REGULATION Missed Questions

William and Rachel, who are married filing jointly, sold their home October 1, Year 4, for $950,000 because of William's out-of-town job transfer. They had purchased it together as principal residence October 1, Year 3, for $600,000. What is the amount of recognized gain or loss?

$100,000 STCG Why? - Married couple, who both meet use test (sort-of), thus maximum exclusion = $500,000 - Job transfer = hardship provision = # months qualified use / 24 months - 12 / 24 = 50% - Thus, William and Rachel may use ($500k * 50%) $250,000 of exclusion toward the gain on sale Key Takeaway: Hardship provision exclusion allowed = (# months used / 24 months) * maximum exclusion

Mark and Susan Smith, who are married filing jointly, sold their principal residence on December 1, Year 5, for $550,000. Mark had purchased the home by himself as his principal residence on March 1, Year 1, for $120,000. He married Susan on February 14, Year 4, and she moved in that day. What is the amount of recognized gain or loss?

$180,000 LTCG Why? - Susan, while the spouse, does NOT meet the two-year use test - In order to get $500,000 as a homeowner's exclusion, both husband and wife need to meet the two-year use test - Thus, the couple only gets the $250,000 exclusion - Recognized gain = realized gain ($430,000) - exclusion ($250,000) = $180,000 - Because the property is held for more than 1 year, it is a long term capital gain Key Takeaway: In order to get $500k for homeowners exclusion both spouses need to meet two-year test

Carl, who is head of household, purchased his principal residence on April 15, Year 2, for $240,000. He lived in the home three years and then sold it for $480,000. During the three years, he had a home office and took depreciation totaling $2,000. What is the amount of recognized gain or loss?

$2,000 Why? - Realized gain = $242,000 - Maximum homeowners' exclusion = $250,000 - However, the gain RECOGNIZED is the extent of depreciation taken -> unrecaptured Section 1250 gain - Thus, $2,000 is gain recognized (and taxable at a maximum of 25%)

Alice, who is single, purchased her principal residence July 1, Year 1, for $420,000. She moved out of the home December 31, Year 3, and immediately rented it, claiming total depreciation of $20,000 over the rental period. She sold the home January 1, Year 6, for $700,000. What is the amount of taxable gain or loss?

$50,000 ($20,000 Section 1250 / $30,000 LTCG) Why? (1) The exclusion is NOT prorated despite it being rented. Why? Alice does NOT live in the residence after it is rented. Thus, we can look back to the period prior rental and see if she meets the two-year use test -> SHE DOES! (2) Exclusion = maximum = $250,000 (3) Realizable gain = $300,000 (4) Gain recognized for Section 1250 purposes = $20,000 (5) Gain after Section 1250 = $280,000 (6) Leftover gain after exclusion = $280k - $250k = $30,000 = LTCG Total gain recognized = $20,000 + $30,000 = $50,000 Key Takeaway -> If there is excess gain after Sec 1250 and exclusions, it is added to Sec 1250 gain

Lisa, who is single, purchased a condominium on January 1, Year 3, for $200,000 and immediately rented it. On January 1, Year 5, she moved into it as her principal residence. During the two years of nonqualified rental used, she claimed depreciation of $11,000. On January 1, Year 9, she sold the condo for $410,000 What is the amount of taxable gain or loss?

$81,000 ($70,000 LTCG / $11,000 Section 1250) Why? - Realized gain = $221,000 - Recaptured (recognized) gain under Section 1250 = $11,000 - Gain left over = $210,000 -> Can it all be excluded? NO! Why? It must be prorated because it was rented IN BETWEEN qualified use. - Non-qualified use = 2/6 * $210,000 = $70,000 gain not able to be excluded - Total gain to be taxed = $70,000 + $11,000 = $81,000 Key Takeaway: Prorate based on full period owned

A Personal Service Corporation involves which fields?

- Accounting - Law - Consulting - Engineering - Health - Actuarial science

Jackson, a single individual, inherited Bean Corp. common stock from Jackson's parents. Bean is a qualified small business corporation under Code Section 1244. The stock cost Jackson's parents $20,000 and had a fair market value of $25,000 at the parents' date of death. During the year, Bean declared bankruptcy and Jackson was informed that the stock was worthless. What amount may Jackson deduct as an ordinary loss in the current year? a. $0 b. $3,000 c. $20,000 d. $25,000

A Why? - Section 1244 losses are ONLY available to ORIGINAL owners of the stock - Because Jackson is not the original owner, he is not allowed the ordinary loss on the stock

Gem Corp. purchased all the assets of a sole proprietorship, including the following intangible assets: - Goodwill = $50,000 - Covenant not to compete $13,000 For tax purposes, what amount of these purchased intangible assets should Gem amortize over the specific statutory cost recovery period? A. $63,000 B. $13,000 C. $0 D. $50,000

A Why? - ALL intangibles, INCLUDING Goodwill, are amortized on a straight-line basis over 15yr (180 mo) for tax purposes Key Takeaway: Goodwill IS amortized for tax purposes

Which of the following statements about the alternative minimum tax (AMT) of an individual are correct? A. AMT credits may be carried forward to future years B. It is computed on a individual's regular taxable income at a rate of 28% C. It is calculated after certain tax preference items that may be used as an alternative to the regular tax are deducted D. It is determined from the tax rate schedules and computed on income that exceeds $100,000

A Why? - AMT credits may be carried forward indefinitely against regular tax - AMT is based on tax rates of both 26% and 28% - Tax preference items are ADDED BACK not deducted - AMT is determined by adjusting the individual's regular taxable income by adjusting taxable income by (1) certain preference items and adjustments (2) subtracting the AMT exemption (3) applying the applicable AMT rates to the resulting AMT income Key Takeaway: AMT credits are carried forward indefinitely

Seth and Sheila file a joint return. Seth expects to earn $35k in wages from his teaching job. Seth is covered by the university's pension plan. Sheila is a volunteer at their son, Stephen's, school. In addition to Seth's income, they received $500 in interest income and $50 in prize winnings form a local radio contest. Each would like to make a deductible contribution to an individual retirement account for the current year. They also believe they will be eligible to claim a tax credit for these contributions. Which of the following is correct? Deductible Contribution // Claim Credit A. Yes // Yes B. No // Yes C. Yes // No D. No // No

A Why? - Although Seth is covered by a plan, the second factor (income limitation) is NOT exceeded, thus, both Seth's and Sheila's contributions should be deductible - Also, both qualify for a portion of the credit -> combined income is less than $65k Key Takeaway: If income is low enough, taxpayer can get both deduction and credit on IRA contribution

Which of the following is a capital asset? A. Land held as an investment B. Inventory held primarily for sale to customers C. Accounts receivable D. A computer system used by the taxpayer in a personal accounting business

A Why? - Capital assets include property (real and personal) held by the taxpayer for INVESTMENT

The Browns borrowed $20,000, secured by their home, to pay their son's college tuition. At the time of the loan, the fair market value of their home was $400,000, and it was unencumbered by other debt. The interest on the loan qualifies as: A. Nondeductible interest B. Investment interest expense C. Deductible qualified residence interest D. Deductible personal interest

A Why? - Interest paid on debt NOT used to acquire or substantially improve a home is not deductible. This is true even if the debt is secured by a home. Key Takeaway: interest on debt against home is NOT deductible unless used to improve the home

A married individual invested in Section 1244 small business stock in year 1. In year 7, the individual sold the stock at a loss of $157,000. There were no other stock transactions during year 7. If the taxpayer files a joint return, how much loss can the taxpayer deduct in year 7 against ordinary income? A. $103,000 B. $157,000 C. $3,000 D. $53,000

A Why? - Married taxpayers are allowed to deduct up to $100,000 of loss on Section 1244 stock as an ORDINARY loss. - Additionally, taxpayers get to deduct up to $3,000 of STCL against ordinary income - Thus, $100k + $3k = $103k in deduction against ordinary income

Data Corp. , a calendar year corporation, purchased and placed into service office equipment during November Year 1. No other equipment was placed into service during Year 1. Under the general MACRS depreciation system, what convention must Data use? a. Full-year. b. Half-year. c. Mid-quarter. d. Mid-month.

