used by the taxpayer in an activity which is treated the same for tax purposes in order to qualify for like-kind exchange treatment. All of the other statements regarding the like-kind exchange treatment of Britney's transaction are correct.
Which of the following is not a requirement of the individual investor exception to the passive activity loss rules? The taxpayer must materially participate in the activity. The taxpayer must own at least 10% of the value of the real estate. The taxpayer must have an AGI of less than $150,000. The taxpayer must actively participate in the activity.
Solution: The correct answer is A. The taxpayer is not required to materially participate in the activity, but the taxpayer must actively participate in the activity. Material participation requires substantial, continuous involvement in the operation of the activity. Active participation means that the taxpayer participates in making management decisions concerning the property, but is not substantially and continuously involved in the operation of the activity.
Marc, Inc. placed into service a machine in 2022 that costs $220,000. What is the maximum Section 179 expense that Marc, Inc. could take for 2022 assuming they had taxable income before the deduction of $100,000? A.$100,000 B.$120,000 C.$220,000 D.$520,000
Solution: The correct answer is A. There is no "placed into service phase out" applicable here because the amount is below the placed into service limit. However, there is a limitation based on taxable income. The section 179 expense cannot create a loss. Thus, only 100,000 can be taken in the current year and the remaining 120,000 will be carried forward to be utilized in future years.
Chanel owns a condo in Hilton Head that she rents during the busy season (April-August). She and her family use the condo all of March, September and one week during October. The condo generates $40,000 in rental income and she incurs $55,000 in expenses (mortgage interest, real estate taxes, brokerage fees, and miscellaneous expenses) associated with the rental activity, which of the following statements is correct? A.There will be no increase in Chanel's taxable income for the year. B.Chanel will report a $15,000 loss on the property for tax purposes this year. C.The $15,000 loss on the property is suspended under the passive activity rules. D.By increasing Chanel's AGI, the inclusion of the income could result in the loss of some of Chanel's otherwise allowable itemized deductions.
Solution: The correct answer is A. This is a mixed-use property, since the property was rented out for more than 14 days, and Chanel used the property for more than 14 days. Therefore, Chanel must include the rental income, but is permitted to deduct expenses to the extent of the income generated from the activity as a production of income expense, which directly offsets gross income (is an above the line deduction). Therefore, there will be no increase in Chanel's AGI or taxable income for the year. The $15,000 of additional expenses that would otherwise have generated a loss is not deductible, so there is no loss that can be suspended under the passive activity rules.
Sandra acquired a passive activity several years ago. Until 20x1, the activity was profitable. The activity produced losses of $100,000 in 20x1 and $50,000 in 20x2. Sandra had no passive income in 20x1 or 20x2. How much is her suspended loss from the activity? $90,000 from 20x1 and $50,000 from 20x2 $100,000 from 20x1 and $50,000 from 20x2 $0 from 20x1 and $0 from 20x2 None of the choices
Solution: The correct answer is B. $100,000 is suspended from 20x1 and $50,000 is suspended from 20x2.
Amy and Steve are married. They sell their home in Texas because Amy was offered a job in Washington DC. Amy owned and used the home for 5 years. Steve moved in 1 year ago. If the basis in the home is $300,000 and the sale price is $700,000, what is the maximum exclusion? $250,000 $375,000 $400,000 $500,000
Solution: The correct answer is B. Amy has met the owned and use rules, she gets the $250,000 exclusion.Steve has only met 1 of the 2 years required for the use rule, so his $250,000 is prorated by 1/2. His exclusion is $125,000. (½ × $250) + 250 = $375; limited to 400 (the total gain)
Joel has a 30 percent interest in a general partnership for which he paid $25,000. The partnership loss for the year is $180,000. How much can Joel deduct? $0. $25,000. $54,000. $60,000.
Solution: The correct answer is B. Joel's proportional loss is $54,000 ($180,000 × 30%). However, Joel's loss is limited to $25,000 due to the at-risk rules. He will also have a suspended loss of $29,000 ($180,000 × 30%) - $25,000. The loss suspended is suspended under the at risk rules.
