Accy 405 - Final

Karen purchased 100 shares of Gold Corporation stock for $11,500 on January 1, 2011. In the current tax year (2014), she sells 25 shares of the 100 shares purchased on January 1, 2011, for $2,500. Twenty-five days earlier, she had purchased 30 shares for $3,000. What is Karen's recognized gain or loss on the sale of the stock, and what is her basis in the 30 shares purchased 25 days earlier?

$0 recognized loss, $3,375 basis in new stock.

Individuals claimed as dependent get GREATER OF: (STANDARD DEDUCTION)

$1,050 OR $350 PLUS EARNED INCOME

Nancy and Tonya exchanged assets. Nancy gave Tonya her personal residence with an adjusted basis of $280,000 and a fair market value of $560,000. The house has a mortgage of $200,000 which is assumed by Tonya. Tonya gave Nancy a yacht used in her business with an adjusted basis of $250,000 and a fair market value of $360,000. What is Tonya's realized and recognized gain?

$110,000 realized and $110,000 recognized gain.

Jamie bought her house in 2008 for $395,000. Since then, she has deducted $70,000 in depreciation associated with her home office and has spent $45,000 replacing all the old pipes and plumbing. She sells the house on July 1, 2014. Her realtor charged $34,700 in commissions. Prior to listing the house with the realtor, she spent $300 advertising in the local newspaper. Sammy buys the house for $500,000 in cash, assumes her mortgage of $194,000, and pays property taxes of $4,200 for the entire year on December 1, 2014. What is Jamie's adjusted basis at the date of the sale and the amount realized?

$370,000 adjusted basis; $661,100 amount realized. b Cost $395,000 Depreciation (70,000) Capital additions 45,000 Adjusted basis $370,000 Cash received $500,000 Mortgage assumed by Sammy 194,000 Commission to realtor (34,700) Advertising (300) Property tax paid by Sammy ($4,200 × 6/12) allocated to Jamie 2,100 Amount realized $661,100

Kevin purchased 5,000 shares of Purple Corporation stock at $10 per share. Two years later, he receives a 5% common stock dividend. At that time, the common stock of Purple Corporation had a fair market value of $12.50 per share. What is the basis of the Purple Corporation stock, the per share basis, and gain recognized upon receipt of the common stock dividend?

$50,000 basis in stock, $9.52 basis per share, $0 recognized gain. RATIONALE: The $50,000 cost of the original shares must be allocated to the total shares owned after the stock dividend (5,000 + 250 = 5,250). Therefore, the basis per share is $9.52 ($50,000/5,250). No gain is recognized on the receipt of the stock dividend.

X purchases 100 shares @ $20,000 in 2012. 12/20/2018, X sells them @ $15,000 so X can use the $5,000 loss to offset capital gains from other transactions. X then repurchases 100 shares of same security for $16,000 on 1/2/2019. What are the tax effects for X of the sale and repurchase of the stock? Assume X repurchases 150 shares @ $24,000 on 1/2/2019. What is X's basis in the replacement stock?

$5000 wash sales loss is not deducted. $5000 is added to X's basis in the new stock. Total basis = $21,000

(1) X Company purchases an apartment building in 1986 @ $800,000. The building is sold in 2018 for $700,000. The maximum allowable depreciation on the building as of date of sale is $600,000. Straight-line depreciation for same period would be $400,000. Building is section 1250 property. What's the character of gain on sale of building if X takes maximum allowable depreciation deduction on building? (2) Assume X has deducted straight-line depreciation while it held the apartment building. What's the character of the gain on sale of building?

(a) AB = $800,000 - $600,000 = $200,000 Gain realized = $700,000 - $200,000 = $500,000 Excess depreciation = $600,000 - $400,000 = 200,000 is recaptured as ORDINARY income. Section 1231 gain = $300,000. (b) AB = $800,000 - $400,000 = $400,000 Gain realized = $700,000 - $400,000 = $300,000 (Section 1231 gain) Excess depreciation = 0. No section 1250 recapture required. No recapture for section 1250 property depreciated straight-line (MACRS) *What about losses? LOSSES ARE NOT SUBJECT TO RECAPTURE*

Carlos purchased an apartment building on November 16, 2017, for $3,000,000. Determine the cost recovery for 2017. a. $13,950 b. $11,910 c. $9,630 d. $22,740 e. None of these choices are correct.

$3,000,000 × .00455 = $13,650.

Property is classified by:

(1) *Use*: determines deductibility of current year expenditures (repairs, depreciation, ...). Can only deduct if property is used in... - Trade or Business - Production of Income - Personal Use (only those specifically allowed expenditures like *property taxes* or *home mortgage interest* are deductible): *Mixed Use Property* uses reasonable allocation of costs among usage (2) *Type*: determines amount of allowable depreciation & tax effects of dispositions. - Tangible Property: + Real property (realty - land + structures on land) + Personal property (personalty - not realty) - Intangible Property: stocks, bonds, patents, trademarks, copyrights, ...

Factors Complicating Initial Basis Calculation (6)

(1) Purchase of Many Assets (2) Purchase of a Business (3) Constructed Assets (4) Property Acquired by Gift (5) Property Acquired by Inheritance (6) Property Converted from Personal to Business Use

Factors Complicating Initial Basis Calculation - (2) Purchase of a Business

- *Purchase assets of business*: direct transfer of asset ownership (Buyer & seller agree on allocation of purchase price) - *Purchase stock*: indirect transfer of asset ownership (buyer controls assets through ownership but seller retains direct control over assets BUT the basis in seller's assets does not change)

Trade or Business Expenses must be...

- Directly connected to the business activity - Ordinary and necessary for the activity (e.g., appropriate and helpful for generating a profit) - AND reasonable in amount (not extravagant)

Property Investment Cycle

- Initial Basis: cost of acquiring asset & placing it in service - Adjusted Basis: Initial basis +/- basis adjustments (BV)

Deductions "for" AGI

-Can be claimed even if the taxpayer does not itemize -Important in determining the amount of certain itemized deductions (e.g. medical, misc.) -More valuable than deductions from AGI

Diane purchased a factory building on April 15, 1993, for $5,000,000. She sells the factory building on February 2, 2017. Determine the cost recovery deduction for the year of the sale. a. $16,025 b. $158,750 c. $26,458 d. $19,838 e. None of these choices are correct.

.03174 × $5,000,000 × 1.5/12 = $19,838. Non-residential real estate placed in service before May 3, 1993 (31.5-year life).

X purchases stock on July 1, 2018. He sells the stock on July 3, 2019. What is X's holding period?

1 year & 1 day

Profit-Motivated Activities

1. Business Activities (called trade or business) 2. Investment activities (stocks, bond, rental properties, buying land)

SCHEDULE A - FROM AGI

1. Medical and Dental Expenses 2. Taxes you paid (state and loal taxes, income tax, real estate tax, personal property) 3. Interest you paid (Home mortgage interest, investment interest) 4. Gifts to Charity 5. Casualty and Theft Losses (federally declared disaster) 6. Misc.

X sells land to Y for $20,000 (AB = $25,000). X uses the $20,000 as a down payment on new property she purchases from Z for $28,000. Tax effects?

2 transactions are not interdependent, not DIRECT so exchange of like-kind property has not occurred. X realizes & recognizes a loss on sale of $5000. Basis in new land = $28,000

A taxpayer that purchases and places in service $2,750,000 of Section 179 property in the 2018 tax year will be allowed a maximum Section 179 deduction of A. $750,000. B. $2,750,000. C. $2,500,000. D. $1,000,000.

A. $750,000 ($1,000 - (750-500))

James purchased a new business asset (three-year personalty) on July 23, 2017, at a cost of $40,000. James takes additional first-year depreciation but does not elect Section 179 expense on the asset. Determine the cost recovery deduction for 2017. a. $8,333 b. $33,333 c. $41,665 d. $26,666 e. None of these choices are correct.

Additional first-year depreciation ($40,000 × .50) $20,000 MACRS cost recovery ($20,000 × .3333) 6,666 Total cost recovery $26,666

Which of the following statements is correct for a § 1033 involuntary conversion of an office building which is destroyed by fire?

All of the above are correct.

Carryover Basis

All or part of an asset's basis transfers from 1 owner to another or from 1 asset to another. If we use carryover basis, *new HP of new basis = HP of previous owner + HP of current owner*

Under MACRS, how's real property depreciated?

Always straight-line! Never have section 1250 recapture BUT we will have unrecaptured section 1250 gain. Section 1250 recapture is only possible for real property placed in service during ACRS period

Capital recoveries include:

Amortization of bond premium.

Distinguish between a direct involuntary conversion and an indirect involuntary conversion.

An involuntary conversion occurs when a taxpayer's property is stolen, destroyed, or condemned. For a direct involuntary conversion, the taxpayer receives property rather than money. For an indirect involuntary conversion, the taxpayer receives money which can then be used to acquire replacement property.

X's adjusted basis is $40,000, the FMV of the land = $28,000, and X paid $3,000 in gift tax on the transfer based on the land's $28,000 FMV. What is Y's basis in the land if he sells the land for $46,000? for $24,000? for $33,000?

Because FMV = $28,000 < Donor's BV = $40,000, none of the gift tax is added to basis. Y will report a gain of $6,000 ($46,000 - $40,000) on sale of land or a loss of $4,000 ($24,000 - $28,000). For $33,000? Y will not report G/L & AB = sales price = $33,000

Which, if any, of the following exchanges qualifies for nonrecognition treatment as a § 1031 like-kind exchange?

Business realty for investment realty.

On June 1, 2014, Sierra places in service a new automobile that cost $21,000. The car is used 70% for business and 30% for personal use. (Assume this percentage is maintained for the life of the car.) She does not take additional first-year depreciation. Determine the cost recovery deduction for 2015. a. $3,160 b. $6,720 c. $3,570 d. $2,212 e. None of these choices are correct.

C $21,000 × 32% = $6,720 (limited to $5,100*). $5,100 × 70% = $3,570. *These depreciation limits are indexed annually.

In the current year, Ken purchased a new home by obtaining a mortgage. He received a mortgage credit certificate from the state specifying a 21% credit rate. His total mortgage interest paid for the year was $12,000. Ken's tax liability for the year is $3,000. How much income tax credit may Ken get on his home mortgage interest?

C. $2,000

Reduce gross sales price by selling expenses if portion of gain is taxable, what type of gain?

Capital gains There are 2 tests for principal residence 1. During the 5-year period ending on the date of sale: - TP owned home for >= 2 years *(ownership recognized)* - TP used home as main home for >= 2 years *(use recognized)* 2. TP has not excluded gain on sale of principal residence during the 2-year period ending on the date of sale. We'll stick with these 2 basic exceptions: - can't exclude gain on vacation homes - can't exclude gain if buying & flipping

X Inc.'s warehouse is destroyed by a fire. The warehouse has AB = $100,000 and FMV = $325,000 before the fire. X receives $300,000 from its insurance company for the loss of the warehouse. X uses the $300,000 to purchase another warehouse costing $400,000. What is X's realized gain or loss on the casualty? Does X have the wherewithal to pay tax on the $200,000 realized gain on the warehouse?

Casualty loss is an involuntary conversion. New warehouse is a continuation of investment in original warehouse. AND...no! X does not have wherewithal to pay because X already reinvested $200,000 into the new asset. X does not have cash available to pay tax on the gain.

Holding period

Classifying G/L requires knowing "holding period" (length of time asset is owned) - Purchased: HP begins @ day *after* acquisition, ends @ disposition - Not Purchased: we'll use "carryover basis" concept.

Which of the following is a TRUE statement concerning child care tax credit?

D. Payments to a nursery school for the care of dependent children while the parents work are eligible for the Child Care Credit.

Basis of replacement asset?

FMV of replacement - Gain deferred + Loss deferred (exchanges only)

Gambling losses are deductible up to the amount of gambling winnings to the extent they exceed 2 percent of the taxpayer's AGI. a. True b. False

False

In choosing between the actual expense method and the automatic mileage method, a taxpayer should not consider the cost of insurance on the automobile. a. True b. False

False If taxpayer lives and works in a metropolitan area and a significant commute is involved, car insurance premiums could be quite costly.

The cost of a covenant not to compete for 20 years incurred in connection with the acquisition of a business is amortized over 10 years. a. True b. False

False A covenant not to compete is amortized over a statutory 15 years.

Tyler, a practicing CPA, pays tuition to attend law school. Since a law degree involves education leading to a new trade or business, the tuition is not deductible. a. True b. False

False A deduction might be available under the § 222 qualified tuition for higher education provision. Here, it does not matter that a new skill is being acquired.

When contributions are made to a traditional IRA, they are not deductible by the participant. Later distributions from the IRA, however, are not taxed. a. True b. False

False Contributions are deductible, while distributions are taxable.

In the case of a nonbusiness debt, a deduction is only allowed in the year the debt was issued. True False

False The year in which the debt was issued is not the key feature of determining deductibility of a nonbusiness bad debt. A deduction is only allowed in the year the debt becomes completely worthless.

4/1: X Corporation sells Z some land (cost = $8,000). Z pays X $13,000 in cash. In addition, Z pays property taxes of $1,000 on the land. X incurs commissions and legal fees of $1,600 related to the sale. What are the gross selling price, the amount realized, and X's gain or loss on the sale of the land to Z?

Gross selling price = $13,000 cash + $1000 taxes x 3/12 = $13,250 Amount realized = $13,250 - $1,600 = $11,650 AB of land = $8000 Gain realized = $3,650

Gift property (disregarding any adjustment for gift tax paid by the donor):

Has the same basis to the donee as the donor's adjusted basis if the donee disposes of the property at a gain.

X owns a 25% interest in conduit entity. At the beginning of the current year, X's adjusted basis for investment = $75,000. For the current year, conduit entity reports the following pass-through tax information: Ordinary income = $100,000 Capital losses = 10,000 Nondeductible expenses = 5,000 Charitable contributions = 1,600 During the year, conduit entity distributes $15,000 in cash to X. What is X's basis in the entity at the end of the current year? What would X's G/L be if she sells her interest at the end of the current year for $100,000? $50,000?

If X sells the investment for $100,000, she would report a $19,150 gain ($100,000 − $80,850) from the sale. If X sells the investment for $50,000, X would report a $30,850 loss.

What requirements must be satisfied for a delayed swap to qualify for § 1031 like-kind exchange treatment?

In a delayed exchange (nonsimultaneous), the transaction will qualify for like-kind exchange treatment if the following requirements are satisfied. ∙ Identification period. The property to be received must be identified within 45 days of the date when the old property was transferred. Exchange period: The property to be received must be received by the earlier of the following: ∙ Within 180 days of the date when the old property was transferred. ∙ The due date (including extensions) for the tax return covering the period of the transfer

If boot is received in a § 1031 likekind exchange and gain is recognized, which formula correctly calculates the basis for the like-kind property received?

Only a. and c.

Latisha owns a warehouse with an adjusted basis of $200,000. She exchanges it for a strip mall building worth $225,000. Which of the following statements is correct?

Only b. and c. are correct.

For the following exchanges, indicate which qualify as like-kind property. a. Inventory of a sporting goods store in Charleston for inventory of an appliance store in Savannah. b. Inventory of a ladies dress shop in Cleveland for inventory of a ladies dress shop in Richmond. c. Investment land in Virginia Beach for office building in Williamsburg. d. Used automobile used in a business for a new automobile to be used in the business. e. Investment land in Paris for investment land in San Francisco. f. Shares of Texaco stock for shares of Exxon Mobil stock.

Only item c. (investment realty for investment realty or business realty qualifies) Items a. and b. do not qualify because they involve inventory. Item d. (business personalty for business personalty) does not qualify as the property is not real property. Item e. does not qualify because foreign realty is exchanged for domestic realty. Item f. does not qualify because shares of stock are not eligible for like-kind exchange treatment.

Factors Complicating Initial Basis Calculation - (5) Property Acquired by Inheritance

Property passing to heir receives a "step-up in basis" to FMV. HP is always LT. - Property after death goes into estate...executor has 3 options for FMV: a. *Primary Valuation Date (Default)*: date of deceased owner's death. Heir's basis = FMV @ date of death b. *Alternative Valuation Date (election required)*: date of death + 6 months. Heir's basis = FMV @ 6 months after death. c. *Distribution Date (special case)*: executor chose alternative valuation date AND heir took property during 6 month period. Heir's basis = FMV @ date of distribution. Result: Gains on property held @ death: NEVER taxed & Losses on property held @ death: NEVER allowed.

X, a physician, purchases a television for her patients to watch while they wait for their appointments. What is the proper classification of the television for X?

Property used in Trade or Business - Deduct depreciation

X purchases a building by paying $10,000 cash and borrowing $130,000 on a 12%, 30-year mortgage. X pays legal fees of $2,000 related to the purchase. X spends $13,000 painting and $20,000 in other repair work. Initial basis?

Purchase price = $10,000 + $130,000 = $140,000 Costs for readying asset for intended use = $2000 + $13,000 + $20,000 = $35,000 Initial basis = $140,000 + $35,000 = $175,000 As X pays the interest on the note, the basis of property does not change, only the liability is reduced.

QBI Limitations

QBI deduction cannot exceed 50% of wages paid or the sum of 25% of wages plus 2.5% of qualified property

X & Y purchased their Nashville home for $208,000 on 7/1/2012. Sold it for $239,000 on 5/1/2015.

Realized gain = $239,000 - $208,000 = $31,000 Recognized gain = 0

Discuss the relationship between the postponement of realized gain under § 1031 (like-kind exchanges) and the adjusted basis and holding period for the replacement property.

Section 1031 results in the mandatory postponement of realized gain or realized loss on like-kind exchanges. Therefore, the basis for the replacement property is a carryover basis and the holding period is a carryover holding period.

X uses the following assets for business purpose: - Inventory - Shelving - Black-topped parking lot - Store building - Land - Shopping carts Which assets are subjected to depreciation under MACRS?

Shelving, store building, black-topped parking lots, shopping carts.

If the holder of an option fails to exercise the option, the lapse of the option is considered a sale or exchange on the option expiration date.a. Trueb. False

TRue

Directly Related to Business Activities

Taxpayers are allowed to deduct expenses incurred to generate business income (Ordinary, necessary, and reasonable)

Loss on Asset Sales

Taxpayers disposing of trade or business assets at a loss ARE ALLOWED TO DEDUCT THE LOSS FOR AGI - Losses from investment assets (called capital assets) are offset against capital gains > if capital losses exceed capital gains, this is called a net capital loss > a net capital loss is deducted FOR AGI BUT LIMITED TO $3,000 (losses in excess of $3,000 are carried forward indefinitely to subsequent years)

Which of the following statements is correct with respect to § 1044 (rollover of publicly traded securities gain into specialized small business investment companies)?

The amount realized must be reinvested in the common stock or partnership interest of a specialized small business investment company.

A purchases a new computer and a new telephone system and installs a new roof and a fire alarm system in her office building. Which of the expenditures qualify for the election to expense?

The computer and the telephone system are depreciable, tangible, personal property and therefore qualify under Section 179. The roof and the fire alarm system are building components and qualify for immediate expensing.

Calculator Cora purchased a hotel building on May 17, 2017, for $3,000,000. Determine the cost recovery deduction for 2018. a. $69,000 b. $76,920 c. $48,150 d. $59,520 e. None of these choices are correct.

The hotel building is nonresidential realty. (.02564 × $3,000,000 = $76,920.)

Under what circumstances may a partial § 121 exclusion be available even though the taxpayer has used the § 121 exclusion within the two-year period preceding the sale of the current residence?

The relief provision which permits partial § 121 exclusion treatment is available in any of the following situations: ∙ Change in place of employment. ∙ Health. ∙ To the extent provided for in the Regulations, other unforeseen circumstances.

X owns 200 shares for which X paid $22,000 on 12/14/2014. On 7/8/2018, company declares and distributes a 10% stock dividend. X receives 20 additional shares from the dividend. What is X's basis in the 220 shares?

Total basis remains $22,000 per share. Basis/sh = $22,000 / 220 = $100/sh

A franchisor licenses its mode of business operation to a franchisee. a. True b. False

True

The maximum amount of the § 121 gain exclusion on sale of a principal residence is $250,000 for a single individual and $500,000 for a married couple. a. True b. False

True

Landon resides in a nursing home primarily for medical reasons rather than personal reasons. Costs for meals and lodging can be included in determining his deductible medical expenses. a. True b. False

True If the primary reason for being in a nursing home is medical, the cost of meals and lodging can be included in medical expenses, along with the costs for medical or nursing care.

A taxpayer who claims the standard deduction may be able to claim an office in the home deduction. a. True b. False

True The office in the home deduction will be allowed if the taxpayer is self-employed.

Excess charitable contributions that come under the 30%-of-AGI ceiling are always subject to the 30%-of-AGI ceiling in the carryover year.

True They will continue to be subject to the 30% ceiling.

Total depreciation is the same over the life of an asset regardless of the method of depreciation used. Any thoughts?

True. But TVM matters. - Assets are depreciated for tax purposes according to *the rules in place when the asset is placed in service*. - *Assets placed in service before 1/1/1981?* "Facts & circumstances" & "asset depreciation range" (ADR): pretty close to depreciation for financial purposes. - *Assets placed in service after 1/1/1981?*: "Accelerated Cost Recovery System" (ACRS). Objective: influence the economy by accelerating capital recovery & administrative convenience. Highlights: 5 useful lives, no salvage values, standard conventions for first & last year depreciation - *Assets placed in service after 1/1/1987*: "Modified Accelerated Cost Recovery System" (MACRS). Objective: slow down recovery under ACRS - *Today*: we have a choice between MACRS & "Alternative Depreciation System".

Cost depletion method

Unrecovered basis = amount being recovered through depletion

What is Section 1231 property? What's the point of Section 1231?

What's section 1231 property? - Property used in T/B - Held for >12 months - Depreciable or real property What's the point? - If net section 1231 is a gain, ALL G/L are capital (preferential tax treatment) - If net section 1231 is a loss, ALL G/L are ordinary (not capped @$3,000/year) BUT Congress giveth... Congress taketh away... What causes a gain? Amount realized > Adjusted basis (could be for 2 reasons): 1) Property appreciated in value 2) Depreciation caused adjusted basis to fall below amount realized

Wash Sales

When a security (stock, bond, option, etc.) is sold @ loss and is replaced within 30 days before or after the sale date with a substantially identical security. Transaction lacks economic substance b/c ownership interest does not change. Wash sales loss is not allowed as a current deduction.

82. On June 1, 2014, Norm leases a taxi and places it in service. The lease payments are $1,000 per month. Assuming the dollar amount from the IRS table is $241, determine Norm's inclusion amount.

a. $0

72. In 2013, Gail had a § 179 deduction carryover of $30,000. In 2014, she elected § 179 for an asset acquired at a cost of $115,000. Gail's § 179 business income limitation for 2014 is $140,000. Determine Gail's § 179 deduction for 2014.

a. $25,000

Mona purchased a business from Judah for $1,000,000. Judah's records and an appraiser provided her with the following information regarding the assets purchased: Adjusted Basis FMV Land $195,000 $270,000 Building 310,000 450,000 Equipment 95,000 180,000

a. Land $270,000, building $450,000, equipment $180,000.

Which of the following is incorrect? a. The deferral of realized gain on a § 1031 like-kind exchange is mandatory. b. The deferral of realized gain on an indirect (into cash and then into qualified property) § 1033 involuntary conversion is mandatory. c. The taxpayer can elect to forgo the exclusion of realized gain on a § 121 sale of residence. d. Both b. and c. are incorrect. e. a., b., and c. are incorrect.

b The deferral of realized gain on an indirect § 1033 involuntary conversion is elective rather than mandatory.

Which, if any, of the following exchanges qualifies for nonrecognition treatment as a § 1031 like-kind exchange? a. Partnership interest for a partnership interest. b. Inventory for inventory. c. Securities for personalty. d. Business realty for investment realty. e. None of the above.

d Business realty that is exchanged for investment realty qualifies for the like-kind exchange treatment (choice d.). Partnership interests (choice a.), inventory (choice b.), and securities (choice c.) do not qualify as like-kind property.

17. Lease cancellation payments received by a lessor are always ordinary income because they are considered to be in lieu of rental payments. t/f

true

An involuntary conversion results from the destruction (complete or partial), theft, seizure, requisition or condemnation, or the sale or exchange under threat or imminence of requisition or condemnation of the taxpayer's property. a. True b. False

true

Since the Code section that defines "capital asset" says what is not a capital asset, other Code sections have to help determine what is and what is not a capital gain or loss.a. Trueb. False

true

Factors Complicating Initial Basis Calculation - (1) Purchase of Many Assets

- Ex: pay $1,000,000 for land, building, office furniture. What's the basis of land? Allocate basis to assets in proportion to FMV which requires appraisal BUT there're alternatives: + Buyer & seller agree on allocation of purchase price + Allocate in proportion to property tax assessments (lower than FMV)

Excess Business Loss Limitation (TCJA)

- FOR TAX YEARS BEGINNING AFTER 2017 - Excess business loss is excess of aggregate business deductions over the sum of business gross income or gain PLUS $250,000 ($500,000 for married filing jointly) - Excess business loss is NOT deductible but is carried forward as net operating loss

Other Deductions FOR AGI

- Health Insurance Deduction by Self-Employed Taxpayers - Penalty for Early Withdrawal of Savings - Self Employment Tax Deduction - Alimony payments are deductible FOR AGI to maintain equity if pursuant to a divorce/separation agreement executed BEFORE 2019 - Contributions to a qualified retirement account are deductible FOR AGI to encourage savings - Interest expense on qualified educational loans

Factors Complicating Initial Basis Calculation - (4) Property Acquired by Gift

- If FMV of gift >= Donor's AB: Appreciation means unrealized gain passes onto donee. Donee's basis = Donor's basis - If FMV of gift < Donor's AB: *Split basis rule for gift*

X purchases for use of business: - Equipment = $1,000,000 (7y) - Computer system = $1,000,000 (5y) How should X allocate Section 179 expense deduction?

- If X wants to deduct the $1,000,000 maximum election to expense, X should elect to expense $1,000,000 cost of equipment. The $1,000,000 cost of computer system will be deducted over 5y life (greater deductions & sooner) - If X elect to deduct less than $1,000,000 maximum election to expense, X can decide how much to deduct & specific assets to expense. This allows TPs to spread deductions out through depreciation charges.

On 2/5, X acquires an apartment building that costs $120,000. The basis allocated to the building is $100,000, and the basis of the land is $20,000. What is X's depreciation deduction for the property for the current year?

- Land is not depreciable. - Building = $100,000 is depreciated using rate = 3.182% (table A10-7). - Depreciation expense = $100,000 x 3.182% = $3,182. The month-2 column of the table becomes the depreciation schedule for the building for the rest of its period of use.

In contrasting the reporting procedures of employees and self-employed persons regarding job-related transactions, which of the following items involve self-employed? a. Schedule C of Form 1040 b. Form W-2 c. Form 2106 d. Schedule A of Form 1040 e. None of these choices are correct.

A Form 2106 is used by those employees who do not account to their employer(s) or are not wholly reimbursed ("Form 2106"). Schedule C is used to list the job-related income and expenses of self-employed taxpayers ("Schedule C of Form 1040"). Form W-2 reports the wages earned by employees ("Form W-2"). Income earned by self-employed persons is often shown on Form 1099. The results of Form 2106 (see "Form 2106") are transferred to Schedule A ("Schedule A of Form 1040").

Jason owns Blue Corporation bonds (face value of $10,000), purchased on January 1, 2014, for $11,000. The bonds have an annual interest rate of 8% and a maturity date of December 31, 2023. If Jason elects to amortize the bond premium, what is his taxable interest income for 2014 and the adjusted basis for the bonds at the end of 2014 (assuming straight-line amortization is appropriate)?

. $700 and $10,900. RATIONALE: Stated interest ($10,000 × 8%) $800 Less: Bond premium amortization (100) Included interest income $700 The adjusted basis of the bond is reduced to $10,900 ($11,000 - $100).

Calculator Doug purchased a new factory building on January 15, 1990, for $400,000. On March 1, 2017, the building was sold. Determine the cost recovery deduction for the year of the sale; Doug did not use the MACRS straight-line method. a. $12,696 b. $0 c. $1,587 d. $2,645 e. None of these choices are correct.

.03174 × $400,000 × 2.5/12 = $2,645. Non-residential real estate placed in service after December 31, 1986 and before May 13, 1993 (31.5-year life).

X Company purchases machinery in 2017 at cost = $40,000. In 2018, AB = $15,000, X sells it for $26,000. Machinery is Section 1245 property. What's the character of $11,000 gain on sale of machinery? 2) Assume machinery is sold for $47,000. Gain on sale $32,000. What's the character of $32,000 gain on sale of machinery?

1) Adjusted basis = $15,000 Depreciation deducted = $25,000 Gain on sale = $26,000 - $15,000 = $11,000 (all due to depreciation). $11,000 gain (all of it) is recaptured as ordinary gain. 2) Adjusted basis = $15,000 Depreciation deducted = $25,000 Gain on sale = $47,000 - $15,000 = $32,000 gain realized - Gain from depreciation (25,000) recaptured as ordinary income - Gain from appreciation 7000 section 1231 gain.

X dies 1/1 of the current year. On the date of his death, he owns 100 shares of D common stock. He purchased the stock 5 years ago for $500. The stock trades for $50 per share on January 1, $75 per share on April 15, and $45 per share on July 1. The D stock is inherited by Y, X's daughter. What is Y's basis in the stock? Assume executor elects to value estate on alternate valuation date. What is Y's basis in the stock? Assume executor elects alternate valuation date. Also assume executor transfers the stock to Y on April 15. What is Y's basis in the stock? Assume executor elects the alternate valuation date. Also assume executor transfers the stock to Y on October 15, when the shares are trading for $85. What is Y's basis in the stock?

1st option: Y's initial basis for the stock is its $5,000 FMV on the day of X's death (100 shares × $50). If Y sells the stock on the day after she receives it from X's estate, she reports it as LT HP 2nd option (Election): Basis = 100 x $45 = $4,500. If T sells the stock on the day after she receives it from Sam's estate, she reports it as LT HP 3rd option: Basis = 100 x $75 = $7,500 4th option: Basis = 100 x $45 = $4,500

Shane, a single taxpayer, took out a mortgage on his home for $300,000 nine years ago. In August of this year, when the home had a fair market value of $550,000 and he owed $225,000 on the mortgage, he took out a home equity loan for $350,000. Shane used the funds to purchase a yacht to be used for recreational purposes. What is the maximum amount of debt on which he can deduct home equity interest? a. $100,000 b. $50,000 c. $350,000 d. $325,000 e. None of these choices are correct.

A Interest is deductible only on the portion of the $350,000 home equity loan that does not exceed the lesser of: •The fair market value of the residence, reduced by the acquisition indebtedness ($550,000 FMV - $225,000 acquisition indebtedness = $325,000). •$100,000 ($50,000 for married persons filing separate returns). Of the $350,000 home equity loan, interest on $100,000 is deductible as home equity interest.

In Adelaide County, the real property tax year is the calendar year. The real property tax becomes a personal liability of the owner of real property on January 1 in the current real property tax year, 2015. The tax is payable on June 1, 2015. On April 30, 2015, Julio sells his house to Victoria for $230,000. On June 1, 2015, Victoria pays the entire real estate tax of $7,300 for the year ending December 31, 2015. How much of the property taxes may Julio deduct? a. $2,380 b. $4,920 c. $0 d. $2,400 e. None of these choices are correct.

A $2,380. Under § 164(d), 119/365 (January 1 - April 29, 2015) × $7,300 = $2,380 is apportioned to Julio.

During the year, Michael went from Raleigh to San Diego on business. Preceding a five-day business meeting, he spent four days vacationing at the beach. Excluding the vacation costs, his expenses for the trip are: Air fare $3,200 Lodging $900 Meals $800 Entertainment $600 Presuming no reimbursement, deductible expenses are: a. $4,800 b. $3,900 c. $5,500 d. $3,200 e. None of these choices are correct.

A $3,200 + $900 + $700 [50%($800 + $600)] = $4,800. No allocation is required for domestic transportation costs (i.e., the airfare) since the trip is primarily business related.

On January 15, 2015, Dillon purchased the rights to a mineral interest for $3,500,000. At that time it was estimated that the recoverable units would be 500,000. During the year, 40,000 units were mined and 25,000 units were sold for $800,000. Dillon incurred expenses during 2015 of $500,000. The percentage depletion rate is 22%. Determine Dillon's depletion deduction for 2015. a. $175,000 b. $200,000 c. $250,000 d. $150,000 e. $176,000

A $3,500,000/500,000 = $7 per unit 25,000 units sold × $7 = $175,000 cost depletion 22% × $800,000 = $176,000 percentage depletion Percentage limit ($800,000 - $500,000) × 50% = $150,000 Thus, the deduction is $175,000.

In 2014, Gail had a § 179 deduction carryover of $10,000. In 2015, she elected § 179 for an asset acquired at a cost of $21,000. Gail's § 179 business income limitation for 2015 is $50,000. Determine Gail's § 179 deduction for 2015. a. $25,000 b. $50,000 c. $31,000 d. $21,000 e. None of these choices are correct.

A $31,000 ($10,000 + $21,000), limited to $25,000

Walnut purchased a factory building on November 15, 1996, for $5,000,000. She sells the factory building on February 2, 2015. Determine the cost recovery deduction for the year of the sale. a. $16,025 b. $26,458 c. $158,750 d. $19,844 e. None of these choices are correct.

A .02564 × $5,000,000 × 1.5/12 = $16,025

Sienna Company acquires a new machine (ten-year property) on January 15, 2015, at a cost of $200,000. Sienna also acquires another new machine (seven-year property) on November 5, 2015, at a cost of $40,000. No election is made to use the straight-line method. The company does not make the § 179 election. Sienna does not take additional first-year depreciation. Determine the total deductions in calculating taxable income related to the machines for 2015. a. $25,716 b. $132,858 c. $102,000 d. $24,000 e. None of these choices are correct.

A 10 year property MACRS cost recovery ($200,000 x .10) = $20,000 7 year property MACRS cost recovery ($40,000 x .1429) = $5,716 __________ Total cost recovery = $25,716

Terry exchanges real estate (acquired on August 25, 2012) held for investment for other real estate to be held for investment on September 1, 2018. None of the realized gain of $10,000 is recognized, and Terry's adjusted basis for the new real estate is a carryover basis of $80,000. Consequently, Terry's holding period for the new real estate begins on August 25, 2012. a. True b. False

True There usually is a carryover holding period for the like-kind exchange property received. For this carryover holding period rule to apply in the case of like-kind exchanges after March 1, 1954, the like-kind property surrendered must have been either a capital asset or § 1231 property. Therefore, Terry's holding period begins on August 25, 2012.

