Income Tax Quiz 2
Arnold purchased interests in two limited partnerships 6 years ago. During 2013, Arnold had income of $22,000 from one of the partnerships. He had a loss from the other partnership of $32,000, salary income of $35,000, and dividend income of $2,000. What is the amount of net passive losses that Arnold may deduct for 2013?
$0
Warren invested in a limited partnership tax shelter in 2000. During 2013, his losses from the partnership amount to $100,000. If Warren has no passive income, what is the amount of Warren's deduction for passive losses for 2013?
$0
Barry is a self-employed attorney who travels to New York on a business trip during 2013. Barry's expenses were as follows: Airfare $560 Taxis $ 40 Meals $100 Lodging $350 How much may Barry deduct as travel expenses for the trip?
$1,000
During 2013, Harry, a self-employed accountant, travels from Kansas City to Miami for a 1-week business trip. While in Miami, Harry decides to stay for an additional 5 days of vacation. Harry pays $600 for airfare, $200 for meals, and $500 for lodging while on business. The cost of meals and lodging while on vacation was $300 and $500, respectively. How much may Harry deduct as travel expenses for the trip?
$1,200
Acacia Company had inventory of $100,000 on December 31, 2013. Other information is as follows: Purchases $1,500,000 Sales 3,000,000 Inventory 1/1/2013 300,000 What is the amount of Acacia's cost of goods sold for 2013?
$1,700,000
Monica has a Roth IRA to which she contributed $15,000. The IRA has a current value of $37,500. She is 54 years old and takes a distribution of $25,000. How much of the distribution will be taxable to Monica?
$10,000
Nancy has active modified adjusted gross income before passive losses of $125,000. She has a loss of $10,000 on a rental property she actively manages. How much of the loss is she allowed to deduct against the $125,000 of other income?
$10,000
Arnold purchased two rental properties 6 years ago. He actively participates in their management. During 2013, Arnold had income of $22,000 from one of the rentals. He had a loss from the other rental of $32,000, as well as salary income of $35,000, and dividend income of $2,000. What is Arnold's net passive income or loss deduction?
$10,000 net loss
Jody is a physician (not covered by a retirement plan) with a salary of $40,000 from the hospital where she is employed. She supports her husband, Andre, who sells art work and has no earned income. Both are in their twenties. What is the maximum total amount that Jody and Andre may contribute to their IRAs and deduct for the 2013 tax year?
$11,000
Mort is the owner of an apartment building containing ten identical apartments. Mort resides in one apartment and rents out the remaining units. For 2013, the following information is available: Gross rents $21,600 Utilities for total building $ 2,500 Maintenance and repairs (rental apartments only) $ 1,200 Advertising for vacant apartments $ 300 Depreciation of building (all ten units) $ 5,000 What amount should Mort report as net rental income for 2013?
$13,350
Ellen supports her family as a self-employed attorney. She reports $90,000 of income on her Schedule C and pays $8,000 for health insurance for her family, $2,500 for dental insurance, $4,000 for health insurance for her 23-year-old daughter who is no longer a dependent, and $3,000 for disability insurance for herself. What is Ellen's self-employed health insurance deduction?
$14,500
Polly, age 45, participates in her employer's Section 401(k) plan which allows employees to contribute up to 15 percent of their salary. Her annual salary is $100,000 in 2013. What is the maximum she can contribute to this plan on a tax-deferred basis under a salary reduction agreement?
$15,000
Ellen loans Nicole $45,000 to start a hair salon. Unfortunately, the business fails in 2013 and she is unable to pay back Ellen. In 2013, Ellen also had $20,000 of income from her part-time job and $12,000 of capital gain from the sale of stock. How much of the $45,000 bad debt can Ellen claim as a capital loss in 2013?
$15,000, with $30,000 carried forward to 2014
Bill is the owner of a house with two identical apartments. He resides in one apartment and rents the other apartment to a tenant. The tenant made timely monthly rental payments of $500 per month for the months of January through December, 2013. The following expenses were incurred on the entire building: Utilities $3,600 Maintenance and repairs $ 800 Insurance on building $ 600 In addition, depreciation allocable to the rented apartment is $1,500. What amount should Bill report as net rental income for 2013?
$2,000
Gary and Charlotte incurred the following expenses in connection with Gary's job transfer from Florida to South Carolina: House-hunting trip: Plane tickets $ 976 Hotel room $ 434 Meals $ 170 Moving expenses: Cost of moving furniture $2,500 Transportation $ 95 Lodging $ 125 Meals $ 60 How much is their qualified moving expense?
$2,720, calculated as $2,500 + $95 + $125. The house-hunting trip and the meals are not deductible.
Stone Pine Corporation, a calendar year taxpayer, has ending inventory of $160,000 on December 31, 2013. During the year, the corporation purchased additional inventory of $415,000. If cost of goods sold for 2013 is $470,000, what was the beginning inventory at January 1, 2013?
