Tax Exam 2
Which of the following is a currently deductible trade or business expense?
$15,000 fee paid to a TV station to advertise a new product. Interest paid on the mortgage note on a business warehouse. Rent paid on a office to run an illegal gambling operation. Aaron owns a local restaurant. He pays the local health inspector a fee of $125 per week, as provided by city regulation
Gary, a sole proprietor, incurs the following expenses in his record store business. Gary CANNOT deduct the following as business expenses in the current year
$3,000 in legal fees to acquire a competing record store. $500 to the local police chief to not write parking tickets to his customers whose time ran-out on parking meters in front of his store.
Drew incurs the following expenses in his grocery store business. Drew can deduct the following as business expenses in the current year
$3,750 for advertising on the web. $2,000 of interest expense related to the purchase of a new delivery truck.
Net Operating Loss
An excess of business deductions over business income
Necessary Expense
Appropriate and helpful
Betterment
Capitalized and amortized over a number of accounting periods
Rosa is a single parent who maintains a home in Durham in which she and her 16-year-old daughter, Maria, reside. She also provides most of the support for her son, Carmelo, age 25, who is a full-time student at Duke Law School, lives at home, and earns $3,500 as a part-time waiter at a local diner. Which of the following statements is true related to Rosa's tax return?
Carmelo is a qualifying relative while Maria is a qualifying child of Rosa's
At-risk amount
Cash or other assets contributed plus recourse debts of the activity
Substantiation Requirements
Certain deductions are disallowed if taxpayer fails to comply.
Active Trader
Considered a trade or business
Constance owns a boutique. During the current year, she has gross income of $400,000 and allowable deductions related to the business of $425,000
Constance has suffered an annual loss, which may be carried forward indefinitely
Deductions for adjusted gross income include
Contribution to conventional IRA Student loan interest
For purposes of the relationship test for dependents, which of the following does not qualify as a relative?
Cousin
Which of the following must be classified as "portfolio income?"
Dividend income from an investment in Lincoln Corp. common stock. Royalty income from the ownership of the mineral rights on land. The taxpayer does not share the expenses with the extraction company. Loss realized from the sale of one-half of his stock shares in Lockleed Corp. Lockleed is qualified small business stock.
Alan is a 23-year old student at Upper State College. He earned $4,400 at a summer job
His parents can claim a $500 family tax credit for Alan as a dependent
Barry owns all of the stock of Jerrico Corporation; an internet based gaming firm. Barry is also the President of and works full-time for Jerrico. During the current year, Jerrico has a loss of $125,000 from its operations.
If Jerrico is an S Corporation, Barry may deduct the loss on his personal tax return as a deduction for AGI. If Jerrico is a regular corporation, the corporation can carry the loss forward indefinitely to reduce taxable income in future years.
Kenneth owns all of the stock of Kearney Corporation. Kenneth is also the President of Kearney and works full-time running the corporation. During the current year, Kearney has a loss of $40,000 from its operations
If Kearney is an S Corporation, the corporation may carry the loss forward indefinitely. If Kearney is a regular corporation, Kenneth may deduct the loss for AGI on his personal tax return because the corporation is a flow through entity. NEITHER
Lynnette is a single individual who receives a salary of $36,000. During 2018, she has $6,800 withheld for payment of her federal income taxes and $2,900 for her 2018 state income taxes. In 2019, she receives a $450 refund after filing her 2018 federal tax return and a $750 refund after filing her 2018 state tax return.
If Lynnette uses the standard deduction in filing her 2018 federal income tax return, the $750 refund is not taxable in 2019
Raisor Corporation pays an annual premium of $12,000 on the whole life insurance policy on the life of Wilson, the founder and CEO of the corporation. The corporation is the beneficiary of the multi-million dollar policy
If Wilson dies, the corporation will receive the policy proceeds tax-free. If Wilson's wife is the beneficiary instead of the corporation, the corporation can deduct the amount of premiums paid as compensation.
Concerning the credit for child and dependent care, NOT TRUE
If a taxpayer's adjusted gross income does not exceed $43,000, the child and dependent care credit rate is 30%. Expenditures qualifying for credit can exceed the earned income of the taxpayer. Neither
Mark has an adjusted gross income of $154,000. Not included in his adjusted gross income is a $16,000 loss from a passive activity. Which of the following statements regarding the effect of the passive loss on his adjusted gross income IS/ARE NOT correct?
If the activity does not involve rental real estate, he can only deduct the loss as a miscellaneous itemized deduction. If the activity is rental real estate and Mark is an active participant, he can deduct the $16,000 loss for adjusted gross income.
Aunt Bea sold some stock she purchased several years ago for $10,000 to her nephew, Andy, for $6,000.
If this is Aunt Bea's only stock transaction, she can deduct only $3,000 of the loss. If Andy sells the stock for $10,000, his taxable gain is $4,000.
Frasier sells some stock he purchased several years ago for $10,000 to his brother, Niles, for $6,000.
If this is Frasier's only stock transaction, he can deduct only $3,000 of the loss. If Niles sells the stock for $10,000, his taxable gain is $4,000. Neither
Personal Interest
Interest paid on credit cards, personal loans, car loans, etc
The wash sale provisions apply to which of the following?
Jim bought 500 additional shares of Alfa Gamma stock for $4,000 on December 2, 2018. Jim owned 2,500 shares after that purchase. On December 26, 2018, Jim realizes a loss of $1,500 on the sale of 250 shares of Alfa Gamma stock
Which of the following is an example of a business purpose as dominant motive?
Larry is a full-time plumber. He is taking his family with him to a convention in Orlando featuring the latest in plumbing products and techniques. He plans to deduct most of his cost of the trip.
Which of the following legal expenses paid by the Sutton Corporation can be deducted in the current year?
Legal fees to initiate a lawsuit against a competitor who is using its patent. Legal fees to settle a lawsuit filed by a delivery person who slipped on the ice delivering a package to Sutton's office.
Which of the following events is a "casualty" loss?
Lightning damage. Loss of the topsoil on a farm from a flood. Diamonds stolen by thief, reported to police Florida orange trees killed by a freeze.
Business Gift
Limited to $25 per person
Capital Loss
Limited to $3,000 annually for individuals.
On May 1, 2018, Linda sells her rental property for $125,000. Her basis in the property at the beginning of the year is $75,000. As part of the sales contract, the buyer agrees to pay the real property taxes of $1,500 for the current year when they come due on December 31, 2018
Linda can deduct $500 in real estate taxes
Which of the following IS/ARE NOT currently deductible trade or business expenses?
Membership dues to an environmental lobbying group. Cost of acquiring a new business automobile. Transportation and lodging expenses of $4,000 to influence state legislation that may affect the taxpayer's business. A $4,000 contribution to the mayor's campaign fund.
Travel Expenses
Must be away from tax home overnight to be deductible
Which of the following taxes paid by Trevor Products, Inc. can be deducted during 2018?