A Why? - Mid-month is used for BUILDINGS - When a taxpayer places more than 40% of its property into service in a single quarter, the corporation must use Mid-quarter convention - Because only one thing was purchased and placed in service during the year -> Mid-Q convention is used Key Takeaway: Mid-Q (40% rule), Mid-Month used with BUILDINGS

In the current year, Vinton exchanged unimproved land for an apartment building. The land had a basis of $300,000 and a FMV of $420,000, encumbered by a $100,000 mortgage. The apartment building had a FMV of $550,000 and was encumbered by a $230,000 mortgage. Each party assumed the other's mortgage. What is Vinton's basis in the office building? A. $430,000 B. $300,000 C. $320,000 D. $550,000

A Why? - Realized gain = $250,000 - Boot = Net Relief from Liability = -$130,000 - Recognized gain = $0 - Deferred gain is NOT $250,000. Rather, we NEED to consider the boot - Deferred gain = $250,000 - $130,000 = $120,000 - Basis = FMV - Deferred Gain = $550,000 - $120,000 = $430,000 Key Takeaway: Do NOT neglect the BOOT

Leker exchanged real property that was used exclusively for business and had an adjusted tax basis of $20,000 for new real property. The new real property had a fair market value of $10,000, and Leker also received $3,000 in cash. What was Leker's tax basis in the acquired property? A. $17,000 B. $13,000 C. $20,000 D. $7,000

A Why? - Scenario = BOOT RECEIVED + LOSS - Realized loss is normal = $10,000 - Recognized loss = $0. WHY? Because losses are NEVER recognized in like-kind exchanges - Basis typically equals FMV of received asset - deferred gain + deferred loss - TYPICALLY, deferred loss = $10,000 - $0 - HOWEVER, because we are in this unique scenario we need to factor in the BOOT: - Deferred loss = $10,000 - $3,000 = $7,000 - Basis = $10,000 + $7,000 = $17,000 Key Takeaway: BOOT is not forgotten in LOSS scenarios

Prime Corporation's building was destroyed by a tornado. The FMV of the building at the time of the tornado was $400,000 and its adjusted basis was $350,000. The insurance proceeds totaled $500,000 as follows: $400,000 for the building, $100,000 for lost profits Prime does not defer any gain under the involuntary conversion provision of Code Sec. 1033. What amount of the insurance proceeds is taxable to Prime? A. $150,000 B. $100,000 C. $0 D. $50,000

A Why? - Since gains are NOT deferred, a taxable gain would occur for the excess amount received for the building ($400,000) over its adjusted basis ($350,000), $50,000 - Additionally, the $100,000 for lost profits IS taxable

Beginning in 2013, a new Medicare tax was levied on certain income. Which of the following statements is true regarding this new tax? A. The tax is 3.8% and is levied on the lesser of (1) the taxpayer's net investment income; or (2) the excess of modified AGI over a threshold amount B. The tax is 3.8% and is levied on the greater of (1) the taxpayer's net investment income; or (2) the excess of modified AGI over a threshold amount C. The tax is 2.8% and is levied on the lesser of (1) the taxpayer's net investment income; or (2) the excess of modified AGI over a threshold amount D. B. The tax is 2.8% and is levied on the greater of (1) the taxpayer's net investment income; or (2) the excess of modified AGI over a threshold amount

A Why? - Tax is 3.8% - The tax is based on the LESSER of the two options

Dale received $1,000 in the current year for jury duty. In exchange for regular compensation from her employer during the period of jury service, Dale was required to remit the entire $1,000 to her employer in this year. In Dale's current year income tax return, the $1,000 jury duty fee should be: A. Deducted from gross income in arriving at AGI B. Excluded from Dale's tax return C. Claimed in full as an itemized reduction D. Included in taxable income without a corresponding offset against other income

A Why? - The $1,000 jury duty fee that was required to be remitted to the employer MAY be deducted from gross income in arriving at AGI. This, in effect, washes out the $1,000 income she will have to report as part of gross income Key takeaway: (1) remittances are allowed as an adjustment in arriving at AGI; (2) items are INCLUDED in gross income unless specifically excludable

Which of the following statements about the child and dependent care credit is correct? A. The credit is nonrefundable B. The child must be a direct descendant of the taxpayer C. The maximum credit is $600 D. The child must be under the age of 18 years

A Why? - The child and dependent care credit is non-refundable. The only refundable credits are the earned income credit, withholding taxes, portions of the Hope Scholarship credit, and excess SS taxes paid - The maximum child and dependent care credit is 35% of eligible expenses, subject to phase-out based on AGI - Child must be under age of 13!

The rule limiting the allowability of passive activity losses and credits applies to: A. Personal services corporation B. Widely held C corps C. S corporations D. Partnerships

A Why? - The rule limiting allowability of passive activity losses and credits applies to personal service corporations - passive activity limitations apply to the various shareholders and partners of S-corps and Partnerships, not to the businesses themselves! Key Takeaway: Passive activity limitations apply to the individual taxpayer

Xylo, a calendar year C corp, acquired the assets of Yerkes, also a calendar year C corp, on March 1 of the current year. One of the assets acquired was a trademark to which Xylo properly allocated $1,200,000 of the purchase price. What is Xylo's amortization deduction for the current year? A. $66,667 B. $30,000 C. $80,000 D. $120,000

A Why? - Trademarks and other intangible are amortized over 15 years, or 180 months, for TAX PURPOSES

Robbe, a cash basis single taxpayer, reported $50k of AGI last year and claimed itemized deductions of $5.5k consisting solely of $5.5k of state income taxes paid last year. Robbie's itemized deduction amount exceeded the standard deduction available to single taxpayers for last year by $1,150. In the current year, Robbe received a $1,500 state tax refund relating to the prior year. What is the proper treatment of the state tax refund? A. Include $1,150 in income for current year B. Include none of the refund in income in the current year C. Amend prior-year's return and reduce the itemized deduction for that year D. Include $1,500 in income in the current year

A Why? - Under IRC Section 111's tax benefit rule, an itemized deduction recovered in the subsequent year is included in income in the year recovered. - ONLY $1,150 of the state income taxes was actually deducted as an itemized deduction last year - The recovery is limited in the amount actually deducted (and not to the entire amount of the state tax refund) Key takeaway: focus on the amount DEDUCTED not the amount received

Easel Co. has elected to reimburse employees for business expenses under a nonaccountable plan. Easel does not require employees to provide proof of expenses and allows employees to keep any amount not spent. Under the plan, Mel, an Easel employee for a full year, gets $400 per month for business automobile expenses. At the end of the year Mel informs Easel that the only business expense incurred was for business mileage of 12,000 at a rate of 30 cents per mile, the IRS standard mileage rate at the time. Mel encloses a check for $1,200 to refund the overpayment to Easel. What amount should be reported in Mel's gross income for the year? A. $4,800 B. $0 C. $3,600 D. $1,200

A Why? - Under a nonaccountable plan (i.e., expenses are not reported to the employer), any amounts received by an employee from the employer must be reported by the employer as part of wages on the employee's W-2 for the year (and subject to income tax withholding requirements). The gross amount RECEIVED is reported as income.

