Chapter 14

58) Which of the following expenditures will qualify as a research expenditure for purposes of the research credit? A) An ice cream producer develops a new type of packaging that will keep ice cream frozen while driving home from the grocery store. B) An ice cream producer develops a new design on the package that will be more pleasing to the culture of a new market it is entering. C) An ice cream producer develops a new marketing campaign to introduce its brand to a new region of the country it is entering. D) All of the above qualify as research expenditures for the research credit

A) An ice cream producer develops a new type of packaging that will keep ice cream frozen while driving home from the grocery store.

29) Which statement is correct? A) Tax credits reduce tax liability on a dollar-for-dollar basis. B) Tax deductions reduce tax liability on a dollar-for-dollar basis. C) The benefit of a tax credit depends on the taxpayer's marginal tax rate. D) Tax deductions are less valuable for high-income taxpayers than for low-income taxpayers.

A) Tax credits reduce tax liability on a dollar-for-dollar basis.

36) Lee and Whitney incurred qualified adoption expenses in 2015 of $2,000, and then incurred $7,000 more in 2016 when the adoption of their child became final. Their 2015 AGI was $120,000 and their 2016 AGI was $140,000. The allowable adoption credit is A) $ 7,000 in 2016. B) $ 9,000 in 2016. C) $13,460 in 2015. D) $2,000 in 2015 and $7,000 in 2016.

B) $ 9,000 in 2016.

13) Joan earns $110,000 in her job as a physician's assistant. She also has her own business selling cosmetics. This business generated $10,000 of earnings. What is Joan's self-employment tax for 2016? A) $1,530 B) $1,322 C) $1,412 D) $268

B) $1,322

43) In the fall of 2016, James went back to school to earn a master of accountancy degree. He incurred $7,000 of qualified educational expenses and his modified AGI for the year was $40,000. His Lifetime Learning Credit is A) $1,000. B) $1,400. C) $1,800. D) $2,500.

B) $1,400.

49) Carlotta, Inc. has $50,000 foreign-source income and $150,000 worldwide income. Its U.S. tax on its worldwide income is $42,000 and it paid foreign taxes of $16,000. What is the corporation's foreign tax credit? A) $2,000 B) $14,000 C) $16,000 D) $42,000

B) $14,000

14) Ava has net earnings from self-employment of $125,000. She also earned salary of $170,000 from a job held earlier in the year. How much Additional Medicare Tax will be owed on the self-employment income? A) $0 B) $769 C) $855 D) $3,625

B) $769

18) In computing AMTI, tax preference items are A) excluded. B) added only. C) subtracted only. D) either added or subtracted.

B) added only.

59) ChocoHealth Inc. is developing new chocolate products providing abundant health benefits at low calorie counts. For the past three years, it spent an average of $500,000 per year on research. ChocoHealth has spent $900,000 on research. The company has elected the simplified credit. For the current year, it will earn a research credit of A) $54,000. B) $126,000. C) $80,000. D) $91,000.

D) $91,000.

3) An individual with AGI equal to or less than $150,000 in the prior year may generally avoid penalties for underpayment of estimated tax in each of the following cases with the exception of A) estimated tax is less than $1,500. B) 90% of the tax due for the current year is paid. C) 90% of the tax due for the current year is paid when computed on an annualized basis. D) 100% of the actual tax liability for the prior year is paid.

estimated tax is less than $1,500.

39) The maximum amount of the American Opportunity Tax Credit for each qualified student is A) $1,500. B) $2,000. C) $2,500. D) $3,000.

C) $2,500.

63) Layla earned $20,000 of general business credits from her sole proprietorship. Her regular tax liability is $45,000, and her tentative minimum tax is $49,000. During the current year Layla will apply general business credits of A) $0. B) $4,000. C) $20,000. D) $45,000

A) $0.

32) Marvin and Pamela are married, file a joint return, and have two children, ages 9 and 11. Their combined AGI is $65,000. Marvin's earned income is $40,000; Pamela's is $25,000. They incur $6,500 of child-care expenses to enable them to be employed during the current year. Their child and dependent care credit is A) $1,200. B) $1,300. C) $1,800. D) $6,000.

A) $1,200.

35) Evan and Barbara incurred qualified adoption expenses in 2015 of $6,000, and then incurred $9,000 more in 2016 when the adoption of their child became final. Their 2015 AGI was $110,000 and their 2016 AGI was $100,000. The allowable adoption credit is A) $13,460 in 2016. B) $15,000 in 2016. C) $6,000 in 2015 and $7,460 in 2016. D) $6,000 in 2015 and $9,000 in 2016.