$215,000
Peter operates a dental office in his home. The office occupies 250 square feet of his residence, which is a total of 1,500 square feet. During 2013, Peter pays rent for his home of $12,000, utilities of $4,800, and maintenance expenses of $1,200. What amount of the total expenses should be allocated to the home office?
$3,000
Tim loaned a friend $4,000 to buy a used car. In the current year, Tim's friend declares bankruptcy and the debt is considered totally worthless. What amount may Tim deduct on his individual income tax return for the current year as a result of the worthless debt, assuming he has no other capital gains or losses for the year?
$3,000 short-term capital loss
Donald owns a two-family home. He rents out the first floor and resides on the second floor. The following expenses attributable to the total building were incurred by Donald for the year ended December 31, 2013: Real estate taxes $ 1,800 Mortgage interest $ 1,200 Utilities $ 1,000 Repairs (first floor) $ 300 Painting (second floor) $ 400 In addition, the depreciation attributable to the entire building would be $2,000. What is the total amount of the expenses that Donald can deduct on Schedule E of Form 1040 (before any limitations)?
$3,300
Richard operates a hair styling boutique out of his home. The boutique occupies 300 of the home's 1,200 square feet of floor space. Other information is as follows: Gross income from the boutique $10,000 Supplies for the boutique $ 2,000 Depreciation on total residence $12,000 Utilities for total residence $ 6,000 What amount of income or loss from the boutique should Richard show on his return?
$3,500 income
Carmen owns a house that she rents out for $500 per month. Her expenses for the 2013 tax year are as follows: Real estate taxes $ 900 Mortgage interest $ 4,000 Insurance $ 300 General repairs $ 320 Carmen bought the property in March of 1990, and her basis for depreciation on the house is $110,000. She uses straight-line depreciation with a 27 ½ -year life, so the depreciation on the house is $4,000. Calculate Carmen's net income or loss from renting the house if her gross rental income is $6,000 ($500 x 12 months).
$3,520 loss, calculated as $6,000 - $900 - $4,000 - $300 - $320 - $4,000
Patricia is a business owner who is trying to determine her cost of goods sold for 2013. She bought 20 units of inventory at $11, then 26 units at $9, and finally 18 units at $14. She sold 30 units in 2013 and uses FIFO for her inventory valuation. What was her cost of goods sold in 2013, assuming that there was no inventory at the beginning of the year?
$310
Carlos drives to Oregon to consult with a client. He works for 1 day and spends 3 days enjoying Oregon since the consultation was right before a 3-day weekend. His expenses were $175 to drive to Oregon and back, $600 for lodging, $45 for food on the day that he worked, and $125 for food on the other 3 days. How much of his travel expenses are deductible?
$348
Mike and Rose are married. Mike earns $45,000 from wages and Rose reports $350 on her Schedule C as an artist. Since Mike's work does not offer health insurance, Rose pays the following health insurance premiums from her business account: Family health insurance $9,500 Family dental insurance $1,000 How much can Mike and Rose deduct as self-employed health insurance?
$350. The deduction for self-employed health insurance is only allowed to the extent of the self-employed earnings. The remainder is deductible as an itemized medical deduction subject to the limitations discussed in Chapter 5.
Under the Keogh plan provisions, deductible contributions to a qualified retirement plan on behalf of a self-employed individual whose net earned income is $20,000 are limited to:
$4,000
Jack is a lawyer who is a member at Ocean Spray Country Club where he spends $7,200 in dues, $4,000 in meals, and $2,000 in green fees to entertain clients. He is also a member of the local Rotary club where he meets potential clients. The dues for the Rotary club are $1,200 a year. How much of the above expenses can Jack deduct as business expenses?
$4,200
Carey, a single taxpayer, purchased a rental house in 2013, which he actively manages. During 2013, Carey had a loss of $14,000 from the rental house. If Carey's adjusted gross income for 2013 is $140,000 before the rental loss, what is the amount of Carey's allowable deduction for the rental activity for 2013?
$5,000
Donald, a 40-year-old married taxpayer, has a salary of $55,000 and interest income of $6,000. What is the maximum amount Donald can contribute to a Roth IRA?
$5,500
A 42-year-old single taxpayer earning a salary of $130,000 a year can make which of the following IRA contributions if he is not covered by a plan at work?
$5,500 to either a traditional IRA or a nondeductible IRA, but no contribution is allowed to a Roth IRA
Nancy owns a small dress store. During 2013, Nancy gives business gifts having the indicated cost to the following individuals:Mrs. Johns (a customer) $37 plus $3 shipping Mr. Johns (nonclient husband of Mrs. Johns) $10 Ms. Brown (a customer) $22 What is the amount of Nancy's deduction for business gifts?
$50
Norm is a real estate professional with a real estate trade or business as defined in the tax law. He has $150,000 of business income and $50,000 of losses from actively managed real estate rentals. How much of the $50,000 in losses is he allowed to claim on his tax return?
$50,000
Linda is self-employed and spends $600 for business meals and $400 for business entertainment in 2013. What is Linda allowed to deduct in 2013 for these expenses?