Which of the following is subject to the Uniform Capitalization Rules of Code Sec. 263A? A. Warehousing costs incurred by a manufacturing company with $32m in gross receipts B. Mine development and exploration costs C. Editorial costs incurred by a freelance writer D. Research and experimental expenditures

A Why? - Uniform capitalization rules apply to the following: (1) real or tangible personal property produced by taxpayer; (2) real or tangible personal property acquired by taxpayer for resale, provided annual gross receipts (for prior 3-yr period > $26m) Key takeaway: Uniform Capitalization rules apply to businesses >$26m in sales and only apply to tangible direct costs!

A CPA's AGI for preceding 12-mo tax year > $150k. Which of the following methods is/are available to the CPA to compute the required annual payment of estimated tax for the current year in order to make timely estimated tax payments and avoid the underpayment of estimated tax penalty? I. the annualized method II. the seasonal method A. I only B. Both I and II C. II only D. Neither

A Why? - When AGI exceeds $150,000, taxpayer must use 110% of last year's tax. Thus, the taxpayer in this example can use the annualized method only. Key Takeaway -> annualized method only for taxpayer's with AGI > $150k

Tap, a calendar-year S corporation, reported the following items of income and expense in the current year: - Revenue = $44,000 - Op Exp = $20,000 - LTCL = $6,000 - Charitable contribution = $1,000 - Interest expense = $4,000 What is the amount of Tap's ordinary income? A. $20,000 B. $13,000 C. $24,000 D. $19,000

A Why? - interest EXPENSE is ordinary (and not separately stated) - Thus, $44k - $20k - $4k = $20k = ordinary income

Allen owns 100 shares of Prime, which he purchases on Jan 1, Y1, for $10,000. On Jan 1, Y3, Price declares a 2-for-1 stock split when the FMV of the stock was $120 per share. Immediately following the split, the FMV was $62 per share. On Feb 1, Y3, Allen sold 100 shares of Prime when the FMV was $65 per share. What amount should Allen recognize as LTCG income on Form 1040, U.S. Individual Income Tax Return, for Year 3? A. $1,500 B. $300 C. $750 D. $2,000

A Why? - receipt of nontaxable stock dividend requires the shareholder to spread the basis of his original shares ($10,000) over the original and new shares, resulting in the SAME total basis ($10,000) but over a lower per share basis - $10,000 / 200 = $50 per share - Selling price = $6,5000 - $5,000 (50 * 100) = $1,500 Key Takeaway: stock dividend -> same prior basis -> split by increase in shares -> lowers per share basis

For regular tax purposes, with regard to the itemized deduction for qualified home residence interest, home equity indebtedness incurred during a year: A. Is only deductible when used to buy, build, or substantially improve the taxpayer's home that secures the loan B. Includes acquisition indebtedness secured by a qualified residence C. May exceed the fair market value of the residence D. Must exceed the taxpayer's net equity in the residence

A Why? - Home equity debt is only deductible when used to buy, build, or substantially improve the taxpayer's home that secures the loan

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

A. Why? - If it has not yet been invoiced, it is assumed that it has not yet been paid for. Thus, this is a situation in which the repair expense would be accrued at year end. Services has been performed, but they have not yet been paid for, as they have not even been invoiced Key takeaway: know how accruals work (and READ carefully)

An individual received $50,000 during the current year pursuant to a divorce decree executed in 2015. A check for $25,000 was identified as annual alimony, checks totaling $10,000 for annual child support, and a check for $15,000 as a property settlement. What amount should be included in the individual's gross income? A. $25,000 B. $50,000 C. $40,000 D. $0

A. Why? - Alimony payments (before 2019) are taxable (to payee) and deductible (to payor) - Child support is not taxable - Property settlements are not taxable Key takeaway: Property settlements from divorce decrees are NOT taxable

Jensen reported the following items during the current year: - Fair rent value of condo owned by employer = $1,400 - Cash found in desk purchased for $30 = $400 - Inheritance = $11,000 The employer allowed Jensen to use the condominium for free in recognition of outstanding achievement. Based on this information, what is Jensen's gross income for the year? A. $1,800 B. $1,400 C. $12,400 D. $1,770

A. Why? - Gross income includes (a) employee achievement awards not in the form of tangible property & (b) treasure troves to the extent of its value in US currency Key takeaway: treasure trove is taxable to FULL extent - NOT netted against cost to find treasure

The divorce agreement, executed in 2017, provides for Hall to receive $3000 per month, of which $600 is designated as child support. After the child reaches 18, the monthly payments are to be reduced to $2,400 and are to continue until remarriage or death. However, for the current year, Hall received a total of only $5,000 from her husband. Hall paid an attorney $2,000 in the current year in a suit to collect the alimony owed. What amount should be reported in Hall's current year tax return as alimony income? A. $0 B. $36,000 C. $5,000 D. $28,800

A. Why? - None of the payments received should be considered alimony income. Hall would only claim alimony if total receipts from her former spouse exceeded $7,200 (the required 12-month child support) Key takeaway: child support satisfied first (not-taxable), then excess is alimony (taxable)

In a tax year where the taxpayer pays qualified education expenses, interest income on the redemption of qualified U.S. Series EE Bonds may be excluded from gross income. The exclusion is subject to a modified gross income limitation and a limit of aggregate bond proceeds in excess of qualified higher-education expenses. Which of the following are true? I. The exclusion applies for education expenses incurred by the taxpayer, the taxpayer's spouse, or any person whom the taxpayer may claim as a dependent for the year II. "Otherwise qualified higher-education expenses" must be reduced by qualified scholarships not includible in gross income A. Both I and II B. I only C. II only D. Neither I nor II

A. Both I and II Why? - Interest earned on Series EE bonds MAY qualify for exclusion - One requirement = pay for tuition and fees for taxpayer, spouse, or dependent enrolled in higher education - The interest exclusion is REDUCED by qualified scholarships that are exempt from tax and other nontaxable payments received for educational expenses Key takeaway: interest exclusion is REDUCED by non-taxable qualified scholarships

Which of the following items must be separately stated on Form 1120S, U.S. Income Tax Return for an S Corporation, Schedule K-1? A. Mark-to-market income B. Gain or loss from sale of collectibles C. Unearned revenue D. Section 1245 Gain

B

Frank and Mary Wood have 2 children, Becky, age 10, and Matt, age 14. The Woods incur expenses of $4,000 for after-school care for each child. Their only income is from wages. Frank's wages are $60,000, and Mary's wages are $2,500. What amount of Child and Dependent Care Credit may the Woods claim on their joint tax return? A. $1,600 B. $500 C. $1,200 D. $800

B Why? - $3,000 of expenses for 1 child; $6,000 for 2 or more - Child must be less than 13, thus Matt is out - Credit = qualifying amount * applicable percentage - Qualifying amount = lessor of: (a) actual expenses ($4,000), (b) maximum contribution ($3,000), OR (c) lowest earned income of spouse ($2,500) - Applicable percentage = 35-20% dependent on AGI - Credit = $2,500 * 20% = $500 Key Takeaway: Child and Dependent Care Credit = Qualifying amount * Applicable percentage

The term active participation for a passive activity loss is relevant in relation to: A. Passive activities in which the taxpayer does not materially participate B. Rental real estate activities C. Passive activities in which the taxpayer materially participates D. Working interests in oil and gas properties

B Why? - Active participation in rental real estate activities allows the taxpayer to deduct losses from the rental activities against other income, subject to limitation Key Takeaway: active participation is relevant to real estate passive activities