A) $13,460 in 2016.

53) Octo Corp. purchases a building for use in its business at a cost of $100,000. The building was built in 1930 and needs substantial work so it can be used. Octo spends $150,000 on qualifying renovations. Octo will earn a rehabilitation credit of A) $15,000. B) $25,000. C) $5,000. D) $30,000

A) $15,000.

13) Drake and Davina are married and file a joint return for 2016 with taxable income of $100,000 and tax preferences and adjustments of $51,000 for AMT purposes. Their regular tax liability is $16,533. What is the amount of their total tax liability? A) $17,472 B) $39,260 C) $34,005 D) $16,533

A) $17,472

11) Jorge has $150,000 net earnings from a sole proprietorship. Jorge's self-employment tax (rounded) for 2016 is A) $18,711. B) $22,950. C) $21,194

A) $18,711.

47) Kerry is single and has AGI of $25,000 in 2016. During the year he contributes $5,000 to his Roth IRA. What is the amount of qualified retirement savings contributions credit to which he is entitled? A) $200 B) $400 C) $800 D) $1,000

A) $200

12) Hong earns $127,300 in her job as a physician's assistant. She also has her own business selling cosmetics. This business generated $10,000 of earnings. What is Hong's self-employment tax for 2016? A) $268 B) $290 C) $1,412 D) $1,530

A) $268

60) Doggie Rx Inc. is a new company developing a tasty chewable pill for dogs that will protect them from all types of fleas, ticks and intestinal parasites. This is its first year of business, and it has spent $500,000 on qualifying research expenditures. Doggie Rx will earned a simplified research credit of A) $30,000. B) $70,000. C) $15,000. D) $250,000

A) $30,000.

34) Mark and Stacy are married, file a joint return, and have one child, age 3. Their combined AGI is $55,000. Mark and Stacy incur $3,500 of child-care expenses during the current year. Mark's employer reimburses him $1,500 under a qualified dependent care assistance plan. The child and dependent care credit is A) $300. B) $600. C) $700. D) $1,200

A) $300.

17) Reva and Josh Lewis had alternative minimum taxable income of $350,000 in 2016 and file a joint return. For purposes of computing the alternative minimum tax, their exemption is A) $36,225. B) $47,575. C) $0. D) $83,800.

A) $36,225.

50) Carlotta, Inc. has $50,000 foreign-source income and $150,000 worldwide income. Its U.S. tax on its worldwide income is $42,000 and it paid foreign taxes of $12,000. What is the corporation's foreign tax credit? A) $4,000 B) $12,000 C) $14,000 D) $42,000

A) $4,000

62) Dwayne has general business credits totaling $30,000 before limitation. His regular tax liability is $83,000 and his tentative minimum tax is $79,000. What amount of general business credit can Dwayne take this year? A) $4,000 B) $14,500 C) $25,000 D) $30,000

A) $4,000

38) Margo and Jonah have two children, ages 13 and 17. Their modified AGI is $120,500.What is their child tax credit? A) $450 B) $900 C) $1,000 D) $2,000

A) $450

57) Kors Corporation has 30 employees and $5 million of gross receipts. Kors spends $15,000 for qualified structural improvements for access for the disabled. The disabled access credit is A) $5,000. B) $5,125. C) $0. D) $7,500.

A) $5,000.

37) Marguerite and Josephus have two children, ages 13 and 10. Their modified AGI is $120,500.What is their child tax credit? A) $900 B) $1,000 C) $2,000 D) None of the above.

A) $900

45) All of the following statements are true regarding the Lifetime Learning Credit except which one? A) In order to qualify for the Lifetime Learning Credit, a student must be enrolled 1/2 time. B) Qualifying expenses include those for tuition and related fees but not for room and board. C) The Lifetime Learning credit may be claimed for any degree or nondegree course at a college or university that helps an individual acquire or improve their job skills. D) The Lifetime Learning credit and the American Opportunity Tax credit may not be taken in the same tax year with respect to the same student's tuition and related fees

A) In order to qualify for the Lifetime Learning Credit, a student must be enrolled 1/2 time.

9) If an individual is liable for self-employment tax, a portion of the self-employment tax is A) a for AGI deduction. B) from AGI as an itemized deduction. C) a Schedule C business expense. D) nondeductible

A) a for AGI deduction.