$500
Contributions by a self-employed individual to a Keogh plan for 2013 are limited to the lesser of 20 percent of net earned income or:
$51,000
Thelma works at a liquor store in 2013 and makes $45,000. She also has dividend income of $12,000 and interest income of $1,000. She owns a beach house that gives her $11,000 in rental income and she owns a stake in a limited partnership that generates a $15,000 loss. What is her adjusted gross income in 2013?
$58,000
During the 2013 holiday season, Bob, a barber, gave business gifts to 34 customers. The values of the gifts, which were not of a promotional nature, were as follows: 8 at $10 each 8 at $25 each 8 at $50 each 10 at $100 each For 2013, what is the amount of Bob's business gift deduction?
$730
Moe has a law practice and earns $322,000 which he reports on his Schedule C. His wife, Mindy, works part-time at Wal-Mart and earns $8,300. Mindy does not receive any medical benefits through Wal-Mart. Their 29-year-old daughter, Michelle, who is not a dependent, is working towards earning her Master's degree. Moe and Mindy pay the following amounts: Health insurance $6,100 Dental insurance $ 525 Vision care insurance $ 425 Health insurance for their daughter $1,620 Long-term care insurance for Moe who is 54 years old $1,380 How much may Moe and Mindy claim on their tax return as a self-employed health insurance deduction?
$8,410, calculated as $6,100 + $525 + $425 + $1,360 limitation on long-term care insurance. The health insurance for their daughter is not deductible because she is not under the age of 27.
Mike owns a house that he rents out for $1,000 per month. His expenses for the 2013 tax year are as follows: Real estate taxes $ 1,500 Mortgage interest $ 4,200 Insurance $ 600 General repairs $ 620 Mike bought the property in September of 1995, and his basis for depreciation on the house is $137,500. He uses straight-line depreciation with a 27 ½-year life, so the depreciation on the house is $5,000. Mike does not use a property manager and handles all aspects of the rental activity himself. Calculate Mike's net income or loss from renting the house if his gross rental income is $12,000 ($1,000 12 months). Is the income or loss on Mike's rental considered to be active, passive, or portfolio income?
$80 profit, calculated as $12,000 - $1,500 - $4,200 - $600 - $620 - $5,000. Actively managed real estate is considered to be a passive source of income.
Sue is a small business owner who often gives gifts to clients. She gives a $40 gift to her client, Mr. Smith, and his wife. Sue spent $6 to wrap the gift. She also gave out 400 calendars with her company name on them. Each calendar cost $1. Sue also gave her secretary a $370 watch for his 10 years of service. How much of the above expenses may she deduct?
$801
Bobby is an accountant who uses a portion of his home as his office. His home is 2,500 square feet and his office space occupies 1,000 square feet. Rent expense is $20,000 a year; utilities expense is $1,200 a year; and maintenance expense is $2,000 a year. What is the total amount of these expenses that can be allocated to his home office?
$9,280
What percentage of medical insurance payments can self-employed taxpayers deduct for adjusted gross income on their 2013 tax returns, assuming their self-employment income exceeds their medical insurance payments?
100 percent
Karen has a net operating loss in 2013. If she does not make any special elections, what is the first year to which Karen can carry the net operating loss?
2011
Greg, a self-employed plumber, commutes from his home to his office which is 10 miles away. He loads his truck for the day with the parts that he needs. Then he is off to see his first customer of the day, Mr. Smith. Mr. Smith is 5 miles away from the office. After Mr. Smith's job, Greg goes to his next job, Martin's Dry Cleaning, which is 21 miles away from Mr. Smith. Greg spends the rest of the day at Martin's Dry Cleaning. From Martin's Dry Cleaning, Greg goes home which is now only 7 miles away. How much can Greg count as deductible transportation miles?
26 miles
Gary is a self-employed accountant who pays $2,000 for business meals. How much of a deduction can he claim for the meals and where should the deduction be claimed?
50 percent, Schedule C deduction
Which of the following would be a business bad debt if it were uncollectible?
A dentist, using the accrual basis of accounting, who records income when it is earned and extends credit to a patient for services provided.
Which of the following taxpayers may not use the standard mileage method of calculating transportation costs?
A taxpayer who has a fleet of 10 business automobiles.
2. Lew started a business writing a popular syndicated Japanese gardening column in the current year and will report a profit for his first year. His results of operations are as follows: Gross income $40,000 Travel $ 5,000 Business suits, to visit magazine editors $ 1,000 Transportation, 858 miles (at 56.5 cents per mile) $ 485 Entertainment $ 1,000 Subscription to bonsai and Japanese gardening magazines $ 500 Gifts: 7 at $100 each; 2 at $20 each $ 740 Rent and utilities for apartment, in total (10 percent is used for a home office) $10,000 What is the net income Lew should show on his Schedule C? Show the calculation of his taxable income.