Employee business expenses for travel qualify as itemized deductions subject to the 2%-of-AGI floor if they are not reimbursed.

True Unreimbursed employee expenses qualify as itemized deductions subject to the 2%-of-AGI floor.

An individual may deduct a loss on personal property, in a Federally declared disaster area, only if it meets the definition of a casualty loss. True False

True An individual's loss on personal use property must meet the definition of a casualty to be deductible.

The purchase of small business stock can provide an advantage to an individual taxpayer, as only individuals who acquire stock from the corporation are eligible to receive ordinary loss treatment under § 1244. True False

True In general, shareholders receive capital gain or loss treatment when they sell stock. However, it is possible to receive an ordinary loss deduction under § 1244 if the loss relates to small business stock. Under this provision, only those individuals who acquired stock directly from the corporation are eligible for ordinary loss treatment. Investment in this type of stock could be an effective part of an individual's tax planning strategy

When an NOL is carried back to a nonloss year, the taxable income and income tax for the year must be recomputed by including the NOL as a deduction for AGI. True False

True Several deductions (such as medical expenses and charitable contributions) are based on the amount of AGI. When an NOL is carried back, all such deductions except the charitable contributions deduction must be recomputed on the basis of the new AGI after the NOL has been applied.

X Corporation obtains land from B. X does not want to sell the land but is willing to trade for land from C. Under a binding contract, B delivers title to her land to D, and D agrees to purchase the land from C and deliver title to the land to B. Is this an exchange??

Yes. Technically, D-C is a buy/sell relationship. When D has the land, D exchanges it with B. So technically this is an exchange IF transaction meets time requirements for completing it.

Stuart owns 300 shares of Turquoise Corporation stock and 2,000 shares of Blue Corporation stock. During the year, Stuart received 150 shares of Turquoise as a result of a 1 for 2 stock split. The value of the shares received was $4,800. Stuart also received 100 shares of Blue Corporation stock as a result of a 5% stock dividend. Stuart did not have the option of receiving cash from Blue. The additional shares he received had a value of $7,200. Stuart's gross income from the receipt of the additional Turquoise and Blue shares is: a. $0. b. $4,800. c. $7,200. d. $12,000. e. None of these.

a. $0.

Katie sells her personal use automobile for $12,000. She purchased the car three years ago for $25,000. What is Katie's recognized gain or loss?

a. $0. RATIONALE: Because the automobile is a personal use asset, none of the realized loss of $13,000 ($12,000 - $25,000) is recognized.

Noelle received dining room furniture as a gift from her friend, Jane. Jane's adjusted basis was $9,200 and the fair market value on the date of the gift was $7,000. Noelle decided she did not need the furniture and sold it to a neighbor six months later for $6,500. What is her recognized gain or loss?

a. $0. RATIONALE: Noelle has a loss basis of $7,000 (the lower of the adjusted basis of $9,200 or the fair market value of $7,000 on the date of the gift) for the furniture. Therefore, sale proceeds of $6,500 result in a realized loss of $500 ($6,500 amount realized - $7,000 adjusted basis). This is a loss on a personal asset and is not recognized.

Matthew pays $8,000 this year to become a charter member of Central University's Athletic Council. The membership ensures that Matthew will receive choice seating at all of Central's home basketball games. In addition, Matthew pays $2,200 (the regular retail price) for season tickets for himself and his wife. For these items, how much qualifies as a charitable contribution? a. $6,400 b. $10,200 c. $6,200 d. $8,000 e. None of these choices are correct.

A Under the exception to the tangible-benefit-received rule, Matthew can deduct $6,400 (80% of $8,000) of the charter membership fee to Central University's Athletic Council. The amount Matthew pays ($2,200) to purchase tickets at the regular price is not deductible as a charitable contribution.

Nontaxable stock dividends result in:

A lower cost per share for all shares than before the stock dividend.

Which of the following is considered a refundable credit?

A. Credit for certain uses of gasoline and special fuels.

Which of the following is NOT a requirement for a student to be eligible for the American Opportunity Tax Credit?

A. Full-time enrollment

Which of the following statements about the child and dependent care credit is correct?

A. The credit is nonrefundable.

All of the following groups are targeted groups for the work opportunity credit except....

A. Trade Readjustment Act beneficiaries

Kenny, a sole proprietor, purchases gasoline for a forklift he uses in his business. The forklift is not a highway vehicle and is not required to be registered for highway use. Kenny may claim a credit or refund for the federal excise taxes paid on this gasoline. (T/F)

A. True

Taxpayers who fraudulently claim the Earned Income Credit are prohibited from using future credits for a period of 10 years. (T/F)

A. True

Unless the employee is claiming an exemption from withholding on Form W-4, an employer is required to notify an employe not having income tax withheld that (s)he may be eligible for a tax refund because of the Earned Income Credit. (T/F)

A. True

Mr. A worked for only one employer in 2018. A's salary for 2018 was $129,500, and his employer withheld Social Security (FICA) tax on the entire amount. Mr. A may claim a credit against his income tax for the excess FICA tax withheld. (T/F)

A. True ?

Which of the following is not a basic category of property use? A. personal property B. production of income property C. trade or business property D. personal use property

A. personal property

Expenses Not Deductible

AFTER 2017, Unreimbursed employee business expenses, TAX PREPARATION FEES, investment expenses, hobby expenses

Listed Property Rules (LP)

Abuse of depreciation deductions for mix-use property led to listed proper rules, which requires TPs to adequately substantiate the extent of asset's business use. LP = passenger autos, trucks, boats, motorcycles If LP is not predominantly (>= 50%) used in T/B, business portion MUST be depreciated under ADS (section 179 not allowed). If LP is > 50% used in T/B, allowable depreciation is the lesser of regular MACRS depreciation or passenger automobile limitation. *Limitations*: The maximum first-year depreciation deduction (including bonus depreciation) on passenger automobiles, trucks, and vans = $18,000 ($10,000 if bonus depreciation is not claimed)

In determining the basis of like-kind property received, postponed losses are:

Added to the fair market value of the like-kind property received.

Do not confused between depreciable basis & adjusted basis. Why?

Adjusted basis = unrecovered capital of asset @ any point in time. AB decreases as cost-recovery deductions are taken. Depreciable basis = can be fully recovered although asset remains in service & salvage value exists.

In July of the current year, X buys 500 shares of C/S at $35/share ($17,500 total). On 12/31, company pays a $4/share cash distribution. Company reports that $3/share is taxable as a dividend and $1/share is a nontaxable dividend. What is X's adjusted basis in the stock?

Adjusted basis in stocks after dividends: $34/share ($17,000 total). $3/share taxable dividend is included in GI & does not affect basis of stocks

Maple Company acquires a new machine (seven-year property) on January 10, 2015, at a cost of $125,000. Maple makes the election to expense the maximum amount under § 179. No election is made to use the straight-line method. Maple does not take additional first-year depreciation. Determine the total deductions in calculating taxable income related to the machine for 2015 assuming Maple has taxable income of $800,000. a. $14,290 b. $39,290 c. $125,000 d. $17,863 e. None of these choices are correct.

B §179 expense = $25,000 MACRS cost recovery ($100,000 x .1429) = $14,290 __________ Total = $39,290

How may taxes paid by an individual to a foreign country be treated?

B. As a credit against federal income taxes due.

If a student is enrolled in a college full-time, (s)he may use both the American Opportunity Tax Credit and the lifetime learning credit during the same calendar year. (T/F)

B. False

If a student is on a full scholarship to attend college, (s)he is eligible for the American Opportunity Tax Credit. (T/F)

B. False

Individuals claiming the earned income tax credit are NOT required to include taxpayer identification numbers (TINs) for themselves, their spouses (if married), and any qualifying children on the return. (T/F)

B. False

Which of the following is a FALSE statement concerning the Earned Income Credit?

B. Having taxes withheld from wages is a requirement for using the Earned Income Credit.

An asset placed in service in 2018 would be subject to depreciation under] A. the facts and circumstances system of depreciation. B. the modified accelerated cost recovery system. C. the asset depreciation range system of depreciation. D. the accelerated cost recovery system.

B. the modified accelerated cost recovery system.

X Corporation purchases the following business assets from Y: A/R (FMV = $100; Y's Adjusted Basis = $100) Furniture (FMV =$800; Y's BV = $500) Equipment (FMV = $600; Y's BV = $300) Building (FMV = $1,000; Y's BV = $1,400) Land (FMV = $300; Y's BV = $100) Total (FMV = $2,800; Y's BV = $2,400) X pays $2,100 in cash & assumes $1,000 of Y's liabilities. Total costs of assets $3,100. What's X's basis in assets purchased?

B/c the $3,100 purchase price > FMV of $2,800, X is considered to have paid $300 for goodwill. Each identifiable asset will have basis = FMV on acquisition date. Y's adjusted basis does not matter.

Factors Complicating Initial Basis Calculation - (6) Property Converted from Personal to Business Use

Basis in securities (stocks, bonds, ...) = purchase price + commissions paid on purchase - *Stock dividends*: nontaxable Basis/sh = Original cost / Total shares after dividend

In order to qualify for likekind exchange treatment under § 1031, which of the following requirements must be satisfied?

Both the property transferred and the property received are held either for productive use in a trade or business or for investment.

Morris made the following business gifts during the year. To Quinton (a key client) at Christmas $50 To Florence (Quinton's 8-year old daughter) on her birthday $20 To Ramon (Morris's secretary) on his birthday ($3 was for gift wrapping) $30 To Penelope (Morris's boss) at Christmas $40 Presuming proper substantiation, Morris's deduction is: a. $73 b. $78 c. $53 d. $98 e. None of these choices are correct

C $25 (Quinton) + $28 (Ramon) = $53. The gift to Florence counts as a gift to Quinton (whose $25 limit already has been reached). Gifts to superiors (Penelope) cannot be deducted.

Vince purchased a used five-year class asset on March 15, 2015, for $60,000. He did not elect § 179 expensing. Determine the cost recovery deduction for 2015 for earnings and profits purposes. a. $3,000 b. $12,000 c. $6,000 d. $2,000 e. None of these choices are correct.

C .10 × $60,000 = $6,000

Shane purchases used seven-year class property at a cost of $200,000 on April 20, 2015. Determine Shane's cost recovery deduction for 2015 for alternative minimum tax purposes, assuming Shane does not elect § 179. a. $2,500 b. $14,280 c. $21,420 d. $10,000 e. None of these choices are correct.

C .1071 × $200,000 = $21,420

Indigo Corporation begins business on April 2, 2015. The corporation has startup expenditures of $54,000. If Indigo Corporation elects § 195, determine the total amount that Indigo may deduct in 2015. a. $2,650 b. $5,000 c. $3,650 d. $1,000 e. None of these choices are correct.

C Deductible amount [$5,000 - ($54,000 - $50,000)] = $1,000 Amortizable amount [($54,000 - $1,000) / 180 x 9 months] = $2,650 __________ Total deduction = $3,650

Schedule A - INTEREST EXPENSE (TCJA)

Debt typically involves principal and interest. - Investment Interest expense: > Deduction of investment interest is LIMITED TO A TAXPAYER'S NET INVESTMENT INCOME > Any investment interest in EXCESS of NET INVESTMENT INCOME LIMITATION carries forward to subsequent year - Home Mortgage Interest: > Interest on acquisition indebtedness of $1 million IF INCURRED BEFORE DEC. 15th, 2017 > Interest on acquisition indebtedness of $750,000 if incurred ON OR AFTER DEC. 15th, 2017 > Applies to debt to acquire, construct, or substantially improve taxpayer's home

In 2018, X Corporation purchases office equipment = $27,000 for business. Because equipment is eligible to be expensed under Section 179, X elects to expense $25,000 of cost. What is X Corporation's depreciable basis in the equipment?

Depreciable basis = $27,000 - $25,000 = $2,000. X recovers $27,000 investment in equipment through expensing $25,000 in acquisition year, and $2,000 in depreciation charges over the life of the equipment. If equipment costs only $22,000 & X elected to expense $22,000 under Section 179, X would fully recover its capital investment in 2018.

During the past two years, through extensive advertising and improved customer relations, Brick Corporation estimated that it had developed customer goodwill worth $500,000. For the current year, determine the amount of goodwill Brick Corporation may amortize. a. $26,667 b. $100,000 c. $33,333 d. $16,667 e. None of these choices are correct.

E Self-created goodwill is not a § 197 intangible and thus cannot be amortized.

Israel purchased a new passenger automobile on August 17, 2014, for $30,000. During the year the car was used 40% for business and 60% for personal use. Determine his cost recovery deduction for the car for 2014. a. $500 b. $1,224 c. $1,500 d. $1,000 e. None of these choices are correct.

E The car, which is listed property, does not pass the predominantly business usage test. Therefore, neither § 179 expensing nor additional first-year depreciation can be taken. $30,000 × .100 = $3,000 (not over $3,160 limit*). $3,000 × 40% = $1,200. *These depreciation limits are indexed annually.

Davis's child attends a school operated by the church the family attends. Davis made a donation of $1,000 to the church in lieu of the normal registration fee of $200. In addition, Davis paid the regular tuition of $6,000 to the school. Based on this information, what is Davis's charitable contribution? a. $7,000 b. $0 c. $6,800 d. $1,000 e. $800

E The taxpayer's donation of $1,000 in lieu of the normal $200 registration fee would be deductible to the extent of $800 [$1,000 - $200 benefit received (the registration fee)]. The tuition of $6,000 is a personal expense that cannot be deducted as a charitable contribution.

The holding period of property acquired by gift may begin on:

Either the date the property was acquired by the donor or the date of gift.

The Federal per diem rates that can be used for "deemed substantiated" purposes are the same for all locations. a. True b. False

False The Federal per diem rates are different for different locations in the United States.

In April 2015, Ellis, a calendar year cash basis taxpayer, paid the state of Kansas additional income tax for 2014. Since it relates to 2014, for Federal income tax purposes the payment qualifies as a tax deduction for tax year 2014. a. True b. False

False The amount is deductible in 2015 because Ellis is a cash basis taxpayer who paid the tax in 2015.

The basis of cost recovery property must be reduced by the lesser of cost recovery allowed or allowable. a. True b. False

False The basis of cost recovery property must be reduced by the cost recovery allowed but not less than the cost recovery allowable.

After she finishes working at her main job, Willow returns home, has dinner, then drives to her second job. Willow may deduct the mileage between her home and second job. a. True b. False

False The deduction is based on the mileage between the first and the second job.

Employees who do not render an adequate accounting to the employer but are fully reimbursed will shift the 50% cutback adjustment to their employer. a. True b. False

False The employee must render an adequate accounting.

Obtaining a tax benefit by shifting itemized deductions from one year to another is not allowed. a. True b. False

False The individual could, for example, prepay a church pledge for a particular year to shift the deduction to the current year so itemized deductions exceed the standard deduction.

The key date for calculating cost recovery is the date the asset is purchased. a. True b. False

False The key date for calculating cost recovery is the date the asset is placed in service, not the purchase date.

Colton just graduated from college. The cost of moving his personal belongings from his parents' home to his first job site does not qualify for the moving expense deduction. a. True b. False

False There is no prohibition against claiming moving expenses if the first job is involved.

The cost recovery basis for property converted from personal use to business use is always the fair market value of the property at the time of the conversion. a. True b. False

False This only occurs if the fair market value is less than the adjusted basis of the property.

For tax purposes, "transportation" is a broader classification than "travel". a. True b. False

False Travel expenses include transportation expenses and meals and lodging while away from home in the pursuit of a trade or business.

When a business is being purchased, if possible, the purchaser should bargain for more of the purchase price being allocated to goodwill and covenants not to compete, rather than equipment. a. True b. False

False When a business is being purchased, goodwill and covenants not to compete are both subject to a statutory amortization period of 15 years. The cost of equipment is depreciated over a 7 year recovery period.

Interest paid or accrued during the tax year on aggregate acquisition indebtedness of $2 million or less ($1 million or less for married persons filing separate returns) is deductible as qualified residence interest.

False A $1 million limit for qualified residence interest applies to acquisition indebtedness ($500,000 or less for married persons filing separately).

Maria traveled to Rochester, Minnesota, with her son, who had surgery at the Mayo Clinic. Her son stayed at the clinic for the duration of his treatment. She paid airfare of $300 and $50 per night for lodging. The cost of Maria's airfare and lodging cannot be included in determining her medical expense deduction.

False A deduction is allowed for transportation and lodging expenses. In addition, Maria's deduction for lodging is allowed, since it falls within the limit of $50 per night.

Charitable contributions that exceed the percentage limitations for the current year can be carried over for up to three years.

False A five year carryover period applies to individual taxpayers.

The only things that the grantee of an option may do with the option are exercise it or let it expire. a. True b. False

False A grantee may also sell or exchange the option rather than exercising it or letting it lapse.

For purposes of computing the deduction for qualified residence interest, a qualified residence includes the taxpayer's principal residence and two other residences of the taxpayer or spouse.

False A qualified residence includes a principal residence and one other residence.

For purposes of computing the deduction for qualified residence interest, a qualified residence includes only the taxpayer's principal residence.

False A qualified residence includes the taxpayer's principal residence and one other residence of the taxpayer or spouse.

A physician recommends a private school for Ellen's dependent child. Because of the physician's recommendation, the cost of the private school will qualify as a medical expense deduction (subject to percentage limitations).

False A recommendation of a physician, although helpful, does not make the expenditure automatically deductible as a medical expense.

Under the taxpayer-use test for a § 1033 involuntary conversion, the taxpayer has less flexibility in qualifying replacement property than under the functional-use test. a. True b. False

False A taxpayer has more flexibility under the taxpayer-use test than under the functional- use test.

Personal expenditures that are deductible as itemized deductions include medical expenses, Federal income taxes, state income taxes, property taxes on a personal residence, mortgage interest, and charitable contributions.

False All of the listed personal expenditures except Federal income taxes are deductible as itemized deductions.

At a particular point in time, a taxpayer can have two principal residences for § 121 exclusion purposes. a. True b. False

False At a particular point in time, a taxpayer can have only one principal residence for § 121 exclusion purposes. Whether property is the taxpayer's principal residence depends upon all of the facts and circumstances in each case. If a taxpayer has two residences, the principal residence is the one he or she lives in most of the time.

To qualify for the § 121 exclusion, the property must have been used by the taxpayer for the 5 years preceding the date of sale and owned by the taxpayer as the principal residence for the last 2 of those years. a. True b. False

False At the date of the sale, the residence must have been owned and used by the taxpayer as the principal residence for at least two years during the five-year period ending on the date of sale.

In January 2017, Pam, a calendar year cash basis taxpayer, made an estimated state income tax payment for 2016. The payment is deductible in 2016.

False Cash basis taxpayers can deduct amounts paid or withheld for state income taxes in the year paid, no matter which year the payments pertain to. The January 2017 payment is a deduction for 2017.

Casualty losses and condemnation losses on the involuntary conversion of a personal residence receive the same tax treatment. a. True b. False

False Casualty losses are recognized subject to the casualty loss limitations, while condemnation losses are not recognized (or postponed).

During the year, Victor spent $300 on bingo games sponsored by his church. If all profits went to the church, Victor has a charitable contribution deduction of $300.

False Costs of raffles, bingo, or lottery tickets do not qualify for the charitable deduction regardless of who receives the profits.

Dan contributed stock worth $16,000 to his college alma mater, a qualified charity. He acquired the stock 11 months ago for $4,000. He may deduct $16,000 as a charitable contribution deduction (subject to percentage limitations).

False Dan's deduction is $4,000, the basis of the property. Contributions of short-term capital gain property are treated the same as contributions of ordinary income property and the amount of the deduction is measured by its basis.

Gains and losses on nontaxable exchanges are deferred because the tax law recognizes that nontaxable exchanges result in a change in the substance but not the form of the taxpayer's relative economic position.a. Trueb. False

False Gains and losses on nontaxable exchanges are deferred because the tax law recognizes that nontaxable exchanges result in a change in the form but not the substance of the taxpayer's relative economic position.

Gambling losses may be deducted to the extent of the taxpayer's gambling winnings. Such losses are subject to the 2%-of-AGI floor for miscellaneous itemized deductions.

False Gambling losses may be deducted to the extent of the taxpayer's gambling winnings. However, such losses are not subject to the 2%-of-AGI floor for miscellaneous itemized deductions.

If boot is received in a § 1031 like-kind exchange that results in some of the realized gain being recognized, the holding period for both the like-kind property and the boot received begins on the date of the exchange. a. True b. False

False The boot received will have a new holding period (i.e., the date of the exchange). However, since only some of the realized gain is recognized, the like-kind property received will have a carryover holding period (i.e., includes the holding period for the like-kind property surrendered)

Judy paid $40 for Girl Scout cookies and $40 for Boy Scout popcorn. Judy may claim an $80 charitable contribution deduction.

False The deduction is limited to the excess of the amount paid over the value of the benefit received (i.e., the cookies and popcorn).

The election to itemize is appropriate when total itemized deductions are less than the standard deduction based on the taxpayer's filing status.

False The election to itemize is appropriate when total itemized deductions exceed the standard deduction based on the taxpayer's filing status.

Purchase land for $1,000,000. Sell in 2018 for $1,600,000. You have $600,000 gain ALL due to appreciation. Purchase equipment in 2015 for $500,000, sell in 2018 for $250,000 after depreciating $400,000. G/L?

Gain realized = $250,000 - ($500,000 - $400,000) = $150,000 gain realized. This gain is ALL due to depreciation. What was the tax effect of depreciation over the tax years 2015-2018? - Expenses that reduced ordinary income (best treatment for an expense) If section 1231 gains are capital gains, it means... ordinary deductions in prior tax years generate a current year capital gain (too favorable)

Under what circumstance is there recognition of some or all of the realized gain associated with the giving of boot by the taxpayer in a like-kind exchange?

Generally, the giving of boot by the taxpayer in a like-kind exchange does not trigger the recognition of realized gain (e.g., cash). However, if the basis of the boot is less than the fair market value of the boot, then gain is recognized to the extent of this excess (e.g., appreciated stock

Joyce, a farmer, has the following events occur during the tax year. Which of the events qualify as an involuntary conversion under § 1033 (nonrecognition of gain from an involuntary conversion)?

Her personal residence, adjusted basis of $100,000, is condemned to make way for an interstate highway. She recovers condemnation proceeds of $175,000.

Like-Kind Exchange (Nonrecognition transactions)

IF like-kind property is exchanged (trade one asset for another similar asset), realized G/L is ALWAYS deferred. However, must recognize G/L eventually...when TP has wherewithal to pay tax after exchange is completed. "Like-kind" = same class. *Requirements*: - MUST be a direct exchange (can't sell, then buy new). - MUST be property used in T/B or held for investment (Personal property does NOT qualify, items held for sale & intangible assets do NOT qualify as well) - MUST be an exchange of real property for real property (buildings, land, land improvements)

Andrew acquires 2,000 shares of Eagle Corporation stock for $100,000 on March 31, 2010. On January 1, 2014, he sells 125 shares for $5,000. On January 22, 2014, he purchases 135 shares of Eagle Corporation stock for $6,075. When does Andrew's holding period begin for the 135 shares?

March 31, 2010, for 125 shares and January 22, 2014, for 10 shares.

Ann and Scott are married filing a joint tax return and have the following credits for the year: Child care credit...................$ 1,260(N) Home mortgage credit..... 1,800(Y) Their tax liability was $1,000. What is the maximum credit they may use and what (if any) is they amount of their carry over?

Maximum Credit Carryover C. $1,000 $1,800

Discuss the relationship between realized gain and boot received in a § 1031 like-kind exchange.

Realized gain serves as the ceiling on the amount of the gain that is recognized in a § 1031 like-kind exchange. If no boot is received, then none of the realized gain is recognized. If boot is received and its fair market value is less than the realized gain, then gain is recognized to the extent of the boot received. If boot is received and its fair market value is greater than the realized gain, then gain is recognized to the extent of the realized gain (i.e., full recognition occurs).

Discuss the treatment of realized gains from involuntary conversions.

Realized gains from involuntary conversions are recognized unless the taxpayer elects postponement treatment under § 1033. In order to defer the realized gain, the taxpayer must reinvest an amount at least equal to the amount realized in qualifying property within the statutory time period. If there is an investment deficiency, realized gain is recognized to the extent of the deficiency. The ceiling on gain recognition is the realized gain. Note that for a direct conversion (i.e., into property), the deferral provision is mandatory (i.e., an election is not required).

If the taxpayer qualifies under § 1033 (nonrecognition of gain from an involuntary conversion), makes the appropriate election, and the amount reinvested in replacement property is less than the amount realized, realized gain is:

Recognized to the extent of the deficiency (amount realized not reinvested).

Depletion

Recover basis of investment in natural resource. TP has *economic interest* in natural resource if: - Investment in natural resource is in place (not removed from original source) - Capital recovery of investment depends on income derived from extraction of natural resource 2 methods, can use 1 method 1 year, the other method in next year... flexible... - Cost depletion method - Percentage depletion method <Depletion deduction can exceed basis>

Edith's manufacturing plant is destroyed by fire on the afternoon of November 3, 2018. The adjusted basis is $800,000. The insurance company offers a settlement of $700,000. After protracted negotiations, Edith receives $825,000 on June 9, 2019. Edith is a fiscal year taxpayer whose tax year ends on June 30th. What is the latest date that Edith can invest the proceeds in qualifying replacement property and elect to defer the gain under § 1033?

Since the form of the involuntary conversion is a casualty, Edith has 2 years from the end of the tax year in which she received a proceeds inflow large enough to produce a realized gain. Since this occurred on June 9, 2019, she has until 2 years from June 30, 2019 (i.e., June 30, 2021).

Classification of Assets

Skip Section 11-4 on Capital G/L.

X has a $5,000 net loss in business. Y (wife) earns $7,000 working part-time. In addition, they earn $1,000 in interest income. X also purchases $14,000 worth of equipment for use in his business. For 2018, what is their maximum Section 179 deduction?

TI = $7000 - $5000 = $2000 ($1000 is not T/B but an investment) Maximum deduction is $2000 for section 179 expense b/c of the TI limitation.

When a patent is transferred the most common forms of payment received by the transferor are a lump sum and/or periodic payment. t/f

TRue

X Corporation purchases an asset in the 3-year MACRS recovery class on 1/5/2018, for $45,000. Assume that X elects not to expense under Section 179 or claim bonus depreciation. What amount may X deduct as depreciation expense for each year of the asset's recovery period?

Table A10-2

In 2016, Brandon, age 72, paid $3,000 for long-term care insurance premiums. He may include the $3,000 in computing his medical expense deduction for the year.

Taxpayers over age 70 may include up to $4,870 of long-term care insurance premiums in computing medical expenses.

X is an employee of A Company. A offered lots for sale at a price of $50,000. A sells X a lot for $20,000. The difference between the $50,000 FMV and the $20,000 purchase price—$30,000—is TI to X because the transaction is a bargain purchase. The purchase price is an attempt to compensate X. How does X's recognition of this income affect his basis in the property?

The bargain purchase difference, $30,000, is added to X's purchase price of $20,000 to reflect the income recognition from the bargain purchase. The property's basis becomes $50,000, which may reduce capital gain when sold.

If the taxpayer qualifies under § 1033 (nonrecognition of gain from an involuntary conversion) and the amount reinvested in replacement property exceeds the amount realized, the basis of the replacement property is:

The cost of the replacement property minus the postponed gain.

What requirements must be satisfied to receive nontaxable exchange treatment under § 1031?

The following requirements must be satisfied to receive nontaxable exchange treatment under § 1031. ∙ The form of the transaction is an exchange. ∙ Both the property transferred and the property received are held either for productive use in a trade or business or for investment. ∙ The property is like-kind property (i.e., real property).

Barry purchased a used business asset (seven-year property) on September 30, 2017, at a cost of $200,000. This is the only asset he purchased during the year. Barry did not elect to expense any of the asset under § 179, did not take additional first-year depreciation, and did not elect straight-line cost recovery. Barry sold the asset on July 17, 2018. Determine the cost recovery deduction for 2018. a. $24,490 b. $34,438 c. $19,133 d. $55,100 e. None of these choices are correct.

The half-year convention applies in this case [$200,000 × .2449 × 1/2 = $24,490].

For purposes of computing the deduction for qualified residence interest, a qualified residence includes only the taxpayer's principal residence and one other residence. a. True b. False

True A qualified residence includes the taxpayer's principal residence and one other residence of the taxpayer or spouse.

The IRS will issue advanced rulings as to whether a worker's status is that of an employee or an independent contractor. a. True b. False

True A ruling from the IRS can be obtained by filing Form SS-8.

Depletion claimed by a sole proprietor is reported on Schedule C. a. True b. False

True Depletion claimed by a sole proprietor is reported on Schedule C.

If depreciation is claimed, it should be supported by completing Form 4562 and then transferred to Schedule C. a. True b. False

True Depreciation is supported by completing Form 4562 and then transferred to Schedule C.

When making noncash donations, the type of property contributed can make a big difference in the amount, if any, of the deduction. a. True b. False

True For example, contribution of capital gain property will provide a deduction equal to fair market value rather than the adjusted basis.

If a taxpayer has a business with a net operating loss carryover reducing current year income, the taxpayer may want to elect to use straight line depreciation to slow down the cost recovery. a. True b. False

True If a taxpayer has a new business with little income or a business with a net operating loss carryover, the taxpayer should elect to use straight line depreciation to slow down the cost recovery and preserve the deductions for later, higher tax rate years.

A taxpayer who always claims the standard deduction (i.e., does not itemize his or her deductions from AGI) may still be able to receive a tax benefit from any education expenses incurred. a. True b. False

True If § 222 applies, a deduction for AGI results. Also, the taxpayer will obtain a deduction for AGI if self-employed and the education is business related. Lastly, a tax benefit can result by means of an exclusion (e.g., certain scholarships, Coverdell accounts, and § 529 plans) or a credit (e.g., HOPE or lifetime learning).

Roth IRAs possess the advantage of tax-free accumulation of income within the plan. a. True b. False

True In addition, the income may not be taxed when distributed to the participant.

With regard to small business stock, only individuals who acquire stock from the corporation are eligible to receive ordinary loss treatment under § 1244. True False

True In general, shareholders receive capital gain or loss treatment when they sell stock. However, it is possible to receive an ordinary loss deduction under § 1244 if the loss relates to small business stock. Under this provision, only those individuals who acquired stock directly from the corporation are eligible for ordinary loss treatment.

After graduating from college with a degree in geophysics, Bob obtains a job as a geologist with ExxonMobile. Bob's job search expenses do not qualify as deductions. a. True b. False

True Job search expenses incurred in obtaining the first job are not deductible.

Land improvements generally are eligible for cost recovery. a. True b. False

True Land improvements are 15-year class property.

Tired of her 60 mile daily commute, Lilly purchases a condo that is only five miles from her job. Lilly's moving expenses to her new condo are disallowed and can not be claimed by her as a deduction.* a. True b. False

True Lilly does not have qualified moving expenses since she did not change job locations.

Medical expenses need not relate to a particular ailment in order to be deductible. The cost of a periodic physical exam is deductible even though it relates to the taxpayer's general state of health. a. True b. False

True Medical expenses do not have to relate to a particular ailment in order to be deductible.

Nate is the sole proprietor of a furniture store. He can deduct real property taxes on his store building but he cannot deduct state income taxes related to his net income from the furniture store as a business deduction. a. True b. False

True Nate may deduct the real property taxes on the store building as a business expense. However, the position of the IRS is that state and local income taxes imposed upon an individual are deductible only as itemized deductions, even if the taxpayer's sole source of income is from a business, rents, or royalties.

If a taxpayer uses regular MACRS for 15 and 20-year class property, an alternative minimum tax adjustment is not necessary with respect to the depreciation on that property. a. True b. False

True No adjustment is required on 15 and 20-year class property because they use 150% declining-balance depreciation.

Employee business expenses for travel do not qualify as itemized deductions subject to the 2% floor if they are reimbursed. a. True b. False

True Nonreimbursed employee expenses qualify as itemized deductions subject to the 2% floor.

All eligible real estate under ACRS is permitted one-half month of cost recovery in the month of disposition. a. True b. False

True One-half month of cost recovery is permitted in the month of disposition for realty under ACRS.

Benjamin performs services for Gabriella. If Benjamin provides his own helper and tools, this is indicative of independent contractor (rather than employee) status. a. True b. False

True Since Benjamin provides his own helper and tools, he is probably not an employee.

In May 2016, after 11 months on a new job, Sunjay is fired after he assaults a customer. Sunjay is not required to include in his gross income for 2016 his deduction for moving expenses he claimed on his 2015 tax return. a. True b. False

True Since Sunjay worked for 11 months, he has already satisfied the 39-week time test.

A taxpayer who claims the standard deduction will not be subject to the 2% floor on unreimbursed employee expenses. a. True b. False

True The 2%-of-AGI floor applies only to miscellaneous itemized deductions. A taxpayer who claims the standard deduction will not be itemizing.

Research and experimental expenditures do not include expenditures for testing of materials for quality control. True False

True The activities associated with the ordinary and customary testing of materials and products for quality control purposes do not quality as research and experimental expenditures.

Deloris paid an appraiser to determine how much a capital improvement made for medical reasons increased the value of her personal residence. The appraisal fee is deductible, but not as a medical expense. a. True b. False

True The appraisal fee does not qualify as a medical expense, but it qualifies as a deduction under § 212 (related to the determination of tax liability) as a miscellaneous itemized deduction.

By itself, credit card receipts will not constitute adequate substantiation for travel expenses. a. True b. False

True The credit card receipts establish the date, place, and amount of the expenditure. Because neither the business relationship nor the business purpose is established, the deduction is disallowed.

It is possible to obtain a tax benefit by shifting itemized deductions from one year to another. a. True b. False

True The individual could, for example, prepay a church pledge for a particular year to shift the deduction to the current year so itemized deductions exceed the standard deduction.

Beatrice pays FICA (employer's share) on the wages she pays her maid to clean and maintain Beatrice's personal residence. The FICA payment is not deductible as an itemized deduction. a. True b. False

True The payment is a nondeductible personal expense.

The election to itemize is not appropriate when the taxpayer's allowable itemized deductions are less than the allowable standard deduction. a. True b. False

True The taxpayer benefits from itemizing when itemized deductions exceed the standard deduction.

Maria made significant charitable contributions of capital gain property in the current year. In fact, the amount of the contributions exceeds 30% of her AGI. The excess charitable contribution that is not deductible this year can be carried over for five years.

True A five year carryover period applies. In the carryover process, the carryover will continue to be classified as 30 percent property.