66) Which one of the following is a refundable credit? A) earned income credit B) child and dependent care credit C) lifetime learning credit D) credit for the elderly and disabled

A) earned income credit

64) Individuals without children are eligible for the earned income credit if they meet all the following conditions except A) file married filing separately. B) at tax year end are at least age 25 but not more than age 64. C) for the tax year are not a dependent of another taxpayer. D) the United States is their principal place of residence for more than one-half of the tax year.

A) file married filing separately.

21) In computing AMTI, all of the following must be added back except A) home mortgage interest (on mortgage in effect since home was purchased). B) state income taxes. C) unreimbursed employee business expenses. D) property taxes on an individual's home

A) home mortgage interest (on mortgage in effect since home was purchased).

27) Nonrefundable tax credits A) only offset a taxpayer's tax liability in the current year. B) may only be used if the taxpayer is receiving a refund. C) can be carried back two years and carried forward 15 years if they exceed tax liability in the current year. D) allow the excess over the taxpayer's tax liability to be paid to the taxpayer

A) only offset a taxpayer's tax liability in the current year.

48) A corporation has $100,000 of U.S. source taxable income and $300,000 of foreign source taxable income from countries X and Y for a total worldwide taxable income of $400,000. Countries X and Y levy a total of $60,000 in foreign taxes upon the foreign source taxable income. U.S. taxes before credits are $140,000. The foreign tax credit limitation is A) $35,000. B) $60,000. C) $80,000. D) $105,000

B) $60,000

41) Timothy and Alice, who are married with modified AGI of $90,000, are sending their daughter to her first year of college. Their total tuition and related payments during the year amounted to $13,000. In addition, their daughter received a $10,000 scholarship to cover tuition. They have not taken advantage of any other type of tax benefit related to educational expenses. Their American Opportunity Tax Credit is A) $2,000. B) $2,250. C) $2,500. D) $3,000.

B) $2,250.

25) Lavonne has a regular tax liability of $13,271 on taxable income of $70,000. She also has tax preferences of $25,000 and positive adjustments attributable to limitations on itemized deductions of $15,000. Lavonne is single and takes a $4,050 personal exemption for herself only. Lavonne's alternative minimum tax for 2016 is A) $0. B) $2,368. C) $15,639. D) none of the above

B) $2,368.

54) Indie Corporation purchases a building for use in its business at a cost of $100,000. The building was built in 1900 and is a certified historic structure. Indie spends $150,000 on qualifying renovations certified as consistent with the buildings character. Indie will earn a rehabilitation (historic) tax credit of A) $15,000. B) $30,000. C) $25,000. D) $50,000.

B) $30,000.

22) Suzanne, a single taxpayer, has the following tax information for the current year. • Charitable contribution of real property with a FMV of $25,000 (adjusted basis $20,000) for which a $25,000 deduction was taken for regular tax. • Research and experimental expenses of $40,000 deducted in full for regular tax. Suzanne's total tax preferences and adjustments equals A) $5,000. B) $36,000. C) $41,000. D) $45,000.

B) $36,000

31) Max and Alexandra are married and incur $5,500 of qualifying expenses to care for their two children, ages 2 and 5. Max's earned income is $35,000 and Alexandra's earnings from a part-time job are $5,000. What is the amount of the qualifying expenses for purposes of computing the child and dependent care credit? A) $3,000 B) $5,000 C) $5,500 D) $6,000

B) $5,000

30) Mingming and Xavier, unrelated single taxpayers, have each incurred a $1,000 expenditure. Before considering this expenditure, Mingming has taxable income of $500,000 and Xavier has taxable income of $32,000. Assume the expenditure qualifies as either a tax deduction or a 25% credit. Which of the following statements is correct? A) Mingming will prefer the credit, but Xavier will prefer the deduction. B) Mingming will prefer the deduction, but Xavier will prefer the credit. C) Both taxpayers will prefer the credit. D) Both taxpayers will prefer the deduction.

B) Mingming will prefer the deduction, but Xavier will prefer the credit.

15) Harley's tentative minimum tax is computed by multiplying the AMT tax rates by her A) taxable income. B) alternative minimum tax base. C) alternative minimum taxable income. D) tentative alternative taxable income.

B) alternative minimum tax base.

23) In calculating a taxpayer's AMT, adjustments for timing differences will be made for all of the following assets except for A) incentive stock options. B) an office building placed in service in 2015. C) machinery placed in service in 2016 (bonus depreciation is not applicable). D) All of the above will require a timing adjustment for AMT.