Marc, Inc. placed into service a machine in the current year that cost $2,720,000. What is the maximum Section 179 expense that Marc, Inc. could take for 2022?
Solution: The correct answer is B. Max = $1,080,000 reduced $1 for $1 in excess of threshold of $2,700,000. $2,720,000 - $2,700,000 = $20,000 $1,080,000 - $20,000 = $1,060,000
Reilly owns and operates an accounting practice as a sole proprietorship. For tax reporting, Reilly uses the accrual method of accounting. Last year, Reilly prepared a tax return for a client and billed the client $600. The client did not pay and has recently disappeared. The reminder notices that Reilly's secretary sent to the client have been returned with no forwarding address. How should this bad debt be treated for income tax purposes? A.No bad debt deduction is permitted. B.Reilly may deduct $600 from his business income. C.Reilly may deduct $600 as a short-term capital loss. D.Reilly may deduct $600 as a long-term capital loss.
Solution: The correct answer is B. Since Reilly uses the accrual method of accounting, he reported and paid tax on the $600 of income last year when he performed all of the services necessary to collect the income. It is clear that Reilly will not be able to collect the debt, so he can use the specific charge off method and deduct $600 from his business income this year.
Kayci would like to establish a business with her business partner Nathan. They would like to have an entity that provides for limited liability. They would like the flexibility to allocate profits and losses in a percentage differing from their ownership interest. They expect losses in the first few years. Which entity should they establish? Partnership LLC taxed as a partnership S-Corporation C-Corporation
Solution: The correct answer is B. The partnership does not allow for limited liability. The S-corporation does not allow for the allocation of profits. The C-Corporation does not allow for the allocation of profits or the flow through of losses. The LLC taxed as a partnership meets all of their requirements.
All of the following are incorrect regarding Net Operating Losses (NOL) EXCEPT: A taxpayer is entitled to apply the NOLs against prior-year income for at least 2 years. NOLs can be carried forward and may be used against up to 80% of income annually. Unused NOLs can be carried forward for 20 years for the full amount of income. All of the above.
Solution: The correct answer is B. The question is looking for the true statement. Choice A is a false statement. Based on the TCJA, as of 2018 NOLs can no longer be carried back. Choice C is a false statement. You can carry forward indefinitely. Choice D is a false statement. Not all answer options are true statements.
Frank is considering selling a parcel of raw land located in South Dakota that he owns. If Frank sells the land, he would like to invest the proceeds in another piece of real property and would like to qualify for like-kind exchange treatment. Which of the following assets would not qualify as like-kind property? An apartment building located in Florida. Raw land located in Canada. An office building located in South Dakota. An industrial warehouse located in California.
Solution: The correct answer is B. U.S. real estate and foreign real estate are not like-kind assets for income tax purposes. Therefore, if Frank exchanges his raw land in South Dakota for raw land in Canada, he will not qualify for like-kind exchange treatment.
40.0% complete Question Abigail was an original investor in, and owns a 25% interest in, Decorate Your Dream LLC, a home decorating company. Abigail paid $50,000 for her interest. This year, Decorate Your Dream did very well and had a profit of $100,000. However, no distributions were made. What is Abigail's basis in her interest in Decorate Your Dream at the end of this year? A.$25,000 B.$50,000 C.$75,000 D.$100,000
Solution: The correct answer is C. Abigail's original cost basis is increased by her share of the profits. Therefore, her original cost basis of $50,000 is increased by $25,000 (her 25% of the $100,000 profit). If there had been a distribution, this would have reduced Abigail's adjusted basis in her interest in the company.
Craig and Mallory got married and bought a house 15 months ago. Mallory's job recently transferred her to an office in a different state, so Craig and Mallory sold their house. What is the maximum amount of gain that Craig and Mallory can exclude from income taxation? $156,250. $250,000. $312,500. $500,000.