ANS: Gross income $40,000 Expenses Travel $ 5,000 Transportation-mileage 485 Entertainment ($1,000 x 50%) 500 Subscriptions 500 Gifts, 7 at $25, 2 at $20 215 Rent and utilities allocated to home office (10% x $10,000) 1,000 Total expenses $ 7,700 Taxable income $32,300
Christian, a single taxpayer, acquired a rental house in 2000. The rental house, which Christian actively manages, generated a $15,000 loss in 2013. In addition, Christian owns a limited partnership interest which he acquired in 2005. His share of the partnership loss for 2013 is $10,000. Christian has modified adjusted gross income, before the rental loss and partnership loss, of $130,000. What is the amount of these losses that Christian may deduct in 2013?
ANS= $10,000, lesser of $15,000 rental loss or $10,000 = $25,000 - [($130,000 - $100,000) 50%]. None of the loss from the limited partnership can be deducted in 2013.
Dennis, the owner of Dennis Company, incurs the following expenses while away from home on a 3-week business trip during 2013: Airfare from Chicago to Boston $ 700 Hotel charges $1,800 Meal charges $ 780 Dry cleaning and laundry $ 100 Local transportation $ 35 Business entertainment $ 150 Business gift to Boston customer $ 45 In addition to the above expenses, Dennis incurred the following expenses for a weekend sightseeing trip to Washington D.C.: Transportation to Washington D.C. $200 Hotel charges $125 Meal charges $ 95
Airfare from Chicago to Boston $ 700 Hotel charges 1,800 Meal charges (50% x $780) 390 Dry cleaning and laundry 100 Local transportation 35 Total travel expense deduction $3,025 Entertainment (50% x $150) $ 75 Business gift (limited to $25 per gift) $ 25
Which of the following factors are considered by the IRS in evaluating whether an activity is classified as a business or a hobby?
All of the above
If a per diem method is not used, which of the following items is not required as substantiation for the deduction of a travel expense?
All of the above must be substantiated
Which of the following does not give rise to a business expense for uniforms or special clothing?
An accountant buys a business suit.
What is the deadline for making a contribution to traditional IRA or a Roth IRA for 2013?
April 15, 2014
The net operating loss (NOL) provisions of the Internal Revenue Code
Are primarily designed to provide relief for trade or business losses.
Which of the following statements is true of a distribution rollover (not a trustee-to-trustee transfer) from a retirement plan?
Assuming there are no unusual events, the taxpayer has a maximum of 60 days in which to transfer funds to a new plan.
Patrick owns a home on the beach in Daytona. He lives in the house for most of the year but leaves town during the big motor sports race that comes through every year. During that time, he rents his home out for 3 weeks to race fans for $5,000. Which of the following is true?
Because Patrick rented the home for more than 14 days, he must report the income. He is also allowed to deduct a percentage of expenses such as utilities and depreciation to the extent of the income.
Martin has a home office for his business as an agent for rock-and-roll bands. The business shows a loss of $2,000 before home office expenses. How should the home office expenses be treated?
Because of the business loss, home office expenses (other than mortgage interest and property taxes allocated to the office) cannot be deducted in the current year but can be carried forward to the next year.
Which of the following statements is false about health savings acounts (HSAs)?
Contributions to HSAs are deductible as itemized medical deductions.
Which of the following items incurred while on travel is not considered a travel expense?
Cost of entertaining clients
Paul earns $55,000 during the current year. His employer contributes $3,000 during the year to a qualified retirement plan on behalf of Paul. The amount of the contribution for the year is based on Paul's desire to have a monthly retirement benefit of $3,500. What type of retirement plan is this?
Defined benefit plan
Which of the following statements is true about health savings accounts (HSAs)?
Distributions from HSAs are tax and penalty free when used for qualified medical expenses.
Deductible transportation expenses:
Do not include the normal costs of commuting.
Choose the correct answer.
Expenses for travel as a form of education are not deductible.
A business gift with a value of $35 presented to a client and his nonclient spouse is fully deductible by the donor.
F
A gift to a foreman by a worker is considered business related and therefore subject to the $25 limit.
F
A taxpayer must make contributions to a regular or Roth IRA prior to the end of the year in order to claim the deduction for that year.
F
A taxpayer who adopts the LIFO method of inventory valuation for tax purposes may use the FIFO method for preparing financial statements.
F
Dividend income is considered "passive income."
F
For an expense to qualify as a travel expense, the taxpayer must be away from home for at least 24 hours.
F
If a Section 401(k) plan allows an employee to choose between a direct payment of compensation in cash or a contribution to the retirement plan, the plan is not a "qualified" plan.
F
If a home office is used for both business and personal purposes, the home office expenses, such as rent or depreciation, should be allocated between the business and personal use and then deducted.
F
If a residence is rented for 15 days or more and is used for personal purposes for not more than 14 days or 10 percent of the days rented, whichever is greater, no allocation of expenses is required and the taxpayer may claim a deduction for the full amount of the expenses.
F
If an employer makes a contribution to a qualified retirement plan on behalf of an employee, the amount is currently deductible by the employer, and the employee must include the amount in gross income at the time the contribution is made.
F
If the taxpayer does not maintain adequate records of the car expenses (i.e., gas, tires, car insurance, etc.), the standard mileage rate cannot be used.