B) an office building placed in service in 2015.

17) All of the following are self-employment income except A) net income of a sole proprietorship. B) dividends received by a corporate shareholder. C) fees received for serving as a director of a corporation. D) distributive share of partnership income from a partnership operating a business.

B) dividends received by a corporate shareholder.

3) A taxpayer at risk for AMT should consider which of the following decisions? A) investing in corporate bonds B) timing of state income tax estimated payments C) choosing a depreciation method for a new business building D) all of the above

B) timing of state income tax estimated payments

42) Joe, who is single with modified AGI of $84,000, is sending his son to his first year of college. The total tuition and related payments during the year amounted to $18,000. Joe has not taken advantage of any other type of tax benefit related to educational expenses. His American Opportunity Tax Credit is A) $ 0. B) $1,000. C) $1,500. D) $2,500

C) $1,500.

15) Tanya has earnings from self-employment of $240,000, resulting in self-employment tax of $21,122 and Additional MedicareTax of $360. Due to these taxes, Tanya will be allowed a deduction for AGI of A) $10,741. B) $21,482. C) $10,561. D) $21,122

C) $10,561

12) Jake and Christina are married and file a joint return for 2016 with taxable income of $100,000 and tax preferences and adjustments of $20,000 for AMT purposes. Their regular tax liability is $16,533. What is the amount of their total tax liability? A) $7,121 B) $9,412 C) $16,533 D) $25,945

C) $16,533

40) Jeffery and Cassie, who are married with modified AGI of $90,000, are sending their son to his first year of college. Their total tuition and related payments during 2015 amounted to $5,500. They have not taken advantage of any other type of tax benefit related to educational expenses. Their American Opportunity Tax Credit for 2016 is A) $1,500. B) $2,000. C) $2,500. D) $5,000

C) $2,500

24) Rex has the following AMT adjustment factors: -Depreciation of real property acquired in 1996 using MACRS is $22,000 while depreciation for AMT purposes is $15,000. -R&E expenditures amounting to $60,000 are expensed. The net adjustment is A) $7,000. B) $54,000. C) $61,000. D) $67,000

C) $61,000.

10) John has $55,000 net earnings from a sole proprietorship. John is also employed part-time by a major corporation and is paid $25,000. John's self-employment tax for 2016 is A) $3,886. B) $4,208. C) $7,771. D) $8,415

C) $7,771.

33) Bud and Stella are married, file a joint return, and have one child, age 3. Their combined AGI is $35,000. Bud and Stella incur $3,500 of child-care expenses during the current year. The child and dependent care credit is A) $600. B) $700. C) $750. D) $875.

C) $750.

5) If a taxpayer's AGI is greater than $150,000, no penalty will be imposed if the taxpayer pays estimated tax payments in 2016 equal to what percentage of 2015's income tax liability? A) 100% B) 90% C) 110% D) 120%

C) 110%

51) Current year foreign taxes paid exceed the ceiling based on U.S. tax attributable to foreign source income. These excess foreign tax credits A) are lost. B) can be carried forward ten years only. C) can be carried back one year and then carried forward ten years. D) can be carried back one year and then carried forward twenty years

C) can be carried back one year and then carried forward ten years.

52) The general business credit includes all of the following with the exception of A) research credit. B) disabled access credit. C) foreign tax credit. D) credit for rehabilitation expenditure.

C) foreign tax credit.

14) In computing the alternative minimum taxable income, no deduction is allowed for A) alimony. B) moving expenses. C) personal exemptions. D) individual retirement account contributions.

C) personal exemptions.

6) Amelida expects to earn $145,000 of AGI and $125,000 of taxable income this year. She is concerned about underpayment penalties. Because of a substantial bonus, her prior year AGI was $155,000 and her taxable income was $135,000. She will not be subject to underpayment penalties for the current year if her estimated taxes equal or exceed any of the following criteria except A) the estimated payments total at least 90% of the tax due for the current year. B) the estimated payments total at least 100% of the tax due for the prior year. C) the estimated payments total at least 110% of the tax due for the prior year. D) the estimated tax is less than $1,000.

C) the estimated payments total at least 110% of the tax due for the prior year.