Solution: The correct answer is C. Although they did not live in their house for a full two years, Craig and Mallory are eligible for a prorated exclusion because of Mallory's change in employment. Therefore, they are eligible for a maximum exclusion of $312,500 [(15/24) × $500,000].
Sam's office building with an adjusted basis of $625,000 and a fair market value of $885,000 is condemned on December 30, 20x1. Sam is a calendar year taxpayer. He receives a condemnation award of $850,000 on March 1, 20x2. He builds a new office building at a cost of $830,000 which is completed and paid for on December 31, 20x4. What is Sam's recognized gain on receipt of the condemnation award and his basis for the new office building assuming his objective is to minimize gain recognition? $0; $605,000 $20,000; $830,000 $20,000; $625,000 $225,000; $830,000 None of the choices
Solution: The correct answer is C. Amount realized $850,000 Adjusted basis (625,000) Realized gain $225,000 Amount realized $850,000 Less: Reinvestment (830,000) Deficiency $ 20,000 Since the form of the involuntary conversion is a condemnation, Sam has until December 31, 20x5, to reinvest the proceeds from the condemned office building in like-kind property. So Sam qualifies to elect § 1033 postponement treatment. Since the amount of the deficiency is less than the realized gain, the recognized gain is $20,000. The basis for the new office building is $625,000 ($830,000 - $205,000 postponed gain).
Pam exchanges a rental building, which has an adjusted basis of $520,000, for investment land which has a fair market value of $700,000. In addition, Pam receives $100,000 in cash. What is Pam's recognized gain or loss and her basis in the investment land? $0 and $420,000 $100,000 and $420,000 $100,000 and $520,000 $280,000 and $700,000 None of the choices
Solution: The correct answer is C. Amount realized ($700,000 + $100,000) $800,000 Adjusted basis (520,000) Realized gain $280,000 Recognized gain $100,000 The receipt of boot in a like-kind exchange triggers the recognition of realized gain, with the ceiling on recognition being the realized gain. Because the boot received of $100,000 is less than the ceiling, gain up to the amount of the boot received is recognized. The basis of the land is calculated as follows: FMV $700,000 Less: Postponed gain (180,000) Basis $520,000
In 20x1, Cindy invested $100,000 for a 25% interest in a limited liability company (LLC) involved in an activity in which she is a material participant. The LLC reported losses of $340,000 in 20x1 and $180,000 in 20x2 with Cindy's share being $85,000 in 20x1 and $45,000 in 20x2. How much of the losses can Cindy deduct? $0 in 20x1, $0 in 20x2 $85,000 in 20x1, $0 in 20x2 $85,000 in 20x1, $15,000 in 20x2 $85,000 in 20x1, $45,000 in 20x2 None of the choices
Solution: The correct answer is C. Cindy's losses are not subject to the passive activity loss rules in either year because she is a material participant. However, the at-risk rules limit her losses to $100,000 over the period ($85,000 in 20x1 and $15,000 in 20x2).
Donna sells stock in Martin Corporation to her brother David. Donna purchased the stock four years ago for $3,000 and the current fair market value of the stock is $1,800. David paid Donna $1,800 for the stock. Which of the following statements is correct regarding the tax consequences of this transaction? A.If David subsequently sells the stock to an unrelated party for $3,500, he will realize a gain of $1,700. B.If David subsequently sells the stock to an unrelated party for $1,600, he will realize a loss of $1,400. C.If David subsequently sells the stock to an unrelated party for $2,200, he will have no gain or loss. D.If David subsequently sells the stock to an unrelated party for $3,500, he will have no gain or loss.