F
In 2013, all taxpayers may make a deductible or nondeductible contribution to an IRA.
F
In a distribution rollover from an IRA, the recipient must contribute 80 percent of the distributed amount to the new trustee in order for the rollover to be tax free.
F
Net losses on the rental of vacation homes are limited to 15 percent of total gross income.
F
Net operating losses may be carried forward indefinitely.
F
Once a taxpayer uses the standard mileage method to determine the deduction for automobile expenses for the tax year, the standard mileage method must be used in all subsequent years.
F
Passive losses are fully deductible as long as they do not exceed $50,000 during the year.
F
Passive losses of one activity may not be used to offset passive income from another activity.
F
Schedule C or Schedule C-EZ may be used to report the net profit or loss from a partnership with business expenses of $2,500 or less.
F
Since a contribution to an IRA is a voluntary action, a taxpayer may withdraw amounts from an IRA at any time without penalty.
F
Taxpayers who use their country club more than 50 percent for business may deduct the total amount of their membership dues.
F
The IRS has approved only two per diem methods to substantiate travel expenses, the high-low method and the meals and incidental expenses method.
F
The cost of a blue wool suit for an accountant is a deductible expense.
F
The home office deduction is an easy way for a taxpayer to show a loss on his or her tax return.
F
The taxpayer must use either the FIFO or LIFO method of valuing inventory, depending upon which method reflects the actual goods the taxpayer has on hand.
F
There is a limitation of $25 per donee on the deduction of gifts to employees for length of service.
F
To qualify for the moving expense deduction, an employee must change job sites, move a required distance, and change employers.
F
Unreimbursed qualifying moving expenses are an itemized deduction for 2013.
F
Without regard to their involvement in the management of the rental property, individual taxpayers may deduct up to $25,000 of rental real estate losses against other income, provided their income does not exceed certain limits.
F
In his spare time, Fred likes to restore old furniture and sell it to his friends. He is a lawyer by trade. During 2013, he sells $500 worth of furniture and has $21,000 worth of expenses. Which one of the following is true?
Fred's deductions are limited to the income from selling furniture because he is engaged in a hobby.
Which of the following expenses, incurred while on travel, does not qualify as a travel expense?
Gift purchased for a prospective customer ($20)
To file a Schedule C-EZ, the taxpayer must:
Have business expenses of $5,000 or less.
Steven is 27 years old and has a total AGI of $110,000 in 2013. In 2013, he gets pneumonia and has a medical bill that totals $7,500. He withdraws $7,500 from his traditional IRA to pay for the bill. Which of the following is true?
He is subject to penalties on the IRA withdrawal because the medical bill was not greater than 10 percent of his AGI.
In which of the following situations may the taxpayer take an education expense on Schedule C?
Henry, an administrative assistant, is taking an advanced Word computer program class through an adult school program.
The expenses associated with the rental of a residence used for both personal and rental purposes are subject to three possible tax treatments. Which of the following is not included as one of the three?
If the residence is rented for 15 days or more and is used for personal purposes for not more than 14 days or 10 percent of the days rented, whichever is greater, the residence is treated as a personal residence for tax purposes.
Choose the correct statement:
In order to be deductible, dues and subscriptions must be related to the taxpayer's work.
Janine is a sole proprietor owning a small specialty store. The business records show that the cost of the store's individual inventory items has been steadily increasing. The cost of the end of the year inventory is $125,000 and the cost of the beginning of the year inventory was $150,000. Janine uses the LIFO method of inventory valuation. Which of the following statements is true?
Janine would have a higher net income if she used the FIFO method of inventory valuation instead of the LIFO method.
Jasper owns a small retail store as a sole proprietor. The business records show that the cost of the store's inventory items has been steadily increasing. The cost of the end of the year inventory is $200,000 and the cost of the beginning of the year inventory was $250,000. Jasper uses the FIFO method of inventory valuation. Which of the following statements is true?
Jasper has apparently decreased the volume of items in his ending inventory as compared to the number of items in his beginning inventory.
Splashy Fish Store allows qualified customers to purchase items on credit. During 2013, Lisa, the owner of the store, determines that $3,500 of accounts receivable are not collectible. Which of the following statements is true with respect to Lisa's deduction for the uncollectible accounts receivable?
Lisa is not allowed a deduction for the uncollectible accounts if she has not previously included the income arising from the accounts in taxable income.
Which of the following is true about the self-employed health insurance deduction?
Long-term care insurance is allowed as a deduction, subject to a dollar limitation.
Which of the following taxpayers qualifies for the maximum individual retirement account deduction for 2013?
Married taxpayers, neither of whom is covered by a qualified retirement plan, with total adjusted gross income, all earned, of $85,000
Taxpayers who make a combined business and pleasure trip:
Must allocate the travel cost between the business and pleasure parts of the trip if the travel is outside the United States.
Ned has active modified adjusted gross income before passive losses of $170,000. He has a loss of $15,000 on rental property he actively manages. How much of the loss is he allowed to deduct against his other income?