Real estate taxes.
Bonnie's sister, Diane, wants to open a restaurant. Because Diane is short of funds, Bonnie purchases the building and leases it to Diane. No agreement is signed, and Bonnie tells Diane not to worry about paying rent until the cash flow can support it. Also, Bonnie promises not to sell the property to anyone other than Diane.
The building rental has the characteristics of a gift. Bonnie's property tax expenses related to the property are deductible.
NOL Carryforward
The loss is used to offset income in future periods
Children under 18 and full time students under 24 are taxed differently than other taxpayers if
Their unearned income exceeds $2,100
Alex and Alicia are married and have two children ages 5 and 9. Their adjusted gross income for the year is $86,000. During the year they establish a Coverdell Education Savings Account (CESA) for each child.
They can contribute $2,000 to each child's CESA
Deductions For AGI
A deduction in this category is always allowed. That is, there is no minimum allowable amount and generally no income limitation placed on these deductions
Nonrecourse Debt
A liability that is only secured by the underlying property
Personal-use loss
A loss that is generally not deductible
Casualty Loss
A loss that results from some sudden, unexpected, or unusual event
Lillian and Michael were divorced last year. Michael has custody of their two children. Lillian pays $8,600 in child support payments during the current year. Michael pays $12,000 in alimony to Lillian. The total cost of supporting the children is $12,500. Michael and Lillian do not have any special agreement about dependents. How many total dependents may Michael claim for the current year?
2
Generally income tax accounting methods are designed to result in
A proper application of the wherewithal-to-pay concept. A tax based on the amount of cash available in the current period to pay taxes. A denial of a current deduction for costs that will not have to be paid in the near future.
Small Business Stock
A type of stock that receives some ordinary loss treatment
Support Test
An exception to this test is a custodial parent
Tax Home
General area where a taxpayer conducts principal activity
Married, Filing Separately
Generally used when financial disagreement exists
Deductions From AGI
Generally, these deductions are for specifically allowed personal expenditures
Walter recently received a notice of an income tax deficiency of $21,000 from the IRS. He hires an attorney to handle his IRS problems. Walter's legal expenses are $4,000. Can Walter deduct the legal expenses?
He can deduct the full amount if the tax deficiency relates to his business. He can deduct the full amount if the tax deficiency relates to rental income other than business income.
Kevin, single, is an employee of the Colonial Company and is an active participant in its pension plan. Kevin's adjusted gross income for the current year is $62,000. Kevin contributes $1,000 to his conventional individual retirement account. Which of the following statements about Kevin contributions and deduction amounts is (are) true?
He is allowed to deduct his $1,000 contribution to his conventional IRA. Kevin can also contribute but not deduct $4,500 to his Roth IRA.
Chi is single and an employee of Federal Company. Chi's adjusted gross income for the current year is $64,000. Chi would like to make the maximum contribution to his individual retirement account this year. Which of the following statements about Chi's contribution and deduction amounts is (are) true?
He is not allowed to make an IRA contribution because his adjusted gross income is greater than $63,000. If Federal Company does not have a qualified pension plan; Chi can contribute and deduct a maximum of $5,500 to his IRA account.
Tisha's husband died in 2015. She has not remarried and maintains a home for herself and her dependent son. What is Tisha's filing status for 2018?
Head of Household
Jose, Mahlon, and Eric are partners in New Communications Partnership. Jose owns a 50% interest, Mahlon owns a 35% interest, and Eric owns a 15% interest. During the current year (the first year of operation for the enterprise), the business has a loss. Although the partnership is established as a general partnership, Jose functions as the manager and performs all of the day-to-day duties of a chief operating officer. Mahlon and Eric are merely investors who receive monthly reports about the business. At the close of the current tax year, each partner will receive a share of the partnership loss. Which of the partners will be able to deduct his (their) share of the partnership loss?
Jose
All of the following are capital assets, except
Land used for business parking lot
Maria, an engineer, has adjusted gross income of $167,000 before considering the following losses. The passive activity rules disallow the deduction for the loss in which of the following?
Maria owns and actively participates in managing a rental house across the street from East State College. This activity generates a $7,000 loss in the current year.
Thomas has adjusted gross income of $228,000, total itemized deductions of $39,000 and has a standard deduction of $24,000. Which is his filing status?
Married filing a joint return
Norton's spouse died in 2018. Norton has one child, age 7, living at home. Norton provides all of the support for the child. The child lives with Norton during 2018, 2019, 2020, and 2021. Norton's most advantageous filing status is
Married filing jointly in 2018, surviving spouse in 2019 and 2020, head of household in 2021
Larry and Louise are both 49 years of age and file a joint return. They provide all of the support for their son, Dylan, who is 20 years old and is at home until he gets called into the army. His income at part-time jobs is $4,500. Their daughter, Phyllis, is a 23-year-old full-time student at State University. She lived at school 9 months and provided two thirds of her own support with a summer job. Which of the following statements is true concerning the qualifying children of Larry and Louise?
Neither Dylan or Phyllis is a qualifying child of Larry and Louise
Child Support
Not deductible
Points
Prepaid interest
Nonbusiness Bad Debt
Short-term capital loss
During the year, Aimee reports $30,000 of active business income, $15,000 of income from passive activity X, and a $25,000 loss from passive activity Y. Determine the tax consequences of these events
The $15,000 income from activity X can offset $15,000 of the loss from activity Y. Any passive loss that is not deducted in the current year is suspended.
Elizabeth operates an accounting firm as a sole proprietorship. She is single, the accounting business has net income of $120,000 and she has taxable income of $130,000. Which of the following is true regarding her Qualified Business Income (QBI) deduction?
The QBI deduction is a deduction for adjusted gross income The QBI deduction is an itemized deduction She is not allowed a QBI deduction because she operates a specified service business. NONE
For its financial accounting records Addison Company uses the allowance method to account for bad debts and estimates the balance in the "Allowance for Bad Debts" account using the aging method. For tax purposes, the allowance method cannot be used. The rationale for not allowing this method is
The all-events test has not been met
Personal Casualty Loss
The amount of loss is limited to the lower of the property's adjusted basis, or the reduction in fair market value
Personal Expense
Specifically disallowed
Kenzie and Ross equally own rental real estate. The rental property generated a loss of $20,000. Kenzie is also employed as a part-time Tupperware salesperson and full time as a real estate agent. For her share of the loss to be fully deductible, she must:
Spend more than 750 hours, in total, as a realtor Spend more than 100 hours managing the rental activity, and spend more time than Ross. She must spend more than 50% of her time as a realtor and must own more than 5% of the real estate agency.
Which of the following taxes is deductible from adjusted gross income when paid by an individual taxpayer?