Solution: The correct answer is C. David will have a double basis in the stock as a related party transaction
Jared, a fiscal year taxpayer with a September 30th year end, owns an office building that was destroyed by a fire on September 12, 20x1. The adjusted basis was $715,000 and the insurance settlement was $950,000 (received on March 1, 20x2). What is the latest date that Jared can replace the office building in order to qualify for § 1033 (non-recognition of gain from an involuntary conversion)? September 30, 20x2 September 30, 20x3 September 30, 20x4 December 31, 20x4
Solution: The correct answer is C. Gain of $235,000 ($950,000 amount realized - $715,000 adjusted basis) is realized on March 1, 20x2. The taxpayer has two years from the close of that taxable year (September 30, 20x2) to replace the property. So the latest replacement date is September 30, 20x4.
Two years ago, Green Corporation, an accrual basis taxpayer, sold merchandise on credit to John, an individual. Green's account receivable from John was $20,000. Last year, John filed for bankruptcy, and Green was notified that it could expect to receive 20 cents on the dollar. Accordingly, Green took a $16,000 bad debt deduction on last year's tax return. In June of the current year, Green received a $6,000 payment from John in final settlement of the debt. How should Green account for the payment in the current year? File an amended tax return for last year. Report no income for the current year. Report $2,000 of income for the current year. Report $4,000 of income for the current year. Report $6,000 of income for the current year.
Solution: The correct answer is C. Green should report $2,000 ($6,000 - $4,000) of income in the current year.
Reese and Jake engage in a like-kind exchange. Reese transfers real estate with a fair market value of $500,000 and an adjusted basis of $200,000 to Jake. Jake transfers real estate worth $700,000 and an adjusted basis of $250,000, plus a $200,000 mortgage on the property, to Reese. What is Jake's potential or deferred gain before and after the transaction? $450,000 potential gain before the transaction; $50,000 potential gain after the transaction. $250,000 potential gain before the transaction; $50,000 potential gain after the transaction. $450,000 potential gain before the transaction; $250,000 potential gain after the transaction. $250,000 potential gain before the transaction; $200,000 potential gain after the transaction.
Solution: The correct answer is C. Including mortgage, the exchange is an equivalent value transfer. The tax consequences for Reese and Jake are illustrated below: REESE Before Exchange After Exchange (Old Property) (New Property) FMV $500,000 FMV $700,000* (*$200,000 mortgage) Basis 200,000 New Basis 400,000 Potential Gain $300,000 Potential Gain $300,000 Boot $200,000 (mortgage) to Jake; Reese adds mortgage to old basis to get new basis JAKE Before Exchange After Exchange (Old Property) (New Property) FMV $700,000* (subject to mortgage) FMV $500,000 Basis 250,000 Carryover Basis 250,000 Potential Gain $450,000 Potential Gain $250,000 Boot $200,000 (mortgage) to Jake; Recognized Gain equal to debt relieved of $200,000
Victor and Vivian have a very diverse family. Which of the following children would not be a qualifying child for the purpose of claiming the child tax credit in the current year? A.Vivian's granddaughter, who turned 4 in the current year and lives with Victor and Vivian for more than half of the year. B.Victor's brother, who turned 16 in the current year and lives with Victor and Vivian for more than half of the year. C.Victor and Vivian's daughter, who turned 17 in the current year and does not provide more than half of her support. D.Victor and Vivian's son, who was born on October 21 of the current year.
Solution: The correct answer is C. Individuals who reach the age of 17 during the tax year are not eligible to be qualifying children for the purpose of the child tax credit. All of the other children are eligible to be qualifying children.
John, Jay and Jeff each have an ownership interest in Three Guys Burgers, Inc. Based on the following information, which of them is/are considered to have materially participated in the conduct of the Three Guys Burgers business this year? John dedicated more than 500 hours this year to Three Guys Burgers. Jay devoted 150 hours to Three Guys Burgers this year. Jeff devoted 115 hours to Three Guys Burgers this year, but also devoted more than 100 hours to several other activities, for a total of 520 hours in all of the activities combined. I only. II and III only. I and III only. I, II and III.
Solution: The correct answer is C. Jay has not materially participated. Although Jay devoted more than 100 hours to the activity, he did not devote more hours than anyone else because John worked at Three Guys Burgers for more than 500 hours. Jeff is also a material participant because he devoted more than 100 hours to the activity and also devoted more than 100 hours to several other activities, for a total of more than 500 hours in all of the activities combined.