None
Lester rents his vacation home for 6 months and lives in the home during the other 6 months of 2013. The gross rental income from the home is $4,500. For the entire year, real estate taxes are $800, interest is $3,000, utilities and maintenance expenses are $2,200, and depreciation expense on the entire home would be $4,000. What is Lester's allowable net loss from renting his vacation home?
None of the above
Donald rents out his vacation home for 9 months and lives in his vacation home for the remainder of the year. His gross rental income for 2013 is $7,200. The expenses attributable to the vacation home for the entire year are as follows: Real estate taxes $2,000 Interest on mortgage loan $4,000 Utilities $1,200 Repairs/maintenance $ 600 Depreciation $3,500 What amount would Donald report as net income or loss from the rental of the vacation home?
None. $7,200, rent income, - (9/12 $6,000, interest and taxes) - (9/12 $1,800, utilities, repairs and maintenance) = $1,350 - (9/12 $3,500, depreciation, limited to $1,350).
Choose the correct statement. Passive losses
Often result from the rental of real estate.
Kendra is a self-employed taxpayer working exclusively from her home office. Before the home office deduction, Kendra has $5,000 of net income. Her allocable home expenses are $10,000 in total. How are the home office expenses treated on her current year tax return?
Only $5,000 home office expenses may be deducted, resulting in net business income of zero. The extra $5,000 of home office expenses may be carried forward and deducted in a future year against business income.
Gene is a self-employed taxpayer working from his home. His net income is $7,000 before home office expenses. His allocable home office expenses are $8,000 in total. How are the home office expenses treated on his current year tax return?
Only $7,000 of the office expenses can be deducted; the remaining $1,000 can be carried forward to future tax years.
Patrick has a business net operating loss of $70,000 in 2013. Patrick's business did well in 2011 and in 2012. Which of the following is true?
Patrick may offset income he generated in 2011 and 2012 with 2013's net operating loss by carrying the net operating loss back to each of those tax years. The remaining net operating loss can be carried forward and used to offset future taxable income.
Ruth is a self-employed surgeon and is required to take a week of continuing medical education every year to keep her license. This year she paid $2,000 in course fees for her continuing medical education in Honolulu. She also paid $1,500 for airfare and a hotel room and $400 for meals. What is the total amount she can deduct on her Schedule C related to these expenses?
Ruth may deduct 100 percent of the medical education fees and travel and 50 percent of the meals, a total of $3,700.
Maria runs a small business out of her home. She has expenses of $2,000 per year and uses the cash basis method of accounting. Her only employee is her cousin who works for her part-time. What form should she use to report her business income?
Schedule C
What income tax form does a self-employed sole proprietor usually use to report business income and expense?
Schedule C
What is the purpose of Schedule C?
Schedule C is used by self-employed taxpayers to report the income or loss from trades or businesses. Taxpayers who use Schedule C include self-employed accountants and attorneys, plumbers, gardeners, manufacturers, restaurant owners, and hundreds of other businesses owned by individuals as sole proprietorships. Schedule C has space for the taxpayer to report information required by the IRS about the type of business and the place where the business is operated. The income of the business must be reported and the expenses of the business must be broken down by category. If the business holds inventory, information related to the beginning and ending inventory, as well as cost of goods sold, must also be reported. If the business requires the use of the owner's automobile, additional information related to the auto must be reported as well.
In the current year, Johnice started a profitable bookkeeping business as a sole proprietor. Johnice made $38,000 in her first year of operation. What two forms must Johnice file for her business?
Schedule SE and C
Walt and Jackie rent out their residence in San Diego to friends for 10 days while they vacation in Europe. They collect $1,000 of rental income. How is the rental income treated on their tax return?
Since the residence was rented for less than 15 days, it is treated as a personal residence for tax purposes and the rental income is not taxable.
Which of the following is deductible as dues, subscriptions or publications?
Subscription to the "Journal of Taxation" for a tax attorney
A deduction for a business bad debt is allowed to the extent that income related to the debt was previously included in taxable income.
T
Earnings on nondeductible IRA contributions are allowed to accumulate tax-free until they are withdrawn.
T
If a taxpayer receives an early distribution from an IRA due to disability, he or she will not be subject to a penalty.
T
If a taxpayer takes a trip within the United States which is primarily for business, the cost of travel to and from the destination need not be prorated between the business and personal portion of the trip.
T
If a taxpayer works at two or more jobs during the same day, he or she may deduct the cost of transportation from one job to the other.
T
If an employee is transferred to a distant location for an indefinite period of time, the new location typically will be considered the employee's new tax home.
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If under 50 years of age, a taxpayer may make a contribution to an IRA, subject to the earned income limitation and the $5,500 annual limitation.
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In most cases, a taxpayer reports rental income and the related expenses on Schedule E.
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In order for a pension plan to be considered a "qualified" retirement plan, the plan must satisfy certain minimum vesting requirements.
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In some cases, a taxpayer may deduct an otherwise allowable contribution to an IRA, even though the contribution is made after the close of the tax year.