Dennis, a calendar year taxpayer, owns a warehouse (adjusted basis of $190,000) which is destroyed by a tornado in October 2018. He receives insurance proceeds of $250,000 in January 2019. If before 2021, Dennis replaces the warehouse with another warehouse costing at least $250,000, he can elect to postpone the recognition of any realized gain. a. True b. False

True All of the requirements for § 1033 deferral are satisfied.

Fees for automobile inspections, automobile titles and registration, bridge and highway tolls, parking meter deposits, and postage are not deductible if incurred for personal reasons, but they are deductible as deductions for AGI if incurred as a business expense by a self-employed taxpayer.

True As noted in the text, certain taxes are deductible and certain are nondeductible. Specified taxes (such as state income taxes and real and personal property taxes) are deductible as itemized deductions, but personal fees are not. However, fees incurred in a trade or business are deductible, but not as itemized deductions.

Joe, a cash basis taxpayer, took out a 12-month business loan on December 1, 2016. He prepaid all $3,600 of the interest on the loan on December 1, 2016. Joe can deduct only $300 of the prepaid interest in 2016.

True Cash basis taxpayers are required to allocate prepaid interest to the tax years to which the interest relates. Therefore, Joe can deduct only $300 ($3,600 X 1/12) in 2016 and the other $3,300 in 2017.

Chad pays the medical expenses of his son, James. James would qualify as Chad's dependent except that he earns $7,500 during the year. Chad may claim James' medical expenses even if he is not a dependent.

True Chad may deduct the medical expenses. The gross income test is waived in determining dependency status for medical expense purposes.

A taxpayer may not deduct the cost of new curbing (relative to a personal residence), even if the construction is required by the city and the curbing provides an incidental benefit to the public welfare.

True Such assessments are added to the basis of the taxpayer's property.

Sergio was required by the city to pay $2,000 for the cost of new curbing installed by the city in front of his personal residence. The new curbing was installed throughout Sergio's neighborhood as part of a street upgrade project. Sergio may not deduct $2,000 as a tax, but he may add the $2,000 to the basis of his property.

True Such assessments are added to the basis of the taxpayer's property.

Upon the recommendation of a physician, Ed has a swimming pool installed at his residence because of a heart condition. If he is allowed to deduct all or part of the cost of the pool, Ed's increase in utility bills due to the operation of the pool qualifies as a medical expense.

True Such expense does qualify as a medical expense.

In April 2016, Bertie, a calendar year cash basis taxpayer, had to pay the state of Michigan additional income tax for 2015. Even though it relates to 2015, for Federal income tax purposes the payment qualifies as a tax deduction for tax year 2016.

True The amount is deductible in 2016 because Bertie is a cash basis taxpayer.

On December 31, 2016, Lynette used her credit card to make a $500 contribution to the United Way, a qualified charitable organization. She will pay her credit card balance in January 2017. If Lynette itemizes, she can deduct the $500 in 2016.

True The date the charge is made on a credit card determines the year of deduction.

If a capital asset is sold at a gain, the holding period is important. a. True b. False

True The holding period (short-term or long-term) is required to determine whether a short- term or long-term capital gain has occurred

Bill paid $2,500 of medical expenses for his daughter, Marie. Marie is married to John and they file a joint return. Bill can include the $2,500 of expenses when calculating his medical expense deduction.

True The joint return test is waived in determining dependency status for medical expense deduction purposes. Bill may include the $2,500 in calculating his medical expenses.

Sadie mailed a check for $2,200 to a qualified charitable organization on December 31, 2016. The $2,200 contribution is deductible on Sadie's 2016 tax return.

True The mailing date is treated as the date of the charitable contribution.

Shirley pays FICA (employer's share) on the wages she pays her maid to clean and maintain Shirley's personal residence. The FICA payment is not deductible as an itemized deduction.

True The payment is a nondeductible personal expense.

Georgia contributed $2,000 to a qualifying Health Savings Account in the current year. The entire amount qualifies as an expense deductible for AGI.

True The payment to the HSA is a deduction for AGI, not an itemized medical expense deduction.

Al contributed a painting to the Metropolitan Art Museum of St. Louis, Missouri. The painting, purchased six years ago, was worth $40,000 when donated, and Al's basis was $25,000. If this painting is immediately sold by the museum and the proceeds are placed in the general fund, Al's charitable contribution deduction is $25,000 (subject to percentage limitations).

True The property was put to an "unrelated use" by the charitable organization. Al is allowed a deduction for the contribution based on the $25,000 basis, not the $40,000 FMV.

Trent sells his personal residence to Chester on July 1, 2016. He had paid $7,000 in real property taxes on March 1, 2016, the due date for property taxes for 2016. Trent may not deduct the portion of the taxes he paid for the period the property was owned by Chester.

True The real property taxes paid by the seller (Trent) but apportioned to the buyer (Chester) is treated as reducing the amount Trent realized from the sale of the residence. Trent may not deduct the portion of the taxes related to the period Chester owned the property.

In 2017, Rhonda received an insurance reimbursement for medical expenses incurred in 2016. She is not required to include the reimbursement in gross income in 2017 if she claimed the standard deduction in 2016.

True The reimbursement is included in gross income only to the extent the taxpayer derived a tax benefit from deducting the expense in the previous year. Because Rhonda did not itemize in 2016, she received no tax benefit.

If there is an involuntary conversion (i.e., casualty, theft, or condemnation) of the taxpayer's principal residence, the realized gain may be postponed as a § 1033 involuntary conversion and/or excluded as a § 121 sale of a principal residence. a. True b.false

True The taxpayer initially can elect to exclude the amount of realized gain allowed under Section 121. Then Section 1033 can be used to postpone the remainder of the realized gain associated with a qualified replacement. By using Section 121 first, the amount of the reinvestment needed under Section 1033 is reduced.

A taxpayer whose principal residence is destroyed in a fire can use both the § 121 (sale of residence gain exclusion) and the § 1033 (involuntary conversion postponement of gain) provisions. a. True b. False

True The taxpayer initially can elect to exclude the amount of realized gain allowed under § 121. Then § 1033 can be used to postpone the remainder of the realized gain associated with a qualified replacement. By using § 121 first, the amount of the reinvestment needed under § 1033 is reduced.

The holding period of replacement property where the election to postpone gain is made includes the holding period of the involuntarily converted property. a. True b. False

True There is a carryover holding period only if the taxpayer elects to postpone the recognition of gain on an involuntary conversion. For an involuntary conversion on which there is a realized loss, there is a new holding period.

Over the past 20 years, Alfred has purchased 380 shares of Green, Inc., common stock. His first purchase was in 1993 when he acquired 30 shares for $20 a share. In 1998, Alfred bought 150 shares at $10 a share. In 2013, Alfred acquired 200 shares at $50 a share. Alfred intends to sell 125 shares at $60 per share in the current year (2014). If Alfred's objective is to minimize gain and assuming he can adequately identify the shares to be sold, what is his recognized gain?

a. $1,250. RATIONALE: Alfred can minimize his recognized gain by selling the 125 shares from the lot acquired in 2013 (the specific identification method). Amount realized $7,500 Adjusted basis (6,250) Realized gain $1,250 Recognized gain $1,250

On June 1, 2017, James places in service a new automobile that cost $40,000. The car is used 60% for business and 40% for personal use. (Assume this percentage is maintained for the life of the car.) James does not take additional first-year depreciation. Determine the cost recovery deduction for 2017. a. $1,896 b. $8,000 c. $1,776 d. $4,800 e. None of these choices are correct.

a. $1,896 MACRS cost recovery ($40,000 × .20) × .60 $ 4,800 Limited to ($3,160 × .60) $ 1,896

Olaf was injured in an automobile accident and received $25,000 for his physical injury, $50,000 for his loss of income, and $10,000 punitive damages. As a result of the award, the amount Olaf must include in gross income is: a. $10,000. b. $50,000. c. $60,000. d. $85,000.

a. $10,000.

68. On May 30, 2014, Jane signed a 20-year lease on a factory building to use for her business. The lease begins on June 1, 2014. In August 2014, Jane paid $300,000 for leasehold improvements to the building. Determine Jane's total deduction with respect to the leasehold improvements for 2014.

a. $2,889

On May 2, 2017, Karen placed in service a new sports utility vehicle that cost $60,000 and has a gross vehicle weight of 6,300 lbs. The vehicle is used 60% for business and 40% for personal use. Determine Karen's total cost recovery for 2017. Karen wants to use both §179 and additional first-year depreciation. a. $31,600 b. $7,200 c. $27,200 d. $25,000 e. None of these choices are correct.

a. $31,600 Cost for business use: $36,000 (60% × $60,000) § 179 expense $25,000 Additional first-year depreciation [($36,000 - $25,000) x 50%] 5,500 MACRS cost recovery [($36,000 - $25,000 - $5,500) × .20] 1,100 Total

71. Augie purchased one new asset during the year (five-year property) on November 10, 2014, at a cost of $650,000. She would like to use the § 179 election if available. The income from the business before the cost recovery deduction and the § 179 deduction was $600,000. Determine the total cost recovery deduction with respect to the asset for 2014.

a. $32,500

Steve purchased his home for $500,000. As a sole proprietor, he operates a certified public accounting practice in his home. For this business, he uses one room exclusively and regularly as a home office. In Year 1, $3,042 of depreciation expense on the home office was deducted on his income tax return. In Year 2, Steve sustained losses in his business; therefore, no depreciation was taken on the home office. Had he been allowed to deduct depreciation expense, his depreciation expense would have been $3,175. What is the adjusted basis in the home?

a. $493,783. RATIONALE: The adjusted basis must be reduced by the greater of the depreciation allowed ($3,042) or allowable ($6,217). Thus, the adjusted basis is $493,783 ($500,000 - $6,217).

On July 17, 2017, Kevin places in service a used automobile that cost $25,000. The car is used 80% for business and 20% for personal use. In 2018, he used the automobile 40% for business and 60% for personal use. Determine the cost recovery recapture for 2018. a. $528 b. $2,500 c. $2,000 d. $0 e. None of these choices are correct.

a. $528 Cost recovery recapture in 2018: MACRS ($25,000 × .20) = $5,000 (limited to $3,160*); $3,160 × 80% $2,528 Straight-line ($25,000 × .10) = $2,500 (limited to $3,160*); $2,500 × 80% (2,000) Cost recovery recapture in 2018 $ 528 * These depreciation limits are indexed annually.

Calculator Mary purchased a new five-year class asset on March 7, 2017. The asset was listed property (not an automobile). It was used 60% for business and the rest of the time for personal use. The asset cost $900,000. Mary made the § 179 election. The income from the business before the § 179 deduction was $600,000. Mary also takes additional first-year depreciation. Determine the total deductions with respect to the asset for 2017. a. $528,000 b. $180,000 c. $600,000 d. $378,000 e. None of these choices are correct.

a. $528,000 Cost for business use: $540,000 (60% × $900,000) § 179 expense (no business income limitation) $510,000 Additional first-year depreciation [($540,000 - $510,000) × 50% $15,000 MACRS cost recovery ($15,000 × .20) 3,000 Total deduction $528,000

Theresa sued her former employer for age, race, and gender discrimination. She claimed $200,000 in damages for loss of income, $300,000 for emotional harm, and $500,000 in punitive damages. She settled the claim for $700,000. As a result of the settlement, Theresa must include in gross income: a. $700,000. b. $500,000. c. $490,000 [($700,000/$1,000,000) × $700,000]. d. $0.

a. $700,000.

Kelly inherits land which had a basis to the decedent of $95,000 and a fair market value of $50,000 on August 4, 2014, the date of the decedent's death. The executor distributes the land to Kelly on November 12, 2014, at which time the fair market value is $49,000. The fair market value on February 4, 2015, is $45,000. In filing the estate tax return, the executor elects the alternate valuation date. Kelly sells the land on June 10, 2015, for $48,000. What is her recognized gain or loss?

a. ($1,000).

In October 2014, Ben and Jerry exchange investment realty in a § 1031 likekind exchange. Ben bought his real estate in 2004 while Jerry purchased his in 2007. In addition to the realty, Ben receives Pearl, Inc. stock worth $10,000 from Jerry. Ben's realized gain is $30,000. On what date does the holding period for Ben's realty received from Jerry begin? When does the holding period for the stock he receives begin? a. 2004, 2014.

a. 2004, 2014.

Adam repairs power lines for the Egret Utilities Company. He is generally working on a power line during the lunch hour. He must eat when and where he can and still get his work done. He usually purchases something at a convenience store and eats in his truck. Egret reimburses Adam for the cost of his meals. a. Adam must include the reimbursement in his gross income. b. Adam can exclude the reimbursement from his gross income since the meals are provided for the convenience of the employer. c. Adam can exclude the reimbursement from his gross income because he eats the meals on the employer's business premises (the truck). d. Adam may exclude from his gross income the difference between what he paid for the meals and what it would have cost him to eat at home. e. None of these.

a. Adam must include the reimbursement in his gross income.

Jared, a fiscal year taxpayer with an August 31st year-end, owns an office building (adjusted basis of $800,000) that was destroyed by fire on December 24, 2014. If the insurance settlement was $950,000 (received March 1, 2015), what is the latest date that Jared can replace the office building in order to qualify for § 1033 nonrecognition of gain?

a. August 31, 2017.

Lucinda, a calendar year taxpayer, owned a rental property with an adjusted basis of $312,000 in a major coastal city. Her property was condemned by the city government on October 12, 2018. In order to build a convention center, Lucinda eventually received qualified replacement property from the city government on March 9, 2019. This new property has a fair market value of $410,000. a. What is Lucinda's recognized gain or loss on the condemnation? b. What is her adjusted basis for the new property? c. If, instead of receiving qualifying replacement property, Lucinda was paid $410,000, what is the latest date that she can acquire qualifying replacement property?

a. Because the conversion of Lucinda's original property was directly into qualified replacement property, the nonrecognition of the realized gain of $98,000 ($410,000 amount realized - $312,000 adjusted basis) is mandatory. b. Due to the mandatory nonrecognition, the basis in the replacement property is a carryover basis of $312,000 ($410,000 - $98,000). c. The latest date that Lucinda can acquire qualifying replacement property is December 31, 2022 (three years after the close of the tax year in which the proceeds received are large enough to produce a realized gain).

Jamal had a deductible casualty loss of $5,000 on his 2018 tax return. In 2019, Jamal is reimbursed for $3,000 of the 2018 loss. Jamal has a salary of $30,000 and experienced the loss from theft of securities of $1,000 and another casualty loss of $6,000 in 2019. How much does Jamal include in 2019 income related to the 2018 casualty loss? a.$3,000 b.$1,000 c.$6,000 d.$30,000 e.$5,000

a.$3,000 If a taxpayer receives a reimbursement for a casualty loss sustained and deducted in a previous year, the taxpayer includes the reimbursement in gross income when it is received to the extent the previous deduction resulted in a tax benefit.

This year Amanda paid $749 in Federal gift taxes on a gratuitous transfer to her nephew. Amanda lives in Texas and does not pay any state or local income taxes. Which of the following is a true statement? a.) Amanda cannot deduct Federal gift taxes. b.) Amanda can deduct Federal gift taxes for AGI. c.) Amanda can deduct Federal gift taxes paid as an itemized deduction. d.) Amanda must include Federal gift taxes with other miscellaneous itemized deductions. e.) None of these is true.

a.) Amanda cannot deduct Federal gift taxes.

Which of the following costs are deductible as an itemized medical expense? a.) Medical expenses incurred to prevent disease. b.) The cost of prescription medicine and over-the-counter drugs. c.) The cost of elective cosmetic surgery. d.) Medical expenses reimbursed by health insurance. e.) None of the above costs are deductible.

a.) Medical expenses incurred to prevent disease.

Which of the following is a true statement? a.) Self-employed taxpayers are not allowed to deduct health care premiums if the taxpayer is eligible to participate in their spouse's employer-provided health plan. b.) Self-employment taxes paid by self-employed taxpayers are deductible as business expenses. c.) The maximum deduction for education interest is $5,000 for married taxpayers filing jointly. d.) All of the choices are correct.

a.) Self-employed taxpayers are not allowed to deduct health care premiums if the taxpayer is eligible to participate in their spouse's employer-provided health plan.

Karen owns City of Richmond bonds with a face value of $10,000. She purchased the bonds on January 1, 2014, for $11,000. The maturity date is December 31, 2023. The annual interest rate is 8%. What is the amount of taxable interest income that Karen should report for 2014, and the adjusted basis for the bonds at the end of 2014, assuming straight-line amortization is appropriate?

b. $0 and $10,900. RATIONALE: One-tenth of the bond premium is amortized each year under the straight-line method. This reduces the adjusted basis of the bond to $10,900 ($11,000 - $100). Because the bond is taxexempt, the bond premium amortization is not deductible from gross income.

Moss exchanges a warehouse for a building he will use as an office building. The adjusted basis of the warehouse is $600,000 and the fair market value of the office building is $350,000. In addition, Moss receives cash of $150,000. What is the recognized gain or loss and the basis of the office building?

b. $0 and $450,000.

77. On June 1, 2014, James places in service a new automobile that cost $40,000. The car is used 60% for business and 40% for personal use. (Assume this percentage is maintained for the life of the car.) James does not take additional first-year depreciation (if available). Determine the cost recovery deduction for 2014.

b. $1,896

81. On March 1, 2014, Lana leases and places in service a passenger automobile. The lease will run for five years and the payments are $500 per month. During 2014, she uses her car 60% for business and 40% for personal activities. Assuming the dollar amount from the IRS table is $20, determine Lana's inclusion as a result of the lease.

b. $10

In 2010, Harold purchased a classic car that he planned to restore for $12,000. However, Harold is too busy to work on the car and he gives it to his daughter Julia in 2014. At this time, the fair market value of the car has declined to $10,000. Harold paid no gift tax on the transaction. Julia completes some of the restoration herself with outofpocket costs of $5,000. She later sells the car for $30,000. What is Julia's recognized gain or loss on the sale of the car?

b. $13,000. RATIONALE: Julia's recognized gain on the sale of the car is calculated as follows:

Karen, a calendar year taxpayer, made the following donations to qualified charitable organizations during the year: Cash donation to State University Basis $30,000; FMV $ 30,000 Unimproved land to the City of Terre Haute, Indiana Basis 70,000; FMV 210,000 ​ The land had been held as an investment and was acquired 4 years ago. Shortly after receipt, the City of Terre Haute sold the land for $210,000. Karen's AGI is $450,000. The allowable charitable contribution deduction this year is: a. $100,000. b. $165,000. c. $225,000. d. $240,000. e. None of the above.

b. $165,000 $30,000 (cash) + $135,000 (30% × $450,000 AGI) = $165,000. The capital gain property is limited to 30% of $450,000 AGI, or $135,000. The carryover to the next five years is $75,000 [$210,000 (FMV of the land) - $135,000 (deduction allowed for the current year)].

89. On January 15, 2014, Vern purchased the rights to a mineral interest for $3,500,000. At that time it was estimated that the recoverable units would be 500,000. During the year, 40,000 units were mined and 25,000 units were sold for $800,000. Vern incurred expenses during 2014 of $500,000. The percentage depletion rate is 22%. Determine Vern's depletion deduction for 2014.

b. $175,000

64. Diane purchased a factory building on April 15, 1994, for $5,000,000. She sells the factory building on February 2, 2014. Determine the cost recovery deduction for the year of the sale.

b. $19,838

Paula inherits a home on July 1, 2014 that had a basis in the hands of the decedent at death of $290,000 and a fair market value of $500,000 at the date of the decedent's death. She decides to sell her old principal residence, which she has owned and occupied for 9 years, with an adjusted basis of $125,000 and move into the inherited home. On September 16, 2014, she sells the old residence for $600,000. Paula incurs selling expenses of $30,000 and legal fees of $2,000. She decides to add a pool, deck, pool house, and recreation room to the inherited home at a cost of $100,000. These additions are completed and paid for on November 1, 2014. What is her recognized gain on the sale of her old principal residence and her basis in the inherited home?

b. $193,000; $600,000.

Bud exchanges a business use machine with an adjusted basis of $22,000 and a fair market value of $30,000 for another business use machine with a fair market value of $28,000 and $2,000 cash. What is Bud's recognized gain or loss?

b. $2,000.

Ralph gives his daughter, Angela, stock (basis of $8,000; fair market value of $6,000). No gift tax results. If Angela subsequently sells the stock for $10,000, what is her recognized gain or loss?

b. $2,000.

73. The only asset Bill purchased during 2014 was a new seven-year class asset. The asset, which was listed property, was acquired on June 17 at a cost of $50,000. The asset was used 40% for business, 30% for the production of income, and the rest of the time for personal use. Bill always elects to expense the maximum amount under § 179 whenever it is applicable. The net income from the business before the § 179 deduction is $100,000. Determine Bill's maximum deduction with respect to the property for 2014.

b. $2,499

Carin, a widow, elected to receive the proceeds of a $150,000 life insurance policy on the life of her deceased husband in 10 installments of $17,500 each. Her husband had paid premiums of $60,000 on the policy. In the first year, Carin collected $17,500 from the insurance company. She must include in gross income: a. $0. b. $2,500. c. $10,000. d. $25,000.

b. $2,500.

66. On May 15, 2014, Brent purchased new farm equipment for $200,000. Brent used the equipment in connection with his farming business. Brent does not elect to expense assets under § 179. Brent does not take additional firstyear depreciation (if available). Determine the cost recovery deduction for 2014.

b. $21,420

59. Barry purchased a used business asset (seven-year property) on September 30, 2014, at a cost of $200,000. This is the only asset he purchased during the year. Barry did not elect to expense any of the asset under § 179, did not take additional first-year depreciation (if available), and did not elect straight-line cost recovery. Barry sold the asset on July 17, 2015. Determine the cost recovery deduction for 2015.

b. $24,490

56. Tan Company acquires a new machine (ten-year property) on January 15, 2014, at a cost of $200,000. Tan also acquires another new machine (seven-year property) on November 5, 2014, at a cost of $40,000. No election is made to use the straightline method. The company does not make the § 179 election and elects to not take additional first-year depreciation if available. Determine the total deductions in calculating taxable income related to the machines for 2014.

b. $25,716

57. James purchased a new business asset (three-year personalty) on July 23, 2013, at a cost of $40,000. James takes additional first-year depreciation Determine the cost recovery deduction for 2013.

b. $26,666

65. Howard's business is raising and harvesting peaches. On March 10, 2014, Howard purchased 10,000 new peach trees at a cost of $60,000. Howard does not make an election to expense assets under § 179 and does not take additional first-year depreciation (if available). Determine the cost recovery deduction for 2014.

b. $3,000

Mary sells her personal use automobile for $20,000. She purchased the car two years ago for $17,000. What is Mary's recognized gain or loss? It increased in value due to its excellent mileage, yet safe design.

b. $3,000. RATIONALE: Realized gains on the sale of personal use assets are recognized. Therefore, the $3,000 ($20,000 -$17,000) realized gain is recognized.

88. Orange Corporation begins business on April 2, 2014. The corporation has startup expenditures of $64,000 which it incurred last year. If Orange Corporation elects § 195, determine the total amount that Orange may deduct in 2014.

b. $3,200

On June 1, 2017, Irene places in service a new automobile that cost $21,000. The car is used 70% for business and 30% for personal use. (Assume this percentage is maintained for the life of the car.) She does not take additional first-year depreciation. Determine the cost recovery deduction for 2018. a. $3,290 b. $3,570 c. $6,720 d. $3,160 e. None of these choices are correct.

b. $3,570 $21,000 × 32% = $6,720 (limited to $5,100*). $5,100 × 70% = $3,570. *These depreciation limits are indexed annually.

Ron, age 19, is a full-time graduate student at City University. During 2016, he received the following payments: Cash award for being the outstanding resident adviser $ 1,500 Resident adviser housing 2,500 State scholarship for ten months (tuition and books) 6,000 State scholarship (meals allowance) 2,400 Loan from college financial aid office 3,000 Cash support from parents 2,000 $17,400 Ron served as a resident advisor in a dormitory and, therefore, the university waived the $2,500 charge for the room he occupied. What is Ron's adjusted gross income for 2016? a. $1,500. b. $3,900. c. $9,000. d. $15,400.

b. $3,900

Sam's office building with an adjusted basis of $750,000 and a fair market value of $900,000 is condemned on November 30, 2014. Sam is a calendar year taxpayer. He receives a condemnation award of $875,000 on March 1, 2015. He builds a new office building at a cost of $845,000 which is completed and paid for on December 31, 2017. What is Sam's recognized gain on receipt of the condemnation award and basis for the new office building assuming his objective is to minimize gain recognition?

b. $30,000; $750,000.

Yolanda buys a house in the mountains for $450,000 which she uses as her personal vacation home. She builds an additional room on the house for $40,000. She sells the property for $560,000 and pays $28,000 in commissions and $4,000 in legal fees in connection with the sale. What is the recognized gain or loss on the sale of the house?

b. $38,000. RATIONALE: Amount realized ($560,000 - $28,000 - $4,000) $528,000 Adjusted basis ($450,000 + $40,000) (490,000) Realized gain $38,000 Recognized gain $38,000

Dena owns 500 acres of farm land in southeastern Maryland. Her adjusted basis for the land is $480,000 and there is a $400,000 mortgage on the land. She exchanges the land for an office building owned by Chris in Newark, New Jersey. The building has a fair market value of $900,000. Chris assumes Dena's mortgage on the land. What is the amount of Dena's recognized gain or loss on the exchange?

b. $400,000.

Molly exchanges a small machine (adjusted basis of $85,000; fair market value of $78,000) used in her business and investment land (adjusted basis of $10,000; fair market value of $15,000) for a large machine (fair market value of $93,000) to be used in her business in a likekind exchange. What is Molly's recognized gain or loss?

b. $5,000.

79. On July 17, 2014, Kevin places in service a used automobile that cost $25,000. The car is used 80% for business and 20% for personal use. In 2015, he used the automobile 40% for business and 60% for personal use. Determine the cost recovery recapture for 2015.

b. $528

Harold bought land from Jewel for $150,000. Harold paid $50,000 cash and gave Jewel an 8% note for $100,000. The note was to be paid over a five-year period. When the balance on the note was $80,000, Jewel began having financial difficulties. To accelerate her cash inflows, Jewel agreed to accept $60,000 cash from Harold in final payment of the note principal. a. Harold must recognize $20,000 ($80,000 - $60,000) of gross income. b. Harold is not required to recognize gross income, but must reduce his cost basis in the land to $130,000. c. Harold is not required to recognize gross income, since he paid the debt before it was due. d. Jewel must recognize gross income of $20,000 ($80,000 - $60,000) from discharge of the debt. e. None of these.

b. Harold is not required to recognize gross income, but must reduce his cost basis in the land to $130,000.

Which of the following items would be an itemized deduction on Schedule A of Form 1040 not subject to the 2%-of-AGI floor? a. Professional dues paid by an accountant (employed by Ford Motor Co.) to the National Association of Accountants. b. Gambling losses to the extent of gambling winnings. c. Job hunting costs. d. Appraisal fee paid to a valuation expert to determine the fair market value of art work donated to a qualified museum. e. None of the above.

b. Gambling losses to the extent of gambling winnings. Items a., c., and d. are miscellaneous deductions that are subject to the 2%-of-AGI floor.

. Hazel, a solvent individual but a recovering alcoholic, embezzled $6,000 from her employer. In the same year that she embezzled the funds, her employer discovered the theft. Her employer did not fire her and told her she did not have to repay the $6,000 if she would attend Alcoholics Anonymous. Hazel met the conditions and her employer canceled the debt. a. Hazel did not realize any income because her employer made a gift to her. b. Hazel must include $6,000 in gross income from discharge of indebtedness. c. Hazel must include $6,000 in gross income under the tax benefit rule. d. Hazel may exclude the $6,000 from gross income because the debt never existed. e. None of these.

b. Hazel must include $6,000 in gross income from discharge of indebtedness.

55. Hazel purchased a new business asset (five-year asset) on September 30, 2014, at a cost of $100,000. On October 4, 2014, Hazel placed the asset in service. This was the only asset Hazel placed in service in 2014. Hazel did not elect § 179 or additional firstyear depreciation if available. On August 20, 2015, Hazel sold the asset. Determine the cost recovery for 2015 for the asset.

c. $23,750

78. On May 2, 2014, Karen placed in service a new sports utility vehicle that cost $60,000 and has a gross vehicle weight of 6,300 lbs. The vehicle is used 60% for business and 40% for personal use. Determine the cost recovery for 2014. Karen wants to maximize her deductions.

c. $26,800

During 2014, Ted and Judy, a married couple, decided to sell their residence, which had a basis of $300,000. They had owned and occupied the residence for 20 years. To make it more attractive to prospective buyers, they had the outside painted in April at a cost of $6,000 and paid for the work immediately. They sold the house in May for $880,000. Broker's commissions and other selling expenses amounted to $53,000. Since they both are age 68, they decide to rent an apartment. They purchase an annuity with the net proceeds from the sale. What is the recognized gain?

c. $27,000.

Abby sells real property for $300,000. The buyer pays $5,000 in property taxes that had accrued during the year while the property was still legally owned by Abby. In addition, Abby pays $15,000 in commissions and $3,000 in legal fees in connection with the sale. How much does Abby realize (the amount realized) from the sale of her property?

c. $287,000. Sales price $300,000 Taxes paid by buyer on behalf of seller 5,000 Less: Commissions (15,000) Legal fees (3,000) Amount realized $287,000

Jena is a full-time undergraduate student at State University and is claimed by her parents as a dependent. Her only source of income is a $10,000 athletic scholarship ($1,000 for books, $5,500 tuition, $500 student activity fee, and $3,000 room and board). Jena's gross income for the year is: a. $10,000. b. $4,000. c. $3,000. d. $500.

c. $3,000

George, an unmarried cash basis taxpayer, received the following amounts during 2016: Interest on savings accounts $2,000 Interest on a State tax refund 600 Interest on City of Salem school bonds 350 Interest portion of proceeds of a 5% bank certificate of deposit purchased on July 1, 2015, and matured on June 30, 2016 250 Dividends on USG common stock 300 What amount should George report as gross income from dividends and interest for 2016? a. $2,300. b. $2,550. c. $3,150. d. $3,500. e. None of these.

c. $3,150.

76. On June 1, 2014, Irene places in service a new automobile that cost $21,000. The car is used 70% for business and 30% for personal use. (Assume this percentage is maintained for the life of the car.) She does not take additional first-year depreciation (if available). Determine the cost recovery deduction for 2015

c. $3,570

74. Mary purchased a new five-year class asset on March 7, 2014. The asset was listed property (not an automobile). It was used 60% for business and the rest of the time for personal use. The asset cost $90,000. Mary made the § 179 election. The income from the business before the § 179 deduction was $60,000. Mary does not take additional first-year depreciation (if available). Determine the total deductions with respect to the asset for 2014.

c. $30,800

Tobin inherited 100 acres of land on the death of his father in 2014. 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 1971 for $19,000 and prior to his death had made permanent improvements of $6,000. What is Tobin's basis in the land?

c. $300,000.

80. On July 10, 2014, Ariff places in service a new sports utility vehicle that cost $70,000 and weighed 6,300 pounds. The SUV is used 100% for business. Determine Ariff's maximum deduction for 2014, assuming Ariff's § 179 business income is $110,000. Ariff does not take additional first-year depreciation (if available).

c. $34,000

aul, a calendar year married taxpayer, files a joint return for 2016. Information for 2016 includes the following: AGI $175,000 State income taxes 13,500 State sales tax 3,000 Real estate taxes 18,900 Gambling losses (gambling gains were $12,000) 6,800 Paul's allowable itemized deductions for 2016 are: a. $13,500. b. $32,400. c. $39,200. d. $42,200. e. None of the above.

c. $39,200. State income taxes exceed state sales tax, so the state sales tax is not deductible (even if that option is available in 2016). The itemized deductions allowed are $39,200 ($13,500 + $18,900 + $6,800). Paul is not subject to the overall limitation on certain itemized deductions because his AGI does not exceed the $311,300 threshold for joint filers.

Doug and Pattie received the following interest income in the current year: Savings account at Greenbacks Bank $4,000 United States Treasury bonds 250 Interest on State of Iowa bonds 200 Interest on Federal tax refund 150 Interest on state income tax refund 75 Greenbacks Bank also gave Doug and Pattie a cellular phone (worth $100) for opening the savings account. What amount of interest income should they report on their joint income tax return? a. $4,775. b. $4,675. c. $4,575. d. $4,300. e. None of these.

c. $4,575.

An office building with an adjusted basis of $320,000 was destroyed by fire on December 30, 2014. On January 11, 2015, the insurance company paid the owner $450,000. The fair market value of the building was $500,000, but under the co-insurance clause, the insurance company is responsible for only 90 percent of the loss. The owner reinvested $410,000 in a new office building on February 12, 2015, that was smaller than the original office building. What is the recognized gain and the basis of the new building if § 1033 (nonrecognition of gain from an involuntary conversion) is elected?

c. $40,000 and $320,000.

84. Pat purchased a used five-year class asset on March 15, 2014, for $60,000. He did not elect § 179 expensing. Determine the cost recovery deduction for 2014 for earnings and profits purposes.

c. $6,000

Larry recorded the following donations this year: $500 cash to a family in need $2,400 to a church $500 cash to a political campaign To the Salvation Army household items that originally cost $1,200 but are worth $300. What is Larry's maximum allowable charitable contribution if his AGI is $60,000? a.) $2,900. b.) $1,000. c.) $2,700. d.) $4,600. e.) None of these

c.) $2,700. $2,400 to church + $300 FMV of household items.

Opal fell on the ice and injured her hip this winter. As a result she paid $3,000 for a visit to the hospital emergency room and $750 for follow-up visits with her doctor. While she recuperated, Opal paid $500 for prescription medicine and $600 to a therapist for rehabilitation. Insurance reimbursed Opal $1,200 for these expenses. What is the amount of Opal's qualifying medical expense? a.) $3,000. b.) $3,750. c.) $3,650. d.) $4,850. e.) All of these

c.) $3,650. Emergency room and doctor visits ($3750) + Prescription medication ($500) + Physical therapy ($600) less Insurance reimbursement (-$1,200) = $3,650

Campbell, a single taxpayer, earns $400,000 of profits from her general store that she operates as a sole proprietorship. She has $100,000 of employee wages, $40,000 of qualified property, and $500,000 of taxable income before the deduction for qualified business income. How much is Campbell's deduction for qualified business income? a.) $100,000 b.) $80,000 c.) $50,000 d.) $26,000 e.) $0

c.) $50,000 Her deduction for qualified business income is limited to 50% of her wages ($100,000 x 50% = $50,000)

Simone donated a landscape painting (tangible capital gain property) to a library, a public charity. She purchased the painting five years ago for $50,000, and on the date of the gift, it had a fair market value of $200,000. What is her maximum charitable contribution deduction for the year if her AGI is $300,000 (before considering the itemized deduction phase-out)? a.) $100,000. b.) $200,000. c.) $90,000 if the library uses the painting for its charitable purpose. d.) $150,000. e.) None of these.

c.) $90,000 if the library uses the painting for its charitable purpose.