State income tax
Business Casualty Loss
The amount of the loss for fully destroyed property is the property's adjusted basis
Recourse Debt
The borrower is personally liable for the debt
Auto, travel, and gift expenses are subject to strict documentation requirements. Taxpayers are required to keep records that show
The business purpose of the event. The time and place of the event.
Simone and Fillmore were divorced last year. Fillmore has custody of their two children. Simone pays $9,600 in child support payments during the current year. The total cost of supporting the children is $12,500. Fillmore and Simone do not have any special agreement about dependents. How many total dependents may Simone claim for the current year?
0
Angel owns a gourmet Mexican restaurant. His head chef, Carmen, is arrested for a parole violation. Because Angel needs Carmen back to work as soon as possible, Angel pays her bail of $250, attorney's fees of $300, and a court fine of $200.
A business purpose exists for the payments. If Carmen were required to repay the expenditures, it would constitute a loan and not be deductible for Angel. If Angel does not require Carmen to repay the amounts paid on Carmen's behalf, the payments constitute compensation and Angel gets a deduction for the expenses paid.
Concerning individual retirement accounts (IRAs), NOT TRUE
A single taxpayer that is not an active participant in a qualified plan may deduct up to $6,000 of the annual contribution. A taxpayer that is not working outside of the home may not deduct any amount if their spouse is an active participant in a qualified plan, unless their AGI is below $63,000.
Kiddie Tax
A tax designed to prevent the shifting of unearned income to children of the taxpayer
Passive Activity
A trade or business in which the taxpayer is not a material participant
"Active participation" and "real estate professional" are both exceptions to the general rule for passive activity losses with rental real estate.
Active participation results from owning at least a 10% interest in the activity and arranging for repairs and maintenance and collecting rents. One of the tests that an individual must meet to qualify as a real estate professional is that the taxpayer spends more than 50% of his/her time in real property trades or businesses. A taxpayer with an AGI of $190,000 qualifying under the real estate professional exception may deduct an unlimited amount of rental real estate losses.
Ariel has two children, Christopher and Pat. Christopher is 25 years old and Pat is 22. Christopher is a full time student at Southern College, has a full tuition scholarship, and lived at school during the year. Pat works full-time and lives at home. Which test will prevent both Pat and Christopher from being qualifying children of Ariel?
Age Test
The all-events test requires that
All events have occurred that determine a liability exists. The amount of a liability is determined with reasonable accuracy
Sheila extensively buys and sells securities. The IRS has determined upon examination that she is not in a trade or business concerning the securities' transactions and therefore, Shelia must be
An active investor
Anna owns a passive activity that has a basis of $30,000 and a suspended loss of $7,000. Anna gifts the passive activity to her daughter Patricia when the property has a fair market value of $42,000.
Anna will report an ordinary loss of $7,000. Patricia's basis in the passive activity is $30,000. NEITHER
Capital Asset
Any asset that is not a receivable, inventory, or depreciable or real property used in a trade or business
If an individual is not a material participant, a rental activity is considered passive. However, certain rental activities are not deemed to be rentals for passive loss purposes even if the individual is not a material participant. Which of the following is not excluded from the passive loss rules?
Apartment rentals
Art is a 21 year old full-time student. Art's support is provided as follows: Art 48% Art's parents 52%
Art is a qualifying child and a qualifying relative
Which of the following requirements does not have to be met for a business or investment expense to be deductible:
Be recurring
Mary Lou is a 22-year old student at Wilson College. She earned $4,300 at a summer job, which is less than half of her support
Because Mary Lou is a full-time college student, and she provides less than half of her own support, her parents can claim a $500 family tax credit because she is their dependent
Will and Brenda of New York City are both age 66 and always file a joint tax return. During the current year they provide all the support for their son who is 20, has no income, and is a part-time college student. Their daughter, age 22 and a full-time student at Columbia University, has $4,800 of income. Which of the following is true related to Will and Brenda's tax return?
Both their son and their daughter are dependents
Which of the following individuals can be claimed as a dependent in the current year? (Assume any test not mentioned has been satisfied).
Carl and Diane are divorced. Carl has custody of their 6-year-old son. Diane pays Carl $500 per month in child support. Carl pays the other $400 per month it costs to support their son. The divorce decree does not stipulate who gets custody of the son. Carl claims his son as a dependent. Kelly's mother, Dana, lives with her for 10 of 12 months during the year. Kelly provides all the support for Dana during that time. The other two months were spent with Dana's other daughter, Alice. Dana's annual income consists of $12,750 in Social Security and $1,850 of savings account interest. Kelly may claim Dana as a dependent. Bart is a 22-year-old college student. His tuition of $7,000 is paid by a scholarship he received for his good high school record. He lives with his parents, who also provide him with $450 monthly support. Bart earns $1,950 mowing lawns in the neighborhood for other support. He may be claimed as a dependent of his parents.
Darien owns a passive activity that has a basis of $36,000 and a suspended loss of $22,000. If Darien dies during the year when the passive activity has a fair market value of $52,000, how will the information be presented on his tax return?
Darien will report an ordinary loss of $6,000.
Which of the following information is not required for substantiation of business gift expenditures?
Date and description of the gift. Specific business purpose of the gift. Receipt to provide evidence of amount of expenditure. Identity of, and business relationship to, those persons receiving the gift.
Business Bad Debt Expense
Deductible as an ordinary loss
Which of the following individuals or couples qualify for the 2018 earned income credit?
Dennis is single and 25 years old. He is a recent graduate of Holly Technical College. During the year, Dennis cannot find a full-time job, but makes $7,000 as a waiter. Larry and Shari are both 30 years old. Larry works part-time and earns $6,000, and Shari, who is starting her own business, earns $9,000. They have one child.
Filing Status
Determines which tax rate schedule and standard deduction amount is applicable.
Due to a shortage of cash, East Coast Entertainment Company, an accrual basis taxpayer, could not pay its November 2018 utility bill on time. In February of 2019, East Coast Entertainment pays the utility bill.
East Coast can deduct the expense on either its 2018 or 2019 tax return. East Coast cannot deduct the utility expense in 2018 because it is paid in 2019. NEITHER
Dependent
Either a qualifying child or a qualifying relative
Ester is a sales representative for a pharmaceutical company. She receives a monthly travel allowance from the company to cover her travel costs (transportation, food, lodging, entertainment, etc.). If Ester is not required to account to the company for the use of the travel advance
Ester will only have gross income to the extent her travel allowance exceeds her actual costs. Ester must include the travel allowance in her gross income. Her actual costs are deductible from AGI, subject to all applicable limits on such deductions. NEITHER
Illegal gambling operation expenses
Expensed in the period incurred
Julian and Judy divorced and Julian received custody of their child. Judy must pay child support of $24,000 annually. Therefore, Julian agreed in writing to allow Judy to claim the child as a dependent. Julian maintains a home for himself and the child. For the current year, Julian's filing status and total number of dependents are
Head of household and no dependents
Chelsea is an employee of Avondale Company. Chelsea's adjusted gross income for the current year is $67,000. Chelsea would like to make the maximum contribution to her individual retirement account this year. Which of the following statements about Chelsea's contribution and deduction amounts is (are) true?