Evan, an individual, has a 40% interest in EF, an S corporation. At the beginning of the year, Evan's basis in EF was $2,000. During the year, EF distributed $100,000 and reported operating income of $200,000. What amount should Evan include in gross income? A. $38,000 B. $80,000 C. $40,000 D. $118,000

B Why? - Allocations to shareholders are made on a per-share, per-day basis in accordance with ownership percentage. Shareholders are taxed on pass through items, regardless of whether or not these items have been distributed to them through the year - $200,000 * 40% = $80,000 Key takeaway: S-corp shareholder should report percentage of INCOME

A beneficiary acquired property from a decedent. The FMV at the date of death was $100,000. The decedent had paid $130,000 for the property. Estate taxes attributed to the property were $2,000. The beneficiary sold the property two years after receipt from the estate. What is the basis of the property for the beneficiary? A. $132,000 B. $100,000 C. $102,000 D. $130,000

B Why? - Basis = FMV at death - Estate taxes NEVER affect basis of inherited property (gift taxes might) Key Takeaway: Estate taxes have NO EFFECT on basis

Which of the following entities must include in gross income 100% of dividends received from unrelated taxable domestic corporations in computing regular taxable income? Personal Service Corporations // Personal Holding Companies A. Yes // No B. Yes // Yes C. No // Yes D. No // No

B Why? - Both PSC and PHCs must include 100% of the dividends received from unrelated taxable domestic corporations in gross income in computing regular taxable income

Two equal shareholders of a C corporation are thinking of filing an election to have the company treated as an S corporation. Which of the following consequences is an advantage of this election? A. The corporation's net operating loss carryovers from prior years are immediately deductible by the shareholders B. The corporation's capital losses can be claimed on the tax returns of the shareholders C. The shareholders of the S corporation will be taxed only on distributions from the corporation D. The corporation's tax-free fringe benefits for the shareholders will be deductible by the corporation

B Why? - Capital losses and all other items of income and loss flow through to the tax returns of the shareholders

A sole proprietor of a farm implement store sold a truck for $15,000 that had been used to make service calls. The truck cost $30,000 three years ago and $21,360 depreciation was taken. What is the appropriate classification of the $6,360 gain for tax purposes? A. Section 1231 B. Ordinary gain C. LTCG D. STCG

B Why? - Equipment = Section 1245 rules - Section 1245: Ordinary income = 100% of lesser of accumulated depreciation or realizable gain - Because only $6,360 is realizable (compared to $21,360), all of the realizable gain is classified as ordinary income - WHY not STCG or LTCG? Equipment is for BUSINESS USE, and thus is NOT capital Key Takeaway: M&E = Section 1245 rules

Dole, the sole owner of Enson Corp., transferred a building to Enson. The building had an adjusted tax basis of $35,000 and a FMV of $100,000. In exchange for the building, Dole received $40,000 cash and Enson common stock with a FMV of $60,000. What amount of gain did Dole recognize? A. $65,000 B. $40,000 C. $5,000 D. $0

B Why? - Gain is recognized to the extent of the lesser of: (a) gain realized, or (b) boot received - Gain realized = $100,000 - $350,000 = $65,000 - Boot received = $40,000 - Thus, gain recognized = $40,000

As part of a complete liquidation, a C corporation distributed the following assets to unrelated individual shareholders: Basis // FMV - Investment land = $500k // $540k - Inventory = $130k // $150k - Marketable securities = $70k // $20k What is the amount of capital gain or loss, if any, recognized by the corporation as a result of the liquidation? A, $40,000 capital gain B. $10,000 net capital loss C. No capital gain or loss D. $10,000 net capital gain

B Why? - INVENTORIES ARE NOT CAPITAL ASSETS - Question SPECIFICALLY asks for CAPITAL GAIN - Gain on liquidation of land = $40k - Loss on liquidation of securities = $50k - Thus, capital loss = $10k

Fox, the sole shareholder in Fall, a C corporation, has a tax basis of $60,000. Fall has $40,000 of accumulated positive earnings and profits at the beginning of the year and $10,000 of current positive earnings and profits for the current year. At year end, Fall distributed land with an adjusted basis of $30,000 and a fair market value (FMV) of $38,000 to Fox. The land has an outstanding mortgage of $3,000 that Fox must assume. What is Fox's tax basis in the land? A. $35,000 B. $38,000 C. $30,000 D. $27,000

B Why? - If the shareholder is an individual, the taxable amount of a property dividend from a corporation's earnings and profits is the FMV of the property received - Thus, the FMV is also the property's basis - Why would this be? The shareholder gets taxed at FMV for distribution of property as a dividend (which is more than the basis). Thus, he should NOT get taxed again (for the difference in adjusted basis and FMV) by assuming the old adjusted basis when he sells in the future. This would be double taxation. - Debt has NO EFFECT on basis Key Takeaway: The shareholder's basis in a distributed property (as a dividend, not liquidation) is its FMV

Smith made a gift of property to Thompson. Smith's basis in the property was $1,200. The fair market value at the time of the gift was $1,400;. Thompson sold the property for $2,500. What was the amount of Thompson's gain on the disposition? A. $0 B. $1,300 C. $1,100 D. $2,500

B Why? - In MOST cases (where FMV > rollover), the adjusted basis is the rollover basis! - Intuitively this makes sense as it allows the tax authorities to collect more from gains on subsequent transactions Key takeaway: when FMV > rollover, use rollover as basis

Clark bought Series EE U.S. Savings Bonds after 1989. Redemption proceeds will be used for payment of college tuition for Clark's dependent child. One of the conditions that must be met for tax exemption of accumulated interest on these bonds is that: A) Bonds must be transferred to the college for redemption by the college rather than by the owner of the bonds B) Purchaser of the bonds must be the sole owner of the bonds (or joint owner with his or her spouse) C) Bonds must be bought by a parent (or both parents) and put in the name of the dependent child D) Bonds must be bought by the owner of the bonds before the owner reaches the age of 24

B Why? - One of conditions that must be met for tax exemption of accumulated interest on the bonds is that the purchaser of the bonds must be the sole owner of the bonds (or joint owner with spouse) Key takeaway: For EE Bond Interest to be Exempt: - Sole owner - >24 y/o when issued - Netted against tax-free scholarship - used for higher education on taxpayer, spouse or dependent

For which of the following entities is the owner's basis increased by the owner's share of profits but not affected by the entity's bank loan increases or decreases? A. C Corp B. S Corp C. Parternship D. LLC

B Why? - Partnerships' owners' basis is affected by bank loans changes - C corp and LLC basis is not affected by increased by shaera of profits

A taxpayer lived in an apartment building and had two-year lease that began 16 months ago. The taxpayer's landlord wanted to sell the building and offered the taxpayer $10,000 to vacate the apartment immediately. The taxpayer's lease on the apartment was a capital asset but had no tax basis. If the taxpayer accepted the landlord's offer, the gain or loss would be which of the following? A. An ordinary gain B. A long-term capital gain C. A short-term capital gain D. A short-term capital loss

B Why? - Specified as a "capital asset" - Held longer than 1 year, thus long-term - Gain on sale since there was ZERO basis

A taxpayer owns 50% of the stock of an S corporation and materially participated in the corporation's activities. At the beginning of the year, the taxpayer had an adjusted basis in the stock of $25,000 and made a loan to the corporation of $13,000. During the year, $3,000 of the loan was repaid, and the taxpayer's share of the corporation's loss for the year was $40,000. What is the amount of the loss that may be deducted on the taxpayer's tax return? A. $25,000 B. $35,000 C. $40,000 D. $38,000

B Why? - Tax basis = stock basis + debt basis = $25,000 + $10,000 = $35,000 - The $40,000 loss can be deducted up to the tax basis - An additional $3,000 capital loss is not applicable because taxpayer materially participates in activity -> NOT a capital asset

Baker, an unmarried individual, sold a personal residence which has an adjusted basis of $70k, for $165k. Baker owned and lived in the residence for 7 years. Selling expenses were $10,000. Four weeks prior to the sale, Baker paid a handyman $1,000 to paint and fix up the residence. What is the amount of Baker's recognized gain? A. $84,000 B. $0 C. $85,000 D. $95,000

B Why? - The exclusion rule for single taxpayers allows up to $250,000 of gains to be excluded (2/5 applies) Key Takeaway: focus on question, don't get bogged down by details!