Which of the following is a true statement? a.) Tax preparation fees are deducted for AGI. b.) Investment expenses are typically deducted for AGI. c.) Rental and royalty expenses are deducted for AGI d.) All of the choices are correct.

c.) Rental and royalty expenses are deducted for AGI

This year Riley files single and reports modified AGI of $71,000. Riley paid $1,200 of interest on a qualified education loan. What amounts can Riley deduct for qualifying education interest? a.) The deduction for qualifying education interest is $1,200. b.) The deduction for qualifying education interest is $1,000. c.) The deduction for qualifying education interest is $720. d.) The deduction for qualifying education interest is $200. e.) None of these.

c.) The deduction for qualifying education interest is $720 Riley may deduct the amount paid ($1,200) up to $2,500, reduced by the phase-out amount. [71,000 - 65,000]/15,000 = 40% [1,200 - (1,200 x 40%)] = $720

Congress allows self-employed taxpayers to deduct the cost of health insurance above the line (for AGI) because: a.) employers are allowed to deduct social security (FICA) taxes as a business expense. b.) self-employed taxpayers need an alternate mechanism for reducing the cost of health care. c.) this deduction provides a measure of equity between employees and the self-employed. d.) health insurance premiums cannot be deducted otherwise. e.) None of the choices are correct.

c.) this deduction provides a measure of equity between employees and the self-employed.

In the computation of a net operating loss, all of the following items are added to the negative taxable income, except: a.Losses from the operation of a business. b.Losses from the operation of a trade. c.Hobby losses. d.Casualty losses. e.Theft losses.

c.Hobby losses. In general, only losses from the operation of a trade or business and casualty and theft losses can create an NOL.

Jared, a fiscal year taxpayer with a August 31st year-end, owns an office building (adjusted basis of $800,000) that was destroyed by fire on December 24, 2018. If the insurance settlement was $950,000 (received March 1, 2019), what is the latest date that Jared can replace the office building in order to qualify for § 1033 nonrecognition of gain? a. December 31, 2018. b. August 31, 2019. c. December 31, 2020. d. August 31, 2021. e. None of the above.

d Gain of $150,000 ($950,000 amount received - $800,000 adjusted basis) is realized on March 1, 2019. As Jared has two years from the close of that tax year (August 31, 2019) to replace the property, the latest replacement date is August 31, 2021.

If boot is received in a § 1031 like-kind exchange and gain is recognized, which formula correctly calculates the basis for the like-kind property received? a. Adjusted basis of like-kind property surrendered + gain recognized - fair market value of boot received. b. Fair market value of like-kind property surrendered + gain recognized + fair market value of boot received. c. Fair market value of like-kind property received - postponed gain. d. Only a. and c. e. None of the above.

d Only the formulas in a. and c. produce the correct amount for the basis of the like-kind property received in a § 1031 exchange.

Lynn purchases a house for $52,000. She converts the property to rental property when the fair market value is $115,000. After deducting depreciation (cost recovery) expense of $1,130, she sells the house for $120,000. What is her recognized gain or loss?

d. $69,130.

62. Cora purchased a hotel building on May 17, 2014, for $3,000,000. Determine the cost recovery deduction for 2015.

d. $76,920

Nancy gives her niece a crane to use in her business with a fair market value of $61,000 and a basis in Nancy's hands of $80,000. No gift tax was paid. What is the niece's basis for depreciation (cost recovery)?

d. $80,000.

A factory building owned by Amber, Inc. is destroyed by a hurricane. The adjusted basis of the building was $400,000 and the appraised value was $425,000. Amber receives insurance proceeds of $390,000. A factory building is constructed during the nine-month period after the hurricane at a cost of $450,000. What is the recognized gain or loss and what is the basis of the new factory building?

d. ($10,000) and $450,000.

Assuming a taxpayer qualifies for the exclusion treatment, the interest income on educational savings bonds: a. Is gross income to the person who purchased the bond in the year the interest is earned. b. Is gross income to the student in the year the interest is earned. c. Is included in the student's gross income in the year the savings bonds are sold or redeemed to pay educational expenses. d. Is not included in anyone's gross income if the proceeds are used to pay college tuition. e. None of these.

d. Is not included in anyone's gross income if the proceeds are used to pay college tuition.

The Perfection Tax Service gives employees $12.50 as "supper money" when they are required to work overtime, approximately 25 days each year. The supper money received: a. Must be included in the employee's gross income. b. Must be included in the employee's gross income if the employee does not spend it for supper. c. May be excluded from the employee's gross income as a "no-additional cost" fringe benefit. d. May be excluded from the employee's gross income as a de minimis fringe benefit.

d. May be excluded from the employee's gross income as a de minimis fringe benefit.

Cash received by an employee from an employer: a. Is not included in gross income if it was not earned. b. Is not taxable unless the payer is legally obligated to make the payment. c. Must always be included in gross income. d. May be included in gross income although the payor is not legally obligated to make the payment.

d. May be included in gross income although the payor is not legally obligated to make the payment.

This year Norma, a single taxpayer, paid $11,200 of real estate taxes on her personal residence and $9,500 of state income taxes. Which of the following is true? a.) Norma can deduct $11,200 of real estate taxes as an itemized deduction. b.) Norma can deduct $9,500 of state income taxes as a for AGI deduction. c.) Even if Norma has no other itemized deductions, she should claim the standard deduction. d.) Norma can deduct $10,000 of taxes as an itemized deduction.

d.) Norma can deduct $10,000 of taxes as an itemized deduction.

Which of the following is a true statement? a.) The deduction of cash contributions to public charities is limited to 30% of AGI. b.) The deduction of capital gain property to private nonoperating foundations is limited to 50% of AGI. c.) The deduction of capital gain property to public charities is limited to 20% of AGI. d.) The deduction of cash contributions to private nonoperating foundations is limited to 30% of AGI. e.) None of the choices are true.

d.) The deduction of cash contributions to private nonoperating foundations is limited to 30% of AGI.

Which of the following events would not produce a deductible loss? a.Losses incurred in a business b.Losses incurred in a trade c.Losses incurred because of a hurricane d.Losses incurred due to personal use of property e.Losses incurred because of fire

d.Losses incurred due to personal use of property Losses result from events that are identifiable; damaging to property; and sudden, unexpected, and unusual in nature. They are not the result of personal use of property, such as a car, furniture, or a residence.

Which of the following statements is correct for a § 1033 involuntary conversion of an office building which is destroyed by fire? a. An election can be made to postpone gain on a § 1033 involuntary conversion only if the proceeds received are reinvested in qualifying property no later than two years after the end of the tax year in which a proceeds inflow is received that is large enough to produce a realized gain. b. The postponement of realized gain in a § 1033 involuntary conversion is elective. c. The functional use test is satisfied if a business warehouse is replaced with another business warehouse. d. The taxpayer use test is satisfied if a shopping mall rented to tenants is replaced with an office building to be rented to tenants. e. All of the above are correct.

e

Melvin receives stock as a gift from his uncle. No gift tax is paid. The adjusted basis of the stock is $30,000 and the fair market value is $38,000. Melvin trades the stock for bonds with a fair market value of $35,000 and $3,000 cash. What is his recognized gain and the basis for the bonds?

e. None of the above. RATIONALE: Amount realized ($35,000 + $3,000) $38,000 Adjusted basis (30,000) Realized gain $8,000 Recognized gain $8,000

Albert purchased a tract of land for $140,000 in 2011 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 2014 and the value of the land fell to $100,000. What is the amount of loss Albert can claim in 2014?

e. None of the above. RATIONALE: 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.

60. Bonnie purchased a new business asset (five-year property) on March 10, 2013, at a cost of $30,000. She also purchased a new business asset (seven-year property) on November 20, 2013, at a cost of $13,000. Bonnie did not elect to expense either of the assets under § 179, nor did she elect straightline cost recovery. Bonnie takes additional first-year depreciation. Determine the cost recovery deduction for 2013 for these assets.

e. None of these

63. Carlos purchased an apartment building on November 16, 2014, for $3,000,000. Determine the cost recovery for 2015.

e. None of these

69. On February 20, 2014, Susan paid $200,000 for a leasehold improvement to an office building that she is going to lease to John. The leasehold improvement is not a qualified leasehold improvement. The lease will begin on June 1, 2014, and terminate on May 31, 2024. At the termination of the lease, the improvement will be worthless. Determine Susan's deductible loss as a result of the termination of the lease. a. $0

e. None of these

70. White Company acquires a new machine (seven-year property) on January 10, 2013, at a cost of $600,000. White makes the election to expense the maximum amount under § 179. No election is made to use the straightline method. White does take additional first-year depreciation. Determine the total deductions in calculating taxable income related to the machine for 2013 assuming White has taxable income of $800,000.

e. None of these

75. Hans purchased a new passenger automobile on August 17, 2014, for $30,000. During the year the car was used 40% for business and 60% for personal use. Determine his cost recovery deduction for the car for 2014.

e. None of these

85. George purchases used sevenyear class property at a cost of $200,000 on April 20, 2014. Determine George's cost recovery deduction for 2014 for alternative minimum tax purposes, assuming George does not elect § 179.

e. None of these

86. During the past two years, through extensive advertising and improved customer relations, Orange Corporation estimated that it had developed customer goodwill worth $500,000. For the current year, determine the amount of goodwill Orange Corporation may amortize

e. None of these

Hans purchased a new passenger automobile on August 17, 2017, for $30,000. During the year the car was used 40% for business and 60% for personal use. Determine his cost recovery deduction for the car for 2017. a. $1,500 b. $500 c. $1,224 d. $1,000 e. None of these choices are correct.

e. None of these choices are correct. e. None of these choices are correct The car, which is listed property, does not pass the predominantly business usage test. Therefore, neither § 179 expensing nor additional first-year depreciation can be taken. $30,000 × .100 = $3,000 (not over $3,160 limit*). $3,000 × 40% = $1,200. *These depreciation limits are indexed annuall

White Company acquires a new machine (seven-year property) on January 10, 2017, at a cost of $610,000. White makes the election to expense the maximum amount under §179, and wants to take any additional first-year depreciation allowed. No election is made to use the straight-line method. Determine the total deductions in calculating taxable income related to the machine for 2017 assuming White has taxable income of $800,000. a. $87,169 b. $524,290 c. $510,000 d. $348,585 e. None of these choices are correct.

e. None of these choices are correct. § 179 expense $510,000 Additional first-year depreciation [($610,000 - $510,000) × .50] 50,000 MACRS cost recovery ($50,000 × .1429) 7,145 Total $567,145

For 2019, a taxpayer and spouse have $1,600 of nonbusiness capital gains, $1,000 of nonbusiness capital losses, $13,000 of interest income, $12,000 of itemized deductions (none of which are personal casualty and theft losses), $3,000 of business capital losses, and $1,000 of business capital gains. How much must they add back to taxable income to calculate the NOL? a.$200 b.$0 c.$600 d.$800 e.$400

e.$400 $3,000 business capital losses - [$1,000 business capital gains + ($13,000 nonbusiness income + $600 net nonbusiness capital gains - $12,000 nonbusiness deductions)] = $400

Tax depreciation is generally faster than financial reporting depreciation. But there are 2 systems in place that REALLY speed up tax depreciation: (1) Section 179 Election to Expense Assets (2) Additional First-year Depreciation ("Bonus Depreciation") Elaborate (1) & its limitations.

*(1) Section 179 Election to Expense Assets*: - Qualifying depreciable property used in T/B can be expensed, not depreciated (promote administrative convenience). - *Qualified Taxpayer?* Individuals, Corps, S-Corps, Partnership - *Qualified Property?* Property must be depreciable, tangible, used in T/B. Generally...not allowed for REAL property (building), land/land improvements, intangibles. - *Qualified Deduction?* Annual limitation = $1,000,000 (2018) - Section 179 is an ELECTION... you can elect all, some, or none of annual amount. 2 limitations: a. *Investment limitations*: IF TP purchases > $2,500,000 (2018) of Section 179 property, then reduce annual limitation $1 for each $ in excess of $2,500,000 (reduce to 0 at $3,500,000 = TP cannot deduct any 179 expense) b. *TI limitations*: Section 179 deduction in a tax year cannot > TI from taxpayer's T/B activities (can't create a loss). - "Soft limitations" = can choose to expense pass TI & create section 179 carryforward. Alternatively, expense under section 179 to TI = 0, recover remaining basis under MACRS.

4 Step Process to handle G/L on property dispositions: 1. Calculate amount realized on disposition 2. Calculate G/L realized on disposition 3. Calculate G/L recognized in current tax year 4. Determine character of G/L recognized Elaborate these terms.

*Amount realized = Gross sales price - expenses incurred to complete sale* *G/L realized = Amount realized - Adjusted basis* *G/L recognized*: infers that it's possible to have realized gain that is NOT recognized in current year *Character of G/L recognized*: classified according to character of asset generating G/L 1. Ordinary G/L: no special treatment, taxed @ marginal tax rate 2. Capital G/L: gains may receive preferential treatment, loss is limited to $3000/year 3. Section 1231 G/L: net gains = capital; net losses = ordinary (best of both worlds) 4. Personal use G/L: gains are capital; losses are not deductible (favor)

Section 179 reduces an asset's basis. Remaining basis depreciated under MACRS. If TP chooses to elect more Section 179 than allowed under TI limitations, basis of asset is reduced by the full Section 179 expense elected (even if CFWD). Section 179 expense is generally < total cost of assets Which assets get the section 179 election? Which doesn't?

*Qualified Property?* Property must be depreciable, tangible, used in T/B. Generally...not allowed for REAL property (building), land/land improvements, intangibles. TP can allocate section 179 in ANY manner...there's an appropriate strategy though :)) What if...production machinery & office furniture will be depreciated under MACRS over a 7-year period...trailer over 5-year period?

X Enterprises purchases 5-year property costing $280,000 on April 4 of the current year. The company purchases other 5-year property costing $1,011,000 on November 3 of the current year. What is X's maximum depreciation deduction?

- $1,011,000 / ($1,011,000 + $280,000) = 78% > 40%: must use mid-quarter convention. - Section 179 expense deduction: $1,000,000 (annual limit) can reduce depreciable basis of assets expensed, X can reduce depreciable basis in 4th quarter by expensing $1,000,000 of $1,011,000 property purchased on 11/3. - Recalculation: $11,000 / ($11,000 + $280,000) = 7% < 40%: no longer subject to mid-quarter convention. - X use general mid-year convention for personal property.

On 2/2, X Partnership purchases a computer for $3,500. On 11/15, X buys office furniture for $6,000. X does not elect to expense any of the property under Section 179. How much depreciation may the partnership deduct for the current year?

- $6000 / ($6,000 + $3,500) = 63% > 40% (more than 40% of depreciable basis of personal property was placed in service during the last 3 months - Table B-1 (class lives): computer (5y) & office furniture (7y) - Table A10-3 (1st quarter): computer ($3,500 x 35% = $1,225 depreciation in 1st quarter). - Table A10-6 (4th quarter): office furniture ($6,000 x 3.57% = $214 depreciation in 4th quarter) Total depreciation deduction = $1,225 + $214 = $1,439.

During 2018, the A Partnership places $2,523,000 of Section 179 property in service for use in its business. What is A's maximum Section 179 deduction?

- Annual limitation: $1,000,000 - Investment limitation reduction: $2,523,000 - $2,500,000 = $23,000 - New limitation: 977,000. NOTE: The $23,000 lost through the annual investment limit is not carried forward to future years. It is lost forever.

On 7/5/2018, X purchases a new car for $60,000. Based on his mileage records, X uses the car 80% of the time for a qualified business use. What is his depreciation deduction on the car for 2018?

- Automobiles are 5-year MACRS property. - Because X uses the automobile > 50% of the time for business, *allowable depreciation is the lesser of the regular MACRS depreciation or the passenger automobile limitation*. Oscar's 2018 depreciation is limited to $14,400.

Rental and Royalty Expenses

- Claimed ABOVE the line (FOR AGI) - Taxpayers report expenses and revenues on SCHEDULE E and transfer the net income or loss from SCHEDULE E to FORM 1040 - Flow through activities are also reported on Schedule E - Limitations may apply: basis, passive activity limits (can't deduct if you get beyond your "at-risk" amount)

How to compute Adjusted Basis (BV)?

- Depreciation, amortization, depletion: most common adjustment. - Easement (payment received from utility company is not a realization of income ...so exclude it from income) - Nontaxable dividends (shareholder treats this payment as a recovery of stock's basis. If eventually recover stock's basis to 0, any additional nontaxable dividends = gain from "sale" of asset)

Three Categories of Deductions FOR AGI

- Directly related to business activities (Such as : SCHEDULE C, Flow-through entities, Loss on Disposition) - Indirectly related to business activities (Such as: self-employed health insurance and tax deductions 50%) - Subsidizing specific activities (Such as PRE 2019 ALIMONY, Qualifieid Student Loan Interest)

Medical Expenses (Continued, SCHEDULE A)

- Elective procedures DO NOT QUALIFY (e.g. cosmetic surgery) - Hospitals and long-term care facilities > Taxpayers may deduct the costs of ACTUAL medical care whether the care is provided at hospitals or other long-term care facilities - Medical Expense DEDUCTION LIMIT > It is limited to the amount of unreimbused qualifying medical expenses paid during the year whic is REDUCED BY 7.5% OF THE TAXPAYER'S AGI

A taxpayer who claims the standard deduction will be affected by the 2% floor on unreimbursed employee expenses. a. True b. False

False The 2%-of-AGI floor applies only to miscellaneous itemized deductions. A taxpayer who claims the standard deduction will not be itemizing.

X is a 50% shareholder & full-time employee of an S corporation. During 2018, the S corporation invests $1,180,000 in Section 179 property. X also owns a sole proprietorship that qualifies as an active business. During 2018, X purchases $511,000 worth of equipment to use in the business. What is the maximum amount that X can deduct as a Section 179 expense for 2018?

- Limit to S-Corps: $1,000,000. The remaining $180,000 is subject to regular depreciation. - S-Corp allocates $500,000 of its section 179 deduction to X. - X's qualified section 179 expense = $1,011,000 ($500,000 from S-Corps + $511,000 from T/B). - BUT the $1,000,000 annual deduction limit applies at the shareholder level as well as S-Corp level, X may elect to deduct only $1,000,000 as section 179 expense. The remaining $11,000 equipment expense can be depreciated using regular methods. If X expenses $511,000 equipment for T/B, the $11,000 carries forward to be used in subsequent years. Any amounts that flow to a taxpayer from a conduit entity should always be expensed under Section 179 before any amount is elected from another T/B of the taxpayer.

What about Section 179 Expense for conduit entities?

- Limits first apply to partnerships or S-Corps: $1,000,000 subject to other limits (Section 179 expense is separately stated on schedule K-1 & allocate per ownership %) - Limits then apply to individual partners/owners: $1,000,000 subject to other limits *(Section 179 from conduit + section 179 from TP's other T/B activities <= $1,000,000)* - Partner/owner investment limitation: do not include amount from conduit - Partner/owner TI limitation: allocate from conduit + salary/wage + proprietorship income.

What qualifies as replacement property in Involuntary Conversion?

- MUST be purchased w/in 2 years of the end of tax year that involuntary conversion took place. - MUST be "property similar or related in service/use" ("functional use test" - replacement property must perform same function or have the same use as property involuntarily converted)

Initial Basis

- Purchased Asset: generally straightforward - Non-purchased asset: more complicated *Initial basis = purchase price + costs of readying asset for intended use* [Purchase price] = cash paid + FMV of property exchanged + FMV of services exchanged + Increases in TP's liabilities related to purchase [Costs of readying asset] = commissions, delivery fees, etc.

X Corporation's depreciable basis in a store building it purchased on 5/31/2012 is $100,000. What is the correct convention for this property, and how does it affect the first-year depreciation?

- Real estate: mid-month convention. - Only 1/2 of depreciation for May is allowed, regardless of the day in month building was actually placed in service. Building is considered to have been in service for 7.5 months (6-12 + 1/2 May) in 2012. - Depreciation using the first-year depreciation rate of 1.605% is $1,605 ($100,000 × 1.605%).

Sale of a Principle Residence (Nonrecognition transactions)

- Sell personal residence @ a loss... is it deductible? NOPE, personal use asset! - Sell personal residence @ a gain... is it taxable? Yes, taxable under the all-inclusive income concept. BUT Congress likes home ownership so it gives homeowners tax breaks. So... - *TPs can elect to exclude from income up to $250,000 ($500,000 if MFJ) of gain on sale of personal residence*

Tax planning by Bunching Itemized Deductions

- Tax benefit can be gained by implementing a simple timing tax-planning strategy > applies to taxpayers with itemized deductions that fall short of the standard deduction amount - Rather than deduct the standard deduction every year, time deductions to bunch together in one year > can be applied to cash payments made near December 31 such as charitable contributions, estimated tax payments, property tax payments, etc. > also applies to NON-CASH CHARITABLE CONTRIBUTIONS

Schedule A - Medical Expenses

- Taxpayers may deduct medical expenses incurred to treat themselves, their spouse, and their dependents - Qualifying medical expenses include unreimbursed payments for care, prevention, diagnosis, or cure of injury, disease, or bodily function > Health and dental insurance premiums qualify in some cases > Taxpayers using personal automobiles for medical transportation may deduct a standard mileage allowance in lieu of actual costs

On 1/1 current year, X buys a new car that X plans to use 80% for business and 20% for personal. X also buys a 5-year extended warranty on the car for $500. Can X deduct the cost of the extended warranty as an expense?

- The warranty is an intangible long-lived asset that provides business benefits, its cost is subject to amortization. Annual am = $100. - X is allowed a deduction of only $80 for business expense. Cannot deduct $20.

X purchases office equipment costing $1,000,000 on 1/1/2018. What are X's options for claiming cost recovery on the office equipment in the year of acquisition?

- X can elect to expense $1,000,000 of the cost of the office equipment (annual limit). Adjusted basis & depreciable basis of equipment = $0. - X can also deduct $1,000,000 in additional first-year depreciation. The depreciable basis = $0. The choice between the two options will depend on several factors, such as the acquisition of other assets and the income and investment limits of Section 179.

3/14/ 2018: X company purchases buses = $1,008,000 to transport its employees. What should X do if it wants to recover its $1,008,000 cost as quickly as possible (i.e., maximize the cost recovery)?

- X could claim 100% bonus depreciation and expense $1,008,000. - If bonus depreciation is not claimed, X should elect to expense $1,000,000 of cost under Section 179, leaving a depreciable basis of $8,000 ($1,008,000 − $1,000,000), which would be recovered using the regular MACRS 200% declining balance method over the 5-year recovery period for buses. - The regular MACRS method provides the fastest depreciation write-off the property's depreciable basis

X & Y both own land that they would like to trade. - X has land (FMV = $15,000) & mortgage ($5000) - Y has land (FMV = $25,000) & mortgage ($20,000) They agree to exchange land & assume each other's debt. Difference paid in cash. Who will have to pay cash? Gross sales price of each person?

- X: net mortgage value = $10,000 - Y: net mortgage value = $5,000 If X exchanges land for Y, X expects to get $10,000. Y have to pay another $5,000 in cash for X. Gross sales price of X = $5,000 (cash from Y) + $25,000 (land from Y) + $5,000 (debt assumed by Y) - $20,000 (debt assumed by X) = $15,000 Gross sales price of Y = $15,000 (land from X) + $20,000 (debt assumed by X) - $5,000 (debt assumed by Y) - $5,000 (cash) = $25,000

The Federal per diem rates that can be used for "deemed substantiated" purposes are the same for all locations in the country. a. True b. False

False The Federal per diem rates are different for different locations in the United States.

Juanita owned stock in Peak Corporation that she donated to a church (a qualified charitable organization) on July 28, 2015. What is the amount of Juanita's charitable contribution deduction assuming that she had purchased the stock for $13,400 on October 17, 2014, and the stock had a value of $18,800 when she made the donation? a. $13,400 b. $5,400 c. $18,800 d. $16,100 e. None of these choices are correct.

A If ordinary income property is contributed to a qualified charitable organization, the deduction is equal to the fair market value of the property less the amount of ordinary income that would have been reported if the property were sold. In most instances, the deduction is limited to the adjusted basis of the property to the donor. Since Juanita had not held the property long enough to meet the long-term capital gain requirement (October 17, 2014 - July 28, 2015), Juanita would have recognized a short-term capital gain of $5,400 if she had sold the property. Since short-term capital gain property is treated as ordinary income property for charitable contribution purposes, Juanita's charitable contribution deduction is limited to the property's adjusted basis of $13,400.

Jeremy and Alison, married taxpayers, took out a mortgage on their home for $350,000 in 1994. In May of this year, when the home had a fair market value of $450,000 and they owed $250,000 on the mortgage, they took out a home equity loan for $220,000. They used the funds to purchase a single engine airplane to be used for recreational travel purposes. What is the maximum amount of debt on which they can deduct home equity interest? a. $100,000 b. $230,000 c. $50,000 d. $220,000 e. None of these choices are correct.

A Interest is deductible only on the portion of the $220,000 home equity loan that does not exceed the lesser of: The fair market value of the residence, reduced by the acquisition indebtedness ($450,000 FMV - $250,000 acquisition indebtedness = $200,000). $100,000 ($50,000 for married persons filing separate returns). Of the $220,000 home equity loan, interest on $100,000 is deductible as home equity interest.

In 2015, Penelope makes the following donations to qualified charitable organizations: BASIS | FAIR MARKET VALUE Inventory held for resale in Penelope's business (a sole proprietorship): $4,000 | $3,600 Stock in Sparrow, Inc. held as an investment (acquired two years ago): $8,000 | $20,000 Comic book collection held as an investment (acquired six years ago): $2,000 | $10,000 The Sparrow stock and the inventory were given to Penelope's church, and the comic book collection was given to the United Way. Both donees promptly sold the property for the stated fair market value. Disregarding percentage limitations, Penelope's charitable contribution deduction for 2015 is: a. $25,600 b. $33,600 c. $14,000 d. $26,000 e. None of these choices are correct

A Inventory is ordinary income property, but the fair market value ($3,600) must be used if lower than the basis ($4,000). Stock is intangible property and is not subject to the tangible personalty rules. Since a sale of the Sparrow stock would have yielded a long-term capital gain, the full fair market value qualifies for the deduction ($20,000). The comic book collection comes under the exception relating to tangible property put to an unrelated use, and the adjusted basis ($2,000) must be used. Thus, $3,600 + $20,000 + $2,000 = $25,600.

Jillian is employed as a systems analyst. For calendar year 2015, she had AGI of $120,000 and paid the following medical expenses: Medical insurance premiums $3,900 Doctor and dentist bills for Carl and Penny (Jillian's parents) $8,250 Doctor and dentist bills for Jillian $6,750 Prescribed medicines for Jillian $300 Nonprescribed insulin for Jillian $825 Carl and Penny would qualify as Jillian's dependents except that they file a joint return. Jillian's medical insurance policy does not cover them. Jillian filed a claim for $3,150 of her own expenses with her insurance company in December 2015 and received the reimbursement in January 2016. What is Jillian's maximum allowable medical expense deduction for 2015? a. $8,025 b. $17,775 c. $4,875 d. $16,875 e. None of these choices are correct

A Jillian's medical expense deduction is $8,025, determined as follows: Medical insurance premiums $3,900 Doctor and dentist bills for Carl $8,250 Doctor and dentist bills for Jillian $6,750 Prescribed medicines for Jillian $300 Nonprescribed insulin for Jillian $825 __________ Total medical expenses $20,025 Less: 10% of $120,000 (AGI) $(12,000) __________ Deductible portion of medical expenses $8,025 Although Carl and Penny cannot be claimed as Jillian's dependents, they could have been had they not filed a joint return. Therefore, they qualify for the medical expense deduction. Insulin is an exception to the rule that nonprescribed drugs do not qualify as medical expenses. The insurance recovery was not received until 2016. Therefore, it has no effect on the medical expense deduction for 2015.

Alice is single and has a college degree in finance. She is employed as a loan officer at a bank; her yearly AGI approximates $50,000. During 2015, she enrolled in a weekend MBA program and incurred the following nonreimbursed expenses: $3,900 (tuition), $300 (books), $200 (other school supplies), and $200 (transportation to and from campus). Disregarding the 2%-of-AGI limitation, as to the MBA program, Alice has a: a. deduction for AGI of $3,900 and deduction from AGI of $700. b. deduction for AGI of $4,000 and deduction from AGI of $600. c. deduction for and deduction from AGI of $0. d. deduction for AGI of $4,100 and deduction from AGI of $500. e. None of these choices are correct.

A Section 222 allows up to $4,000 for qualified tuition and related expenses. As Alice spent only $3,900, this is the amount she can claim as a deduction for AGI. The remaining expenses of $700 ($300 + $200 + $200) can be claimed as deductions from AGI.

During 2015, Bradley, a self-employed individual, paid the following amounts: Real estate tax on residence $3,900 State income tax $1,400 Real estate taxes on land in Canada (held as an investment) $900 State sales taxes $1,950 State occupational license fee $250 Personal property tax on value of his automobile $200 What amount can Bradley claim as taxes in itemizing deductions from AGI? a. $6,950 b. $6,600 c. $8,600 d. $7,200 e. None of these choices are correct.

A State sales taxes ($1,950) are more than the state income tax ($1,400); so Bradley will choose to deduct the sales tax rather than the state income tax. The state occupational license fee ($250) is deductible for AGI as a business expense. The state sales tax ($1,950), the personal property tax on the auto ($200), and the real estate taxes ($3,900 + $900) are deductible as itemized deductions. The total itemized deductions are $6,950.

Joseph entertains several of his key clients on January 1 of the current year. Expenses paid by Joseph are as follows: Cab fare $60 Cover charge at supper club $200 Dinner at club $800 Tips to waiter $160 Presuming proper substantiation, Joseph's deduction is: a. $740 b. $640 c. $1,220 d. $610 e. None of these choices are correct.

B $60 + [50% × ($200 + $800 + $160)] = $640.

Property Disposition

After acquisition, capital is recovered through depreciation deductions. Any un-recovered amount is recovered @ disposition. *Amount realized = sales price - expenses to dispose* - If amount realized > adjusted basis (BV): realized gain @ disposition - If amount realized < adjusted basis (BV): realized loss @ disposition If there's G/L, character is important & can lead to big differences in tax liabilities - *Ordinary G/L*: taxed @ marginal tax rate - *Capital G/L*: maybe taxed @ preferential tax rates (LT capital gains @ 20% tax, capital loss is capped @ $3000/year) - *Section 1231 G/L* (G/L from sales of certain business assets): best of both world treatments - net Sec. 1231 G with LT capital gain AND deduct Sec. 1231 L as ordinary loss (both favorable).

For each of the following involuntary conversions, determine if the property qualifies as replacement property. a. Chuck's restaurant building is destroyed by fire. He clears the site and builds another restaurant building. b. Diane's warehouse which she used for storing inventory is destroyed by a tornado. She purchases another warehouse in which she will store inventory. c. Part of Andrew's dairy farm land is condemned to make way for an interstate highway. He uses the condemnation proceeds to construct a barn to be used for storing cattle feed. d. Liz owns a shopping mall which is destroyed by a flood. Since the tenant occupancy rate was down, she uses the insurance proceeds to purchase an office building which she will rent to tenants. e. Eleanor's Maserati Gran Turismo is stolen. The original cost was $125,000, and she had used it exclusively for personal use. Due to the limited supply of this model, it had appreciated in value. Eleanor received insurance proceeds of $130,000 and uses the proceeds to purchase a replacement Gran Turismo.

All of the replacements qualify as replacement property for purposes of an involuntary conversion. Items a., b., and e. qualify under the functional use test; item c. qualifies under the special rule for condemned realty; and item d. qualifies under the taxpayer use test.

X has a principal house: - Original cost (5/8/2009) = $60,000 - Home improvements = $20,000 - Sales price (6/6/2018) = $133,000 - Commission paid = $8,000 X purchases a new residence for $140,000 (8/18/2018) Gain recognized? Basis of new property?

Amount realized = $133,000 - $8,000 = $125,000 Gain realized = $125,000 - (60,000 + 20,000) = $45,000 X can elect to exclude up to $250,000 gain on sale of personal residence. So gain recognized = 0. Basis of new property = $140,000

Logger's skidder is fully destroyed when mechanical issues cause a fire. Logger paid $240,000 for skidder 5 years ago. AB = $75,000. FMV = $180,000 before the fire. Insurance company pays logger $200,000. A few weeks after fire, logger purchased a replacement skidder for $180,000. What was the logger's AB in the skidder?

Amount realized = $200,000 Gain realized = $200,000 - $75,000 = $125,000 Amount reinvested = $180,000 (deferred) Amount not reinvested = $20,000 (trigger income recognition to the extent of amount not reinvested) = *$20,000 Gain recognized* Gain deferred = $125,000 - $20,000 = $105,000 Logger's basis in new skidder? - FMV of new property - Gain deferred = Basis in new property ($180,000 - $105,000 = $75,000)

A & B exchange buildings. B assumes A's mortgage & pays A $50,000 cash. A's building FMV = $500,000, AB = $250,000 mortgage = $100,000 B's building FMV = $350,000, AB = $300,000 Consider tax consequences for A.

Amount realized = $350,000 + $50,000 (cash) + $100,000 (mortgage) = $500,000 Gain realized = Amount realized - AB = $500,000 - $250,000 = $250,000 *Gain recognized = Boot received (limited to gain realized)* = $150,000. Gain deferred = Gain realized - gain recognized = $250,000 - $150,000 = $100,000. What's A's basis in new property? FMV of new property - Gain deferred = $250,000

Gross Sales Price

Amounts received by seller from buyer Cash FMV of property/services received Seller's expenses paid by the buyer Seller's debt assumed by the buyer LESS: Amounts given by seller to buyer Buyer's expenses paid by the seller Buyer's debt assumed by the seller

Define an involuntary conversion.

An involuntary conversion results from the destruction (complete or partial), theft, seizure, requisition, or condemnation, or sale or exchange under threat or imminence of requisition or condemnation of the taxpayer's property.

Simer Corp. purchases $2,700,000 of section 179 property in 2018. - Production machinery: $2,500,000 - Trailer: $100,000 - Office furniture: $100,000 - Income before considering section 179 expenses = $620,000 Annual limitations?