If Chelsea is single and is covered by a qualified pension plan, she is allowed to contribute $5,500 to her IRA account, but she is allowed a deduction for only $3,300 of the contribution because her adjusted gross income is greater than $63,000. If Chelsea is married and covered by a qualified pension plan and her husband does not work, they can contribute and deduct $5,500 to two separate IRA accounts (one for herself and one for her husband).
Norris owns a passive activity that has a suspended loss of $12,000. The activity has a fair market value of $42,000 and his adjusted basis in the activity is $27,000.
If Norris dies, none of the suspended loss is deductible
Sarah owns a passive activity that has a suspended loss of $18,000. The activity has a fair market value of $35,000 and her adjusted basis in the activity is $20,000
If Sarah sells the activity, she is allowed to deduct the $18,000 suspended loss
Perry owns all of the stock of Sound Corporation. Perry is also the President of Sound and works full-time running Sound. During the current year, Sound has a loss of $75,000 from its operations
If Sound is a regular corporation, the corporation can carry the loss forward indefinitely to reduce taxable income in future years
Concerning the credit for child and dependent care
If a taxpayer's adjusted gross income exceeds $43,000, the child and dependent care credit rate is reduced to 20%.
Cory is a 32 years old, unmarried, and has no children. Cory's father lives in a nursing home
If his father's taxable income is less than $4,150 and the other dependency tests are met, Cory will file as head of household
Rose has an adjusted gross income of $130,000. Not included in her adjusted gross income is a $15,000 loss from a passive activity. Which of the following statements regarding the effect of the passive loss on his adjusted gross income is/are correct?
If the activity is rental real estate and Rose meets the real estate professional exception, she can deduct the $15,000 loss for adjusted gross income
A passive activity
Includes an interest in a limited partnership held by a limited partner investor. Includes any trade or business in which a taxpayer does not materially participate. Includes rentals of apartment buildings, rental houses, etc., where no significant personal services are involved.
Which of the following qualify for the medical expense deduction?
Insulin. Medicare insurance premiums. Chiropractic treatments.
Which of the following expenses is not deductible for AGI?
Interest expense related to an investment
Certain interest expense can be carried forward if not deductible in the current year. Which of the following types of interest can be carried forward and deducted in a future year?
Interest on a loan to buy common stock
Home Equity Loan Interest
Interest paid on a mortgage secured by the taxpayer's residence. The proceeds of the loan are used to pay off a credit card, the interest is not deductible
Investment Interest
Interest paid on debt used to buy securities
Material Participant
Involved in a rental activity for more than 500 hours in a year.
Irene is 47 years old, unmarried, and has no children. Irene's mother lives in a nursing home.
Irene can file as head of household because her mother lives in a nursing home. Because Irene's mother is a lineal descendent, Irene automatically qualifies for head of household status. Neither
An ordinary expense
Is normal, common, and accepted under the circumstances of the business community. Is an expense commonly incurred in an income-producing activity.
Kelly buys a new Lexus for $48,750 in the current year to use in her commercial real estate business. Kelly cannot deduct the cost of the automobile in the current year, because
It is a capital expenditure
Jerome owns a farm, which has three separate houses. He rents out two of the houses and lives in the other house. During 2018, a tornado, a federally-declared disaster, goes through his property causing damage to the houses. Rental House A had a fair market value of $40,000 and an adjusted basis of $20,000, but it is not damaged by the tornado. A local real estate agent told Jerome that because of the tornado, property values in the area have declined 10%. Rental House B, which has an adjusted basis of $25,000, is worth $60,000 before the tornado and $20,000 after the tornado. Jerome's insurance company pays him $20,000 for the damage to Rental House B. Jerome's residence (which has an adjusted basis of $80,000) was worth $70,000 before it is totally destroyed by the tornado. Jerome's insurance company reimburses him $60,000 for the loss of his residence. Ignore the limitation based on Adjusted Gross Income.
Jerome's loss on his residence is $9,900. Jerome cannot deduct a loss on Rental House A.
Jim operates a business out of his home. One room in his home is used for business and qualifies as a home office. Which of the following allocable expenditures can Jim use in computing his home office expense deduction?
Jim pays his housekeeper $25 a week to sweep, dust and straighten-up his office. Jim's fire and casualty insurance premiums on his home are $800.
Karen is single and graduated from Marring University in May of 2017. In January of 2018, she begins repaying her student loans and in 2018 pays $2,800 of interest on the loans. Her adjusted gross income is $51,000.
Karen can deduct $2,500 of interest as a deduction for adjusted gross income
Kyle is married and a self-employed landscaper. During the current year, Kyle pays $3,000 for health insurance coverage for himself. He pays another $400 for coverage for his employee, Tabatha. How should Kyle deduct the health insurance cost?
Kyle deducts a total of $3,400 for AGI. Kyle cannot deduct any portion of his premium of $3,000 for AGI if his spouse is covered by a health plan through her employer.
Which of the following legal expenses paid by the Kerr Corporation can be deducted in the current year?
Legal fees to resolve a tax dispute with the Internal Revenue Service
Which of the following individuals or couples qualify for the child and dependent-care credit?
Lois is single and earns $45,000 for the year. She pays $2,600 in child-care costs for her 8-year-old daughter. Patrick and Carol are married and together they earn $67,000 ($42,000 and $25,000 respectively). They pay $5,000 in child-care costs for their twin boys, age 11. Michael is single and earns $75,000. Michael pays $10,000 for a nurse to help care for his father who is disabled and lives with him. Michael is entitled to the dependency exemption for his father.
Which of the following losses are generally deductible?
Loss on the sale of corporate stock. Losses incurred in carrying on a trade or business. Loss due to the theft of business inventory
Lynn is a sales representative for Textbook Publishing Company. He receives a monthly travel allowance from Textbook to cover his travel costs (transportation, food, lodging, entertainment, etc.). If Lynn is not required to account to Textbook for the use of the travel advance
Lynn will not have to show any aspect of the travel reimbursement or expenses incurred if he spends all of the reimbursement on valid travel expenses. To the extent Lynn is reimbursed for his costs he will get a deduction for AGI. NEITHER
Limited Partnership
Management is left to at least one general partner whose liability is not limited and who is responsible for the on-going activities of the business.
Margaret is single and is a self-employed proprietor of a convenience store near the mall. During the current year, Margaret paid $4,000 for health insurance coverage for herself. She paid another $500 for coverage for her unrelated employee, Corky. How should Margaret deduct the health insurance cost?
Margaret takes $500 as a business expense. Margaret takes the $4,000 as a deduction for AGI.