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Most taxpayers must use the specific charge-off method in calculating the bad debt deduction.
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Once the election to use the LIFO inventory method has been made by a taxpayer, the inventory method may be changed only with the consent of the IRS.
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Subject to the annual dollar limitation and the earned income limitation, deductible IRA contributions are allowed for all taxpayers who do not participate in a qualified retirement plan.
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The cost of a subscription to the New England Journal of Medicine is a deductible expense for a hospital intern.
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The cost of transportation from New York to London for a trip that is for both business and pleasure may be deducted in full as a travel expense.
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The expense of a sales luncheon may be deductible (50 percent in 2013) even if no sale is made.
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The expense of travel as a form of education is not deductible.
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The standard mileage rate for automobiles in 2013 is 56.5 cents per mile.
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Under a defined contribution plan, the contribution made on behalf of the employee is determined using a formula dependent on the employee's current compensation.
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Under the passive loss rules, real estate rental activities are specifically defined as passive, even if the taxpayer actively manages the property.
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Under the specific charge-off method, a deduction for a bad debt is taken when the debt is determined to be worthless.
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Wages are considered "active income."
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When a residence is rented for less than 15 days during the year, the rental income is excluded from gross income.
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When a taxpayer uses the FIFO inventory valuation method, the assumption on which the method is based is that the inventory on hand at the end of the year consists of the most recently acquired items.
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In determining whether an activity should be classified as a hobby, the tax law provides a rebuttable presumption with regard to the profits or losses of an activity. Which of the following statements describes the profit/loss test which must be satisfied in order to meet the presumption that the activity is not a hobby?
The activity shows a profit for 3 of the 5 previous years.
To be deductible as the cost of special work clothing or uniforms:
The clothing must not be suitable for everyday use and must be required as a condition of the job.
Which of the following statements is correct?
The contribution limits for SEPs (Simplified Employee Pension) are the lesser of 20 percent of net self-employment income or $51,000 for a self-employed taxpayer.
Which of the following is not deductible as a moving expense?
The cost of a pre-move house-hunting trip
Mikey is a self-employed computer game software designer. He takes a week-long trip to Maui, primarily for business. He takes 2 personal days at the beach. How should he treat the expenses related to this trip?
The cost of all of the airfare and the expenses related to the business days should be deducted, while the expenses related to the personal days are not deductible.
If an employer chooses a per diem method of substantiation for travel expenses,
The meals and incidental expenses method requires actual cost records to substantiate lodging expenses.
Which of the following is not a test which must be met to qualify for the moving expense deduction?
The taxpayer must stay with the same employer.
Which of the following statements is true?
There are no current-year tax consequences for a direct transfer.
Jezebel loaned her friend $7,000 to buy a used car. She had her friend sign a note with repayment terms and set a reasonable interest rate on the note because she wanted her friend to understand that this was purely a loan and not a gift. Her friend is now on disability and has made it clear she has no way of paying back the loan. How should Jezebel treat the bad loan for tax purposes?
This is a nonbusiness bad debt. Jezebel may claim a $3,000 short-term capital loss in the current year, $3,000 in the next year and $1,000 in the following year, assuming she has no other capital transactions.
Ursula, an employee of Ficus Corporation, is 35 years old and plans to retire in 20 years. The corporation has a qualified retirement plan and contributes $2,000 during 2013 for Ursula. How should Ursula treat the $2,000 contribution made on her behalf by the corporation?
Ursula is not required to include either the $2,000 contribution or the earnings thereon in her 2013 gross income.
Which of the following is not a factor that the IRS looks at to determine if a loss is from a hobby or from a business?
Whether the activity is owned and run by the taxpayer alone
Choose the incorrect answer. Money removed from a traditional IRA is taxable as ordinary income and subject to a 10 percent penalty except for taxpayers who are:
Withdrawing up to $20,000 of first-time home-buying expenses
Sherri is a tax accountant. She prepared a large corporate tax return 2 years ago and billed $5,000 to her client. After 2 years of attempting to collect the money, it is clear that she will not be able to collect anything since the business has gone bankrupt. She reports income on her tax return on the accrual basis as she bills it, so the $5,000 was included in her taxable income 2 years ago. Can she claim a bad debt deduction for the $5,000? Explain.
Yes. A business bad debt deduction for services is allowed as an ordinary deduction to the extent the amount was previously included in income.
For the current year, Robert, a single taxpayer, earned wages of $235,000 from Big Shot Corporation. He also received interest income of $1,000 from Little Credit Union. Robert had a $9,000 loss from his rental property which he actively manages. $2,000 of income was also reported on his Schedule K-1 from ABC Limited Partnership. Neither the rental property nor the partnership investment has passive losses carried over from prior years. Since Robert is not an active participant in a retirement plan, he decides to contribute $5,500 to his IRA. Calculate Robert's adjusted gross income using the above information. b. How much is Robert's unallowed loss from his passive investments? c. What happens to the unallowed passive loss? d. Calculate Robert's adjusted gross income assuming his wages were only $35,000.
a. $230,500, calculated as $235,000 + $1,000 - $5,500. The $2,000 of income from the Form K-1 is offset by the rental property loss. Since Robert's modified gross income is greater than $150,000, the loss from the rental real estate is not allowed and must be carried forward. b. $7,000. Robert may offset the $2,000 of partnership income against the $9,000 of rental loss. c. The $7,000 of unallowed rental loss will be carried forward to future years subject to the passive loss rules. d. $23,500, calculated as $35,000 + $1,000 - $9,000 + $2,000 - $5,500. Since his modified gross income is less than $100,000, Robert may deduct the full rental loss.