Annual limitation = $1,000,000 Investment limitation reduction: $2,700,000-$2,500,000 = $200,000 New annual limitation = $800,000 (maximum amount we can elect in 2018) Options given TI = $620,000: 1) Elect $800,000 section 179, we generate $180,000 section 179 CFWD 2) Elect $620,000 section 179, depreciate remainder under MACRS. —> There's no TI limitation w/ MACRS depreciation. You can generate NOL. Option 2 makes sense if you max out section 179 deduction each year.

X bought an apartment building in 1985 (ACRS time) for $800,000. Sold in current year for $700,000. X deducts $600,000 in depreciation on building. Straight-line depreciation for same period would have been $400,000. What's the character of the gain on sale of building?

Apartment building is 1231 property. The $200,000 of excess depreciation is recaptured as ordinary income, leaving a $300,000 Section 1231 gain If the building is section 1245 property, $500,000 gain is recaptured as ordinary income (b/c it is all due to depreciation: 500,000 < 600,000).

MACRS (Modified Accelerated Cost Recovery System)

Applies to new & used tangible, depreciable (property, buildings, land improvements, equipment) with DETERMINABLE USEFUL LIVES & USED IN T/B. NOT land, intangibles, personal use assets, inventory. What amount is subject to depreciation under MACRS? - *Depreciable basis* = initial basis - section 179 elected - bonus depreciation. What about useful lives? - MACRS pre-determines using "class life", which specifies its recovery period. TP can avoid using MACRS by using other depreciation methods not based on years (like standard mileage rate method). Election must be made @ year of acquisition.

Which, if any, of the following factors is a characteristic of independent contractor status? a. Receipt of a Form 1099 reporting payments received. b. All of these choices are correct. c. Services are performed for more than one party. d. Work-related income and expenses are reported on Schedule C. e. Workplace fringe benefits are not available.

B

Which of the following statements about the Earned Income Credit is true?

D. The taxpayer must have received earned income during the year but does not have to owe a tax liability.

Due to a merger, Meredith transfers from San Francisco to Little Rock. Under a new job description, she is reclassified from employee to independent contractor status. Her moving expenses, which are not reimbursed, are as follows: Transportation $1,400 Meals $400 Lodging $500 Cost of moving household goods $4,000 Penalty for breaking lease on San Francisco apartment $3,000 Meredith's deductible moving expense is: a. $0 b. $5,900 c. $6,100 d. $8,900 e. $9,300

B $1,400 (transportation) + $500 (lodging) + $4,000 (moving household goods) = $5,900 ("$5,900"). Meals are not qualified moving expenses ("$6,100" and "$9,300") nor are penalties for breaking a lease ("$8,900" and "$9,300"). It is immaterial that Meredith's status as an employee changed to that of an independent contractor ("$0").

During the year, Dagney went from New Orleans to Barcelona (Spain) on business. She spent four days on business, two days on travel, and four days on vacation. Disregarding the vacation costs, Dagney's unreimbursed expenses are: Air fare $3,000 Lodging $800 Meals $600 Entertainment $400 Dagney's deductible expenses are: a. $2,800 b. $3,100 c. $2,500 d. $4,300 e. None of these choices are correct.

B $1,800 [(6 days business/10 day trip) × $3,000 (air fare)] + $800 + $500 [50%($600 + $400)] = $3,100. The air fare has to be allocated as Dagney did not meet either the seven days (or less) or less than 25% personal use exceptions for foreign travel.

During the year, Jessica went from Atlanta to Tangier (Morocco) on business. She spent four days on business, two days on travel, and four days on vacation. Disregarding the vacation costs, Jessica's unreimbursed expenses are: Air fare $3,000 Lodging $800 Meals $600 Entertainment $400 Jessica's deductible expenses are: a. $2,800 b. $3,100 c. $2,500 d. $4,300 e. None of these choices are correct.

B $1,800 [(6 days business/10 day trip) × $3,000 (air fare)] + $800 + $500 [50%($600 + $400)] = $3,100. The air fare has to be allocated as Jessica did not meet either the seven days (or less) or less than 25% personal use exceptions for foreign travel.

On June 1, 2015, Mako Corporation purchased an existing business. With respect to the acquired assets of the business, Mako allocated $300,000 of the purchase price to a patent. The patent will expire in 20 years. Determine the total amount that Mako may amortize for 2015 for the patent. a. $0 b. $11,667 c. $35,000 d. $1,667 e. None of these choices are correct.

B $300,000 × (7 months/180 months) = $11,667. The statutory amortization period for § 197 intangibles is 15 years.

Jack purchased a new factory building on September 2, 2015, for $2,000,000. He elected the alternative depreciation system (ADS). Determine the cost recovery deduction for 2016. a. $18,000 b. $50,000 c. $22,000 d. $15,000 e. None of these choices are correct.

B .025 × $2,000,000 = $50,000

On May 2, 2015, Pearl placed in service a new sports utility vehicle that cost $60,000 and has a gross vehicle weight of 6,300 lbs. The vehicle is used 60% for business and 40% for personal use. Determine the cost recovery for 2015. Pearl wants to maximize her deductions. a. $3,060 b. $27,200 c. $25,000 d. $2,200 e. None of these choices are correct

B Cost for business use: $36,000 (60% x $60,000) §179 expense = $25,000 MACRS cost recovery [($36,000 - $25,000) x .20)] = $2,200 __________ Total = $27,200

A worker may prefer to be treated as an employee (rather than an independent contractor) for which of the following reasons: a. avoids the cutback adjustment as to business meals. b. the FICA rate is lower than for independent contractors. c. all of the FICA tax is deductible for income tax purposes. d. None of these choices are correct. e. work-related expenses are not subject to the 2%-of-AGI floor.

B Independent contractors are also subject to the cutback adjustment ("avoids the cutback adjustment as to business meals"). All of the FICA tax is not deductible ("all of the FICA tax is deductible for income tax purposes"). Because all work-related expenses of an employee are deductions from AGI, the 2%-of-AGI reduction is not avoided ("work-related expenses are not subject to the 2%-of-AGI floor"). The FICA rate is lower than for employees ("the FICA rate is lower than for independent contractors").

Cartman and Kenny are equal owners in Mountain Corporation. On July 1, 2015, each loans the corporation $20,000 at annual interest of 10%. Cartman and Kenny are brothers. Both shareholders are on the cash method of accounting, while Mountain Corporation is on the accrual method. All parties use the calendar year for tax purposes. On June 30, 2016, Mountain repays the loans of $40,000 together with the specified interest of $4,000. How much of the interest can Mountain Corporation deduct in 2015? a. $1,000 b. $0 c. $4,000 d. $2,000 e. None of these choices are correct

B Mountain Corporation can deduct interest expense of $4,000 in 2016 and $0 in 2015. Under § 267, Cartman and Kenny are regarded as related to the corporation. Consequently, the deductibility must await actual payment (in 2016).

Maria purchased a hotel building on May 17, 2015, for $3,000,000. Determine the cost recovery deduction for 2016. a. $59,520 b. $76,920 c. $69,000 d. $48,150 e. None of these choices are correct.

B The hotel building is nonresidential realty. .02564 × $3,000,000 = $76,920.

One of the tax advantages of being self-employed (rather than being an employee) is: a. the cutback adjustment does not apply. b. None of these choices are correct. c. the self-employment tax is lower than the Social Security tax. d. the actual cost method for deducting the business use of an automobile can be selected. e. job-related expenses are deductions from AGI.

B The self-employment tax is double what the employee pays ("the self-employment tax is lower than the Social Security tax"). The cutback adjustment also applies to self-employed taxpayers ("the cutback adjustment does not apply"). Job-related expenses are reported on Schedule C (rather than Schedule A) which results in deduction-for-AGI treatment ("job-related expenses are deductions from AGI"). The actual cost method is equally available to both employees and self-employed persons ("the actual cost method for deducting the business use of an automobile can be selected").

Marian purchased one new asset during the year (five-year property) on November 10, 2015, at a cost of $100,000. She made the § 179 election. The income from the business before the cost recovery deduction and the § 179 deduction was $50,000. She does not take additional first-year depreciation. Determine the total cost recovery deduction with respect to the asset for 2015. a. $20,000 b. $28,750 c. $25,000 d. $5,000 e. $40,000

B §179 expense = $25,000 MACRS cost recovery [($100,000 - $25,000) x .05)] = $3,750 __________ Total = $28,750

Hamlet is the regional manager for a national chain of auto-parts stores and is based in Denver. When the company opens new stores in Wichita, Hamlet is given the task of supervising their initial operation. For three months, he works weekdays in Wichita and returns home on weekends. He spends $410 returning to Denver but would have spent $390 had he stayed in Wichita for the weekend. As to the weekend trips, how much, if any, qualifies as a deduction? a. $0, since the trips are personal and not work related. b. $0, since Hamlet's tax home has changed from Denver to Wichita. c. $390 d. $410 e. None of these choices are correct.

C Hamlet's assignment in Wichita is temporary, so his tax home has not changed ("$0, since Hamlet's tax home has changed from Denver to Wichita"). Hamlet's deduction is limited to the lesser of what he actually spent and what he would have spent had he not returned home ("$390").

Which of the following is a FALSE statement concerning credits?

C. Excess FICA withheld when an employee works for only one employer may be used as a credit against income taxes. ?

Which one of the following statements about the foreign operations of Nora Corporation (a domestic corporation) is TRUE?

C. NORA may elect to take either a credit or a deduction, but not both, for the income taxes paid to a foreign country.

Schedule A - OTHER ITEMS

CASUALTY AND THEFT LOSSES: - After 2017, only federal disaster loss deductible - Subject to 10% AGI and $100 FLOOR LIMITS MISCELLANEOUS ITEMIZED DEDUCTIONS: - Gambling losses and expenses to the extent of gambling income - Casualty and theft losses on investment property - unrecovered cost of a life annuity at death

Factors Complicating Initial Basis Calculation - (3) Constructed Assets

Capitalize direct & indirect costs. Value of time is not capitalized. - *Direct construction costs*: costs actually incurred to physically construct asset (DM, DL, FO = architect fees, sub-constructions, ...) - *Indirect construction costs*: other general costs of business that indirectly support a project (interest on funds used in construction, related taxes, general admin costs, depreciation on equipment used in projects,...)

Schedule A - CHARITABLE DEDUCTIONS

Contribution of money or property must be made to a qualified charity (Educational, religious, scientific, public service) > NOT POLITICAL -Special Rules apply to charitable contributions of property depending on the type of property > Capital gain property e.g. appreciated stock > Ordinary income property > PUBLIC vs. PRIVATE foundation impacts deductible amount Contributions IN EXCESS OF LIMITS carried forward over to next year and 5 years FORM 1040, SCHEDULE A

In financial reporting, what information was important for depreciation? In financial reporting, which is preferred...faster depreciation or slower? In tax reporting, which is preferred....faster or slower depreciation?

Cost, salvage value, useful life, method, first/last year depreciation. Management prefers slower depreciation (to maximize income, because depreciation is an expense) For tax purposes, we prefer faster depreciation. So...there are conflicting objectives with depreciation.

Juan was permanently disabled in a car accident and was unable to climb the stairs to reach his second-floor bedroom. His physician advised him to add a first-floor bedroom to his home. The cost of constructing the room was $28,000. The increase in the value of the residence as a result of the room addition was determined to be $12,000. In addition, Juan paid the contractor $5,000 to construct an entrance ramp to his home and $7,000 to widen the hallways to accommodate his wheelchair. Juan's AGI for the year was $80,000. How much of these expenditures can Juan deduct as a medical expense? a. $16,000 b. $10,000 c. $40,000 d. $20,000 e. None of these choices are correct.

D A capital improvement that ordinarily would not have a medical purpose qualifies as a medical expense if it is directly related to prescribed medical care and is deductible to the extent that the expenditure exceeds the increase in value of the related property. Examples of such improvements include dust elimination systems, elevators, and a car specially designed for a wheelchair-bound taxpayer. Juan's medical expense related to the room addition is $16,000 ($28,000 - $12,000). The full cost of home-related capital expenditures incurred to enable a physically handicapped individual to live independently and productively qualifies as a medical expense. Qualifying costs include expenditures for constructing entrance and exit ramps to the residence, widening hallways and doorways to accommodate wheelchairs, installing support bars and railings in bathrooms and other rooms, and adjusting electrical outlets and fixtures. These expenditures are subject to the 10% floor only, and the increase in the home's value is deemed to be zero. Juan's medical expense related to the ramp and hallways is $12,000 ($5,000 + $7,000). Therefore, Juan's medical expense deduction is as follows: Qualifying medical expenses ($16,000 + $12,000) = $28,000 Less: 10% x $80,000 = $(8,000) __________ Deductible medical expenses = $20,000

Riley had an accident while rock climbing on vacation. She sustained facial injuries that required cosmetic surgery. While having the surgery done to restore her appearance, she had additional surgery done to reshape her nose, which was not injured in the accident. The surgery to restore her appearance cost $12,000 and the surgery to reshape her nose cost $5,000. How much of Riley's surgical fees will qualify as a deductible medical expense (before application of the 10% limitation)? a. $5,000 b. $0 c. $17,000 d. $12,000 e. None of these choices are correct.

D Cosmetic surgery is necessary (and therefore deductible) when it ameliorates (1) a deformity arising from a congenital abnormality, (2) a personal injury, or (3) a disfiguring disease. The $12,000 cost incurred in connection with the restorative surgery (required as a result of the accident) is deductible because the surgery was necessary. Amounts paid for the unnecessary cosmetic surgery ($5,000 for reshaping the nose) are not deductible as a medical expense.

Lorraine, James's daughter who would otherwise qualify as his dependent, filed a joint return with her husband Larry. James, who is age 66 and had AGI of $100,000, paid the following medical expenses: Laser surgery to correct Lorraine's vision problem $2,600 Lorraine's prescribed medicines $800 James's doctor and dentist bills $7,400 Prescription drugs for James $1,200 Contact lenses for James $500 __________ Total $12,500 James has a medical expense deduction of: a. $2,500 b. $12,500 c. $1,600 d. $5,000 e. None of these choices are correct.

D James may claim the medical expenses he paid on behalf of Lorraine, even though Lorraine cannot be claimed as his dependent. This exception applies if the gross income and/or joint return tests are the only reasons why a person cannot be otherwise claimed as a dependent. The contact lenses qualify. His deduction is $5,000 [$12,500 - ($100,000 × 7.5%)].

Taxes assessed for local benefits, such as a new sidewalk, may be deductible as real property taxes. a. True b. False

False Such taxes must be capitalized (added to the adjusted basis of the taxpayer's property).

Kyle, who uses the cash method of accounting, lives in a state that imposes an income tax (including withholding from wages). On April 14, 2015, he files his state return for 2014, paying an additional $600 in state income taxes. During 2015, his withholdings for state income tax purposes amount to $3,550. On April 13, 2016, he files his state return for 2015 claiming a refund of $800. Kyle receives the refund on August 3, 2016. If he itemizes deductions, how much may Kyle claim as a deduction for state income taxes on his Federal income tax return for calendar year 2015 (filed in April 2016)? a. $3,550 b. $3,350 c. $5,150 d. $4,150 e. None of these choices are correct

D Kyle is a cash basis taxpayer. His deduction is limited to the amounts paid in 2015. The $800 refund is reported as income in 2016 under the tax benefit rule. Kyle's state income tax deduction for 2015 is determined as follows: Paid April 14, 2015, for 2014 $600 Withholdings for 2015 $3,550 __________ Total deduction $4,150

On June 1, 2014, Eddie places in service a new automobile that cost $40,000. The car is used 60% for business and 40% for personal use. (Assume this percentage is maintained for the life of the car.) Eddie does not take additional first-year depreciation. Determine the cost recovery deduction for 2014. a. $1,776 b. $6,696 c. $8,000 d. $1,896 e. None of these choices are correct.

D MACRS cost recovery ($40,000 x .20) = $8,000 Limited to ($3,160 x .60) = $1,896

Yancy purchased a new business asset (three-year personalty) on July 23, 2015, at a cost of $40,000. Yancy does not take additional first-year depreciation Determine the cost recovery deduction for 2015. a. $8,000 b. $30,000 c. $40,000 d. $13,332 e. None of these choices are correct.

D MACRS cost recovery ($40,000 x .3333) = $13,332

The only asset Chadwick purchased during 2015 was a new seven-year class asset. The asset, which was listed property, was acquired on June 17 at a cost of $50,000. The asset was used 40% for business, 30% for the production of income, and the rest of the time for personal use. Chadwick always elects to expense the maximum amount under § 179 whenever it is applicable. The net income from the business before the § 179 deduction is $100,000. Determine Chadwick's maximum deduction with respect to the property for 2015. a. $1,428 b. $28,573 c. $50,000 d. $2,499 e. None of these choices are correct.

D The listed property does not pass the predominantly business usage test. Therefore, neither § 179 expensing nor additional first-year depreciation can be taken. In addition, only straight-line cost recovery can be used. Maximum deduction ($50,000 x .0714 x 70%) = $2,499

A worker may prefer to be classified as an employee (rather than an independent contractor) for which of the following reasons: a. to claim unreimbursed work-related expenses as a deduction for AGI. b. None of these choices are correct. c. to avoid the 2%-of-AGI floor on unreimbursed work-related expenses. d. to avoid the self-employment tax. e. to avoid the cutback adjustment on unreimbursed business entertainment expenses.

D The self-employment tax is twice the Social Security equivalent imposed on employees ("to avoid the self-employment tax"). Most unreimbursed employee expenses are deductions from AGI ("to claim unreimbursed work-related expenses as a deduction for AGI") and will be subject to the 2%-of-AGI adjustment ("to avoid the 2%-of-AGI floor on unreimbursed work-related expenses"). Unreimbursed entertainment expenses will be subject to the cutback adjustment ("to avoid the cutback adjustment on unreimbursed business entertainment expenses").

Sonia paid the following taxes during the year: Taxes on residence (for the period from March 1 through August 31) $5,250 State motor vehicle tax (based on the value of the personal use automobile) $430 State income tax $3,050 State and local sales tax $3,500 Sonia sold her personal residence on June 30, under an agreement in which the real estate taxes were not prorated between the buyer and the seller. What amount qualifies as a deduction from AGI for Sonia? a. $9,130 b. $9,180 c. $5,382 d. $7,382 e. None of these choices are correct.

D [(121 days/184 days × $5,250) + $430 + $3,500] = $7,382. State and local sales taxes ($3,500) are more than the state income tax ($3,050). Therefore, assuming that Sonia may choose to deduct the higher of her state and local sales taxes or her state income tax, her deduction will include $3,500 rather than $3,050.

During 2018, Jamie Cohen received wages of $15,000 and interest income of $3,900 and maintained a home in the United States, Jamie filed a joint return with his wife and claimed dependency benefits for one child who resided with them. What is the Cohen's Earned Income Credit?

D. $0 ?

Sally and Joe Johnson have one child who is a U.S. citizen under the age of 17. Their earned income for all of 2018 was $40,000. What is the amount of child tax credit they may take in 2018?

D. $2,000

Stacy and Mark have two children that are U.S. citizens under the age of 17. Their earned income for all of 2018 was $39,000. What is the amount of child tax credit that they may take in 2018?

D. $4,000

Which of the following statements concerning the Credit for the Elderly of the Disabled is TRUE?

D. A person under the age of 65 must be retired on disability and must have been permanently and totally disabled upon retirement to be eligible for the credit.

Which of the following are expenses that are not eligible for the adoption credit?

D. Child care expenses

For which of the following dependent children will a parent be eligible for the Earned Income Credit? I. 10-year-old stepchild II. 9-year-old foster child III. 18-year-old daughter

D. I, II, and III

Which of the following are wages for the purpose of the work opportunity credit? I. Remuneration for employment II. Educational assistance program expenses III. Dependent care expenses

D. I, II, and III

Which of the following is NOT a qualifying student for purposes of the lifetime learning credit?

D. None of these answers are correct a) a student in a graduate program b) a part-time student (less than half-time) c) a student in a continuing professional education program

All of the following statements regarding the "Credit for the Elderly and the Permanently and Totally Disabled" are true EXCEPT....

D. The amount of the credit that is not absorbed can be carried back 3 years or carried forward 5 years.

Which of the following disqualifies an individual from the Earned Income Credit?

D. The taxpayer has a filing status of married filing separately. ?

For his birthday, X gives his son, Y, a basketball card. X paid $100 for the card 12 years earlier. On Y's birthday, FMV = $90. What is Y's basis in the card? a. Assume Y sells the card 2 months after his birthday for $80. What's HP? What's G/L on sale of card? b. Assume Y sells card 2 months after his birthday for $125. What's HP? What's G/L on sale of card? c. Assume Y sells card 2 months after birthday for $95. What's G/L on sale of card?

FMV = $90 < Donor's BV (carryover basis) = $100 Split basis rule apply! a. Sales price = $80 < FMV = $90: :Loss of $10. b. Sales price = $125 > BV = $100: Gain of $25 c. FMV $80 < Sales price $95 < Donor's BV $100 Basis = Sales price = $95. NO G/L. What if X's AB = $100 & FMV = $125? No more split basis rule apply. We use carryover basis instead. Donor's basis = donee's basis. If later sold @ $150? Sales price - AB = $150 - $100 = $50 gain. *What about HP? - If Basis is FMV, HP does not tack & begins @ gift - If Basis is BV, HP tacks = Donor's HP + donee's HP*

Traditional, but not Roth, IRAs possess the advantage of tax-free accumulation of income within the plan. a. True b. False

False Both traditional and Roth IRAs possess the advantage of tax-free accumulation of income within the plan. In the case of a traditional IRA, however, the income will be taxed when distributed to the participant.

When contributions are made to a Roth IRA, they are deductible by the participant. Later distributions from the IRA, however, are not taxed. a. True b. False

False Contributions are not deductible.

Cost depletion is determined by multiplying the depletion cost per unit by the number of units produced. a. True b. False

False Cost depletion is determined by multiplying the depletion cost per unit by the number of units sold (not produced).

Depletion reported by a sole proprietor is reported on Schedule D. a. True b. False

False Depletion reported by a sole proprietor is reported on Schedule C.

Research and experimental expenditures include expenditures for testing of materials for quality control. True False

False Expenditures for the ordinary testing or inspection of materials for quality control purposes are not considered research and experimental expenditures. Research and experimental expenditures are associated with activities intended to develop or improve a product.

When making noncash donations, the type of property contributed does not make a difference in the amount, if any, of the deduction. a. True b. False

False For example, contribution of capital gain property will provide a deduction equal to fair market value rather than the adjusted basis.

For self-employed taxpayers, travel expenses are subject to the 2%-of-AGI floor. a. True b. False

False For self-employed taxpayers, travel expenses are deductions for adjusted gross income. The 2%-of-AGI floor applies only to certain deductions from AGI, such as unreimbursed employee expenses.

If a taxpayer has a new business with little income, the taxpayer should elect to use Section 179 to avoid bothering with depreciation. a. True b. False

False If a taxpayer has a new business with little income or a business with a net operating loss carryover, the taxpayer should elect to use straight line depreciation to slow down the cost recovery.

If depreciation is claimed, it should be supported by completing Form 4562 and then transferred to Form 1040. a. True b. False

False If depreciation is claimed, it should be supported by completing Form 4562 and then transferred to Schedule C.

Under no circumstances will a taxpayer's meals and lodging expense qualify as a deductible education expense. a. True b. False

False If the education involves the taxpayer being away from home (i.e., in travel status).

A taxpayer's home was destroyed by a storm in the current year. If the taxpayer elects to treat the loss as having occurred in the prior year, he or she will not be subject to the 10%-of-AGI reduction based on the AGI of the prior year. True False

False If the taxpayer elects to treat the loss as if it occurred in the prior year, his or her AGI of the prior year will be used for determining the limitation.

Intangible drilling costs must be capitalized and written off through depletion. a. True b. False

False Intangible drilling costs may be expensed rather than capitalized and written off through depletion.

Employee business expenses for travel qualify as itemized deductions subject to the 2% floor if they are reimbursed. a. True b. False

False Nonreimbursed employee expenses qualify as itemized deductions subject to the 2% floor.

All eligible real estate under ACRS is permitted one-half year of cost recovery in the year of disposition. a. True b. False

False One-half month of cost recovery is permitted in the month of disposition for realty under MACRS.

Cost depletion enables the taxpayer to recover more than the cost of an asset. a. True b. False

False Percentage depletion, not cost depletion, can be taken even though the basis in the asset has been reduced to zero by depletion deductions.

Crystal's sole source of income is from a restaurant that she owns and operates as a proprietorship. Any state income tax Crystal pays on the business net income must be deducted as a business expense rather than as an itemized deduction. a. True b. False

False State and local income taxes imposed on an individual are deductible only as an itemized deduction even if the taxpayer's sole source of income is from a business.

Taxpayers may not elect to use the straight-line method under ACRS for personalty. a. True b. False

False Straight line can be elected under ACRS.

A taxpayer who uses the automatic mileage method to compute auto expenses can not deduct the business portion of tolls and parking. a. True b. False

False Such costs are deductible under both methods.

Even if the cost of uniforms is deductible, their maintenance cost (e.g., laundry, dry cleaning, alterations) is not deductible. a. True b. False

False Such maintenance costs are deductible.

Wyatt sells his principal residence in December 2018 and qualifies for the § 121 exclusion. He sells another principal residence in November 2019. Under no circumstance can Wyatt qualify for the § 121 exclusion on the sale of the second residence. a. True b. False

False Generally, a taxpayer must wait two years from the use of the § 121 exclusion to again be eligible to use the § 121 exclusion. However, under a relief provision, the two-year ownership and use requirement and the only once every two years provision are waived associated with the following: ∙Change in place of employment. ∙Health. ∙To the extent provided in the Regulations, other unforeseen circumstances. Under the relief provision, only a partial § 121 exclusion is available. Note also that Wyatt would be eligible for the full § 121 exclusion on the sale of the second residence if he elected to forgo the use of the § 121 exclusion on the sale of the first residence.

Noah gave $750 to a good friend whose house was destroyed by an earthquake. In addition, Noah contributed his time, valued at $250, in the cleanup effort. Noah may claim a charitable deduction of $1,000 on his tax return for the current year.

False Gifts of property made to needy individuals are not tax deductible. Deductible gifts need to be made to a qualifying charity. Furthermore, contributions of one's services, even if provided to a qualifying charity, are not deductible.

The taxpayer must elect to have the exclusion of gain under § 121 (sale of principal residence) apply. a. True b. False

False If the election to forgo the exclusion is not made, then the § 121 exclusion of gain will apply.

Leona borrows $100,000 from First National Bank and uses the proceeds to purchase City of Houston bonds. The interest Leona pays on this loan is deductible as investment interest subject to the investment interest limits.

False Interest incurred to purchase or carry tax-exempt bonds is not deductible.

Abby exchanges an SUV that she has held for personal use plus $24,000 for a new SUV which she will use exclusively in her sole proprietorship business. This exchange qualifies for nontaxable exchange treatment. a. True b. False

False Nontaxable exchange treatment does not apply to personal use property. It applies to investment property and trade or business property.

Jack sold a personal residence to Steven and paid points of $3,500 on the loan to help Steven finance the purchase. Jack can deduct the points as interest.

False Points paid by the seller of a personal residence are deductible as interest by the buyer (i.e., Steven). Such amounts reduce the seller's (Jack's) amount realized.

A taxpayer who sells his or her principal residence at a realized loss can elect to recognize the loss even if a qualified residence is acquired during the statutory time period. a. True b. False

False Realized losses on the sale of personal use assets are disallowed. So the taxpayer does not have the opportunity to choose to elect losses or not.

Ronaldo contributed stock worth $12,000 to the Children's Protective Agency, a qualified charity. He acquired the stock 20 months ago for $7,000. He may deduct $7,000 as a charitable contribution deduction (subject to percentage limitations).

False Ronaldo's deduction is $12,000, the FMV of the property. Capital gain property contributions usually are measured by FMV, not basis.

Section 1033 (nonrecognition of gain from an involuntary conversion) applies to both gains and losses. a. True b. False

False Section 1033 nonrecognition rules apply only to gains, not to losses.

The subdivision of real property into lots for resale when no substantial physical improvements have been made to the property never causes the gain from sale of the lots to be treated as ordinary income.a. Trueb. False

False Section 1237 allows certain real estate investors capital gain treatment if they engage only in limited development activities, but professional real estate developers generally have ordinary gain or loss.

A business taxpayer sells depreciable business property with an adjusted basis of $40,000 for $32,000. The taxpayer held the property for more than a year. The taxpayer has an $8,000 capital loss.a. Trueb. False

False Since the property was depreciable business property, it is not a capital asset. Since the property was held more than one year, it is a § 1231 asset and, therefore, the loss is a § 1231 loss.

If the recognized gain on an involuntary conversion equals the realized gain because of a reinvestment deficiency, the basis of the replacement property will be more than its cost (cost plus realized gain). a. True b. False

False Since there would be no postponed gain in this case, the basis of replacement property would be its cost.

Grace's sole source of income is from a restaurant that she owns and operates as a proprietorship. Any state income tax Grace pays on the business net income must be deducted as a business expense rather than as an itemized deduction.

False State and local income taxes imposed on an individual are deductible only as an itemized deduction even if the taxpayer's sole source of income is from a business.

Mindy paid an appraiser to determine how much a capital improvement made for medical reasons increased the value of her personal residence. The appraisal fee qualifies as a deductible medical expense.

False The appraisal fee does not qualify as a medical expense, but it qualifies as a deduction under § 212 (related to the determination of tax liability) as a miscellaneous itemized deduction.

If a taxpayer exchanges like-kind property under § 1031 and assumes a liability associated with the property received, the taxpayer is considered to have received boot in the transaction. a. True b. False

False The assumption of a liability in a § 1031 like-kind exchange is considered to be boot given by the taxpayer.

The basis of boot received in a like-kind exchange is its fair market value, unless the realized gain is a smaller amount. a. True b. False

False The basis of boot received in a like-kind exchange is its fair market value. The realized gain has no effect on the basis of boot received.

Involuntary Conversions (Nonrecognition transactions)

G/L caused by a disposition of property that was outside the control of property owner. Ex: - Property destroyed/lost to casualty /theft. - Government condemnation - Foreign government seizing or nationalizing property (take ownership of property) *Rules*: - Losses are recognized in FULL. - Gains maybe deferred IF conversion proceeds are reinvested in replacement property - Gains are recognized if conversion proceeds are NOT reinvested

Kendra owns a home in Atlanta. Her company transfers her to Chicago on January 2, 2018, and she sells the Atlanta house in early February 2018. She purchases a residence in Chicago on February 3, 2018. On December 15, 2018, Kendra's company transfers her to Los Angeles. In January 2019, she sells the Chicago residence and purchases a residence in Los Angeles. Because multiple sales have occurred within a two-year period, § 121 treatment does not apply to the sale of the second home. a. True b. False

False The exception to the multiple sale rule associated with employment transfers applies. Note, however, that the amount of the § 121 exclusion in this case is limited (i.e., less than the normal available exclusion amount of $250,000 or $500,000) unless the election to forgo the § 121 exclusion on the sale of the first residence is made. 1

Mason, a physically handicapped individual, pays $10,000 this year for the installation of wheelchair ramps, support bars, and railings in his personal residence. These improvements increase the value of his personal residence by $2,000. Only $8,000 of the expenditure qualifies as a medical expense for tax purposes.

False The full $10,000 is included as a medical expense under a special rule applicable to physically handicapped persons.

An individual taxpayer received a valuable painting from his uncle, a famous painter. The painter created the painting. After the taxpayer held the painting for two years, he sold it for a $400,000 gain. The gain is a long-term capital gain. a. Trueb. False

False The painting is not a capital asset because it was received from its creator by gift. Therefore, the gain is not a capital gain.

In order to dissuade his pastor from resigning and taking a position with a larger church, Michael, an ardent leader of the congregation, gives the pastor a new car. The cost of the car is deductible by Michael as a charitable contribution.

False The pastor is not a qualified charitable organization. Therefore, the gift is not deductible as a charitable contribution.

A phaseout of certain itemized deductions applies for all taxpayers who choose to itemize their deductions.

False The phaseout of certain itemized deductions applies to only certain high-income taxpayers.

For all of the current year, Randy (a calendar year taxpayer) allowed the Salvation Army to use a building he owns rent-free. The building normally rents for $24,000 a year. Randy will be allowed a charitable contribution deduction this year of $24,000.

False The rent-free use of building space is not deductible as a charitable contribution.

Milt's building which houses his retail sporting goods store is destroyed by a flood. Sandra's warehouse which she is leasing to Milt to store the inventory of his business also is destroyed in the same flood. Both Milt and Sandra receive insurance proceeds that result in a realized gain. Sandra will have less flexibility than Milt in the type of building in which she can invest the proceeds and qualify for postponement treatment under § 1033 (nonrecognition of gain from an involuntary conversion). a. True b. False

False The requirements for owner-investors (Sandra) are less restrictive than for owner- users (Milt).

A taxpayer pays points to obtain financing to purchase a second residence. At the election of the taxpayer, the points can be deducted as interest expense for the year paid.

False The special rule for the expensing of points applies when a personal residence is involved (i.e., the taxpayer's principal residence).

Contributions to public charities in excess of 50% of AGI may be carried back 3 years or forward for up to 5 years.

False They may be carried forward for up to 5 years, but they may not be carried back.

In 2016, Allison drove 800 miles to volunteer in a project sponsored by a qualified charitable organization in Utah. In addition, she spent $250 for meals while away from home. In total, Allison may take a charitable contribution deduction of $112 (800 miles × $.14) relating to her transportation.

False Transportation for charitable purposes is deductible at 14 cents per mile. The cost of meals is deductible because they were incurred while the taxpayer was away from home. Therefore, Allison's charitable contribution deduction is $362 [$250 + (800 miles × $.14 per mile)].

During the year, Eve (a resident of Billings, Montana) spends three consecutive weeks in Louisville, Kentucky. One week is spent representing the Billings First Christian Church at the national convention, and two weeks are spent vacationing with relatives. One third of Eve's travel expenses will qualify as a charitable deduction.

False Two weeks out of three weeks would be considered "a significant element" for vacation time. Therefore, none of Eve's travel expenses will qualify.

Matt, a calendar year taxpayer, pays $11,000 in medical expenses in 2016. He expects $5,000 of these expenses to be reimbursed by an insurance company in 2017. In determining his medical expense deduction for 2016, Matt must reduce his 2016 medical expenses by the amount of the reimbursement he expects in 2017.

False Unlike the casualty loss deduction, the medical expense deduction does not have to be reduced by anticipated recoveries. Matt can include all $11,000 as a medical expense in 2016.

Adrienne sustained serious facial injuries in a motorcycle accident. To restore her physical appearance, Adrienne had cosmetic surgery. She cannot deduct the cost of this procedure as a medical expense.