Sara's daughter Tara completed her senior year of college in the current year. Sara paid $5,000 in qualified education expenses for Tara in the current year. Sara is a single taxpayer and has an AGI of $50,000 for the current year. Tara has a felony drug conviction. What, if any, education credit should Sara claim and how much is the credit? Sara is not eligible to claim an education credit. American Opportunity Credit in the amount of $2,500. Lifetime Learning Credit in the amount of $1,000. Lifetime Learning Credit in the amount of $2,000.
Solution: The correct answer is C. Option B is incorrect because the American Opportunity Credit cannot be claimed if someone has a felony drug conviction. Option C is correct; Sara is eligible to claim the Lifetime Learning Credit and her credit is equal to 20% of her qualified education expenses, or $1,000. Option D is incorrect because Sara would need to have paid $10,000 in qualified education expenses in order to claim the maximum Lifetime Learning Credit of $2,000.
Trenton owns a country home that sometimes rents out to other people. Which of the following statements regarding Trenton's rental activity is correct? If Trenton rents out the country home for less than half of the year, it will be considered a nontaxable activity. If Trenton rents out the home for exactly half the year and uses the home personally for exactly half the year, the activity will be considered primarily a rental activity. If Trenton rents out the home for 180 days per year and uses the home personally for 20 days of the year, the activity will be considered a mixed-use activity. If Trenton rents out the home for more than half of the year, it will be considered primarily a rental activity regardless of his personal use.
Solution: The correct answer is C. Option a is not correct because the activity will only be considered a nontaxable activity if Trenton rents out the country home for less than 15 days per year. Option b is not correct because this option meets the requirements of a mixed-use activity. That is, the property is rented out for 15 days or more, but the owner personally uses it for the greater of 14 days or 10% of the rental days. Option d is not correct because even if Trenton rents out the home for more than half of the year, the activity may be a mixed-use activity if he personally uses the property for the greater of 14 days or 10% of the rental days
Payments for employment-related care that are made to relatives of the taxpayer may qualify for the credit for child and dependent care expenses. Which of the following payments does not qualify? Payments for employment-related care made to the taxpayer's aunt. Payments for employment-related care made to the taxpayer's 21-year-old daughter (who is not a dependent of the taxpayer). Payments for employment-related care made to a qualifying dependent of the taxpayer. Payments for employment-related care made to taxpayer's 17-year-old niece.
Solution: The correct answer is C. Payments for employment-related care made to a dependent of the taxpayer do not qualify for the credit for child and dependent care expenses. All of the other options are qualifying payments.
All of the following expenses incurred when an individual travels from his office to a client's place of business to discuss business matters will qualify as a business deduction EXCEPT: A $6 toll to cross the commerce bridge. Mileage expense for the round trip to visit the client. A $30 parking ticket for parking in a no-parking zone since no other parking spaces were available. Cost of printing material for the client meeting.
Solution: The correct answer is C. Penalties and fines are never deductible business expenses, even if they are incurred in the conduct of a trade or business. The other expenses are deductible.
Dave invested $30,000 in CSC, Inc. 5 years ago. CSC is a publicly traded company that declared bankruptcy on June 30 of the current year at which time the stock became worthless. Which of the following statements describes the tax treatment of this transaction? A.Dave may deduct the $30,000 as an ordinary loss. B.Dave may deduct the $30,000 investment as a short-term capital loss, subject to limitations. C.Dave has a $30,000 long-term capital loss and may deduct it, subject to limitations. D.Dave is not permitted to take a loss deduction.
Solution: The correct answer is C. Since the company became worthless during the year, a constructive sale of the stock occurs on December 31 of this year making Dave's holding period for the stock long-term (he purchased the stock 5 years ago). Therefore, Dave will be able to deduct the $30,000 investment as a long-term capital loss. Sufficient facts are not presented to consider this Section 1244.