Which of the following is NOT a deduction to arrive at adjusted gross income? A. Capital losses in excess of capital gains B. Mortgage interest C. Alimony payments pursuant to a divorce settlement finalized on or before 12/31/18 D. Trade or business expenses

B Why? - capital losses in excess of capital gains ARE deductible (up to $3,000) on Form 1040 before the calculation of AGI - alimony payments (for decrees before 2019) are deductible to arrive at AGI - trade or business expenses are deducted on Schedule C (before the calculation of AGI)

Baker, a sole proprietor CPA, has several clients that do business in Spain. While on a 4-week vacation in Spain, Baker attended a five-day seminary on Spanish business practices that cost $700. Baker's round-trip airfare to Spain was $600. While in Spain, Baker spent an average of $100 per day on accommodations, local travel, and other incidental expenses, for total expenses of $2,800. What amount of total expense can Baker deduct on Form 1040 Schedule C, "Profit or Loss from Businesses" related to this situation? A. $4,100 B. $1,200 C. $1,800 D. $700

B. Why? - If foreign travel if primary personal, NONE of the travel expenses incurred will be allowable business deductions - Daily expenses during the time of business ($100 x 5 days) is deductible Key takeaway: partition what is personal and what is business

The Clarks have a 21yo son, Alex, who is a full-time student at the state university. Alex received $10,000 in scholarships this year for academic achievement. He also works part-time at the bookstore and earned $5,400 this year. The Clarks paid $7,000 to support Alex this year. Alex was home for two months in the summer and at school for the rest of the year. Alex used the scholarship, the earnings from the part-time job, and the money from his parents as his only source of support this year. Which of the following definitions does Alex meet for Clarks? A. Exemption B. Qualifying child C. Qualifying person D. Qualifying relative

B. Qualifying Child Why? - He meets the close relative test (son) - Meets the age test (< 24yo) and is full-time student - He meets residency requirement since principal abode is parent's house unless at school - He does NOT provide more than 1/2 his own support Key takeaway: Scholarships do NOT count as support provided by Alex

The Clarks have a 21yo son, Alex, who is a full-time student at the state university. Alex received $10,000 in scholarships this year for academic achievement. He also works part-time at the bookstore and earned $5,400 this year. Alex's grandparents paid $7,000 to support Alex this year. Alex was home for two months in the summer and at school for the rest of the year. Alex used the scholarship, the earnings from the part-time job, and the money from his parents as his only source of support this year. Which of the following definitions does Alex meet for Clarks? A. Exemption B. Qualifying child C. Qualifying person D. Qualifying relative

B. Qualifying Child Why? - Meets close relative test - Meets age test - Meets residency requirement - Does NOT provide more than 1/2 of his OWN support Key takeaway: Does child provide OWN support? Parents can still claim dependent child, even if they don't support him themselves, if he does not support himself > 1/2!

Which of the following statements regarding a partnership's tax year is correct? A. A "valid business purpose" can no longer be claimed as a reason for adoption of a tax year other than the generally required tax year B. Within 30 days after a partnership has established a tax year, a form must be filed with the IRS as notification of the tax year adopted C. A partnership may elect to have a tax year other than the generally required tax year if the deferral period for the tax year elected does not exceed three months D. A partnership formed on July 1 is required to adopt a tax year ending June 30

C

On Year 1, Janice had the following transactions in Jacky, Inc. comon stock: Jan 01 - Purchase: 500 shares // $25 May 12 - Sale: 500 shares // $23 May 28 - Purchase: 250 shares // $22 Oct 15 - Sale: 100 shares // $18 What is Janice's deductible capital loss? A. $400 B. $700 C. $1,100 D. $1,400

C Why? - 250 of 500 shares sold on May 12, qualify as a WASH. Why? Because 250 are purchased less than a month later - Loss on sale of shares on May 12 = (-$2 * 500) = $1,000 - (250 * -$2) = $500 -> HALF of the loss is NOT deductible due to wash sale rules - Weighted average share price on Oct 15 = ((500 * 25) + (250 * 22)) / 750 = $24 per share - Loss of sale of shares on Oct 15 = (($24-$18) * 100) = $600 Total capital loss = $500 + $600 = $1,100 Key Takeaway = Remember weighted average share price

A guaranteed payment by a partnership to a partner for services rendered may include an agreement to pay: I. A salary of $5,000 monthly without regard to partnership income II. A 25% interest in partnership profits A. II only B. Both I and II C. I only D. Neither I nor II

C Why? - A guaranteed payment is a salary or other payment to a partner that is NOT calculated with respect to partnership income Key takeaway: a GUARANTEED payment is NOT dependent upon profits

A taxpayer is trading real property used solely for business purposes for new real property to be used in his business. The real property originally cost $35,000 and he has taken $18,000 in depreciation. The new real property the taxpayer wants in exchange is only worth $17,500. The taxpayer agrees to assume a liability of $1,000. The other party also agrees to assume a liability secured by the taxpayer's old real property of $3,500. What is the gain or loss recognized by the taxpayer on this transaction? A. $0 B. $3,500 C. $2,500 D. $3,000

C Why? - Adjusted basis = $17,000 - Boot given = $1,000 - Property received = $17,500 - Boot received = $3,500 - Realized gain = $18,000 - $21,000 = $3,000 - Recognized gain = lesser of realized gain or NET boot - Net boot = $3,500 - $1,000 = $2,500 gain on boot - Recognized gain = $2,500 Key Takeaway: NET relief from liabilities = boot received

Capital assets include which of the following items? A. Trade accounts receivable B. Fixtures used in a retail store C. Land held for personal use D. Real property used to store business assets

C Why? - Assets held for personal use = capital assets

A taxpayer sold for $200,000 equipment that had an adjusted basis of $180,000. Through the date of sale, the taxpayer had deducted $30,000 of depreciation. Of this amount, $17,000 was in excess of straight-line depreciation. What amount of gain would be recaptured under Section 1245? A. $17,000 B. $13,000 C. $20,000 D. $30,000

C Why? - Focus on what is important - Section 1245 rule stipulates that 100% of the lesser of REALIZABLE GAIN or ACCUMULATED DEPRECIATION will be recaptured as ordinary income (remainder = Section 1231 gains) - Realizable gain = $20,000 - Depreciation = $30,000 - Thus, $20,000 will be recaptured under Section 1245

Jensen had the following during the year: Salary: $50,000 Inheritance: $25,000 Alimony (divorce finalized in 2015): $12,000 Child support from ex-spouse: $9,000 Capital loss on investment stock sale: $(6,000) What is Jensen's AGI for the current year? A. $44,000 B. $59,000 C. $62,000 D. $84,000

C Why? - Inheritance = not taxable - Child support = not taxable - Maximum deductible for capital loss = $3,000