False Unnecessary cosmetic surgery is not deductible. However, Adrienne's surgery restored her appearance and corrected a problem caused by the accident.

Profit-Motivated or Motivated by personal objectives

For tax purposes, directly related business activities are.... -The second are generally not deductible, but many itemized deductions on Schedule A are exceptions to the rule

Schedule A - TAXES

For tax years beginning AFTER 2017: The deduction for taxes is LIMITED TO $10,000 ($5,000 married filing separate) - Individuals may deduct itemized deductions payments for the following taxes: > STATE, LOCAL, and FOREIGN INCOME TAX > Real Estate taxes on property held for PERSONAL OR INVESTMENT purposes > Personal property taxes that are assessed on the value of the specific property - SALES TAX DEDUCTION: state and local sales taxes can be deducted in lieu of state and local income taxes

What effect do the assumption of liabilities have on a § 1031 like-kind exchange?

For the taxpayer who is transferring the liability, the liability increases the amount realized as it is treated as boot received. For the taxpayer who is assuming the liability, the liability increases this taxpayer's adjusted basis for the property and is treated as boot given.

Investment limitation knocks out big business for section 179 . What else is available to big business? *Additional first-year (bonus) depreciation!* Elaborate this.

IRC section 168 (k) allows for additional first year depreciation on certain assets. TPs can claim 100% cost of qualified property after 9/27/2017 & before 1/1/2023 for use in T/B or Production of Income. - 2023: 80% - 2024: 60% - 2025: 40% - 2026: 20% - After 2026: 0% *Qualifying property*: new, must use MACRS, recovery period of <= 20 years. Properties depreciate using ADS (alternative depreciation system) does not qualify. Depreciable basis of the property is reduced by the bonus depreciation to ensure capital recovery. If don't want to use this bonus depreciation, must elect out on an asset class by asset class basis. - Available to TPs of all sizes - Limits go away for bonus (there's no annual income limit, investment limit, TI limit). So you can create large NOLs.

How do we deal with asset place in service on dates other than 12/31 or 1/1?

IRS makes it easy with "conventions" (administrative convenience) - *Mid year convention (for all but real estates)*: assumes all assets are placed in service @ midyear. - *Mid month convention* (only for real estates): allocates depreciation to months real estates are in service. - *Mid quarter convention*: assumes all assets placed in service @ mid quarter. What if TP sees opportunity, waits until end of year to purchase all new assets? - If >40% of depreciable basis of personal property placed in service is placed in serviced in last 3 months of tax year, must use mid-quarter convention (because this usually results in smaller depreciation deduction than mid-year convention)

X has a serious heart problem and is near death. X owns stock that has a cost basis of $10,000 and FMV of $90,000. Should X sell the stock? Should X sell the stock if FMV = $1,000?

If X sells the stock, X must report $80,000 gain on sale. The full $90,000 is subject to estate tax. The appreciation on the stock is subject to both income and estate tax. If X holds the stock, no income tax will be paid on the $80,000 unrealized appreciation in the value of the stock. X should not sell the stock. If the stock is worth only $1,000, X could sell the stock and recognize a $9,000 loss on the sale. Only $1,000 would be included in gross estate. X benefits by the income tax savings on the $9,000 tax loss if sells the stock before X dies.

Which of the following statements is correct with respect to qualified replacement property in a § 1033 involuntary conversion?

If the like-kind exchange test applies, a building used by the taxpayer for manufacturing can be replaced with an office building to be used in the taxpayer's business.

Rick and Carol Ryan, married taxpayers, took out a mortgage of $160,000 when purchasing their home ten years ago. In October of the current year, when the home had a fair market value of $200,000 and they owed $125,000 on the mortgage, the Ryans took out a home equity loan for $110,000. They used the funds to purchase a sailboat to be used for recreational purposes. The sailboat does not qualify as a residence. What is the maximum amount of debt on which the Ryans can deduct home equity interest? a. $75,000 b. $90,000 c. $110,000 d. $125,000 e. None of the above

Interest is deductible only on the portion of a home equity loan that does not exceed the lesser of: ​ The fair market value of the residence, reduced by the acquisition indebtedness ($200,000 FMV - $125,000 acquisition indebtedness = $75,000). $100,000 ($50,000 for married persons filing separate returns). ​ On a joint return, Rick and Carol can deduct all of the interest on the first mortgage since it is acquisition indebtedness. Of the $110,000 home equity loan, interest on $75,000 is deductible as home equity interest.

Ross, who is single, purchased a personal residence eight years ago for $170,000 and took out a mortgage of $100,000 on the property. In May of the current year, when the residence had a fair market value of $220,000 and Ross owed $70,000 on the mortgage, he took out a home equity loan for $110,000. He used the funds to purchase a BMW for himself and a Lexus SUV for his wife. For both vehicles, 100% of the use is for personal activities. What is the maximum amount on which Ross can deduct home equity interest?

Interest is deductible only on the portion of a home equity loan that does not exceed the lesser of: ​The fair market value of the residence, reduced by the acquisition indebtedness ($220,000 FMV - $70,000 acquisition indebtedness = $150,000). or, ​$100,000 ($50,000 for married persons filing separate returns). Ross can deduct all of the interest on the first mortgage since it is acquisition indebtedness. Of the $110,000 home equity loan, interest on $100,000 is deductible as home equity interest.

Joseph and Sandra, married taxpayers, took out a mortgage on their home for $350,000 15 years ago. In May of this year, when the home had a fair market value of $450,000 and they owed $250,000 on the mortgage, they took out a home equity loan for $220,000. They used the funds to purchase a single engine airplane to be used for recreational travel purposes. What is the maximum amount of debt on which they can deduct home equity interest? a. $50,000 b. $100,000 c. $220,000 d. $230,000 e. None of the above

Interest is deductible only on the portion of the $220,000 home equity loan that does not exceed the lesser of: ​ The fair market value of the residence, reduced by the acquisition indebtedness ($450,000 FMV - $250,000 acquisition indebtedness = $200,000). or $100,000 ($50,000 for married persons filing separate returns). ​ Of the $220,000 home equity loan, interest on $100,000 is deductible as home equity interest.

A strip along the boundary of Joy's land is condemned for a utility easement. She receives a payment of $7,500 from the utility company. Her basis in the land is $80,000. Which of the following is correct?

Joy must reduce the basis of the land by $7,500. RATIONALE: As Joy reduces the basis of her land by $7,500, she does not include anything in gross income.

Lily exchanges a building she uses in her rental business for a building owned by Kendall, which she will use in her rental business. The adjusted basis of Lily's building is $120,000 and the fair market value is $170,000. Which of the following statements is correct?

Lily's recognized gain is $0 and her basis for the building received is $120,000.

On May 30, 2016, Jane purchased a factory building to use for her business. In August 2017, Jane paid $300,000 for improvements to the building. Determine Jane's total deduction with respect to the building improvements for 2017. a. $25,000 b. $2,889 c. $4,815 d. $4,173 e. None of these choices are correct.

MACRS cost recovery ($300,000 × .00963); 39-year real property; month 8 = $2,889

Melissa, age 58, marries Arnold, age 50, on June 1, 2018. Melissa decides to sell her principal residence on August 1, 2018, which she has owned and occupied for the past 30 years. Arnold has never owned a house. However, while he was married to Kelly who died 6 months prior to his marriage to Melissa, Kelly used the § 121 election on the sale of her residence in January 2016 to reduce her realized gain from $123,000 to $0. Kelly used the sales proceeds to pay off Arnold's gambling debts. Can Melissa elect the § 121 exclusion on the sale of her residence? What is the maximum § 121 exclusion available to Melissa and Arnold if they file a joint return?

Melissa is eligible for a maximum § 121 exclusion of $250,000. Even if Melissa and Arnold file a joint return, the maximum § 121 exclusion still is $250,000. To increase the § 121 maximum exclusion amount from $250,000 to $500,000 on a joint return, Arnold would need to be eligible for the § 121 exclusion. He is ineligible on Melissa's sale of her residence because he has not occupied the residence for at least two years.

Oxford, Inc., C corporation, purchased one asset during the 2018 tax year - a computer costing $2,400 was purchased in early-December. If Oxford, Inc. elects out of bonus depreciation and does not elect to expense the asset under Section 179, what is the allowable depreciation deduction for the computer in 2018? A. $86 B. $120 C. $168 D. $480

Mid-quarter convention. Computer has 5y recovery period. 5% 1st year depreciation during 4th quarter $2,400 x 5% = $120

X purchases a duplex for $80,000. He lives in 1 unit and rents out the other. How should X account for the duplex?

Mixed-Use Asset. - X is allowed itemized deduction only for interest + property taxes from personal use unit. - X can deduct ALL business expenses of the rental unit + deduct depreciation allocated to business purpose.

Percentage depletion method

Multiply gross income from sale of natural resource by statutory %. *Maximum deduction is limited to 50% TI from natural resource*.

Section 1231 gains are subject to "depreciation recapture"

Net section 1231 gains yield capital gains, but... gains created through depreciation are reclassified (recaptured) as ORDINARY. 2 major recapture provisions: *1) Section 1245 recapture*: harsher, easier to apply... - Section 1245 property is subject to FULL recapture of ALL depreciation deducted. - Gain driven by depreciation is recaptured as ordinary income - NO section 1231 (capital) gain if 1245 property has sales price < original cost *2) Section 1250 recapture*: more generous than 1245... - Section 1250 property is subject to recapture of gains attributable to "excess depreciation" (difference between depreciation ACTUALLY deducted & allowable straight-line depreciation) - *Unrecaptured section 1250 gain*: amount of gain NOT recaptured under section 1250 rules that would have been recaptured under section 1245 recaptured rules (taxed @ MAX rate of 25%) ALL depreciable section 1231 property can be classified as either 1245 or 1250 property.

Brett owns investment land located in Tucson, Arizona. He exchanges it for other investment land. In which of the following locations may the other investment land be located and enable Brett to qualify for § 1031 likekind exchange treatment?

None of the above.

The basis of personal use property converted to business use is:

None of the above.

Which of the following is correct?

None of the above.

Split Basis Rule for Gift

ONLY USE IF FMV OF GIFT < DONOR'S AB! Property has 1 basis for determining gains, separate basis for determining losses - Basis for determining gains = Donor's AB (higher number, favorable) - Basis for determining losses = FMV (lower number, unfavorable) When does this matter? When donee sells property. There are 3 possibilities: - Sales Price > Donor's BV: Gain - Sales Price < FMV: Loss - FMV < Sales Price < Donor's BV: Don't report G/L. Basis = sales price (*Special Sale Price Basis*)

On 3/10/2018, X purchases & places into service office furniture costing $20,000. X does not elect to expense any of the furniture under Section 179. What is the correct convention for this property?

Office furniture is personal property: mid-year convention (assumes the property is placed in service 7/1). - Depreciable basis: $20,000 - Check table for MACRS recovery period: 7-year office furniture. - Check recovery period = 7, recovery year = 1: depreciation rate = 14.29% (based on 200% declining balance depreciation method & uses mid-year convention). - Depreciation expense = 14.29% x $20,000 = $2,858.

Basis in Conduit Entities

Partners in partnerships OR owners of S Corporations sell interests = G/L (depending on adjusted basis in conduit entities)

Exchanged properties RARELY have equal FMVs

Party with the lower FMV property must equalize transaction with cash or other property NOT of like kind (*"boot"*). *Boot does not taint a like-kind exchange but receiver of boot recognizes gain to the extent of boot received (limited to gain realized).* Receiver of boot has *wherewithal to pay* tax on the exchange, to the extent boot received (limited to gain realized). Boot is most commonly cash...straightforward. Could also use services, other assets, assumption of debt.

X Corporation purchases $600,000 of new machinery on 2/19/2018. The machinery is 5-year MACRS property. What is the depreciable basis in the machinery? What if X does not want to claim the additional first-year depreciation on the machinery. What is X's depreciable basis in the machinery?

Property is qualified (new, use MACRS, < 20 years recovery). X deducts 100% $600,000 in bonus depreciation. Depreciable basis in the machinery is $0. If X doesn't want to claim the bonus depreciation, X must make an election not to claim. The election applies to all 5-year MACRS property that X acquires in 2018 (asset class by asset class). X's depreciable basis in the machinery is $600,000.

Deductions for Qualified Business Income (FROM AGI, NOT ITEMIZED)

QBI is a new deduction FROM AGI starting in 2018 (it's in addition to itemized or standard deductions) - Applies to income from > Sole proprietorship, Partnership, and S Corp. income > DOES NOT APPLY TO SPECIFIED SERVICE TRADE OR BUSINESS (law, health, financial service) unless taxable income below $157,500 or $315,000 joint - Deduction is LESSER of 20% or QBI or 20% of taxable income in excess of net capital gains

Bonnie purchased a new business asset (five-year property) on March 10, 2017, at a cost of $30,000. She also purchased a new business asset (seven-year property) on November 20, 2017, at a cost of $13,000. Bonnie did not elect to expense either of the assets under § 179, nor did she elect straight-line cost recovery. Bonnie takes additional first-year depreciation. Determine the cost recovery deduction for 2017 for these assets. a. $9,586 b. $7,464 c. $19,429 d. $5,858 e. None of these choices are correct.

The half-year convention applies in this case. Five-year property: Additional first-year depreciation ($30,000 × .50) $15,000 MACRS cost recovery ($15,000 × .20) 3,000 Seven-year property: Additional first-year depreciation ($13,000 × .50) 6,500 MACRS cost recovery ($6,500 × .1429) 929 Total cost recovery $25,429 e. None of these choices are correct.

Alice purchased office furniture on September 20, 2016, for $100,000. On October 10, 2016, she purchased business computers for $80,000. Alice placed all of the assets in service on January 15, 2017. Alice did not elect to expense any of the assets under § 179, did not elect straight-line cost recovery, and did not take additional first-year depreciation. Determine the cost recovery deduction for the business assets for 2017. a. $6,426 b. $25,722 c. $14,710 d. $30,290 e. None of these choices are correct.

The half-year convention applies. Regular MACRS Furniture (seven-year property) $100,000 × .1429 $14,290 Computers (five-year property) $80,000 × .20 16,000 Total cost recovery $30,290

How does the replacement time period differ for the condemnation of real property used in a trade or business or held for investment when compared with that for other involuntary conversions?

The plus two years is replaced with plus three years (i.e., an additional year to make the replacement is provided).

What kinds of property do not qualify under the like-kind provisions?

The property exchanged may not qualify for § 1031 treatment for several reasons. First, the property involved in the exchange (i.e., transferred and received) must be business use or investment property. Thus, personal use property does not qualify. In addition, the types of property contained in the language of § 1031(a)(2) do not qualify as business use or investment property (i.e., inventory, partnership interests, stocks, bonds, notes, chooses in action, certificates of trust or beneficial interest, or other securities or evidences of indebtedness or interest). Second, one kind or class of property may not be exchanged for a different kind or class (i.e., real property for personal property or vice versa ; further, only real property qualifies for like-kind exchange treatment). Third, real property located in the United States exchanged for foreign real property (and vice versa) does not qualify as like-kind property.

Discuss the logic for mandatory deferral of realized gain or loss for a § 1031 like-kind exchange.

The property received is considered to be a continuation of the property exchanged (i.e., nothing of economic significance has occurred). Therefore, a realized gain or realized loss is not recognized, and the property received has a carryover basis and holding period.

The Standard Deduction

The sum of: - Basic Standard Deduction - Additional standard deductions (available for taxpayers who are AGE 65 OR OLDER AND/OR BLIND) Individuals NOT eligible for standard deduction: - MARRIED FILING SEPARATELY, IF SPOUSE ITEMIZES - NONRESIDENT ALIEN

To be eligible to elect postponement of gain treatment for an involuntary conversion, what are the three tests for qualifying replacement property?

The three tests for qualifying replacement property are as follows: ∙ Functional use test: This test applies to owners-users. The taxpayer's use of the replacement property and the involuntary converted property must be the same. ∙ Taxpayer use test: This test applies to owner-investors. The properties must be used by the taxpayer (owner-investor) in similar endeavors. ∙ Special test for condemnations: This test applies when business real property or investment real property is condemned. In this case, the broader replacement rules for like-kind exchanges replace the narrower replacement rules discussed above.

Tan Company acquires a new machine (ten-year property) on January 15, 2017, at a cost of $200,000. Tan also acquires another new machine (seven-year property) on November 5, 2017, at a cost of $40,000. No election is made to use the straight-line method. The company does not make the § 179 election and elects to not take additional first-year depreciation. Determine the total deductions in calculating taxable income related to the machines for 2017. a. $25,716 b. $132,858 c. $102,000 d. $24,000 e. None of these choices are correct.

The total cost recovery is computed as follows. 10-year property MACRS cost recovery ($200,000 × .10) $20,000 7-year property MACRS cost recovery ($40,000 × .1429) 5,716 Total cost recovery $25,716

Every year, Fern Corporation gives each employee a turkey and a cake at Christmas. These gifts are not subject to the cutback adjustment. a. True b. False

True

If a taxpayer does not own a home but rents an apartment, the office in the home deduction is still available. a. True b. False

True

In a nontaxable exchange, recognition is postponed. In a tax-free transaction, nonrecognition is permanent. a. True , b.false

True

One indicia of employee (rather than independent contractor) status is when the individual performing the services is paid based on time spent (rather than tasks performed). a. True b. False

True

Points paid by the owner of a personal residence to refinance an existing mortgage must be capitalized and amortized over the life of the new mortgage.

True

Taxpayers may elect to use the straight-line method under ACRS for personalty. a. True b. False

True

The amount realized does not include any amount received by the taxpayer that is designated as severance damages by both the government and the taxpayer. a. True b. False

True

The unreimbursed work-related expenses of an employee will be subject to the 2%-of-AGI floor. a. True b. False

True

Valley Corporation pays for a trip to Barbados for its two top salespersons. This expense is not subject to the cutback adjustment. a. True b. False

True

When a business is being purchased, if possible the purchaser should bargain for more of the purchase price being allocated to equipment rather than goodwill and covenants not to compete. a. True b. False

True

Deidra has owned and occupied her principal residence for 10 years. Two and one-half years ago she married Doug who moved into her house. Doug has never owned a home. When Deidra is transferred to another city, she sells the house and has a realized gain of $425,000. Deidra can exclude the realized gain of $425,000 from her gross income under § 121 if she and Doug file a joint return. a. True b. False

True Deidra and Doug meet the statutory requirements to exclude up to $500,000 from their gross income: ∙ Either spouse meets the at-least-two-years ownership requirement. ∙ Both spouses meet the at-least-two-years use requirement. ∙ A joint return is filed. Neither spouse is ineligible for the § 121 exclusion on the sale of the current ∙ principal residence because of the sale of another principal residence within the prior two years.

In 2016, Dena traveled 600 miles for specialized medical treatment that was not available in her hometown. She paid $90 for meals during the trip, $145 for a hotel room for one night, and $15 in parking fees. She did not keep records of other out-of-pocket costs for transportation. Dena can include $179 in computing her medical expenses.

True Dena can deduct $114 (600 miles × 19 cents per mile) for transportation. The 19 cents per mile automatic mileage option for medical transportation does not include related parking fees and tolls, so she also can deduct the $15 paid for parking fees. She can deduct $50 for the hotel, but she cannot deduct the cost of meals. Therefore, Dena can deduct $179 ($114 + $50 + $15 = $179).

A security that was purchased by an individual and qualifies as § 1244 stock becomes worthless. The taxpayer is single and the loss is $30,000. The loss is treated as an ordinary loss.a. Trueb. False

True For a single taxpayer, up to $50,000 per year of loss on § 1244 stock is treated as ordinary loss.

A realized gain on an indirect (conversion into money) involuntary conversion of business property can be postponed, but a realized loss on an indirect involuntary conversion of business property cannot be postponed. a. True b. False

True For an indirect involuntary conversion, the postponement of the realized gain is elective. Losses on an indirect involuntary conversion of business property are recognized.

If a taxpayer reinvests the net proceeds (amount received - related expenses) received in an involuntary conversion in qualifying replacement property within the statutory time period, it is possible to defer the recognition of the realized gain. a. True b. False

True For § 1033 postponement of gain treatment to apply for an indirect (conversion into money) involuntary conversion, the taxpayer must elect § 1033 treatment.

Herbert is the sole proprietor of a furniture store. He can deduct real property taxes on his store building as a business deduction but he cannot deduct state income taxes related to his net income from the furniture store as a business deduction.

True Herbert may deduct the real property taxes on the store building as a business expense. However, the position of the IRS is that state and local income taxes imposed upon an individual are deductible only as itemized deductions, even if the taxpayer's sole source of income is from a business, rents, or royalties

Capital assets donated to a public charity that would result in long-term capital gain if sold, are subject to the 30%-of-AGI ceiling limitation on charitable contributions for individuals.

True However, a limited exception applies if the long-term capital gain property is tangible personalty that is put to an unrelated use by the charity. In this situation, the deduction is subject to the 50%-of-AGI limitation.

Phyllis, a calendar year cash basis taxpayer who itemized deductions totaling $20,000, overpaid her 2015 state income tax and is entitled to a refund of $400 in 2016. Phyllis chooses to apply the $400 overpayment toward her state income taxes for 2016. She is required to recognize that amount as income in 2016.

True It does not matter for Federal income tax purposes whether the overpayment is refunded or applied toward the 2016 state income tax liability if the overpayment resulted in a tax benefit.

A lease cancellation payment received by a lessee is generally treated as an exchange because the lease extinguished is usually a capital asset.a. Trueb. False

True Lease cancellation payments received by a lessee are treated as an exchange. Thus, these payments are capital gains if the lease is a capital asset.

Jim's employer pays half of the premiums on a group medical insurance plan covering all employees, and employees pay the other half. Jim can exclude the half of the premium paid by his employer from his gross income and may include the half he pays in determining his medical expense deduction.

True Medical coverage provided by an employer is a nontaxable fringe benefit. Premiums paid by the taxpayer may be included in determining deductible medical expenses.

Letha incurred a $1,600 prepayment penalty to a lending institution because she paid off the mortgage on her home early. The $1,600 is deductible as interest expense.

True Prepayment penalties are considered to be deductible interest.

ndividuals who are not professional real estate developers may get capital gain treatment for sale of their real property if they engage only in limited development activities.a. True

True Section 1237 allows certain non-professional real estate investors capital gain treatment if they engage only in limited development activities.

Sidney, a calendar year taxpayer, owns a building (adjusted basis $450,000) in Columbus, OH, in which he conducts his retail computer sales business. The building is destroyed by fire on December 12, 2018, and two weeks later he receives insurance proceeds of $600,000. Due to family ties, Sidney decides to move to Columbia, SC. He reinvests all of the insurance proceeds in a building in Columbia where he opens a retail computer sales business on April 2, 2019. By electing § 1033, Sidney has no recognized gain and a basis in the new building of $450,000 ($600,000 cost - $150,000 postponed gain). a. True b. False

True Sidney satisfies both the replacement property and the time period requirements for a § 1033 involuntary conversion.

An accrual basis taxpayer accepts a note receivable from a retail customer with a weak credit rating. The taxpayer immediately sells the note to a bank for less than the note's stated value. The taxpayer has an ordinary loss.a. Trueb. False

True Since the note receivable was received in the normal course of the taxpayer's business from the sale of inventory, it is not a capital asset. The loss from the disposition of the note is an ordinary loss.

Nonrecognition transactions In chapter 11, we said it's possible to have a *realized* gain that's not *recognized* in current tax year Chapter 12 addresses 3 such transaction types: 1. Exchange of like-kind property (deferrals) 2. Involuntary conversions (deferrals) 3. Sale of principal residence (permanent exclusion)

Why nonrecognition? For #1 & #2...wherewithal to pay & realization concepts: when there's immediate reinvestment of proceeds, no wherewithal also, it's probably good case that there was no true realization.. For #3...just an incentive Congress provides for home ownership. Rationale: 1. Initial realization is part of a continuing investment process. 1 asset has been disposed of, but another similar to it has taken its place. *Substance-over-form doctrine* says new asset continues original investment. *Realization concept* postpones recognition of increase in value until property is disposed of. 2. TP lacks *wherewithal-to-pay* tax on realized gain b/c amount realized is reinvested in new asset.

X sells 600 shares to Y (X's father) for $9,000 (cost = $15,000). One year later, Y sells the 600 shares for $12,000. What are X's & Y's realized and recognized gains or losses on the sales of the stock?

X has a realized loss of $6,000 ($9,000 − $15,000) on the sale of the stock. However, the loss is disallowed because the sale is to a related party. Loss is N/D. Y realizes a gain of $3,000 ($12,000 − $9,000). Under the related party rules, Y can use X's disallowed loss to reduce gain to zero. Y has realized a gain on the sale of the stock, but it is not recognized because of the related party rules.

X Corporation uses a machine in its business that cost $10,000. Using tax depreciation methods, X can deduct depreciation on the machine of $9,000. However, because of clerical errors, X actually deducted a total of $6,000 in allowed depreciation on its tax returns. X sells the machine on July 1 for $5,000. What are the tax effects to X of the clerical errors?

X must report a gain of $4,000 from sale of asset [$5,000 - BV of ($10,000 - $9,000)]. Tax law requires X to reduce basis by the *larger* of depreciation X actually deducted or the amount X should have deducted. So...X lost the benefit of $3,000 in depreciation ($9000 allowed - $6000 deducted) for tax reduction. X can file amended tax returns to correct the error.

X purchases business assets from Y: - A/R: 100 (AB), 100 (FMV) - Furniture: 500 (AB), 800 (FMV) - Equipment: 300 (AB), 600 (FMV) - Building: 1,400 (AB), 1000 (FMV) - Land: 100 (AB), 300 (FMV) - Total: 2,400 (AB), 2,800 (FMV) X purchases 100% of Y's stock for $3,100 to gain control over assets. What's the property basis?

X owns 100% Y's stock with a tax basis of $3,100. X and Y are separate tax entities. X should expect to receive dividend income from the investment in stock. When X sells the stock, it may reduce the sales price by the $3,100 basis to compute G/L on disposition. Y's basis in assets is not affected by the purchase of its stock by X. Y will continue to use assets in business. The corporation is indifferent about who owns its stock and does not revalue its assets when ownership change hands.

X purchases business assets from Y: - A/R: 100 (AB), 100 (FMV) - Furniture: 500 (AB), 800 (FMV) - Equipment: 300 (AB), 600 (FMV) - Building: 1,400 (AB), 1000 (FMV) - Land: 100 (AB), 300 (FMV) - Total: 2,400 (AB), 2,800 (FMV) X pays $2,100 in cash + assume $1000 liabilities. Total cost = $3,100. What's X basis in asset purchased? What if X pays only $2,100 to Y?

X should allocate the purchase price according to FMV of assets. $3,100 purchase price > FMV of $2,800, X is considered to have paid $300 for goodwill.

X invests $90,000 in a coal mine. The investment is allocated as follows: - $25,000: machinery and equipment - $50,000: deposit still in place below ground - $15,000: residual value of the land. How should X recover his investment? Assume that the coal mine has operated for several years and that before deducting depletion for the current year X's AB for depletion of the coal deposit is $2,000. Cost depletion = $2,000 & percentage depletion = $2,500. What is X's current depletion deduction, and how does it affect his depletable basis?

X's $50,000 investment in the coal deposit in place is subject to depletion. The $25,000 investment --> depreciation. Land is not subject to depletion or depreciation. The basis of the land will be recovered at disposition. *X is allowed to deduct the $2,500 in percentage depletion because it is greater than the $2,000 cost depletion*. Basis = 0. X has claimed $500 more in capital recovery deductions. Because X has fully recovered his basis, he cannot claim cost depletion in future years. However, X may continue to claim percentage depletion so long as he has gross income from the sale of the coal.

X estimates that his $50,000 investment in the coal deposit will result in 350,000 recoverable tons of coal. During 2018, he mines and sells 40,000 tons of coal. What is X's cost depletion deduction for 2018?

X's cost depletion deduction for 2018 is $5,714 [($50,000 basis ÷ 350,000 tons of coal) × 40,000 tons sold]. Un-recovered basis of the coal deposit after deducting $5,714 for 2018's depletion is $44,286 ($50,000 − $5,714).

X Corporation purchases a machine costing $1,002,000 for use in business. X wants to expense $1,000,000 of the asset's cost under Section 179. If X makes the Section 179 election to expense $1,000,000 of the asset's cost, what is its depreciable basis in the machine?

X's depreciable basis for regular depreciation is $2,000. The reduction of depreciable basis by amounts expensed under Section 179 is necessary to ensure that the total capital recovery on the machine does not exceed the $1,002,000 invested.

Libby's principal residence is destroyed by a tornado. She is single and her realized gain is $360,000. Is it possible for Libby's recognized gain to be $0?

Yes, it is possible for the Libby's recognized gain to be $0. This can be achieved by using § 1033 in conjunction with § 121. To achieve the desired result, § 1033 postponement treatment needs to be elected and the taxpayer must invest in another principal residence with an amount at least equal to the amount realized reduced by the § 121 exclusion amount.

Byron, who lived in New Hampshire, acquired a personal residence ten years ago when he was 52 years old. During this period he has occupied the residence for only eight months (out of 12) each year due to winter vacations in Florida. Is Byron eligible for exclusion of gain under § 121?

Yes, temporary absences such as vacations do not invalidate the requirement that the taxpayer use the house as a principal residence for at least two years during the five- year period ending on the date of the sale.

X exchanges land holds as an investment for an office building to be used in business. Are the two properties of like kind?

Yes. Same class - real property.

Edward, age 52, leased a house for one year in Memphis with an option to buy as his personal residence. At the end of the lease, he purchased the house. He lived there for an additional 26 months before his employer transferred him to Tucson. Expecting to be in Tucson for 18 to 24 months, he rented the Memphis house for 18 months with an option to extend on a month to month basis for an additional 6 months. At the end of the 18-month period, Edward's employer offered him a permanent position in Tucson as branch manager. The tenant who had been occupying Edward's house in Memphis purchased it at the end of the 24-month extended lease period. Is Edward eligible to elect exclusion treatment under § 121?

Yes. To qualify for § 121 exclusion treatment, Edward must have owned and used the residence as his principal residence for at least two years during the 5-year period ending on the date of sale. It is not necessary that the house be his principal residence at the date of sale. Edward has owned and occupied the residence for at least two years out of the 5-year period ending on the date of sale.

f the taxpayer qualifies under § 1033 (nonrecognition of gain from an involuntary conversion), makes the appropriate election, and the amount reinvested in replacement property is less than the amount realized, realized gain is: a. Recognized to the extent of the deficiency (amount realized not reinvested). b. Recognized to the extent of realized gain. c. Recognized to the extent of the amount reinvested in excess of the adjusted basis. d. Permanently not subject to taxation. e. None of the above.

a If the taxpayer elects § 1033 treatment, the realized gain is postponed (i.e., temporary nonrecognition rather than permanent nonrecognition) except to the extent of the deficiency.

In October 2018, Ben and Jerry exchange investment realty in a § 1031 like-kind exchange. Ben bought his real estate in 2007 while Jerry purchased his in 2010. In addition to the realty, Ben receives Pearl, Inc. stock worth $10,000 from Jerry. Ben's realized gain is $30,000. On what date does the holding period for Ben's realty received from Jerry begin? When does the holding period for the stock he receives begin? a. 2007, 2018. b. 2007, 2007. c. 2010, 2010. d. 2010, 2018. e. None of the above

a The holding period for the like-kind property received (i.e., investment realty) by Ben includes his holding period for the investment realty transferred (i.e., begins in 2007). His holding period for the boot received (i.e., stock) begins with the date of the exchange (i.e., October 2018).

Fran was transferred from Phoenix to Atlanta. She sold her Phoenix residence (adjusted basis of $250,000) for a realized loss of $50,000 and purchased a new residence in Atlanta for $375,000. Fran had owned and lived in the Phoenix residence for 6 years. What is Fran's recognized gain or loss on the sale of the Phoenix residence and her basis for the residence in Atlanta? a. $0 and $375,000. b. $0 and $425,000. c. ($50,000) and $325,000. d. ($50,000) and $375,000. e. None of the above.

a The realized loss of $50,000 on the sale of the Phoenix residence is disallowed. The basis for the new Atlanta residence is the purchase price of $375,000.

On October 1, Paula exchanged an apartment building (adjusted basis of $375,000 and subject to a mortgage of $125,000) for another apartment building owned by Nick (fair market value of $550,000 and subject to a mortgage of $125,000). The property transfers were made subject to the mortgages. What amount of gain should Paula recognize?

a$0.

Arthur owns a tract of undeveloped land (adjusted basis of $145,000) which he sells to his son, Ned, for its fair market value of $105,000. What is Arthur's recognized gain or loss and Ned's basis in the land?

a. $0 and $105,000.

Fran was transferred from Phoenix to Atlanta. She sold her Phoenix residence (adjusted basis of $250,000) for a realized loss of $50,000 and purchased a new residence in Atlanta for $375,000. Fran had owned and lived in the Phoenix residence for 6 years. What is Fran's recognized gain or loss on the sale of the Phoenix residence and her basis for the residence in Atlanta?

a. $0 and $375,000.

As part of the divorce agreement, Tyler transfers his ownership interest in their personal residence to Lupe. The house had been jointly owned by Tyler and Lupe and the adjusted basis is $520,000. At the time of the transfer to Lupe, the fair market value is $800,000. What is the recognized gain to Tyler, and what is Lupe's basis for the house?

a. $0 and $520,000.

Matilda works for a company with 1,000 employees. The company has a hospitalization insurance plan that covers all employees. However, the employee must pay the first $3,000 of his or her medical expenses each year. Each year, the employer contributes $1,500 to each employee's health savings account (HSA). Matilda's employer made the contributions in 2016 and 2017, and the account earned $100 interest in 2017. At the end of 2017, Matilda withdrew $3,100 from the account to pay the deductible portion of her medical expenses for the year and other medical expenses not covered by the hospitalization insurance policy. As a result, Matilda must include in her 2017 gross income: a. $0. b. $100. c. $1,600. d. $3,100. e. None of these.

a. $0.

Maud exchanges a rental house at the beach with an adjusted basis of $225,000 and a fair market value of $200,000 for a rental house at the mountains with a fair market value of $180,000 and cash of $20,000. What is the recognized gain or loss?

a. $0.

Peggy is an executive for the Tan Furniture Manufacturing Company. Peggy purchased furniture from the company for $9,500, the price Tan ordinarily would charge a wholesaler for the same items. The retail price of the furniture was $12,500, and Tan's cost was $9,000. The company also paid for Peggy's parking space in a garage near the office. The parking fee was $600 for the year. All employees are allowed to buy furniture at a discounted price comparable to that charged to Peggy. However, the company does not pay other employees' parking fees. Peggy's gross income from the above is: a. $0. b. $600. c. $3,500. d. $4,100. e. None of these.

a. $0.