Tobin inherited 100 acres of land on the death of his father. A Federal estate tax return was filed and the land was valued at $300,000 (its fair market value at the date of the death). The father had originally acquired the land in 1963 for $19,000 and prior to his death had made permanent improvements of $6,000. What is Tobin's basis in the land? A.$19,000 B.$25,000 C.$300,000 D.$325,000
Solution: The correct answer is C. The basis of the property is its fair market value at the date of the death.
In the current year, Chee gives stock (basis of $36,000; fair market value of $30,000) to his nephew and pays a gift tax of $3,000 on the transfer. The nephew's basis in the stock is: A.$0 for gain and $0 for loss. B.$30,000 for gain and $30,000 for loss. C.$36,000 for gain and $30,000 for loss. D.$36,300 for gain and $30,300 for loss. E.None of the choices.
Solution: The correct answer is C. The donee's gain basis of $36,000 is the same as that of the donor. The donee's loss basis of $30,000 is the lower of the donor's adjusted basis or fair market value on the date of the gift. The gift tax paid is only proportionally added based on the appreciation when the asset is gifted to the donor. Gift tax adjustment is not made to basis for gifts of loss property.
Harry and Wilma are married and file a joint income tax return. On their tax return, they report $44,000 of adjusted gross income ($20,000 salary earned by Harry and $24,000 salary earned by Wilma) and claim two exemptions for their dependent children. During the year, they pay the following amounts to care for their 4-year old son and 6-year old daughter while they work. ABC Day Care Center - $3,200 Blue Ridge Housekeeping Services - 2,000 Mrs. Mason (Harry's mother) - 1,000 Harry and Wilma may claim a credit for child and dependent care expenses of: A.$840 B.$1,040 C.$1,200 D.$1,240
Solution: The correct answer is C. Total qualifying child care expenses are $6,200 ($3,200 + $2,000 + $1,000). A provider of child care can also perform housekeeping chores. Also, the amounts paid to Mrs. Mason qualify since she is not their child. Thus, 20% × $6,000 (maximum allowed is $3,000 per child) = $1,200 child care credit.
Which of the following, if any, do not describe the status or nature of limited liability companies? Cannot elect partnership tax status if incorporated under state law. One of the main reasons why the check-the-box Regulations were issued. Can elect to be taxed as a corporation. Statutes creating these entities have been adopted by only a minority of the states. None of the choices.
Solution: The correct answer is D. A limited liability company cannot elect partnership status if incorporated under state law . The confusion regarding the tax status of limited liability companies was one of the main reasons why the check-the-box Regulations were issued. Limited liability companies can elect to be taxed as corporations. All states have enacted laws permitting the use of limited liability companies.
Which of the following statements properly describes the income tax treatment of asset sales? The sale of classic movies on DVDs by Movie Emporia (a retail movie distributor) will generate income subject to capital gains tax. The sale of Big Box Mart stock by an individual investor generates ordinary income. The sale of a desk used for 10 years in a business at a loss will result in a capital loss. The sale of a typewriter used for 10 years in a trade or business at a gain (after recapturing any depreciation) will generate a capital gain.
Solution: The correct answer is D. A typewriter used in a trade or business is a Section 1231 asset, and the sale of a Section 1231 asset at a gain is treated as a capital gain. The sale of DVDs by a retail distributor is a sale of inventory, which generates ordinary income. Big Box Mart stock held by an individual investor is a capital asset, which will generate a capital gain or loss upon sale. While short-term capital gains are taxed at ordinary rates, the gain/loss is still considered a capital gain/loss and is subject to special limitations. Finally, the sale of a desk used for 10 years in a business at a loss will result in an ordinary loss, since the desk is a Section 1231 asset.