In October of the current year, Brandy and her husband Ben split up and do not speak to each other. Neither individual will cooperate with the other on finalizing the divorce. Ben supports their two children after the split up and maintains their household. What is Ben's filing status for the current year?
Married, filing separately
Lilly and her husband Ben have a serious argument. In fact, Lilly moved out in August, left town, and has not been heard from since. Ben supports their two children after the split up and maintains their household. What is Ben's filing status for the current year?
Married, filing separately
In which of the following circumstances will income of the child be taxed at the rates applicable to estates and trusts?
Martin, age 6, earns $14,000 this year by acting in television commercials. Allen, age 22 and a full time college student, has $4,000 of interest income on municipal bonds that he inherited from his grandfather last year. NEITHER
Carla, a single taxpayer, has taxable income of $250,000. Included in her taxable income is income from her consulting business that is operated as a S Corporation. Mary, a single taxpayer, has taxable income of $120,000. Included in her taxable income is income from her consulting business that is operated as a S Corporation. Which of the taxpayers can use the Qualified Business Income (QBI) deduction?
Mary can take the QBI deduction
Mary is a 21 year old full-time student. Mary's support is provided as follows: Mary 60% Mary's parents 40% Assuming all other tests for dependency not mentioned are satisfied
Mary is not a qualifying child of her parents and is not a qualifying relative
Melissa is a corporate sales representative for Computer City. Melissa receives a monthly travel allowance from Computer City to cover her travel costs (transportation, food, lodging, etc.). If Melissa is required to account to Computer City for the use of the travel advance and to return any excess travel advance
Melissa will not have to show any aspect of the travel reimbursement or expenses incurred if she spends all of the reimbursement on valid travel expenses
Morris is a single individual who has total itemized deductions in 2018 of $12,500. His itemized deductions include $2,000 for state income taxes. After filing his 2018 state income tax return he receives a refund of $275
Morris must include $200 as income on his 2019 federal income tax return
During the current year, Paul came down with a serious illness. Paul's uncle paid many of Paul's expenses during the period of rehabilitation. For tax purposes, how are Paul's mortgage interest and real estate property taxes handled?
Neither Paul nor his uncle can deduct the expenses
In which of the following circumstances will income of the child be taxed at the tax rates applicable to estates and trusts?
Nicole, age 17, has $4,000 of interest income from Microsoft bonds
Which of the following WILL NOT prevent a couple from filing as married filing joint in 2018?
One spouse dies on June 6, 2018. The couple is legally married, but is living apart throughout the year.
Gross Income Test
One test for a qualifying relative
Business Meals
Only 50% of the cost is deductible
Active Participant
Owns at least a 10% interest and is significantly involved in the rental activity.
Which of the following is (are) correct concerning the deduction for moving expenses?
Prior to 2018, certain moving expenses were deductible for adjusted gross income.
Thomas changes jobs during 2018 and moves from Philadelphia to El Paso. Which of the following expenses relating to the move can Thomas NOT deduct?
Prior to the move, Thomas flies to El Paso to find an apartment. The cost of meals while driving his household goods to El Paso.
Reasonable Expense
Problems with this generally arise with related parties
Randy is a single individual who receives a salary of $30,000. During 2018, he has $7,000 withheld for payment of his federal income taxes and $2,500 for his state income taxes. In 2019, he receives a $400 refund after filing his 2018 federal tax return and a $50 refund after filing his state tax return
Randy is allowed a deduction for the $2,500 of state taxes withheld from his salary on his 2018 federal tax return. If Randy has total itemized deductions of $12,400 on his 2018 federal tax return, he must include the $50 state tax refund in his 2019 gross income.
Richard is a sales person for Publix Company. Every month Richard fills out an expense account report, documenting all his expenses and submits it for reimbursement. During the current year, Richard submitted documentation and receives $12,500 of reimbursements. All his claims are reimbursed. How will these expenses and reimbursements affect Richard's income tax calculation?
Reimbursed amounts are excluded from gross income
Roscoe and Amy are married and own 12,000 shares of qualifying small business stock that they purchased for $150,000. During the current year, they sell 10,000 shares of the small business stock to an unrelated third party for $30,000. Eager to sell the remaining shares, they sell the other 2,000 shares to Amy's sister for $4,000. In addition, they sell stock with a basis of $5,000 for $10,000. The stock was acquired in 2007. In 2010, Roscoe and Amy loaned her brother, Carl, $8,000 to start his business. Carl has only repaid $2,000 on his documented loan. During the year, Carl has filed for bankruptcy. The bankruptcy court liquidates all of Carl's assets and Roscoe and Amy receive nothing from the liquidation.
Roscoe and Amy have a net short-term capital loss of $1,000
Sally is a corporate sales representative for Computer City. Sally receives a monthly travel allowance from Computer City to cover her travel costs (transportation, food, lodging, etc.). If Sally is not required to account to Computer City for the use of the travel advance
Sally will not have to show any aspect of the travel reimbursement or expenses incurred if she spends all of the reimbursement on valid travel expenses. Sally will only have gross income to the extent her travel allowance exceeds her actual costs. NEITHER
Salvador owns a passive activity that has a basis of $44,000 and a suspended loss of $18,000. Salvador's taxable income from active and portfolio income is $55,000. If Salvador's sells the passive activity for $56,000 how will he report the transaction on his tax return?
Salvador will report an ordinary loss of $18,000. Salvador will report a capital gain of $12,000.
Shaheen owns 2 rental properties. She hires her 21 year old son, who is a junior at State College, to obtain tenants, negotiate leases, make arrangements for repairs, and pay expenses related to the properties.
Shaheen's sale of the properties will result in a capital gain or loss. Shaheen's sale of the properties at a loss results in a current-year loss deduction of no more than $3,000.
Which of the following taxes paid by the Sill Engineering Company can be deducted during 2018?
Sill Engineering's share of employee's Social Security taxes
Georgia is unmarried and maintains a home in which she and her unmarried daughter Karla age 34, live. Karla is an engineer and earns $52,000 annually. Karla had some severe financial difficulties two years ago and Georgia has been helping her out ever since. Georgia's spouse died in 2017. What is Georgia's filing status for 2018?
Single
Which of the following taxes paid by Woodhaven Inc. can be deducted during 2018?
State income taxes paid in 2018 when filing Woodhaven's 2017 corporate return tax return
Sullivan, a pilot for Northern Airlines, has adjusted gross income of $92,000 before considering the following losses. The passive activity rules disallow the deduction for a loss in which of the following?
Sullivan has a $7,000 loss from his ownership interest in Swineco, a feeder-pig limited partnership. Sullivan is a limited partner
Frank's wife died in 2016. He has not remarried and maintains a home for himself and his dependent daughter. What is Frank's filing status for 2018?
Surviving Spouse
Susan is a 21 year old full-time student. Susan's support is provided as follows: Susan 44% Susan's parents 48% Susan's grandmother 8% Assuming all other tests for dependency not mentioned are satisfied
Susan is a qualifying child of her parents but is not a qualifying relative
Which of the following payments are currently deductible?