Miki, who is single and 57 years old, has a quaifying high-deductible insurance plan. She had the following transactions with her HSA during the year: Contributions to her HSA $3,250 Interest income earned on her HSA $ 9 Medical expenses paid from her HSA $5,739 HSA distribution to pay for her daughter's wedding $7,650 a. How much may Miki claim as a deduction for adjusted gross income? b. What is the amount that Miki must report on her tax return as income from her HSA? c. How much is subject to a penalty? What is the penalty percentage?
a. $3,250. b. $7,650. The distribution from the HSA to pay for the wedding is taxable. The interest income and the distribution for medical expenses are not taxable on the federal tax return. c. $7,650. The distribution from the HSA to pay for the wedding is subject to a 20 percent penalty.
What is the amount of the deductible HSA for each of the following taxpayers? a. Amelia and Albert, both age 43, have a qualifying high-deductible insurance plan. They contribute $5,700 to a family HSA. b. Betsy, who is single, 72 years old and covered by Medicare, wants to contribute the maximum amount to an HSA. c. Carlo has health insurance through his employer which has low deductible amounts. He is 34 years old and is married. Carlo wants to contribute the maximum to an HSA. d. Diane is 57 years old. She has a qualifying high-deductible insurance plan. She has contributed $4,250 to her HSA.
a. $5,700. Deductible HSA is limited to the smaller of the amount contributed or the contribution limit. b. $0. Individuals are not allowed to make contributions to HSAs once they attain the age for Medicare coverage. c. $0. Carlo does not carry qualifying high-deductible medical insurance. d. $4,250. Since Diane is 57 years old, she may contribute $3,250, the maximum as a self-only contribution, plus an additional $1,000 as a catch-up contribution.
Vinnie has a small retail store and sells one product. His beginning inventory consisted of 1,000 products at $4 each for a total of $4,000. During the year, Vinnie made the following purchases of the product: March 1 5,000 products at $5 each = $25,000 August 1 1,000 products at $6 each = $ 6,000 Vinnie uses the FIFO method of inventory valuation and he sells 5,000 products during the current year. a. Calculate the total cost of goods available for sale. b. Calculate the cost of the ending inventory. c. Calculate the cost of goods sold.
a. Beginning inventory $ 4,000 Add: Purchases ($25,000 + $6,000) 31,000 Cost of goods available for sale $35,000 b. Ending inventory is equal to 2,000 units (7,000 units available for sale less 5,000 units sold), consisting of: 1,000 units at $6 $ 6,000 1,000 units at $5 5,000 Cost of ending inventory $11,000 c. Cost of goods available for sale $35,000 Less: Ending inventory (11,000) Cost of goods sold $24,000
1. Peter is a self-employed attorney. He gives the following information about his business to his CPA for use in preparing his 2013 tax return: Income Fees from law practice $153,000 Expenses Malpractice insurance $ 8,000 Office rent 12,000 Office supplies 5,500 Travel expense 2,000 Meals and entertainment 6,500 Paralegal wages 25,500 Country club dues (Peter uses the club for business entertainment) 2,500 Peter also drove his car 5,034 miles for business and used the standard mileage method for computing transportation costs. How much will Peter show on his Schedule C for 2013 for: a. Income b. Tax deductible expenses c. Taxable income
a. Income $153,000 b. Tax deductible expenses Malpractice insurance $ 8,000 Office rent 12,000 Office supplies 5,500 Travel expense 2,000 Meals and entertainment ($6,500 50%) 3,250 Paralegal wages 25,500 Mileage: 5,034 miles x $.565 2,844 Total expenses $ 59,094 c. Taxable income $ 93,906
Rob and Julie, both in their 30s, file a joint income tax return for 2013. Rob's wages are $25,000 and Julie's wages are $33,000 for the year. Their total adjusted gross income is $58,000, and Julie is covered by a qualified pension plan at work but Rob is not. a. What is the maximum amount that Rob and Julie may each contribute to their Roth IRAs? b. If Julie's wages are $110,000 for 2013, instead of $33,000, and their adjusted gross income is $135,000, (1) what is the maximum amount that Rob and Julie may each deduct for contributions to their individual retirement accounts, and (2) what is the maximum amount they could each contribute to Roth IRAs instead?
a. Rob $5,500. Julie $5,500. b1 Rob $5,500, since AGI is less than $178,000. Julie $0. She is covered by a plan and AGI is more than $115,000. b2 Rob $5,500. Julie $5,500.