Drew recently purchased a new machine for his business. The price of the machine was $12,000, but Drew also paid $100 in sales tax, $300 in freight, and $1,000 in installation and testing costs. What is Drew's basis in the new machine? $12,100 $12,400 $13,000 $13,400
Solution: The correct answer is D. All costs to get the asset into operation are included in the cost basis of the asset. Therefore, Drew's cost basis includes the price of the machine, sales tax, freight, and installation and testing costs.
Grape Corporation purchased a machine in December of the current year. This was the only asset purchased during the current year. The machine was placed in service in February of the following year. No assets were purchased in the following year. Grape Corporation's cost recovery would begin: A.In the current year using a mid-quarter convention. B.In the current year using a half-year convention. C.In the following year using a mid-quarter convention. D.In the following year using a half-year convention. E.None of the choices.
Solution: The correct answer is D. Cost recovery begins the year the equipment is placed into service. Machinery follows half-year convention per MACRS tables.
A famous rock singer/songwriter sells the copyrights to all of his hit songs for $1,200,000 in cash. He has no tax basis for the copyrights and had created all of the copyrights at least 10 years before their sale. The taxpayer has: A.No gain or loss. B.A long-term capital gain of $1,200,000. C.A short-term capital gain of $1,200,000. D.Ordinary gain of $1,200,000. E.None of the above.
Solution: The correct answer is D. Generally, the person whose efforts led to the copyright or creative work has an ordinary asset, not a capital asset. Since there was no tax basis for the copyrights, the entire gain of $1,200,000 is ordinary gain. It will be Capital gains treatment if someone other than the creator owns it. In the hands of the creator it is inventory = Ordinary Income.
Which of the following statements regarding the adoption expenses credit is not true? A.The adoption expenses credit is a nonrefundable credit. B.The adoption expenses credit starts to be phased out in 2022 beginning when a taxpayer's modified AGI exceeds $223,410. C.No adoption expenses credit is available in 2022 if a taxpayer's modified AGI exceeds $263,410. D.The adoption expenses credit is limited to no more than $10,000 per eligible child in 2022.
Solution: The correct answer is D. In 2022, the credit is limited to no more than the indexed amount of $14,890, not $10,000.
Miriam, who is single and age 36, provides you with the following information from her financial records. Regular income tax liability - $44,342 AMT positive adjustments - $30,000 AMT preferences - $20,000 Taxable income - $175,000 Calculate her AMTI. $80,251 $168,126 $212,875 $225,000 None of the choices
Solution: The correct answer is D. Miriam's AMTI is calculated as follows: Taxable income $175,000+ AMT positive adjustments $30,000+ AMT preferences $20,000 = AMTI $225,000. Miriam's AMT exemption is not deducted in calculating AMTI. Rather, it is deducted from AMTI to calculate the AMT base. Likewise, the regular income tax liability does not affect the calculation of AMTI.
Which of the following is true regarding real estate activities? Real estate activities are always passive. An individual investor in rental real estate can always consider their real estate activities as active businesses. Closely held C corporations that participate in real estate activities will always be considered active businesses. Real estate professionals may be allowed to consider their real estate activities as active in some circumstances.
Solution: The correct answer is D. Real estate activities are generally passive, but exceptions do apply. An individual investor in rental real estate will be subject to the passive income rules; however, some exceptions apply. Closely held C corporations are also eligible if more than 50% of the gross receipts of the corporation are derived from real property trades or businesses in which the corporation materially participates.
Robyn rents her beach house for 60 days and uses it for personal use for 30 days during the year. The rental income is $6,000 and the expenses are as follows: Mortgage interest - $9,000 Real estate taxes - $3,000 Utilities - $2,000 Maintenance - $1,000 Insurance - $500 Depreciation (rental part) $4,000 Using the IRS approach, total expenses that Robyn can deduct on her tax return associated with the beach house are: $0 $6,000 $8,000 $12,000 None of the choices.
Solution: The correct answer is D. Since the property is classified as personal/rental use, the general rule is that the deductible expenses cannot exceed the gross income. Thus, under the general rule, the deductible expenses would be limited to $6,000. However, this ceiling does not apply to expenses that otherwise would be deductible as itemized deductions. Consequently, all of the mortgage interest and real estate taxes can be deducted ($9,000 + $3,000 = $12,000).