Sweeney Corporation pays tuition to an MBA program for Phyllis, the controller.
Which of the following taxpayers CANNOT claim a business bad debt deduction for the current year?
Sylvia lent her neighbor $4,000 to put a new roof on his home. Because they have been friends for over 15 years, Sylvia trusted her neighbor to pay her back and didn't make him sign a note with interest. The neighbor has left town and Sylvia will not get any of her money back. Her loss is properly related to this year using the cash basis of accounting. Saul is an attorney using the cash basis of accounting. One of his clients is short of money to pay the utilities in the office building Saul rents from him. Saul advances the client $5,000. Saul has just learned that the client has filed bankruptcy and that Saul will not be repaid for any part of the loan.
Anita receives a state income tax refund of $550 in May 2018. When she filed her 2017 federal income tax return, she used the standard deduction amount. Although the all-inclusive income concept would require Anita to report the $550 in her federal gross income for 2018, she may exclude it. What tax concept explains why the exclusion is permitted in this case?
Tax Benefit Rule
To be a qualifying relative, an individual must meet certain tests. These tests include
The citizen or residency test. The gross income test.
To be deductible, the dominant motive for incurring an expense must be
The intent to earn a profit
NOL Carryback
The loss may be used to offset income from prior periods
Standard Deduction
The minimum amount a taxpayer can deduct for personal expenditures
Jackie recently retired from the U.S. Coast Guard after 30 years of service. She would like to open a boat shop to operate in her retirement years. Jackie incurs $3,800 of expenses while investigating sites for her shop and while checking out boat franchises. What are the tax effects of the expenses Jackie incurs?
They are not deductible if Jackie does not enter the ski and boat business.
Economic Performance
This is met when services or property are provided to the taxpayer.
All-events test
This is met when the existence and the amount of a liability have been established
Victor is a sales representative for Valley Winery. Victor receives a monthly travel allowance from Valley to cover his travel costs (transportation, food, lodging, etc.). If Victor is required to account to Valley for the use of the travel advance and to return any excess travel advance
To the extent Victor is reimbursed for less than his costs, part of his expenses are deducted for AGI and part are deducted from AGI
The wash sale provisions DOES NOT apply to which of the following?
Tom realizes an $8,000 loss on the June 17, 2018, sale of 650 shares of Roadrunner Corporation common stock. He replaces the 650 shares with Hawke Inc., stock on July 8, 2018. Rosie realizes a $6,000 loss on the December 29, 2017, sale of 40 Billings corporate bonds. Each bond has a face value of $1,000. She replaces the Billings corporate bonds with 30 Redeemer corporate bonds, each with a face value of $1,000 on January 16, 2018. The Redeemer bonds have the same interest rate, maturity date, but a different bond rating (AAA) as the Billings bonds.
Brees Co. requires its employees to adequately account for all reimbursed business expenses. Tracy, an employee of Brees Co. has AGI of $50,000 and submitted for reimbursement the following valid business expenses: Transportation costs $1,000 Meals 700 Hotel costs $1,300
Tracy must report $2,400 of income. Tracy can deduct $2,400 of the expenses for AGI and $-0- as miscellaneous itemized deductions.
Which of the following expenses IS/ARE NOT deductible?
Transportation and lodging expenses of $4,000 to influence state legislation that may affect the taxpayer's business. A $4,000 contribution to the mayor's campaign fund.
Head of Household
Unmarried and provides a household for a dependent
Single
Unmarried without dependents
Surviving Spouse
Use the same tax rate schedule as married, filing jointly
Transaction Loss
When an asset is disposed of for less than its basis
An accrual basis taxpayer may deduct expenses in the year in which certain tests are met. These tests include
When services or property are provided to the taxpayer or when the taxpayer uses the property. When the "all-events test" is met. When "economic performance" has occurred. When all events have occurred to determine that a liability exists and the amount of the liability can be determined with reasonable accuracy.
If a taxpayer owes interest, economic performance occurs
With the passage of time
Kevin wants to know if he can claim his brother, Richard, as a qualifying relative for income tax purposes. Richard is 18 and is a part-time student at City Community College. He lives with Kevin in his home for the entire tax year. Kevin provides the majority of Richard's support. During the year Richard has the following items of income: State of Oklahoma bond interest $1,000 Dividends on General Motors stock $700 Employee wages from part-time work $2,900
Yes
Sergio wants to know if he can claim his daughter, Sarah, as a dependent on his income tax return. Sarah lives at home with her parents all year. Sergio provides $11,500 for her support (i.e., food, shelter, and transportation). Sarah, age 18, made $13,250 last year by acting and working as a cashier at a restaurant. Sarah saved $9,000 of her income and spent $4,250 on clothes and entertainment. Can Sergio claim his daughter, Sarah, as a dependent for income tax purposes?
Yes
Marian, a schoolteacher in Duluth, Minnesota, owns a rental house in Scottsdale, Arizona. She travels to Arizona during spring break to inspect her property and discuss property improvements with the tenant and property manager. Marian's brother, Brian, lives in Scottsdale. She stays at his house during her week in Arizona and borrows his car to travel across town for her day of meetings. Her trip accomplishes several objectives: a visit with her brother, a trip away from Minnesota's winter weather, and a review of her investment property. The expenses of traveling to Scottsdale
have a dominant business purpose. are deductible as expenses for the production of income. NEITHER
Garcia is single, 65 years old, and has no dependents. Garcia will not have to file a tax return in 2018 if:
his gross income does not exceed $12,000. his only income is $11,000 of social security benefits.
Canfield is single, 70 years old, and has no dependents. Canfield will not have to file a tax return in 2018 if
his gross income does not exceed $12,000. his only income is $300 of self-employment income.
The Business Purpose Concept means
that the economic purpose of the transaction must exceed the tax avoidance motive
Three requirements must be met in order to deduct a trade or business expense. Also, deductible trade or business expenses may not be which of the following:
A capital expenditure. A payment that frustrates public policy. An expense related to tax-exempt income.
In which of the following circumstances would a cash basis taxpayer be required to account for an item of income or deduction under the accrual method of accounting?
A cash basis taxpayer will not be required to use the accrual basis method of accounting in any of the above circumstances
In which of the following independent situations is the taxpayer entitled to deduct expenses related to the home office?