A married couple purchased their principal residence for $300,000. They spent $40,000 on improvements. After living in it for 10 years, the couple sold the home and paid $35,000 in real estate commissions. What gain should the couple recognize in their joint return? A. $274,000 B. $310,000 C. $0 D. $60,000

C Why? - The exclusion rule for couples allows up to $500,000 of gains to be excluded (if 2/5 years the residence is occupied by them) - The adjusted basis would be $300k + $40k + $36 - Real estate commissions would INCREASE the BASIS - Nevertheless, the exclusion wipes away any gain under $500k Key Takeaways: (1) Exclusion rule for married couple = $500,000 of gain (2) Commissions on sale increase the adjusted basis

An individual taxpayer makes the following gifts during the year: - a residence to his married son - a life estate in a trust to his older daughter - a remainder interest in the trust for his younger daughter - cash contribution to a qualified charity Which of the gifts qualifies for neither a deduction nor an exclusion in determining the taxpayer's gift tax for the year? A. The residence B. The life estate in trust C. The remainder interest in trust D. The cash contribution

C Why? - The remainder interest is a FUTURE INTEREST because it will be distributed to her at some future date. - A future interest gift does NOT qualify for either a deduction or the annual exclusion from gift tax - A life estate = present interest

Which of the following statements is correct regarding the deductibility of donations made to qualifying charities by a cash-basis individual taxpayer? A. A contemporaneous written acknowledgement is required for donations of $100 B. A qualified appraisal for real property donations is NOT required to be attached to the tax return unless the property value exceeds $10,000 C. A charitable contribution deduction is NOT allowed for the value of services rendered to a charity D. The charitable contribution deduction for long-term appreciated stock is limited to 50% of adjusted gross income

C Why? - a written acknowledgement is required for donations of $250 or more - a qualified appraisal for real property donation is NOT required to be attached to the tax return UNLESS the property exceeds $5,000 - charitable contribution for long-term appreciated stock is limited to 30% Key Takeaway: A charitable contribution is NOT allowed for the value of services rendered to a charity

An individual taxpayer earned $10,00 in investment income, $8,000 in noninterest investment expenses, and $5,000 in investment interest expense. How much is the taxpayer allowed to deduct on the current-year's tax return for investment interest expenses? A. $3,000 B. $0 C. $5,000 D. $2,000

C Why? - because the non-interest investment expenses are not deductible, the net investment income is equal to $10,000 - ALL of the $5,000 of investment interest expense is deductible Key Takeaway: Non-interest investment expenses are NOT subtracted from investment income to arrive at net investment income

Winkler, a CPA, provided accounting services to a client, Thompson. On December 15 of the same year, Thompson gave Winkler 100 shares of Foster Corp. as compensation for services. The adjusted basis of the stock was $4,000, and its fair market value at the time of transfer was $5,000. The following year, Winkler sold the stock on February 15 for $7,500. What is the amount that Winkler should recognize as gain on the sale of stock? A. $1,000 B. $5,000 C. $2,500 D. $0

C Why? - the adjusted basis of the stock to Winkler is the FMV, or $5,000 - the FMV is the adjusted basis because it is considered COMPENSATION in the form of property Key Takeaway: When property is used as COMPENSATION it is taken at FMV

Mary, an unmarried taxpayer, made the following charitable contributions during the current year: Cash contribution to church = $2,000 Donation of furniture to hospital (FMV) = $500 Donation to state university of publicly traded stock purchased for $3,000 four months ago (FMV) = $4,000 Assuming Mary's adjusted gross income was $50,000, what amount can mary claim as a charitable contribution deduction? A. $6,500 B. $6,000 C. $5,500 D. $5,000

C Why? - the publicly traded stock, since held for less than one year, is considered ordinary income property - the amount deducted for ordinary income property is the lesser of the property's adjusted basis or its fair market value Ket Takeaway: capital gain items held less than 1 year = ordinary income property -> lesser of FMV or basis

Which of the following statements correctly represents the tax effect of the liquidation of an 80% or more owned subsidiary? A. The subsidiary can recognize a loss on depreciated assets transferred to minority shareholders B. The total basis of assets transferred to the parent of the liquidating corporation must be allocated among the various assets according to their FMVs C. Assets transferred to the parent of the liquidating corporation generally have a carryover basis D. The subsidiary recognizes gain on the distribution of appreciated assets to the parent

C Why? - In a tax-free liquidation of an 80% or more owned subsidiary, the parent corporation takes a carryover basis in the assets it receives form the subsidiary

Magic Corp., a regular C corporation elected S corporation status at the beginning of the current calendar year. It had an asset with a basis of $40,000 and a fair market value (FMV) of $85,000 on January 1. The asset sold during the year for $95,000. Magic's corporate tax rate was 35%. What was Magic's tax liability as a result of the sale? A. $0 B. $3,500 C. $19,250 D. $15,750

D Why? (1) A built-in-gain tax IS applicable here (2) Built-in gain is computed as excess of FMV over adjusted basis at the beginning of year in which S corporation status is elected (3) Thus, gain = $85,000 - $40,000 = $45,000 (4) * tax rate = * 35% = $15,750 (5) The $10,000 from $85k to $95k is taxable at the SHAREHOLDER LEVEL Key-Takeaway: Use FMV at date of election NOT date of sale

Robert had current-year adjusted gross income of $100,000 and potential itemized deductions as follows: Medical expenses (10% AGI floor) = $12,000 State income taxes = $4,000 Real estate taxes = $3,500 Qualified housing and residence mortgage interest = $10,000 Home equity mortgage interest (used to consolidated personal debts) = $4,500 Charitable contributions (cash) = $5,000 What is Robert's itemized deduction for AMT purposes? A. $19,500 B. $25,500 C. $21,500 D. $17,000

D Why? - AMT adds back taxes as adjustments, so disregard those - Medical expenses = $12,000 less $10,000 = $2,000 - REMEMBER - only QUALIFIED interest against mortgages can be deducted (personal use is not allowed) Key Takeaways: (1) AMT adds back taxes, (2) NOT all interest may be deducted

Davis, a sole proprietor with no employees, has a SEP IRA plan to which he may contribute and deduct 20% of his annual earned income. For this purpose, "earned income" is defined as net self-employment earnings reduced by the: A. Self-employment tax B. Deductible SEP IRA contribution C. Self-employment tax and one-half of the deductible SEP IRA contribution D. One-half of the self-employment tax

D

The selection of an accounting method for tax purposes by a newly incorporated C corporation: A. Is made by filing a request for a private letter ruling from the IRS B. Must be disclosed in the company's organizing documents C. Must first be approved by the company's board of directors D. Is made on the initial tax return by using the chosen method

D

A cash basis taxpayer should report gross income: A) Only for the year in which income is actually received whether in cash or property B) For the year in which income is either actually or constructively received in cash only C) Only for the year in which income is actually received in cash D) For the year in which income is either actually or constructively received, whether in cash or property

D Why? A cash basis taxpayer should report gross income for the year in which income is either actually OR constructively received, whether in cash OR property Key takeaway: Cash basis = Actual or Constructive & Cash or Property

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

D Why? - Business expenses include work uniforms, subscriptions, and continuing education - Business expenses do NOT include "investment expenses" (be careful of wording) - Business expenses do NOT include custodial fees for retirement accounts Key takeaway: anything that personally related (i.e., retirement plan, investments) should not be expensed under the business