Ridge is the manager of a motel. As a condition of his employment, Ridge is required to live in a room on the premises so that he would be there in case of emergencies. Ridge considered this a fringe benefit, since he would otherwise be required to pay $800 per month rent. The room that Ridge occupied normally rented for $70 per night, or $2,100 per month. On the average, 90% of the motel rooms were occupied. As a result of this rent-free use of a room, Ridge is required to include in gross income. a. $0. b. $800 per month. c. $2,100 per month. d. $1,890 ($2,100 × .90). e. None of these.

a. $0.

In 2016, Boris pays a $3,800 premium for high-deductible medical insurance for himself and his family. In addition, he contributes $3,400 to a Health Savings Account. Which of the following statements is true? a. If Boris is self-employed, he may deduct $7,200 as a deduction for AGI. b. If Boris is self-employed, he may deduct $3,400 as a deduction for AGI and may include the $3,800 premium when calculating his itemized medical expense deduction. c. If Boris is an employee, he may deduct $7,200 as a deduction for AGI. d. If Boris is an employee, he may include $7,200 when calculating his itemized medical expense deduction. e. None of the above.

a. If Boris is self-employed, he may deduct $7,200 as a deduction for AGI. Boris, who is self-employed, may deduct 100% of the premium ($3,800) as a deduction for AGI. He may also deduct the $3,400 HSA contribution as a deduction for AGI.

. Louise works in a foreign branch of her employer's business. She earned $5,000 per month throughout the relevant period. Which of the following is correct: a. If Louise worked in the foreign branch from May 1, 2015 until October 31, 2016, she may exclude $40,000 from gross income in 2015 and exclude $50,000 in 2016. b. If Louise worked in the foreign branch from May 1, 2015 until October 31, 2016, she cannot exclude anything from gross income because she was not present in the country for 330 days in either year. c. If Louise began work in the foreign country on May 1, 2015, she must work through November 30, 2016 in order to exclude $55,000 from gross income in 2016 but none in 2015. d. Louise will not be allowed to exclude any foreign earned income because she made less than $101,300. e. None of these.

a. If Louise worked in the foreign branch from May 1, 2015 until October 31, 2016, she may exclude $40,000 from gross income in 2015 and exclude $50,000 in 2016.

Louis owns a condominium in New Orleans which has been his principal residence for 12 years. He wants to be near Lake Ponchartrain since he enjoys water activities. Therefore, he sells the condominium. His original intent was to purchase a house in New Orleans near the lake. However, the cost of such properties far exceeded his sales proceeds. He was able to purchase a house on the lake in Covington, which is located across the causeway. He invested all of his sales proceeds in the Covington house. After two months of commuting over an hour to and from work each day, he decides to rent an efficiency apartment in New Orleans near his office. He spends the weekends and vacations at his home in Covington. a. Does Louis qualify for exclusion of gain under § 121? b. Does his Covington house qualify as his principal residence?

a. Louis satisfies the § 121 exclusion requirement. He has owned and occupied the residence for at least two years during the 5-year period ending on the date of sale. b. No. The Covington home does not qualify as his principal residence. The principal residence is where the taxpayer lives most of the time. For Louis, this is the efficiency apartment in New Orleans.

Martha participated in a qualified tuition program for the benefit of her son. She invested $6,000 in the fund. Four years later her son withdrew $8,000, the entire balance in the program, to pay his college tuition. a. Martha is not required to include the $2,000 ($8,000 - $6,000) in her gross income when the funds are used to pay the tuition. b. Martha's son must include the $2,000 ($8,000 - $6,000) in his gross income when the funds are used to pay the tuition. c. Martha must include $8,000 in her gross income. d. Martha's son must include $8,000 in his gross income. e. None of these.

a. Martha is not required to include the $2,000 ($8,000 - $6,000) in her gross income when the funds are used to pay the tuition.

Evaluate the following statements: I. De minimis fringe benefits are those that are so immaterial that accounting for them is impractical. II. De minimis fringe benefits are subject to strict anti-discrimination requirements. III. Generally, a fringe benefit of less than $50 is considered de minimis and can be excluded from gross income. a. Only I is true. b. Only III is true. c. Only I and III are true. d. I, II, and III are true. e. None of these.

a. Only I is true.

Under the Swan Company's cafeteria plan, all full-time employees are allowed to select any combination of the benefits below, but the total received by the employee cannot exceed $8,000 a year. I. Group medical and hospitalization insurance for the employee, $3,600 a year. II. Group medical and hospitalization insurance for the employee's spouse and children, $1,200 a year. III. Child-care payments, actual cost but not more than $4,800 a year. IV. Cash required to bring the total of benefits and cash to $8,000. Which of the following statements is true? a. Sam, a full-time employee, selects choices II and III and $2,000 cash. His gross income must include the $2,000. b. Paul, a full-time employee, elects to receive $8,000 cash because his wife's employer provided these same insurance benefits for him. Paul is not required to include the $8,000 in gross income. c. Sue, a full-time employee, elects to receive choices I, II and $3,200 for III. Sue is required to include $3,200 in gross income. d. All of these. e. None of these.

a. Sam, a full-time employee, selects choices II and III and $2,000 cash. His gross income must include the $2,000.

On January 1, 2006, Cardinal Corporation issued 5% 25-year bonds at par and used the $12,000,000 proceeds to finance the construction of a new plant. On January 1, 2016, the company acquired the bonds on the open market for $11,500,000. Assuming that Cardinal Corporation is neither bankrupt nor insolvent, the acquisition and retirement of the bonds results in which of the following: a. The company must recognize a $500,000 gain. b. The company can make an election to recognize a $500,000 gain or reduce the company's basis in the plant by $500,000. c. The company must recognize a $500,000 gain and increase the company's basis in the plant by $500,000. d. The company can amortize the $500,000 gain, recognizing income over the remaining life of the bonds. e. None of these.

a. The company must recognize a $500,000 gain.

The Royal Motor Company manufactures automobiles. Non-management employees of the company can buy a new automobile for Royal's cost plus 2%. The automobiles are sold to dealers at cost plus 20%. Generally, management employees of Local Dealer, Inc., are allowed to buy a new automobile from the company at the dealer's cost. Which of the following statements is correct? a. The non-management employees who buy automobiles at a discount are not required to recognize income from the purchase. b. None of the employees who take advantage of the fringe benefits described above are required to recognize income. c. Employees of Royal are required to recognize as gross income 18% (20% - 2%) of the cost of the automobile purchased. d. All of these. e. None of these.

a. The non-management employees who buy automobiles at a discount are not required to recognize income from the purchase

Han is a self-employed carpenter and his wife, Christine, works full-time as a grade school teacher. Han paid $525 for carpentry tools and supplies, and Christine paid $3,600 as her share of health insurance premiums for Han and herself in a qualified plan provided by the school district (not through an exchange). Which of the following is a true statement? a.) The tools and supplies are deductible for AGI while the health insurance is an itemized deduction. b.) Both expenditures are deductible for AGI. c.) The tools and supplies are an itemized deduction but the health insurance is deductible for AGI. d.) Both expenditures are itemized deductions. e.) Neither of the expenditures is deductible.

a.) The tools and supplies are deductible for AGI while the health insurance is an itemized deduction.

Which of the following is a deductible miscellaneous itemized deduction? a.) gambling losses to the extent of gambling winnings. b.) fees for investment advice. c.) employee business expenses. d.) tax preparation fees. e.) All of the choices are correct

a.) gambling losses to the extent of gambling winnings.

Glenn is an accountant who races stock cars as a hobby. This year Glenn was paid a salary of $80,000 from his employer and won $2,000 in various races. What is the effect of the racing activities on Glenn's taxable income if Glenn has also incurred $4,200 of hobby expenses this year? Assume that Glenn itemizes his deductions but has no other miscellaneous itemized deductions. a.) increase in taxable income of $2,000 b.) increase in taxable income of $1,640 c.) no change in taxable income d.) decrease in taxable income of $560 e.) decrease in taxable income of $2,200

a.) increase in taxable income of $2,000

Which of the following statements is correct?

a., b., and c.

Which of the following types of exchanges of insurance contracts qualify for nonrecognition treatment under § 1035?

a., b., and c.

Which of the following might motivate a taxpayer to try to avoid like-kind exchange treatment?

a., b., and c. are correct.

Noelle owns an automobile which she uses for personal use. Her adjusted basis is $45,000 (i.e., the original cost). The car is worth $22,000. Which of the following statements is correct?

a., b., and c. are correct. RATIONALE: Personal casualty losses (choice c.) can be deducted subject to a $100 floor and a 10% of AGI floor.

Five years ago, Randy loaned his son Neil $20,000 to start a business. A note was executed with an interest rate of 8%. The note required monthly payments of the interest with the $20,000 due at the end of 10 years. Neil always made the interest payments until last year. During the current year, Neil notified his father that he was bankrupt and would not be able to repay the $20,000 or the accrued interest of $1,800. Randy is a cash basis taxpayer whose only income is salary and interest income. The proper treatment for the nonpayment of the note is: a.A $3,000 deduction. b.No deduction. c.A $21,800 deduction. d.A $1,800 deduction. e.A $20,000 deduction.

a.A $3,000 deduction. This is a bona fide loan to his son; therefore, Randy is entitled to a bad debt of $20,000. The deduction for the current year is limited to $3,000 since the bad debt is classified as a short-term capital loss. No deduction is allowed for the $1,800 of accrued interest receivable because Randy is a cash basis taxpayer.

Byron owned stock in Blossom Corporation that he donated to a museum (a qualified charitable organization) on June 8 this year. What is the amount of Byron's deduction assuming that he had purchased the stock for $10,500 last year on August 7, and the stock had a fair market value of $13,800 when he made the donation? a. $3,300 b. $10,500 c. $12,150 d. $13,800 e. None of the above

b RATIONALE: If ordinary income property is contributed to a qualified charitable organization, the deduction is equal to the fair market value of the property less the amount of ordinary income that would have been reported if the property were sold. In most instances, the deduction is limited to basis of the property to the donor. Since he had not held the property long enough to meet the long-term capital gain requirement (i.e., not more than one year), Byron would have recognized a short-term capital gain of $3,300 if he had sold the property. Since short-term capital gain property is treated as ordinary income property for charitable contribution purposes, Byron's charitable contribution deduction is limited to the property's basis of $10,500 ($13,800 - $3,300).

Pedro's child attends a school operated by the church the family attends. Pedro made a donation of $1,000 to the church in lieu of the normal registration fee of $200. In addition, Pedro paid the regular tuition of $6,000 to the school. Based on this information, what is Pedro's charitable contribution? a. $0 b. $800 c. $1,000 d. $6,800 e. $7,000

b The taxpayer's donation of $1,000 in lieu of the normal $200 registration fee would be deductible to the extent of $800 [$1,000 - $200 benefit received (the registration fee)]. The tuition of $6,000 is a personal expense that cannot be deducted as a charitable contribution.

In order to qualify for like-kind exchange treatment under § 1031, which of the following requirements must be satisfied? a. The form of the transaction is a sale or exchange. b. Both the property transferred and the property received are held either for productive use in a trade or business or for investment. c. The exchange must be completed by the end of the second tax year following the tax year in which the taxpayer relinquishes his or her like-kind property. d. Only a. and b. e. a., b., and c.

b The time period for a nonsimultaneous like-kind exchange includes a 45-day period and an 180-day period, but does not include the period mentioned in choice c. The form of the transaction must be an exchange (sale as in a. is not permitted).

In the current year, Jerry pays $8,000 to become a charter member of Mammoth University's Athletic Council. The membership ensures that Jerry will receive choice seating at all of Mammoth's home basketball games. Also this year, Jerry pays $2,200 (the regular retail price) for season tickets for himself and his wife. For these items, how much qualifies as a charitable contribution? a. $6,200 b. $6,400 c. $8,000 d. $10,200 e. None of the above

b Under the exception to the tangible-benefit-received rule, Jerry can deduct $6,400 (80% of $8,000) of the charter membership to Mammoth University's Athletic Council. The amount Jerry pays ($2,200) to purchase tickets at the regular price is not deductible as a charitable contribution.

In determining the basis of like-kind property received, postponed losses are: a. Added to the basis of the old property. b. Subtracted from the basis of the old property. c. Added to the fair market value of the like-kind property received. d. Subtracted from the fair market value of the like-kind property received. e. None of the above.

c

Zeke made the following donations to qualified charitable organizations during the year: Used clothing (all acquired more than a year ago) of taxpayer and his family: Basis $ 1,350; FMV $ 375 Stock in ABC, Inc., held as an investment for fifteen months: Basis 12,000; FMV 10,875 Stock in MNO, Inc., held as an investment for eleven months: Basis 15,000; FMV 18,000 Real estate held as an investment for two years: Basis 15,000; FMV 30,000 ​ The used clothing was donated to the Salvation Army; the other items of property were donated to Eastern State University. Both are qualified charitable organizations. Disregarding percentage limitations, Zeke's charitable contribution deduction for the year is: a. $43,350. b. $56,250. c. $59,250. d. $60,375. e. None of the above.

b. $56,250. For the used clothing and the ABC stock, fair market value controls in determining the amount of the deduction. The ABC stock was held long term, but it was not appreciated property. The MNO stock would not yield a long-term capital gain if sold because of the holding period. Consequently, it is ordinary income property for charitable contribution purposes and the appreciation cannot be claimed. The real estate meets the definition of capital gain property. Thus, $56,250 ($375 + $10,875 + $15,000 + $30,000) is the amount qualifying as a charitable contribution.

Augie purchased one new asset during the year (five-year property) on November 10, 2017, at a cost of $660,000. She would like to use the § 179 election and will also take additional first-year depreciation. The income from the business before the cost recovery deduction and the § 179 deduction was $600,000. Determine the total cost recovery deduction with respect to the asset for 2017. a. $510,000 b. $588,750 c. $30,500 d. $320,250 e. None of these choices are correct.

b. $588,750 The mid-quarter convention applies to the MACRS calculation. § 179 expense $510,000 Additional first-year depreciation [($660,000 - $510,000) × .50] $75,000 MACRS cost recovery ($75,000 × .05) 3,750 Total $78,750 Income from the business before cost recovery $600,000 Less: Total cost recovery (78,750) § 179 business income limitation $521,250 Hence, Augie's total cost recovery deduction is $588,750 ($510,000 + $78,750).

Barney is a full-time graduate student at State University. He serves as a teaching assistant for which he is paid $700 per month for 9 months and his $5,000 tuition is waived. The university waives tuition for all of its employees. In addition, he receives a $1,500 research grant to pursue his own research and studies. Barney's gross income from the above is: a. $0. b. $6,300. c. $11,300. d. $12,800.

b. $6,300.

Sandra's automobile, which is used exclusively in her trade or business, was damaged in an accident. The adjusted basis prior to the accident was $11,000. The fair market value before the accident was $10,000 and the fair market value after the accident is $6,000. Insurance proceeds of $3,200 are received. What is Sandra's adjusted basis for the automobile after the casualty?

b. $7,000. RATIONALE: The adjusted basis after the casualty is calculated as follows: Adjusted basis before $11,000 Casualty loss deduction* (800) Insurance proceeds (3,200) Adjusted basis after $7,000 *Lesser of: Adjusted basis $11,000 Value decline 4,000 $4,000 Insurance proceeds (3,200) Casualty loss deduction $800 There is no $100 floor or 10% of AGI floor in computing a business casualty loss.

67. On June 1, 2014, Sam purchased used farm machinery for $150,000. Sam used the machinery in connection with his farming business. Sam does not elect to expense assets under § 179. Sam has, however, made an election to not have the uniform capitalization rules apply to the farming business. Determine the cost recovery deduction for 2014.

b. $7,500

James, a cash basis taxpayer, received the following compensation and fringe benefits in the current year: Salary $66,000 Disability income protection premiums 3,000 Long-term care insurance premiums 4,000 His actual salary was $72,000. He received only $66,000 because his salary was garnished and the employer paid $6,000 on James's credit card debt he owed. The wage continuation insurance is available to all employees and pays the employee three-fourths of the regular salary if the employee is sick or disabled. The long-term care insurance is available to all employees and pays $150 per day towards a nursing home or similar facility. What is James's gross income from the above? a. $66,000. b. $72,000. c. $73,000. d. $75,000. e. None of these.

b. $72,000.

In addition to other gifts, Megan made a gift of stock to Jeri in 1976. Megan had purchased the stock in 1974 for $7,500. At the time of the gift, the stock was worth $20,000. If Megan paid $850 of gift tax on the transaction in 1976, what is Jeri's gain basis for the stock?

b. $8,350. RATIONALE: Because the gift occurred prior to 1977, all of the gift tax paid of $850 is added to Megan's adjusted basis of $7,500. Thus, Jeri's adjusted basis is $8,350 ($7,500 + $850).

83. Bhaskar purchased a new factory building on September 10, 2014, for $3,700,000. Five hundred thousand of the purchase price was allocated to the land. He elected the alternative depreciation system (ADS). Determine the cost recovery deduction for 2015.

b. $80,000

53. On June 1 of the current year, Tab converted a machine from personal use to rental property. At the time of the conversion, the machine was worth $90,000. Five years ago Tab purchased the machine for $120,000. The machine is still encumbered by a $50,000 mortgage. What is the basis of the machine for cost recovery?

b. $90,000

Shontelle received a gift of income-producing property with an adjusted basis of $49,000 to the donor and fair market value of $35,000 on the date of gift. No gift tax was paid by the donor. Shontelle subsequently sold the property for $31,000. What is the recognized gain or loss?

b. ($4,000). RATIONALE: The gain basis for Shontelle is $49,000 and the loss basis is $35,000. Because the amount realized (sales price) of $31,000 is less than the loss basis of $35,000, the realized loss of $4,000 ($31,000 -$35,000) is recognized.

The exclusion of interest on educational savings bonds: a. Applies only to savings bonds owned by the child. b. Applies to parents who purchase bonds for which the proceeds are used for their child's education. c. Means that the child must include the interest in income if the bond is owned by the parent. d. Does apply even if used to pay for room and board. e. None of these.

b. Applies to parents who purchase bonds for which the proceeds are used for their child's education.

The de minimis fringe benefit: a. Exclusion applies only to property received by the employee. b. Can be provided on a discriminatory basis. c. Exclusion is limited to $250 per year. d. Exclusion applies to employee discounts. e. None of these.

b. Can be provided on a discriminatory basis.

Heather is a full-time employee of the Drake Company and participates in the company's flexible spending plan that is available to all employees. Which of the following is correct? a. Heather reduced her salary by $1,200, actually spent $1,500, and received only $1,200 as reimbursement for her medical expenses. Heather's gross income will be reduced by $1,500. b. Heather reduced her salary by $1,200, and received only $900 as reimbursement for her actual medical expenses. She is not refunded the $300 remaining balance, but her gross income is reduced by $1,200. c. Heather reduced her salary by $1,200, and received only $800 as reimbursement for her medical expenses. She is not refunded the $400. Her gross income is reduced by $800. d. Heather reduced her salary by $1,200, and received only $900 as reimbursement for her medical expenses. She forfeits the $300. Her gross income is reduced by $300.

b. Heather reduced her salary by $1,200, and received only $900 as reimbursement for her actual medical expenses. She is not refunded the $300 remaining balance, but her gross income is reduced by $1,200.

Emily is in the 35% marginal tax bracket. She can purchase a York County school bond yielding 3.5% interest and the interest is not subject to a 5% state tax. But she is interested in earning a higher return for comparable risk. Which of the following is correct: a. If she buys a corporate bond that pays 6% interest, her after-tax rate of return will be less than if she purchased the York County school bond. b. If she buys a U.S. government bond paying 5%, her after-tax rate of return will be less than if she purchased the York County school bond. c. If she buys a common stock paying a 4% dividend, her after-tax rate of return will be higher than if she purchased the York County school bond. d. All of these are correct. e. None of these are correct.

b. If she buys a U.S. government bond paying 5%, her after-tax rate of return will be less than if she purchased the York County school bond.

In the case of interest income from state and Federal bonds: a. Interest on United States government bonds received by a state resident can be subject to that state's income tax. b. Interest on United States government bonds is subject to Federal income tax. c. Interest on bonds issued by State A received by a resident of State B cannot be subject to income tax in State B. d. All of these are correct. e. None of these are correct.

b. Interest on United States government bonds is subject to Federal income tax

Your friend Scotty informs you that he received a "tax-free" reimbursement in 2016 of some medical expenses he paid in 2015. Which of the following statements best explains why Scotty is not required to report the reimbursement in gross income? a. Scotty itemized deductions in 2015. b. Scotty did not itemize deductions in 2015. c. Scotty itemized deductions in 2016. d. Scotty did not itemize deductions in 2016. e. Scotty itemized deductions in 2016 but not in 2015.

b. Scotty did not itemize deductions in 2015. If Scotty did not itemize in 2015, he can exclude the reimbursement from gross income in 2016. If Scotty itemized deductions in 2015, he must report the reimbursement as gross income in 2016 to the extent he received a tax benefit from deducting medical expenses in 2015. Whether he itemized in 2016 will have no impact on the treatment of the reimbursement.

The taxpayer is a Ph.D. student in accounting at City University. The student is paid $1,500 per month for teaching two classes. The total amount received for the year is $13,500. a. The $13,500 is excludible if the money is used to pay for tuition and books. b. The $13,500 is taxable compensation. c. The $13,500 is considered a scholarship and, therefore, is excluded. d. The $13,500 is excluded because the total amount received for the year is less than her standard deduction and personal exemption.

b. The $13,500 is taxable compensation

An employee can exclude from gross income the value of meals provided by his or her employer whenever: a. The meal is not extravagant. b. The meals are provided on the employer's premises for the employer's convenience. c. There are no places to eat near the work location. d. The meals are provided for the convenience of the employee. e. None of these.

b. The meals are provided on the employer's premises for the employer's convenience.

Tommy, a senior at State College, receives free room and board as full compensation for working as a resident advisor at the university dormitory. The regular housing contract is $2,000 a year in total, $1,200 for lodging and $800 for meals in the dormitory. Tommy had the option of receiving the meals or $800 in cash. Tommy accepted the meals. What must Tommy include in gross income from working as a resident advisor? a. All items can be excluded from gross income as a scholarship. b. The meals must be included in gross income. c. The meals may be excluded because he did not receive cash. d. The lodging must be included in gross income because it was compensation for services. e. None of these.

b. The meals must be included in gross income.

. In December 2016, Todd, a cash basis taxpayer, paid $1,200 of fire insurance premiums for the calendar year 2017 on a building he held for rental income. Todd deducted the $1,200 of insurance premiums on his 2016 tax return. He had $150,000 of taxable income that year. On June 30, 2017, he sold the building and, as a result, received a $500 refund on his fire insurance premiums. As a result of the above: a. Todd should amend his 2016 return and claim $500 less insurance expense. b. Todd should include the $500 in 2017 gross income in accordance with the tax benefit rule. c. Todd should add the $500 to his sales proceeds from the building. d. Todd should include the $500 in 2017 gross income in accordance with the claim of right doctrine.

b. Todd should include the $500 in 2017 gross income in accordance with the tax benefit rule.

A scholarship recipient at State University may exclude from gross income the scholarship proceeds used to pay for: a. Only tuition. b. Tuition, books, and supplies. c. Tuition, books, supplies, meals, and lodging. d. Meals and lodging.

b. Tuition, books, and supplies

Under which of the following conditions is a loss allowed? a.When it appears that securities will become completely worthless during the year b.When securities become completely worthless during the year c.When it appears that securities will become partially worthless during the year d.When it appears that securities will become worthless within the next two years e.When securities became completely worthless during the prior year

b.When securities become completely worthless during the year A loss cannot be recognized until the year the stock is completely worthless. There is no provision for recognizing a loss when a security becomes partially worthless, and only the current year window is applicable to a completely worthless assessment.

Turquoise Company purchased a life insurance policy on the company's chief executive officer, Joe. After the company had paid $400,000 in premiums, Joe died and the company collected the $1.5 million face amount of the policy. The company also purchased group term life insurance on all its employees. Joe had included $16,000 in gross income for the group term life insurance premiums. Joe's widow, Rebecca, received the $100,000 proceeds from the group term life insurance policy. a. Rebecca can exclude the life insurance proceeds of $100,000, but Turquoise Company must include $1,100,000 ($1,500,000 - $400,000) in gross income. b. Turquoise Company and Rebecca can exclude the life insurance proceeds of $1,500,000 and $100,000, respectively, from gross income. c. Turquoise Company can exclude $1,100,000 ($1,500,000 - $400,000) from gross income, but Rebecca must include $84,000 in gross income. d. Turquoise Company must include $1,100,000 ($1,500,000 - $400,000) in gross income and Rebecca must include $100,000 in gross income.

b. Turquoise Company and Rebecca can exclude the life insurance proceeds of $1,500,000 and $100,000, respectively, from gross income.

Mason owns an income-producing farm as his livelihood. During the year, one of the barns was destroyed by a tornado, and he suffered a total loss of the property. The adjusted basis of the barn was $100,000. The fair market value of the barn before the fire was $75,000. The barn was insured for 90% of its fair market value, and Mason recovered this amount under the insurance policy. Mason has adjusted gross income for the year of $50,000 (before considering the casualty). The amount of loss he can deduct on his tax return for the current year is: a.$50,000. b.$32,500. c.$75,000. d.$100,000. e.$67,500.

b.$32,500. Amount of loss (adjusted basis for business property that is completely destroyed)$ 100,000 Less: Insurance proceeds received ($75,000 × 90%)(67,500) Business loss$ 32,500

Daniel, who is single, had the following items for the current year:·Salary of $90,000.·Gain of $30,000 on the sale of § 1244 stock acquired two years earlier.·Loss of $100,000 on the sale of § 1244 stock acquired three years earlier.·Worthless stock of $10,000. The stock was acquired on February 1 of the prior year and became worthless on January 15 of the current year.Daniel's AGI for the current year would be: a.$38,000. b.$37,000. c.$47,000. d.$10,000. e.$42,000.

b.$37,000. Salary$ 90,000 § 1244 ordinary loss(50,000) Long-term capital gain$ 30,000 Long-term capital lossExcess § 1244 loss ($100,000 - $50,000)$50,000 Worthless security10,000(40,000) Net long-term capital loss (limited to $3,000) (3,000) Adjusted gross income$ 37,000

Teresa, a single taxpayer, operates her business as a sole proprietorship during 2019. She has gross income of $190,000 and deductions of $500,000. Teresa's excess business loss for 2019 is: a.$190,000. b.$55,000. c.$310,000. d.$500,000. e.$250,000.

b.$55,000. Excess business loss is carried forward to subsequent years. $190,000 - $500,000 = loss of $310,000 less threshold of $255,000 = $55,000

Margaret Lindley paid $15,000 of interest on her $300,000 acquisition debt for her home (fair market value of $500,000), $4,000 of interest on her $30,000 home-equity loan, $1,000 of credit card interest, and $3,000 of margin interest for the purchase of stock. Assume that Margaret Lindley has $10,000 of interest income this year and no investment expenses. How much of the interest expense may she deduct this year? a.) $19,000 b.) $18,000 c.) $22,000 d.) $23,000

b.) $18,000 The credit card interest is nondeductible personal interest and the home equity interest is not deductible. The remaining interest is deductible as qualified residence interest ($15,000) and investment interest ($3,000). The $3,000 investment interest is not restricted by her net investment income ($10,000).

Max, a single taxpayer, has a $270,000 loss from his sole proprietorship. How much of this loss is deductible after considering the excess business loss rules? a.) $270,000 b.) $250,000 c.) $20,000 d.) $0 e.) None of the choices are correct.

b.) $250,000 The nondeductible excess business loss is $20,000 (the taxpayer's aggregate business deductions ($270,000) over the sum of his business gross income $0 and $250,000).

Carly donated inventory (ordinary income property) to a church. She purchased the inventory last month for $100,000, and on the date of the gift, it had a fair market value of $92,000. What is her maximum charitable contribution deduction for the year if her AGI is $200,000? a.) $100,000. b.) $92,000. c.) $60,000. d.) $46,000 if the church sells the inventory. e.) None of these.

b.) $92,000. The charitable deduction for ordinary income property is the lesser of FMV or basis limited to 50% of AGI.

Which of the following is a true statement? a.) For purposes of the deduction for educational interest, expenses do not include expenses for room, board, and travel. b.) For purposes of the deduction for educational interest, qualified education expenses are those paid for the education of the taxpayer, the taxpayer's spouse, or a taxpayer's dependent. c.) The maximum deduction for interest expense on qualified education loans is $6,000. d.) A penalty paid for prematurely withdrawing a certificate of deposit or similar deposit is deductible from AGI as an investment expense. e.) All of the choices are false.

b.) For purposes of the deduction for educational interest, qualified education expenses are those paid for the education of the taxpayer, the taxpayer's spouse, or a taxpayer's dependent.

On October 6, 2019, Walter purchased § 1244 stock in Brass Corporation for $8,000. On December 31, 2019, the stock was worth $9,500. On August 21, 2020, Walter was notified that the stock was worthless. How should he report this item on his 2019 and 2020 tax returns? a.2019—$0; 2020—$8,000 long-term capital loss b.2019—$0; 2020—$8,000 ordinary loss c.2019—$1,500 short-term capital gain; 2020—$8,000 ordinary loss d.2019—$1,500 long-term capital loss; 2020—$8,000 ordinary loss e.2019—$1,500 short-term capital loss; 2020—$8,000 short-term capital loss

b.2019—$0; 2020—$8,000 ordinary loss The loss cannot be recognized until the year the stock is completely worthless. That year is 2020 in this case. The loss is treated as having occurred on the last day of that tax year. Hence, the $8,000 loss would be a long-term capital loss in 2020, except the stock is § 1244 stock. So, in 2020, there is an $8,000 ordinary loss.

If the taxpayer qualifies under § 1033 (nonrecognition of gain from an involuntary conversion) and the amount reinvested in replacement property exceeds the amount realized, the basis of the replacement property is: a. The cost of the replacement property. b. The fair market value of the involuntarily converted property minus the postponed gain. c. The cost of the replacement property minus the postponed gain. d. The amount realized. e. None of the above.

c

Weston sells his residence to Joanne on October 15, 2018. Indicate which of the following statements is correctly associated with § 121 (exclusion of gain on sale of principal residence). a. Selling expenses decrease the seller's amount realized and increase the buyer's adjusted basis. b. Repair expenses of the seller decrease the seller's amount realized and have no effect on the buyer's adjusted basis. c. Capital expenditures made by the seller prior to the sale increase the seller's adjusted basis and have no effect on the buyer's adjusted basis. d. Only a. and c. e. a., b., and c

c Choice a. is incorrect because selling expenses do not affect the buyer's adjusted basis. Choice b. is incorrect because repair expenses do not affect the buyer's adjusted basis or the seller's amount realized.

Which of the following statements is correct? a. In a nontaxable exchange in which gain is realized, the transaction results in a permanent recovery of more than the taxpayer's cost or other basis for tax purposes. b. In a nontaxable exchange in which loss is realized, the transaction results in a permanent recovery of less than the taxpayer's cost or other basis for tax purposes. c. In a tax-free transaction in which gain is realized, the transaction results in the permanent recovery of more than the taxpayer's cost or other basis for tax purposes. d. All of the above. e. None of the above.

c Choices a. and b. result in temporary recoveries rather than permanent recoveries.

Joyce, a farmer, has the following events occur during the tax year. Which of the events qualify as an involuntary conversion under § 1033 (nonrecognition of gain from an involuntary conversion)? a. Her farm tractor is hauled to the city dump because it is worn out. b. She sells 10 acres of pasture land at a loss of $40,000 because she has reduced the size of her dairy herd in preparation for her retirement. c. Her personal residence, adjusted basis of $100,000, is condemned to make way for an interstate highway. She recovers condemnation proceeds of $175,000. d. 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. e. None of the above.

c Choices a., b., and d. do not satisfy the definition of an involuntary conversion.

Lily exchanges a building she uses in her rental business for a building owned by Kendall, which she will use in her rental business. The adjusted basis of Lily's building is $120,000 and the fair market value is $170,000. Which of the following statements is correct? a. Lily's recognized gain is $50,000 and her basis for the building received is $120,000. b. Lily's recognized gain is $50,000 and her basis for the building received is $170,000. c. Lily's recognized gain is $0 and her basis for the building received is $120,000. d. Lily's recognized gain is $0 and her basis for the building received is $170,000. e. None of the above is correct.

c Lily's realized gain is $50,000 ($170,000 - $120,000), but her recognized gain is $0. The exchange qualifies as a like-kind exchange. Lily's basis for the building received is a carryover basis of $120,000.

Which of the following statements is correct with respect to qualified replacement property in a § 1033 involuntary conversion? a. If the functional use test applies, a warehouse used to store inventory can be replaced with a smaller building to be used to sell inventory. b. If the taxpayer use test applies, an office building rented to tenants can be replaced with an office building to be used in the taxpayer's business. c. If the like-kind exchange test applies, a building used by the taxpayer for manufacturing can be replaced with an office building to be used in the taxpayer's business. d. Only b. and c. e. a., b., and c

c Storing inventory and selling inventory as in a. are not the same functional use. For b. to qualify, the taxpayer would need to replace the rental office building with realty rented to tenants.

Evelyn, a calendar year taxpayer, lists her principal residence with a realtor on February 7, 2018, enters into a contract to sell on July 12, 2018, and sells (i.e., the closing date) the residence on August 1, 2018. The realized gain on the sale is $225,000. Which date is the appropriate ending date in determining if the residence has been owned and used by the Evelyn as the principal residence for at least two years during the prior five-year period? a. February 7, 2018. b. July 12, 2018. c. August 1, 2018. d. December 31, 2018. e. None of the above.

c The appropriate ending date in testing for the at least two-out-of-five-years ownership and occupancy requirements is the date of sale (i.e., August 1, 2018).

Heather's interest and gains on investments for the current year are as follows: Interest on Madison County school bonds $600 Interest on U.S. government bonds 700 Interest on a Federal income tax refund 200 Gain on the sale of Madison County school bonds 500 Heather's adjusted gross income from the above is: or; Heather must report gross income in the amount of: a. $2,000. b. $1,800. c. $1,400. d. $1,300. e. None of these.

c. $1,400.