A real estate agent employed by a local real estate agency owns several rental properties. She regularly and exclusively uses a second bedroom in her home solely as an office for bookkeeping and other activities related to management of the rental properties. She has no other place to perform these functions
During 2017, Virginia, an architect, made a bona fide $7,500 loan to her friend Joe when he was in a time of need. Joe died in 2018. Virginia has been informed by Joe's estate that he was insolvent. Virginia should record the nonpayment of the loan as
A short-term capital loss
Indicate which of the following statements is/are correct:
An accrual basis taxpayer who gives a creditor his note payable in payment of a claim may deduct the related expense when the note is given. When a cash basis taxpayer uses a credit card to pay for an expense it can deduct the expense when the expense is charged to the credit card. A cash basis taxpayer may deduct prepaid rent if it will be used-up within one year of prepayment and the payment is required to be made. An accrual basis taxpayer must satisfy an all-events test and an economic performance test to claim a deduction.
Sarah extensively buys and sells securities . The IRS has determined upon examination that she is in a trade or business concerning the securities' transactions and therefore, Sarah is
An active trader
Matthew, a single taxpayer with adjusted gross income of $90,000, works as a computer programmer for the Novak Corporation. The corporation reimburses all its employees 50% of tuition, fees and books for courses taken at the local university. Matthew incurs $6,000, is reimbursed $3,000, and can deduct the remaining $3,000 of the education expense
As a deduction for adjusted gross income. Only if the course is required by state law to continue in his current job. NEITHER
Organization Costs
Can be capitalized and amortized or deductible depending on the amount of the expenditure
Start up costs over $5,000
Can be capitalized and amortized or deductible depending on the amount of the expenditure
Covenant not to compete for 4 years
Capitalized and amortized over a number of accounting periods
Bruce operates an illegal drug business. Which of the following is deductible?
Cost of drugs sold
Business expenses include
Expenditures that have a business purpose. Expenditures that are incurred for the production of income. An expenditure that satisfies the dominant profit-motive requirement. An expenditure that is incurred in a trade or business activity.
Fire and casualty insurance premium on business warehouse
Expensed in the period incurred
Repair and maintenance expenditures
Expensed in the period incurred
Which of the following is not deductible?
Expenses related to interest income from municipal bonds
All of the following are a required test for the deduction of a business expense except?
GAAP
Which of the following taxpayers can claim a business bad debt deduction for the current year?
George owns and operates a sporting goods store and uses the accrual method of accounting. He has several customers who have owed him money for more than 10 months
Which of the following business expenses IS/ARE NOT subject to a 50% deduction limit for 2018?
Gifts. Incidental expenses while traveling.
During the current year, Hope Corporation paid a $3,250 premium for a life insurance policy on the life of the chief executive officer, Joel. Determine the deductibility of the $3,250.
Hope could deduct the premium as compensation if Joel's daughter is the stated beneficiary of the policy. The premium is not deductible if Hope Corporation is the beneficiary.
Electronic City sells various electronic products. With each of its products, Electronic City offers customers the option of purchasing a repair contract. Under the contracts, Electronic City will make repairs anytime during the term of the contract. Electronic City estimates that repair costs related to this year's sales will be $39,000. During the current year, Electronic City incurs repair costs of $37,000 related to prior year's contracts and $4,000 on contracts sold this year.
If Electronic City accounts for the contracts using the cash method of accounting, its repair cost deduction is $41,000.
Ernest went to Boston to negotiate several new contracts with clients. His airfare was $400 and he spent $150 per day on lodging, $40 per day on meals, and a total of $60 on cab fare
If Ernest spends 2 days on business and 3 days on personal activities, he can deduct $160 of his airfare. If Ernest spends 3 days on business and 2 days on personal activities, he can deduct $120 of the meal costs. NEITHER
Harold is a 90% owner of National Homes Construction, an accrual basis S corporation. On December 30, 2017, National Homes accrues a $100,000 bonus to Harold, payable on February 15, 2018.
If Harold is an accrual basis taxpayer, National Homes deducts the bonus in 2017 and Harold reports the income in 2018. If Harold is a cash basis taxpayer, National Homes deducts the bonus in 2017 and Harold reports the income in 2018. NEITHER
Sadie is a full time nurse and a part time painter. Her painting qualifies as a hobby. Her gross income from painting is $7,000. Her expenses include $800 of interest on inventory loans, $5,200 of expenses in conducting business activities, and $2,000 of depreciation of equipment. Which of the following statements about Sadie's hobby activity is/are correct?
If Sadie itemizes her deductions she will not receive any tax benefit from the hobby expenses. If Sadie uses the standard deduction she will not receive any tax benefit from the hobby expenses.
Twin City Manufacturing Corporation is an accrual basis taxpayer. Twin City Manufacturing provides medical insurance for its employees through a self-insured reimbursement plan. Twin City Manufacturing pays $100 per month per employee into the plan fund. The fund is then used to reimburse employees' medical expenses. During the current year, Twin City Manufacturing Corp. pays $12,000 into the fund and pays medical reimbursement claims of $10,600
If Twin City Manufacturing is a cash basis taxpayer it can deduct $10,600.
William, a single taxpayer, has $3,500 state income tax withheld from his paychecks in 2017. When he filed his 2017 state income tax return on April 15, 2018, he calculated and received a $600 refund. The $600 refund was received on May 27, 2018. What are the federal tax effects of the state income tax events of 2017 and 2018?
If his itemized deductions including state income taxes total $6,600 in 2017, William includes $300 in gross income for 2018, If he did not itemize his deductions in 2017, none of the refund is included in 2018 gross income.
Davis owns and operates a convenience store on the north side of the city. He has always wanted to operate a sports bar. When he hears of a new shopping center development in the south part of the city, he contacts the developer and begins negotiations to open his dream enterprise.
If negotiations are successful and Davis incurs $40,000 in start-up costs to open his new business, he can deduct up to $5,000 of the start-up costs and must capitalize the costs of investigation and start-up exceeding $5,000.
Amy borrowed $25,000 for her business from a local bank two years ago. To increase her deductions for 2018, she pays December interest of $400 and prepays January and February interest totaling $800 on December 30, 2018. The maturity date of the note is November 30, 2019. How much of the interest that she paid in December is deductible in 2018?
If she is an accrual-basis taxpayer, Amy's interest deduction is $400
Safina, a single taxpayer with adjusted gross income of $100,000, works is a self-employed engineer. Safina incurs $8,000 of education expenses (tuition and books) and can deduct the $8,000 education expense
If the course improves her skills as an engineer but does not qualify her for a new trade or business
Sergio purchases $3,000-worth of supplies from a local vendor. The supplies are delivered on April 1, 2018. The supplies are fully used up on December 31, 2018. Because of unusual circumstances, a bill for the supplies arrives from the vendor on February 1, 2019, and is promptly paid. When can Sergio deduct the expenses?
In 2018, if he is an accrual basis taxpayer.
Christy purchases $1,000-worth of supplies from a local vendor. The supplies are delivered on March 29, 2018. The supplies are fully used up by year end. Because of unusual circumstances, a bill for the supplies arrives from the vendor on January 10, 2019, and is promptly paid. When can Christy deduct the expenses?
In 2018, if she is an accrual basis taxpayer. In 2019, if she is a cash basis taxpayer.