Newman purchased a home in Los Angeles, CA for $750,000 using a variable rate mortgage. When interest rates increased, he could no longer afford the payments and was forced to sell the house for $650,000. Which of the following statements correctly describes the income tax consequences of this transaction? A. Newman can reduce his adjusted gross income by the amount of his loss, $100,000. B. Newman can reduce his adjusted gross income by $3,000 this year. C. Newman will carry forward a $97,000 short-term capital loss. D. Newman's AGI will not be affected in any way by the loss.
Solution: The correct answer is D. The home is a personal use asset. It was not purchased for investment or production of income. While Newman did suffer an economic loss on the home, he is not entitled to take any part of the loss as a tax deduction since the home was a personal use asset.
In 20x1, Dan exercised an incentive stock option, acquiring 150 shares of stock at an option price of $75 per share (fair market value at the date of exercise was $130 per share). Which of the following statements is incorrect? Dan has a positive AMT adjustment from the ISO in 20x1. Dan has no taxable income from the ISO in 20x1. Dan has an AMT basis of $19,500 in the stock. Dan has an income tax basis of $19,500 in the stock. If Dan sells the stock less than a year from exercise it will be a disqualifying disposition.
Solution: The correct answer is D. The question is looking for the false statement. The transaction has no effect on taxable income but there is a positive alternative minimum tax adjustment in 20x1. Dan's AMT basis is equal to FMV at the date of exercise (19,500), and his regular income tax basis is equal to his cost (11,250). To ensure the best tax consequences for ISOs, the sale must be 1 year from exercise and 2 years from grant.
All of the following are included in the amount realized upon disposition of an asset EXCEPT: A.The cash received. B.The fair market value of property received in the exchange. C.A transfer of obligation to pay debt from the seller to the buyer. D.The taxpayer's adjusted basis.
Solution: The correct answer is D. The taxpayer's adjusted basis is subtracted from the amount realized to calculate gain. The amount realized includes the cash received, plus the fair market value of property received in the exchange, plus any liabilities shed in the transaction.
Which of the following is not a disallowed loss? Losses on the sale of personal use assets. Losses on the subsequent sale of property gifted or sold to a related party when its fair market value is less than the original owner's adjusted basis. Loss from a wash sale. Capital losses in excess of $3,000.
Solution: The correct answer is D. Up to $3,000 of capital losses may be recognized against forms of income other than capital gains in any one tax year. However, if a taxpayer has capital losses in excess of $3,000, these losses are not disallowed, but are carried over to future tax years.
Albert purchased a tract of land for $140,000 in 20x1 when he heard that a new highway was going to be constructed through the property and that the land would soon be worth $200,000. Highway engineers surveyed the property and indicated that he would probably get $180,000. The highway project was abandoned in 20x5 and the value of the land fell to $100,000. What is the amount of loss Albert can claim in 20x5 if the land was sold for $100,000 in 20x6? A.$40,000 B.$60,000 C.$80,000 D.$100,000 E.None of the choices.
Solution: The correct answer is E. Neither gain nor loss is recognized by Albert associated with the perceived fluctuations in the value of the land. The requisite identifiable event (i.e., sale or other disposition) has not occurred.
Which of the following exchanges qualifies for non-recognition treatment as a § 1031 like-kind exchange? Airplane used in a business for 1,000 shares of Blue, Inc., stock Computer used in a business for a shed Female cow for a male bull Land in Spain for land in Florida None of the choices
Solution: The correct answer is E. None qualify as like-kind exchanges. Stock is not eligible for the like-kind exchange treatment. The computer and the shed are different kinds of property. The cattle are not of the same sex. Foreign land and domestic land are not like-kind property, nor eligible for like-kind exchange after 2017. After 2017 only real property will be eligible for like-kind exchange.