Joyce's office building was destroyed in a fire (adjusted basis of $350,000; fair market value of $400,000). Of the insurance proceeds of $360,000 she receives, Joyce uses $310,000 to purchase additional inventory and invests the remaining $50,000 in short-term certificates of deposit. She received only $360,000 because of a co-insurance clause in her insurance policy. What is Joyce's recognized gain or loss?

c. $10,000 gain. RATIONALE: The receipt of insurance proceeds in excess of Joyce's adjusted basis for the office building creates a casualty gain to Joyce of $10,000 ($360,000 insurance proceeds - $350,000 adjusted basis).

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 the recognized gain or loss and the basis of the investment land?

c. $100,000 and $520,000.

87. On June 1, 2014, Red Corporation purchased an existing business. With respect to the acquired assets of the business, Red allocated $300,000 of the purchase price to a patent. The patent will expire in 20 years. Determine the total amount that Red may amortize for 2014 for the patent.

c. $11,667

Paul sells property with an adjusted basis of $45,000 to his daughter Dean, for $38,000. Dean subsequently sells the property to her brother, Preston, for $38,000. Three years later, Preston sells the property to Hun, an unrelated party, for $50,000. What is Preston's recognized gain or loss on the sale of the property to Hun?

c. $12,000.

61. Doug purchased a new factory building on January 15, 1989, for $400,000. On March 1, 2014, the building was sold. Determine the cost recovery deduction for the year of the sale assuming he did not use the MACRS straight- line method.

c. $2,645

During the current year, Khalid was in an automobile accident and suffered physical injuries. The accident was caused by Rashad's negligence. Khalid threatened to file a lawsuit against Amber Trucking Company, Rashad's employer, claiming $50,000 for pain and suffering, $90,000 for loss of income, and $70,000 in punitive damages. Amber's insurance company will not pay punitive damages; therefore, Amber has offered to settle the case for $100,000 for pain and suffering, $90,000 for loss of income, and nothing for punitive damages. Khalid is in the 35% marginal tax bracket. What is the after-tax difference to Khalid between Khalid's original claim and Amber's offer? a. Amber's offer is $20,000 less. ($50,000 + $90,000 + $70,000 - $100,000 - $90,000). b. Amber's offer is $7,000 less. [($50,000 + $90,000 + $70,000 - $100,000 - $90,000) × .35)]. c. Amber's offer is $4,500 more. {$190,000 - ($50,000 + $90,000) + [$70,000 × (1 - .35)]}. d. Amber's offer is $22,000 more. [($190,000 - $210,000) + ($120,000 × .35)].

c. Amber's offer is $4,500 more. {$190,000 - ($50,000 + $90,000) + [$70,000 × (1 - .35)]}.

Warren, a single taxpayer, is an S corporation shareholder and materially participates in the business. In the current year Warren's share of losses is $325,000. He also received a salary from the corporation of $80,000. At the beginning of the year, he had a basis in his S corporation stock of $500,000. Which of the following statements regarding how much excess business loss Warren has is true? a.He can use the $325,000 loss against other nonbusiness income. His excess business loss is $325,000. b.He can use the entire amount of his share at the beginning of the year. His excess business loss is $500,000. c.He can use $250,000 of the $325,000 loss against other nonbusiness income. His excess business loss is $75,000. d.Warren is not entitled to an excess business loss under these circumstances. e.He can use $250,000 of the $325,000 loss against other nonbusiness income. His excess business loss is $250,000.

c. He can use $250,000 of the $325,000 loss against other nonbusiness income. His excess business loss is $75,000. He can use $250,000 of the $325,000 loss against other nonbusiness income. His excess business loss is $75,000.

Ben was diagnosed with a terminal illness. His physician estimated that Ben would live no more than 18 months. After he received the doctor's diagnosis, Ben cashed in his life insurance policy and used the proceeds to take a trip to see relatives and friends before he died. Ben had paid $12,000 in premiums on the policy, and he collected $50,000, the cash surrender value of the policy. Henry enjoys excellent health, but he cashed in his life insurance policy to purchase a new home. He had paid premiums of $12,000 and collected $50,000 from the insurance company. a. Neither Ben nor Henry is required to recognize gross income. b. Both Ben and Henry must recognize $38,000 ($50,000 - $12,000) of gross income. c. Henry must recognize $38,000 ($50,000 - $12,000) of gross income, but Ben does not recognize any gross income. d. Ben must recognize $38,000 ($50,000 - $12,000) of gross income, but Henry does not recognize any gross income.

c. Henry must recognize $38,000 ($50,000 - $12,000) of gross income, but Ben does not recognize any gross income

Gold Company was experiencing financial difficulties, but was not bankrupt or insolvent. The National Bank, which held a mortgage on other real estate owned by Gold, reduced the principal from $110,000 to $85,000. The bank had made the loan to Gold when it purchased the real estate from Silver, Inc. Pink, Inc., the holder of a mortgage on Gold's building, agreed to accept $40,000 in full payment of the $55,000 due. Pink had sold the building to Gold for $150,000 that was to be paid in installments over 8 years. As a result of the above, Gold must: a. Include $40,000 in gross income. b. Reduce the basis in its assets by $40,000. c. Include $25,000 in gross income and reduce its basis in its assets by $15,000. d. Include $15,000 in gross income and reduce its basis in the building by $25,000. e. None of these.

c. Include $25,000 in gross income and reduce its basis in its assets by $15,000.

All employees of United Company are covered by a group hospitalization insurance plan, but the employees must pay the premiums ($8,000 for each employee). None of the employees has sufficient medical expenses to deduct the premiums. Instead of giving raises next year, United is considering paying the employee's hospitalization insurance premiums. If the change is made, the employee's after-tax and insurance pay will: a. Decrease by the same amount for all employees. b. Increase more for the lower paid employees (10% and 15% marginal tax bracket). c. Increase more for the higher income (35% marginal tax bracket) employees. d. Increase by the same amount for all employees. e. None of these.

c. Increase more for the higher income (35% marginal tax bracket) employees.

52. Which of the following assets would be subject to cost recovery?

c. Landscaping around the doctor's office.

A company has a medical reimbursement plan for officers that covers all costs that the insurer will not pay. However, for all employees who are not officers, the medical reimbursement plan applies only after the employee has paid $1,000 from his or her own funds. An officer incurred $1,500 in medical expenses and was reimbursed for that amount. An hourly worker also incurred $1,500 in medical expense and was reimbursed $500. a. Both employees must include all benefits received in gross income. b. The officer must include $500 in gross income. c. The officer must include $1,500 in gross income. d. The hourly employee must include $1,000 in gross income. e. None of these.

c. The officer must include $1,500 in gross income.

This year, Jong paid $3,000 of interest on a qualified education loan. Jong files married joint and reports modified AGI of $147,000. What is Jong's deduction for interest expense on an educational loan? a.) $2,500. b.) $3,000. c.) $1,500. d.) $1,000. e.) None of these.

c.) $1,500 2018 maximum = [147,000 -135,000]/30,000 = 40% = $2,500 x 60% = $1,500

Campbell, a single taxpayer, earns $95,000 of profits from her general store that she operates as a sole proprietorship. She has no employees, $40,000 of qualified property, and $50,000 of taxable income before the deduction for qualified business income. How much is Campbell's deduction for qualified business income? a.) $95,000 b.) $19,000 c.) $10,000 d.) $8,000 e.) $0

c.) $10,000 Her 20% qualified business deduction is limited to 20% of her taxable income before the deduction.

Madeoff donated stock (capital gain property) to a public charity. He purchased the stock 3 years ago for $100,000, and on the date of the gift, it had a fair market value of $200,000. What is his maximum charitable contribution deduction for the year if his AGI is $500,000 (before considering the itemized deduction phase-out)? a.) $100,000. b.) $200,000. c.) $150,000. d.) $250,000. e.) None of these.

c.) $150,000. The stock is appreciated capital gain property limited to 30% of AGI.

Emily, who lives in Indiana, volunteered to travel to Louisiana in March to work on a home-building project for Habitat for Humanity (a qualified charitable organization). She was in Louisiana for three weeks. She normally makes $500 per week as a carpenter's assistant and plans to deduct $1,500 as a charitable contribution. In addition, she incurred the following costs in connection with the trip: $600 for transportation, $1,200 for lodging, and $400 for meals. What is Emily's deduction associated with this charitable activity? a. $600 b. $1,200 c. $1,800 d. $2,200 e. $3,700

d RATIONALE: Emily cannot deduct the estimated value of $1,500 of her contributed services. However, she can deduct out-of-pocket costs of $2,200 ($600 for transportation, $1,200 for lodging, and $400 for meals).

Latisha owns a warehouse with an adjusted basis of $200,000. She exchanges it for a strip mall building worth $225,000. Which of the following statements is correct? a. If the warehouse was used in Latisha's business to store inventory and the strip mall building is to be rented to tenants, her recognized gain is $25,000 and her basis for the strip mall building is $225,000. b. If the warehouse was used in Latisha's business to store inventory and the strip mall building is to be used as a retail outlet for her business, her recognized gain is $0 and her basis for the strip mall building is $200,000. c. If the warehouse is used by Latisha to store personal use items such as excess furniture and the strip mall building is to be rented to tenants, her recognized gain is $25,000 and her basis for the strip mall building is $225,000. d. Only b. and c. are correct. e. a., b., and c. are correct.

d a. is a like kind exchange and thus no gain is recognized. b. is a like-kind exchange. c. is not a like-kind exchange and thus the gain is recognized.

Carlton purchases land for $550,000. He incurs legal fees of $10,000 and broker's commission of $28,000 associated with the purchase. He subsequently incurs additional legal fees of $25,000 in having the land rezoned from agricultural to residential. He subdivides the land and installs streets and sewers at a cost of $800,000. What is Carlton's basis for the land and the improvements?

d. $1,413,000. RATIONALE: All of the costs incurred by Carlton are capital expenditures. Thus, his adjusted basis for the land and the improvements is: Cost $550,000 Legal fees ($10,000 + $25,000) 35,000 Broker's commission 28,000 Streets and sewers 800,000 Basis $1,413,000

Alice owns land with an adjusted basis of $610,000, subject to a mortgage of $350,000. Real estate taxes are $9,000 per calendar year and are payable on December 31. On April 1, 2014, Alice sells her land subject to the mortgage for $650,000 in cash, a note for $600,000, and property with a fair market value of $120,000. What is the amount realized?

d. $1,722,219. RATIONALE: The amount realized includes the following: Cash $650,000 Note 600,000 Property 120,000 Mortgage assumed by buyer 350,000 Real estate taxes of seller paid by buyer ($9,000 90/365) 2,219 Amount realized $1,722,219

The taxpayer's marginal tax bracket is 25%. Which would the taxpayer prefer? a. $1.00 taxable income rather than $1.25 tax-exempt income. b. $1.00 taxable income rather than $.75 tax-exempt income. c. $1.25 taxable income rather than $1.00 tax-exempt income. d. $1.40 taxable income rather than $1.00 tax-exempt income.

d. $1.40 taxable income rather than $1.00 tax-exempt income.

54. Tara purchased a machine for $40,000 to be used in her business. The cost recovery allowed and allowable for the three years the machine was used are as follows: Cost Recovery Allowed Cost Recovery Allowable Year 1 $16,000 $ 8,000 Year 2 9,600 12,800 Year 3 5,760 7,680 If Tara sells the machine after three years for $15,000, how much gain should she recognize?

d. $11,480

In 2016, Gail had a § 179 deduction carryover of $30,000. In 2017, she elected § 179 for an asset acquired at a cost of $115,000. Gail's § 179 business income limitation for 2017 is $140,000. Determine Gail's § 179 deduction for 2017. a. $130,000 b. $25,000 c. $115,000 d. $140,000 e. None of these choices are correct.

d. $140,000 $145,000; $30,000 + $115,000 limited to $140,000.

Nat is a salesman for a real estate developer. His employer permits him to purchase a lot for $75,000. The employer's adjusted basis for the lot is $45,000, and its normal selling price is $90,000. What is Nat's recognized gain and his basis for the lot?

d. $15,000 $ 90,000 RATIONALE: Nat's recognized gain on the bargain purchase is $15,000 ($90,000 - $75,000) and his basis for the lot is $90,000 ($75,000 cost + $15,000 recognized gain).

The only asset Bill purchased during 2017 was a new seven-year class asset. The asset, which was listed property, was acquired on June 17 at a cost of $50,000. The asset was used 40% for business, 30% for the production of income, and the rest of the time for personal use. Bill always elects to expense the maximum amount under § 179 whenever it is applicable. The net income from the business before the § 179 deduction is $100,000. Determine Bill's maximum deduction with respect to the property for 2017. a. $1,428 b. $26,749 c. $33,375 d. $2,499 e. None of these choices are correct.

d. $2,499 The listed property does not pass the predominantly business usage test. Therefore, neither § 179 expensing nor additional first-year depreciation can be taken. In addition, only straight-line cost recovery can be used. Maximum deduction ($50,000 × .0714 × 70%) = $2,499

Pedro borrowed $250,000 to purchase a machine costing $300,000. He later borrowed an additional $25,000 using the machine as collateral. Both notes are nonrecourse. Eight years later, the machine has an adjusted basis of zero and two outstanding note balances of $145,000 and $18,000. Pedro sells the machine subject to the two liabilities for $45,000. What is his realized gain or loss?

d. $208,000. RATIONALE: Amount realized ($45,000 + $145,000 + $18,000) $208,000 Adjusted basis (-0-) Realized gain $208,000 The amount realized includes the two nonrecourse notes.

Jack received a court award in a civil libel and slander suit against National Gossip. He received $120,000 for damages to his professional reputation, $100,000 for damages to his personal reputation, and $50,000 in punitive damages. Jack must include in his gross income as a damage award: a. $0. b. $100,000. c. $120,000. d. $270,000.

d. $270,000.

58. Alice purchased office furniture on September 20, 2013, for $100,000. On October 10, 2013, she purchased business computers for $80,000. Alice placed all of the assets in service on January 15, 2014. Alice did not elect to expense any of the assets under § 179, did not elect straightline cost recovery, and did not take additional firstyear depreciation (if available). Determine the cost recovery deduction for the business assets for 2014.

d. $30,290

Albert had a terminal illness which required almost constant nursing care for the remaining two years of his estimated life, according to his doctor. Albert had a life insurance policy with a face amount of $100,000. Albert had paid $25,000 of premiums on the policy. The insurance company has offered to pay him $80,000 to cancel the policy, although its cash surrender value was only $55,000. Albert accepted the $80,000. Albert used $15,000 to pay his medical expenses. Albert made a miraculous recovery and lived another 20 years. As a result of cashing in the policy: a. Albert must recognize $55,000 of gross income, but he has $15,000 of deductible medical expenses. b. Albert must recognize $65,000 ($80,000 - $15,000) of gross income. c. Albert must recognize $40,000 ($80,000 - $25,000 - $15,000) of gross income. d. Albert is not required to recognize any gross income because of his terminal illness.

d. Albert is not required to recognize any gross income because of his terminal illness.

The First Chance Casino has gambling facilities, a bar, a restaurant, and a hotel. All employees are allowed to obtain food from the restaurant at no charge during working hours. In the case of the employees who operate the gambling facilities, bar, and restaurant, 60% of all of Casino's employees, the meals are provided for the convenience of the Casino. However, the hotel workers, demanded equal treatment and therefore were also allowed to eat in the restaurant at no charge while they are at work. Which of the following is correct? a. All the employees are required to include the value of the meals in their gross income. b. Only the restaurant employees may exclude the value of their meals from gross income. c. Only the employees who work in gambling, the bar, and the restaurant may exclude the meals from gross income. d. All of the employees may exclude the value of the meals from gross income. e. None of these.

d. All of the employees may exclude the value of the meals from gross income.

Swan Finance Company, an accrual method taxpayer, requires all of its customers to carry credit life insurance. If a customer dies, the company receives from the insurance company the balance due on the customer's loan. Ali, a customer, died owing Swan $1,500. The balance due included $200 accrued interest that Swan has included in income. When Swan collects $1,500 from the insurance company, Swan: a. Must recognize $1,500 income from the life insurance proceeds. b. Must recognize $1,300 income from the life insurance proceeds. c. Does not recognize income because life insurance proceeds are tax-exempt. d. Does not recognize income from the life insurance because the entire amount is a recovery of capital.

d. Does not recognize income from the life insurance because the entire amount is a recovery of capital.

The employees of Mauve Accounting Services are permitted to use the copy machine for personal purposes, provided the privilege is not abused. Ed is the president of a civic organization and uses the copier to make several copies of the organization's agenda for its meetings. The copies made during the year would have cost $150 at a local office supply. a. Ed must include $150 in his gross income. b. Ed may exclude the cost of the copies as a no-additional cost fringe benefit. c. Ed may exclude the cost of the copies only if the organization is a client of Mauve. d. Ed may exclude the cost of the copies as a de minimis fringe benefit. e. None of these.

d. Ed may exclude the cost of the copies as a de minimis fringe benefit.

Iris collected $150,000 on her deceased husband's life insurance policy. The policy was purchased by the husband's employer under a group policy. Iris's husband had included $5,000 in gross income from the group term life insurance premiums during the years he worked for the employer. She elected to collect the policy in 10 equal annual payments of $18,000 each. a. None of the payments must be included in Iris's gross income. b. The amount she receives in the first year is a nontaxable return of capital. c. For each $18,000 payment that Iris receives, she can exclude $500 ($5,000/$180,000 × $18,000) from gross income. d. For each $18,000 payment that Iris receives, she can exclude $15,000 ($150,000/$180,000 × $18,000) from gross income.

d. For each $18,000 payment that Iris receives, she can exclude $15,000 ($150,000/$180,000 × $18,000) from gross income.

Tonya is a cash basis taxpayer. In 2016, she paid state income taxes of $8,000. In early 2017, she filed her 2016 state income tax return and received a $900 refund. a. If Tonya itemized her deductions in 2016 on her Federal income tax return, she should amend her 2016 return and reduce her itemized deductions by $900. b. If Tonya itemized her deductions in 2016 on her Federal income tax return and her itemized deductions exceeded the standard deduction by at least $900, the refund will not affect her 2017 tax return. c. If Tonya itemized her deductions in 2016 on her Federal income tax return, she must amend her 2016 Federal income tax return and use the standard deduction. d. If Tonya itemized her deductions in 2016 on her Federal income tax return and her itemized deductions exceeded the standard deduction by more than $900, she must recognize $900 income in 2017 under the tax benefit rule.

d. If Tonya itemized her deductions in 2016 on her Federal income tax return and her itemized deductions exceeded the standard deduction by more than $900, she must recognize $900 income in 2017 under the tax benefit rule.

Flora Company owed $95,000, a debt incurred to purchase land that serves as security for the debt. a. If Flora had borrowed the funds from a bank, the bank accepts $85,000 in full payment of the debt, and Flora is solvent after the transfer, Flora does not recognize income, but the company must reduce the cost of the land by $10,000. b. If Flora had borrowed the funds from a bank, and the bank accepts $85,000 in full payment of the debt, when the value of the property is $80,000, Flora can deduct a loss. c. If Flora transfers to the bank other property, with a basis of $90,000 and a fair market value of $95,000, in full payment of the debt, Flora can recognize a $5,000 loss. d. If the $95,000 is owed to the person who sold the property to Flora, and the creditor accepts $85,000 in full payment for the debt, Flora does not recognize gain but must reduce its basis in the land.

d. If the $95,000 is owed to the person who sold the property to Flora, and the creditor accepts $85,000 in full payment for the debt, Flora does not recognize gain but must reduce its basis in the land.

51. 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 January of the following year. No assets were purchased in the following year. Grape Corporation's cost recovery would begin:

d. In the following year using a half-year convention.

Which of the following taxes will NOT qualify as an itemized deduction? a.) Personal property taxes assessed on the value of specific property. b.) State, local, and foreign income taxes. c.) Real estate taxes on a residence. d.) Gasoline taxes on personal travel. e.) Non of the choices qualify as an itemized deduction.

d.) Gasoline taxes on personal travel.

Kristen's employer owns its building and provides parking space for its employees. The value of the free parking is $150 per month. Karen's employer does not have parking facilities, but reimburses its employee for the cost of parking in a nearby garage, up to $150 per month. a. Kristen and Karen must recognize gross income from the parking services. b. Kristen can exclude the employer provided parking from gross income, but Karen must include her reimbursement in gross income. c. Kristen must include the value of the employer provided parking from her gross income, but Karen can exclude her reimbursement from gross income. d. Neither Kristen nor Karen is required to include the cost of parking in gross income. e. None of these.

d. Neither Kristen nor Karen is required to include the cost of parking in gross income.

The exclusion for health insurance premiums paid by the employer applies to: a. Only current employees and their spouses. b. Only current employees and their spouses and dependents. c. Only current employees and their disabled spouses. d. Present employees, retired former employees, and their spouses and dependents.

d. Present employees, retired former employees, and their spouses and dependents.

A U.S. citizen worked in a foreign country for the period July 1, 2015 through August 1, 2016. Her salary was $10,000 per month. Also, in 2015 she received $5,000 in dividends from foreign corporations (not qualified dividends). No dividends were received in 2016. Which of the following is correct? a. The taxpayer cannot exclude any of the income because she was not present in the foreign country more than 330 days in either 2015 or 2016. b. The taxpayer can exclude a portion of the salary from U.S. gross income in 2015 and 2016, and all of the dividend income. c. The taxpayer can exclude from U.S. gross income $60,000 salary in 2015, but in 2016 the taxpayer will exceed the twelve month limitation and, therefore, all of the 2016 compensation must be included in gross income. All of the dividends must be included in 2015 gross income. d. The taxpayer must include the dividend income of $5,000 in 2015 gross income, but the taxpayer can exclude a portion of the compensation income from U.S. gross income in 2015 and 2016.

d. The taxpayer must include the dividend income of $5,000 in 2015 gross income, but the taxpayer can exclude a portion of the compensation income from U.S. gross income in 2015 and 2016.

As an executive of Cherry, Inc., Ollie receives a fringe benefit in the form of annual tuition scholarships of $10,000 to each of his three children. The scholarships are paid by the company on behalf of the children of key employees directly to each child's educational institution and are payable only if the student maintains a B average. a. The tuition payments of $30,000 may be excluded from Ollie's gross income as a scholarship. b. The tuition payments of $10,000 each must be included in the child's gross income. c. The tuition payments of $30,000 may be excluded from Ollie's gross income because the payments are for the academic achievements of the children. d. The tuition payments of $30,000 must be included in Ollie's gross income.

d. The tuition payments of $30,000 must be included in Ollie's gross income.

Sharon had some insider information about a corporate takeover. She unintentionally informed a friend, who immediately bought the stock in the target corporation. The takeover occurred and the friend made a substantial profit from buying and selling the stock. The friend told Sharon about his stock dealings, and gave her a pearl necklace because she "made it all possible." The necklace was worth $10,000, but she already owned more jewelry than she desired. a. The necklace is a nontaxable gift received by Sharon because the friend was not legally required to make the gift. b. The value of the necklace is not included in Sharon's gross income unless she sells it. c. The value of the necklace is not included in Sharon's gross income because passing the information was an illegal act and the SEC can confiscate the necklace. d. The value of the necklace must be included in

d. The value of the necklace must be included in

Employees of the Valley Country Club are allowed to use the golf course without charge before and after working hours on Mondays, when the number of players on the course is at its lowest. Tom, an employee of the country club played 40 rounds of golf during the year at no charge when the non-employee charge was $20 per round. a. Tom must include $800 in gross income. b. Tom is not required to include anything in gross income because it is a de minimis fringe benefit. c. Tom is not required to include the $800 in gross income because the use of the course was a gift. d. Tom is not required to include anything in gross income because this is a "no-additional-cost service" fringe benefit. e. None of these.

d. Tom is not required to include anything in gross income because this is a "no-additional-cost service" fringe benefit.

Peter files a return as a single taxpayer. In 2019, he had the following items:·Salary of $40,000.·Loss of $65,000 on the sale of § 1244 stock acquired two years ago.·Interest income of $8,000.Peter's AGI for 2019 is: a.$0. b.$(5,000). c.$48,000. d.$(2,000). e.$45,000.

d.$(2,000). Salary$ 40,000 Interest income8,000 Ordinary loss (§ 1244 ordinary loss)(50,000) Long-term capital loss (limited to $0)* -0- AGI$ (2,000) *$15,000 ($65,000 - $50,000) is long-term capital loss. Of this amount, no amount can be used because there is no ordinary income. $15,000 ($15,000 - $0) will be carried forward.

Campbell, a single taxpayer, earns $400,000 of profits from her general store that she operates as a sole proprietorship. She has no employees, $40,000 of qualified property, and $500,000 of taxable income before the deduction for qualified business income. How much is Campbell's deduction for qualified business income? a.) $100,000 b.) $80,000 c.) $20,000 d.) $1,000 e.) $0

d.) $1,000 Her 20% qualified business deduction is limited to 25% of her wages ($0) plus 2.5% of her qualified property (2.5% x $40,000 = $1,000)

Which of the following is a true statement? a.) A casualty loss on investment property is generally not deductible b.) All casualty losses are deductible. c.) A casualty loss on personal-use asset is deductible for AGI. d.) A casualty loss on personal-use assets is generally not deductible.

d.) A casualty loss on personal-use assets is generally not deductible.

Which of the following is a true statement? a.) Taxpayers may only deduct interest on up to $1,500,000 of acquisition indebtedness. b.) Taxpayers may deduct interest on up to $1,000,000 of home-equity debt. c.) The deduction for investment interest expense is not subject to limitation. d.) A taxpayer who incurs acquisition indebtedness in 2018 may only deduct interest on up to $750,000 of acquisition indebtedness. e.) None of the choices are correct.

d.) A taxpayer who incurs acquisition indebtedness in 2018 may only deduct interest on up to $750,000 of acquisition indebtedness.

Which of the following satisfy the time period requirement for postponement of gain as a § 1033 (nonrecognition of gain from an involuntary conversion) involuntary conversion? a. Al's business warehouse is destroyed by a tornado on October 31, 2018. Al is a calendar year taxpayer. He receives insurance proceeds on December 5, 2018. He reinvests the proceeds in another warehouse to be used in his business on December 29, 2020. b. Heather's personal residence is destroyed by fire on October 31, 2018. She is a calendar year taxpayer. She receives insurance proceeds on December 5, 2018. She purchases another principal residence with the proceeds on October 31, 2020. c. Mack's office building is condemned by the city as part of a road construction project. The date of the condemnation is October 31, 2018. He is a calendar year taxpayer. He receives condemnation proceeds from the city on that date. He purchases another office building with the proceeds on December 5, 2021. d. Lizzy's business automobile is destroyed in an accident on October 31, 2018. Lizzy is a fiscal year taxpayer with the fiscal year ending on June 30th. She receives insurance proceeds on December 5, 2018. She purchases another business automobile with the proceeds on June 1, 2021. e. All of the above.

e All of the involuntary conversions satisfy the time period requirement for postponement of gain as a § 1033 involuntary conversion. The latest replacement date for each of the involuntary conversions is as follows: December 31, 2020 (choice a.); December 31, 2020 (choice b.); December 31, 2021 (choice c.); and, June 30, 2021 (choice d.).

Which of the following statements is correct? a. The receipt of boot in a § 1031 like-kind exchange can result in the recognition of gain. b. The receipt of boot in a § 1031 like-kind exchange cannot result in the recognition of loss. c. The giving of boot in a § 1031 like-kind exchange can result in the recognition of gain. d. Only a. and b. e. a., b., and c.

e If boot is received in a § 1031 like-kind exchange, the recognized gain is the lesser of the realized gain or the boot received. Realized loss, however, cannot be recognized. The giving of boot in a § 1031 like-kind exchange generally does not result in the recognition of gain, but it can if the fair market value of the boot exceeds its adjusted basis.

Brett owns investment land located in Tucson, Arizona. He exchanges it for other investment land. In which of the following locations may the other investment land be located and enable Brett to qualify for § 1031 like-kind exchange treatment? a. Mexico City, Mexico. b. Toronto, Canada. c. Paris, France. d. Only a. and b. e. None of the above.

e Real property located in the United States exchanged for foreign real property (and vice versa) does not qualify as like-kind property.

During 2018, Howard and Mabel, a married couple, decided to sell their residence. The residence has a basis of $162,000 and has been owned and occupied by them for 11 years. The house was sold in May for $395,000 with broker's commissions and other selling expenses being $24,000. They purchased a new residence in June for $400,000. What is the adjusted basis of the new residence? a. $0 b. $141,000 c. $162,000 d. $191,000 e. None of the above

e Section 121 is an exclusion provision rather than a postponement provision. Thus, the adjusted basis of the new residence is the cost of $400,000.

Which of the following might motivate a taxpayer to try to avoid like-kind exchange treatment? a. Taxpayer has unused NOL carryovers. b. Taxpayer has unused general business credit carryovers. c. Taxpayer has suspended or current passive activity losses. d. Only a. and b. are correct. e. a., b., and c. are correct.

e a., b., and c. could motivate current recognition.

Early in the year, Marion was in an automobile accident during the course of his employment. As a result of the physical injuries he sustained, he received the following payments during the year: Reimbursement of medical expenses Marion paid by a medical insurance policy he purchased $10,000 Damage settlement to replace his lost salary 15,000 What is the amount that Marion must include in gross income for the current year? a. $25,000. b. $15,000. c. $12,500. d. $10,000. e. $0.

e. $0.

Christie sued her former employer for a back injury she suffered on the job in 2016. As a result of the injury, she was partially disabled. In 2017, she received $240,000 for her loss of future income, $160,000 in punitive damages because of the employer's flagrant disregard for the employee's safety, and $15,000 for medical expenses. The medical expenses were deducted on her 2016 return, reducing her taxable income by $12,000. Christie's 2017 gross income from the above is: a. $415,000. b. $412,000. c. $255,000. d. $175,000. e. $172,000.

e. $172,000.

Julie was suffering from a viral infection that caused her to miss work for 90 days. During the first 30 days of her absence, she received her regular salary of $8,000 from her employer. For the next 60 days, she received $12,000 under an accident and health insurance policy purchased by her employer. The premiums on the health insurance policy were excluded from her gross income. During the last 30 days, Julie received $6,000 on an income replacement policy she had purchased. Of the $26,000 she received, Julie must include in gross income: a. $0. b. $6,000. c. $8,000. d. $14,000. e. $20,000.

e. $20,000.

Last year, Embargo Corporation incurred the following expenditures in the development of a new plant process: Salaries $200,000, Materials 80,000, Utilities 10,000, Patent fees 30,000, Management study costs 5,000, Depreciation of equipment 15,000. During the current year, benefits from the project began being realized in May. If Embargo Corporation elects a 60-month deferral and amortization period, the amount of the deduction for the current year is: a.$45,333. b.$67,000. c.$33,500. d.$200,000. e.$44,667.

e. $44,667 Salary$200,000Materials80,000Utilities10,000Patent fees30,000Depreciation 15,000Research and experimental costs$335,000 Current deduction $44,667 [($335,000 ÷ 60) × 8 months]The management study costs are not research and experimental expenditures.

During 2014, Howard and Mabel, a married couple, decided to sell their residence. The residence has a basis of $162,000 and has been owned and occupied by them for 11 years. The house was sold in May for $395,000 with broker's commissions and other selling expenses being $24,000. They purchased a new residence in June for $400,000. What is the adjusted basis of the new residence?

e. None of the above.

Ross lives in a house he received as a gift from his father. His father had lived in the house for 12 years. The adjusted basis of the house to his father was $160,000 and the fair market value at the time of the gift was $140,000. Ross sells this residence after living in it for 18 months for $150,000 and purchases a new home for $125,000. He incurs selling expenses of $7,000. What is Ross' recognized gain or loss and basis for the new residence?

e. None of the above.

On February 20, 2019, Lonnie purchased stock in Alloy Corporation (the stock is not small business stock) for $1,000. On May 1, 2020, the stock became worthless. During 2020, Lonnie also had an $8,000 loss on § 1244 small business stock purchased two years ago, a $9,000 loss on a nonbusiness bad debt, and a $5,000 long-term capital gain. How should Lonnie treat these items on his 2020 tax return? a.$4,000 long-term capital loss and $3,000 short-term capital loss b.$4,000 long-term capital loss and $9,000 short-term capital loss c.$8,000 ordinary loss and $5,000 short-term capital loss d.$8,000 long-term capital loss and $6,000 short-term capital loss e.$8,000 ordinary loss and $3,000 short-term capital loss

e.$8,000 ordinary loss and $3,000 short-term capital loss Ordinary loss (small business stock)$(8,000) Long-term capital gain$ 5,000 Less long-term capital loss (worthless securities) (1,000) Net long-term capital gain$ 4,000 Less short-term capital loss (nonbusiness bad debt) (9,000) Net short-term capital loss$(5,000) Short-term capital loss limited to$(3,000)

Frieda is 67 years old and deaf. If Frieda files as a head of household, what amount of standard deduction can she claim in 2018? a.) $12,000 b.) $13,600 c.) $18,000 d.) $19,300 e.) $19,600

e.) $19,600 $19,600 = $18,000 + $1,600 the regular standard deduction increased for age 65 or blindness.

Which of the following is a true statement? a.) business deductions are one of the most common deductions for AGI but they are not readily visible on the front of Form 1040. b.) Unreimbursed employee business expenses are not deductible. c.) Investment advisory expenses are not deductible. d.) The distinction between business and investment expenses is critical for determining whether a deduction is claimed above the line (for AGI) or below the line (itemized). e.) All of the choices are correct.

e.) All of the choices are correct.

Which of the following costs are NOT deductible as an itemized medical expense? a.) The cost of eyeglasses. b.) Payments to a hospital. c.) Transportation for medical purposes. d.) The cost of insurance for long-term care services. e.) All of the choices are deductible as medical expenses.

e.) All of the choices are deductible as medical expenses.

Brice is a single, self-employed electrician who earns $60,000 per year in self-employment income. Brice paid the following expenses this year. Which of the expenses are deductible for AGI? 1. The cost of health insurance 2. The employer portion of self-employment tax paid 3. Penalty on early withdrawal of funds from a certificate of deposit a.) Numbers 1 and 2 only. b.) Numbers 1 and 3 only. c.) Numbers 2 and 3 only. d.) None of these is deductible for AGI. e.) All of these are deductible for AGI

e.) All of these are deductible for AGI

Mason paid $4,100 of interest on a loan that paid tuition for him to attend a private university this year. How much of this payment can Mason deduct as interest expense on an educational loan if he files single and reports modified AGI of $90,000? a.) $4,100. b.) $4,000. c.) $2,667. d.) $2,000. e.) None of these.

e.) None of these. The deduction is eliminated for modified AGI over $80,000 (2018).

For tax purposes, there is no original issue discount on a bond unless the bond is issued for less than its face value and the difference between the face value and the bond issue price is at least one-fourth of 1 percent of the redemption price at maturity multiplied by the number of years to maturity.a. True b. False

true