Which of the following production of income expenses would be deductible:
Interest expense on loan to acquire U.S. Treasury notes. Interest expense on loan to acquire IBM Corporate bonds.
Which of the following people is currently engaged in a trade or business?
Jennifer is a full-time realtor, and she owns a house that she rents to Barry and his family for $900 a month. Jennifer provides for the repairs and maintenance of the house, and she stops by monthly to collect the rent and visit with Barry and his family. Willie devotes 45 hours per week to betting on horse races. Although he intends to win large sums, he has failed to win the big one. He considers his betting activities his job and relies on his meager winnings to support his family.
Which of the following individuals ARE NOT involved in a trade or business?
Lil owns a farm near Lafayette, Indiana. She leases the property to Cal, who operates the farm for himself. Lil receives 10% of Cal's net income as part of the lease agreement but has no responsibilities for the farming operation. Lorraine owns a warehouse located in Brooklyn NY. She paid $250,000 for the real estate several years ago. It is now appraised at over $1,000,000, but she still uses the building only to store her painting collection.
Which of the following business expenses is/are subject to a 50% deduction limit for 2018?
Meals while traveling
Ordinary Expense
Normal, common, and accepted but not necessarily regularly recurring
Active Investor
Not considered a trade or business
Federal lobbying expenditures
Not deductible
Hobby loss
Not deductible
Investment interest expense related to earning interest from municipal bonds
Not deductible
Michelle is a bank president and a weekend artist. She regularly sells her paintings at flea markets and spends an average of 9 hours a week painting or selling. Although she made about $6,000 last year from sales of artwork, she tells her friends she would do it for free. For the current tax year, she incurs expenses of $800 primarily for admission fees to flee markets and art fairs. The $800 is
Not deductible
Political Contributions
Not deductible
Premiums the insured taxpayer pays for life insurance
Not deductible
Pedro owns 5 rental properties. He contracts with East Lake Properties, Inc., to manage the real estate. East Lake obtains tenants, negotiates leases, makes necessary repairs, pays expenses related to the properties, and remits monthly net receipts to Pedro.
Pedro's sale of the properties at a gain will result in a capital gain
Which of the following expenditures are not deductible because they are personal in nature?
Premiums paid on liability insurance for the taxpayer. Legal costs to acquire a personal residence. Losses from the sale of personal residence.
Portia, a CPA, operates a financial and tax planning service. During the months of February, March, and April of every year, she hires graduate tax students from The University of Chicago as interns. This year she hires 4 interns. One is her brother, Sidney. She pays all interns except Sidney $20 per hour for help with tax return preparation and tax research. Sidney receives $25 an hour. She cannot deduct the full amount of Sidney's hourly wages because the expense is not
Reasonable
Michael operates an illegal cock fighting business. Which of the following expenses is currently deductible?
Rent expense on the enterprise's building.
Which of the following is/are trade or business expenses?
Shaheen has expenses related to managing her portfolio of securities. The short-term trading of her securities generates most of her annual income. She has no other job. Susan owns several rental apartments. She negotiates new rental contracts, arranges for repairs and maintenance, and handles all leasing activities.
Which of the following taxes paid by the Fowlers Company can be deducted during 2018?
State sales tax on utilities.
Which of the following payments ARE NOT currently deductible?
Steve is a self-employed attorney. He pays another attorney $14,000 to represent him in a lawsuit that alleged that he was liable in a personal auto accident. Connie has an investment portfolio in excess of $600,000. She pays Chris $1,000 to do an analysis of her investments and make recommendations on restructuring the portfolio.
Which of the following best describes the tax treatment of losses from uncollectible business debts?
Such losses are deductible without limitation as an ordinary loss
Which of the following factors absolutely must be present for an activity to be considered a trade or business for tax purposes?
Taxpayer has a profit motive for engaging in the activity
Which of the following factors are used to aid in determining whether an activity that earns income is profit motivated and should be treated as a business or is subject to the hobby loss rules?
The amounts of occasional profits, if any. Taxpayer's success in similar activities. The taxpayer's financial status. Elements of personal pleasure derived from the activity.
Income tax accounting methods and financial accounting methods differ in many ways. Which of the following tax law provisions ARE NOT likely to create permanent differences between taxable income and financial (or book) income of an entity?
The cost of certain property is allowed to be deducted in the year of acquisition rather than through regular depreciation methods. Tax depreciation is computed over a statutory life rather than the asset's useful life.
Oscar drives a taxi on weekends. In maximizing the amount of fares he earns, he occasionally gets tickets for speeding. Oscar figures that as long as he keeps his traffic violations under $100 over a weekend, he can more than offset those costs with additional fares. What is/are the tax effect(s) of Oscar's speeding ticket costs?
The costs are not deductible because they are due to violations of law.
George is a full-time student at Indiana State University majoring in accounting. He works 12 to 20 hours per week at a local CPA firm inputting data for spreadsheets to prepare monthly financial statements for the firm's clients. George's tuition, fees, books, and supplies related to his education are $3,000 for the current year
The educational costs are deductible from AGI because they prepare him for a new trade or business. The education costs are deductible because it is part of a program that will qualify George to become a CPA. NEITHER
Several factors are used to determine whether an activity is classified as a hobby or as a business. Which of the following are factors that aid in this determination?
The financial status of the taxpayer. The expectation that the assets involved in the activity will increase in value.. The taxpayer's success in similar activities. The amount of personal pleasure and enjoyment that accrues to the taxpayer.
An exception to the economic performance test allows the deduction of year-end accruals if
The liability exists and the amount of the liability can be reasonably estimated. Economic performance occurs within the shorter of 8 1/2 months after the close of the tax year or a reasonable time after the close of the tax year. Either the expense is not material for both tax and financial purposes or the accrual results in a better matching of revenue and expenses. The taxpayer consistently treats the item as incurred in the year the all events test is met.
If someone provides a taxpayer with either property or services, economic performance occurs when
The property or services are actually provided
The legislative grace concept dictates that deductible business expenses be grouped into certain categories that include
Trade or business expenses. Expenses for the production of income
Income tax accounting methods and financial accounting methods differ in many ways. Which of the following tax law provisions are likely to create permanent differences between taxable income and financial (or book) income of a single entity?
Treatment of payment of penalties and fines. Disallowance of 50% of the cost of business meals and 100% of entertainment.
Which of the following payments are deductible?
Wilcox is in the construction business. In January, he sends his chief financial officer to Washington, D.C., to monitor current legislation affecting the real estate industry. Expenses totaled $2,100.
Karen owns a vacation home in Door County, Wisconsin. During the year, she rents it out for two weeks and uses it personally for three weeks. Her expenses directly related to renting out the property were utilities $300, and maid service $150. The portion of taxes allocable to the rental activity is $600 and revenue from the rental is $1,000. Karen will
report no income and deduct no rental expenses related to the vacation home.