55) To help retain its talented workforce, Zapper Corporation opens a child care facility in the building next to its offices. It spends $200,000 on rent, salaries and supplies. With respect to the $200,000 expenditure, Zapper will be entitled to a tax credit and a tax deduction of A) Tax Credit Tax Deduction $50,000 $0 B) Tax Credit Tax Deduction $0 $200,000 C) Tax Credit Tax Deduction $50,000 $200,000 D) Tax Credit Tax Deduction $50,000 $150,000

D) Tax Credit Tax Deduction $50,000 $150,000

44) In the fall of 2016, Gina went back to school to earn a master of taxation degree. She incurred $7,000 of qualified educational expenses and her modified AGI for the year was $57,000. Her Lifetime Learning Credit is A) $2,500. B) $1,400. C) $280. D) $1,120.

D) $1,120.

67) In 2016 Rita is divorced with one child. She has AGI of $20,000 resulting in a federal income tax liability of $260 and an earned income credit of $3,137. She has had $550 of federal income taxes withheld from her pay. Rita will receive a federal income refund of A) $550. B) $325. C) $3,137. D) $3,427

D) $3,427

16) In 2016 Charlton and Cindy have alternative minimum taxable income of $130,000 and file a joint return. For purposes of computing the alternative minimum tax, their exemption is A) $0. B) $8,100. C) $53,900. D) $83,800

D) $83,800

61) The general business credit may not exceed the net income tax minus the greater of the tentative minimum tax or A) 20% of the net regular tax liability above $20,000. B) 25% of the net regular tax liability above $20,000. C) 20% of the net regular tax liability above $25,000. D) 25% of the net regular tax liability above $25,000.

D) 25% of the net regular tax liability above $25,000.

56) Runway Corporation has $2 million of gross receipts in the preceding year. For purposes of the disabled access credit, what is the maximum number of full-time employees the corporation can have in the preceding year? A) 10 B) 15 C) 20 D) 30

D) 30

46) Which of the following statements is not correct regarding the residential energy efficient property (REEP) credit? A) Credits earned but not used in the current year can be carried forward to the next year. B) The taxpayer's basis in the property is reduced by the credit. C) After 2016, only solar property will qualify. D) All of the above statements regarding the REEP credit are correct.

D) All of the above statements regarding the REEP credit are correct.

16) All of the following statements regarding self-employment income/tax are true except: A) The self-employment tax is imposed on net earnings from self-employment when self-employment income is over $400. B) Self-employment tax is computed separately for married individuals filing joint returns. C) Independent contractors are subject to self-employment tax on the amount of net earnings from the self-employment activity. D) Employees who have a business in addition to their regular employment are not subject to the selfemployment tax since FICA is withheld on their wages.

D) Employees who have a business in addition to their regular employment are not subject to the selfemployment tax since FICA is withheld on their wages.

8) A wage cap does not exist for which of the following self-employment taxes? A) Social Security tax B) FICA C) FUTA D) Medicare hospital insurance

D) Medicare hospital insurance

7) Self-employment taxes include components for A) Medicare hospital insurance and SUTA. B) Social Security and FUTA. C) FICA and FUTA. D) Social Security and Medicare hospital insurance

D) Social Security and Medicare hospital insurance

28) Refundable tax credits A) only offset a taxpayer's tax liability. B) may only be used if the taxpayer is receiving a refund. C) have all expired but may be reinstated with new tax legislation. D) allow the excess over the taxpayer's tax liability to be paid to the taxpayer

D) allow the excess over the taxpayer's tax liability to be paid to the taxpayer

19) In computing AMTI, adjustments are A) limited. B) added only. C) subtracted only. D) either added or subtracted

D) either added or subtracted

4) With respect to estimated tax payments for a taxpayer with AGI of $150,000 or lower in the prior year, all of the following are generally true with the exception of A) no penalty is imposed if the estimated tax is less than $1,000. B) no penalty is imposed if the individual has no tax liability for the prior year. C) no underpayment penalty is imposed if the estimated payments total at least 90% of the tax due for the current year. D) no underpayment penalty is imposed if the estimated payments total at least 90% of the actual tax liability for the prior year.

D) no underpayment penalty is imposed if the estimated payments total at least 90% of the actual tax liability for the prior year.

65) A taxpayer will be ineligible for the earned income credit if he or she has disqualified investment income of more than $3,400 in 2016. Disqualified income includes all the following except A) net capital gains. B) tax-exempt interest. C) net rental income. D) self-employment income

D) self-employment income

20) All of the following are allowable deductions under the alternative minimum tax except A) charitable contributions. B) gambling losses. C) qualified housing interest. D) state income taxes

D) state income taxes