In Year 4, a taxpayer gifted an undivided one-half interest in the taxpayer's farm to the taxpayer's child. Title to the farm was held by the parent and child as tenants in common. In Year 10, the taxpayer died and the other one-half interest in the farm was left to the same child. The taxpayer paid $40,000 for the farm in Year 1, and the FMV of the entire farm was $100,000 at the date of the taxpayer's death. An alternate valuation date was NOT elected. What is the child's basis in the farm after the taxpayer's death? A. $100,000 B. $0 C. $40,000 D. $70,000

D Why? - Gift at Year 4 = Rollover Cost Basis = 1/2 of $40,000 = $20,000 - Inheritance at Year 10 = FMV = 1/2 of $100,000 = $50,000 - Basis = $20k + $50k = $70k

At the beginning of Year 3, Wolf Inc. has a written accounting policy to expense amounts paid for tangible personal property costing up to $8,000. Wolf does NOT have an applicable financial statement for the year. During Year 3, Wolf pays $12,000 for three pieces of office furniture that cost $4,000 each and have an economic life of five years. Under the De Minimis Safe Harbor rule, how much can Wolf deduct for tax purposes in Year 3? A. $4,000 B. $12,000 C. $7,500 D. $0

D Why? - IF company does NOT have AFT, then maximum cost per item to be deducted is $2,500 ($5,000 if AFT is present) - Thus, because the furniture costs $4,000 (which is greater than the limit) it may NOT be immediately expensed/deducted Key Takeaway: If under De Minimis limit ($5,000 or $2,500) NO expense is deducted (all-or-nothing)

Quigley, Roberk, and Storm form a corporation. Quigley exchanges $25,000 of legal fees for 30 shares of stock. Roberk exchanges land with a basis of $10,000 and a fair market value of $100,000 for 60 shares of stock. Storm exchanges $10,000 cash for 10 shares of stock. What amount of income should each shareholder recognize? Quigley // Roberk // Storm A. $0 // $90,000 // $0 B. $0 // $0 // $0 C. $25,000 // $90,000 // $10,000 D. $25,000 // $90,000 // $0

D Why? - IRC Section 351 stipulates that for shareholders to NOT recognize a gain in contribution of property to a corporation, there must be (1) 80% of voting stock in control AND (2) no boot received - NOTE: A shareholder who contributes only SERVICES (Quigley) is NOT counted as part of the control group - Thus, only 70 out of the 100 (70%) shares are controlled - Quigley recognizes ordinary income for at FMV of services performed -> $25,000 - Rober would recognize the realizable gain of $90,000 on the contribution (because both parts of Section 351 are not satisfied) Key Takeaway: Services =/= controlling shares

A corporation distributed land with a basis of $20,000 and a FMV of $60,000, but was subject to a nonrecourse liability of $70,000 to its sole shareholder. What amount represents the corporation's recognized gain? A. $20,000 B. $60,000 C. $70,000 D. $50,000

D Why? - If a property's FMV < Liability Assumed by recipient, than the FMV is assumed to be the amount of the liability - $70,000 - Normal gain recognized on distribution of property: FMV - Basis = $70,000 - $20,000 Key Takeaway: If Liability > FMV, use Liability

Coffee Inc. and Tea Inc., unrelated domestic corporations, decided to form a new partnership. Coffee has a December 31 year-end and will own 75% of the new partnership. Tea has a June 30 year-end and will own the remaining 25%. The new partnership wants to elect a fiscal tax year for business purposes. The new partnership may elect which of the following as its tax year-end? A. February 28 B. June 30 C. August 31 D. November 30

D Why? - If partners have different tax year, the required tax year for the partnership is the tax year of the partner who owns more than 50% of the partnership. Thus, the partnership would use Coffee's December 31 year-end - However, a new partnership can ALSO make a Section 444 election that allows it to change the tax year, but only if the deferral period is no longer than three months - The only possible answer is November 30, because it has a deferral period of 1 month, where the others have 5 months or more Key Takeaway: Partnership takes tax year of partner with > 50% ownership, but can also make a Section 444 election (allowing 3 months prior)

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

D Why? - If security deposits are held separately and not available (in a segregated account), they are a liability to the taxpayer, NOT income Key takeaway: security deposits are generally NOT included in gross income computation

A corporation transferred fully depreciated machinary to an individual shareholder in a liquidating distribution. The originla cost of the machinery was $6,000, and the FMV was $5,000. If the shareholder's basis in the stock was $2,000, then the shareholder reports: A. No gain and no loss B. $5,000 ordinary income and $2,000 capital loss C. $3,000 ordinary income D. $3,000 capital gain

D Why? - In liquidating distributions, the shareholder recognizes a capital gain to the extent that the FMV of the property distributed exceeds the shareholder's basis in the stock - Why not ordinary income? because in a liquidating scenario, the shareholder is essentially SELLING his stock, which is a capital asset. Thus, a capital gain is appropriate. Key Takeaway: Liquidating scenario = capital gain

The Tiller family has MAGI of $50,000. The Tillers have two children, ages 12 and 13, who qualify as dependents. All of the Tillers' income is from wages and their tax liability is $1,000 before the child tax credit. What total amount of the child tax credit will the Tillers use as a credit? What portion of this amount is refundable? Child Tax Credit Taken // Refundable Portion A. $2,000 // $0 B. $2,000 // $1,400 C. $4,000 // $0 D. $3,800 // $2,800

D Why? - Maximum credit usable = $4,000 ($2k * 2) - Take $1,000 against taxable income - Of remaining $3,000 only $2,800 is refundable - Refund is lesser of: (1) Excess credit over liability [=$3,000], (2) Earned income less $2,500 * 15% [=$7,125], OR (3) $1,400 per child [=$2,800] Key Takeaway: A portion of the Child Tax Credit IS refundable

Tom and Sharlene had the following items of income and expense during the taxable year: Self employment activity: Gross income = $35,000 Business license = $500 Marketing = $2,000 Salary paid to Sharlene = $10,000 Tom's wages from his job = $67,000 Interest from money market = $1,500 Gain on sale of securities = $15,000 What is Tom & Sharlene's gross income before adjustments? A. $128,500 B. $106,000 C. $131,500 D. $116,000

D Why? - Net self-employment income = $35k - 500 - 2000 = $32,500 - Tom's wages, interest, and gain on sale ALL included - Sharlene's salary = DRAW, thus not included in income or deductible from self-employment income Key takeaway: recognize a DRAW as not included in gross income NOR deductible

For a cash basis taxpayer, gain or loss on a year-end sale of listed stock arises on the: A. Date of delivery of stock certificate B. Trade date C. Date of receipt of cash proceeds D. Settlement date

D Why? - RULE: whether on cash or accrual method, taxpayers who sell stock or securities on an established securities market MUST recognize gains and losses on the trade date, rather than the settlement date Key takeaway: g/l on sale of stock = TRADE date

Kent Corp is a calendar year accrual basis C corporation. In Year 1, Kent made a nonliquidating distribution of property with an adjusted basis of $150,000 and FMV of $200,000 to its sole shareholder, Reed. Information: - Reed's basis in Kent stock = $500,000 - Accumulated earnings and profits = $125,000 - Current earnings and profits = $60,000 What is taxable as dividend income to Reed for Year 1? A. $60,000 B. $150,000 C. $185,000 D. $200,000

D Why? - Taxable dividend income IS limited to extent of current and accumulated E&P ($185,000) - HOWEVER, when Kent distributes the property to Reed, it recognizes a gain: $200k - $150k, of $50,000 - Thus, the total E&P (after distribution) amounts to $185,000 + $50,000 = $235,000 - The amount taxable to Reed = FMV of property received = $200,000 - The whole amount is allowable as a taxable dividend Key Takeaway: A property distribution increases the current year's E&P

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

D Why? - The first $50,000 of group term life insurance is NON-taxable - Thus, the total amount of taxable life insurance is $150,000 (200k - 50k) - 150 x 2.76 = 414 Key takeaway: first $50,000 of group term life insurance is non-taxable

Talbot purchased a laptop for $1,500 and a television for $1,300. The laptop is used solely for business and the television solely for entertainment. During the same year, Talbot experienced serious financial difficulty and sold the television for $300 and the laptop for $1,000. What amount, if any, is Talbot entitled to deduct as a loss relating to the sale of the television and laptop? A. $1,000 B. $0 C. $1,500 D. $500

D Why? - The loss on the disposal of business-use assets is DEDUCTIBLE

In Year 2, Carson was hired as an employee of Barton Co. As part of his employment contract, Barton provided a company car for Carson's spouse, Mary, who is not employed. The value for the use of the automobile in Year 2 was $8,000. Carson does not use the automobile. Carson and Mary file separate individual income tax returns. What amounts, if any, should be reported as taxable fringe value on Carson and Mary's Year 2 income tax return for the personal use of the automobile? A. Carson $0; Mary $0 B. Carson $4,000; Mary $4,000 C. Carson $0; Mary $8,000 D. Carson $8,000; Mary $0

D Why? - The value of the company car is a taxable employee fringe benefits. Carson is the employee who received the benefit from his employer, even if his spouse, Mary, used the car. Mary is NOT an employee of the company, so the use of the company car is not a taxable employee fringe benefit to Mary. Key takeaway: taxable fringe benefits from employers only apply to the EMPLOYEE, no matter how the benefit is used among other people

Cobb, an unmarried individual, had an adjusted gross income of $200,000 in the current year before any IRA deduction, taxable SS benefits, or passive activity losses. Cobb incurred a loss of $30,000 in the current year from rental real estate in which he actively participated. What amount of loss attributable to this rental real estate can be used in the current year as an offset against income from non-passive sources? A. $25,000 B. $12,500 C. $30,000 D. $0

D Why? - While the "Mom & Pop" exemption allows deduction of up to $25,000 of rental losses to offset other active income, there is a phase-out that begins at $100,000 and ends at $150,000 - Because Cobb earned $200,000 AGI, he is not allowed to deduct any of the $25,000 against his active income Key Takeaway: Mom-and-Pop exemption is subject to full phaseout at $150k

Four years ago, a self-employed taxpayer purchased office furniture for $30,000. During the current tax year, the taxpayer sold the furniture for $37,000. At the time of the sale, the taxpayer's depreciation deductions totaled $20,700. What part of the gain is taxed as long-term capital gain? A. $27,700 B. $0 C. $20,700 D. $7,000

D Why? - With real and personal property used for business, the LTCG is NOT the realizable gain. It is less, due to depreciation - Realizable gain = $27,700 - Amount recaptured, as ordinary income, equals lesser of: (1) depreciation, or (2) realizable gain - Amount as ordinary income = depreciation = $20,700 - Long term capital gain = $27,700 - $20,700 = $7,000

In April, X and Y formed Z Corp. X contributed $50,000 cash, and Y contributed land worth $70,000 (adjusted basis of $40,000). Y also received $20,00 cash from the corporation. X and Y each receive 50% of the corporation's stock. What is the tax basis of the land to Z Corp? A. $50,000 B. $60,000 C. $70,000 D. $40,000

D Why? - Z corporation will record the basis of the land at the basis of Y ($40,000) PLUS any cash paid to secure the land ($20,000) - Total basis in land = $40,000 + $20,000

Mock operates a retail business selling illegal narcotics. Which of the following item(s) may Mock deduct from business income? I. Cost of merchandise II. Business expenses other than the cost of merchandise A. II only B. Neither I nor II C. Both I and II D. I only

D Why? - illegal income is always taxable - the only expense that can be deducted from illegal sales is cost of merchandise - any other business expense incurred in operating an illegal business is NOT permitted

Which payment(s) is (are) included in a recipient's gross income? I. Payment to a graduate assistant for a part-time teaching assignment at a university. Teaching is not a requirement toward obtaining a degree. II. A grant to a Ph.D. candidate for his participation in a university-sponsored research project for the benefit of the university A. Neither I nor II B. I only C. II only D. Both I and II

D Why? - payment to student for part-time job is taxable income just like any other campus job would be - there is no exclusion in tax law for amounts paid to a degree candidate for participation in university-sponsored research Key takeaway: ALL income is INCLUDED unless specifically mentioned to be excluded* *If you don't know, err on the side of inclusion

Cole, a single taxpayer who does not itemize deductions, earned $3,000 in wages, incurred $1,000 in unreimbursed employee business expenses, paid $400 as interest on a student loan, and contributed $100 in cash to a public charity. What is Cole's AGI? A. $3,000 B. $2,600 C. $1,600 D. $2,500

D Why? - student loan interest is an adjustment to gross income - if NOT itemized, contribution to charity can be an adjustment to gross income - unreimbursed employee business expenses are NOT deductible Key Takeaway: unreimbursed employee businesses expenses are NOT adjustments to gross income

Kari Corp., a manufacturing company, was organized on January 2, Year 1. Its Year 1 federal taxable income was $400,000 and its federal income tax was $100,000. What is the maximum amount of accumulated taxable income that may be subject to the accumulated earnings tax for Year 1 if Kari takes only the minimum accumulated earnings credit? a. $300,000 b. $150,000 c. $50,000 d. $0

D. Why? - Accumulated taxable income = $400,000 - $100,000 = $300,000 - Minimum accumulated earnings credit $250,000, since it is a regular corporation - ATI - Earnings Credit = $300k - $250k = $50,000 = Current accumulated taxable income (which is the amount assessed for the Accumulated Earnings Tax) Key Takeaway: Remember the formula to arrive at accumulated earnings tax

Tiana and her spouse divorced in January of the current year. Tiana's 9-year-old daughter lived with her during the school year and lived with her father during the summer. Her father provided most of their daughter's support. What would be Tiana's filing status?

Head of Household Why? - HoH = HALF - Tiana has child for > HALF of year - SUPPORT is NOT a factor Key Takeaway: Support of child is NOT a factor in Head of Household status* *Divorce situations: parent who has child for majority of time gets HoH status

Blink Corp., an accrual basis calendar year corporation, carried back a NOL for the tax year ending Dec 31, Year 1. Blink's gross revenues have been under $500,000 since inception. Blink expects to have profits for the tax year ending Dec 31, Year 2. Which method(s) of estimated tax payments can Blink use for its quarterly payments during the Year 2 tax year to avoid underpayment of federal estimated taxes? I. 100% of the preceding tax year method II. Annualized income method

II ONLY Why? - Blink cannot use the 100% of preceding year since it did not pay income tax in year I - Annualized income method is acceptable

Mary is single and fully supports her 22-year-old daughter, Jill, a full-time college student who graduated in May. Jill earned $5,000 by working part-time jobs during the year. Jill lived in a dorm until she graduated and then lived with Mary the rest of the year. How many dependents can Mary claim?

One Why? - Jill is a "qualifying child" as she is a full-time student (during the year) under the age of 24 - Jill has the same principal residence as Mary for more than half of the year - By graduating in May, Jill is a full-time student for at least part of the year and she meets the definition of full-time student for dependency purposes Key Takeaway: Students graduating in spring are still "qualifying children" for the year in which they graduate (if they live with the parent for the better part of the tax year)

Section 1244 stock losses are classified as

Ordinary losses AND are not netted against capital gains