Ch 6, 7, 9, 11, ,

19. Once the actual cost method is used, a taxpayer cannot change to the automatic mileage method in a later year. a. True b. False

False

30. If personal casualty gains exceed personal casualty losses (after deducting the $100 floor), there is no itemized deduction. a. True b. False

True

31. The amount of a loss on insured personal use property is reduced by the insurance coverage if no claim is made against the insurer. a. True b. False

True

32. An education expense deduction may be allowed even if the education results in a promotion or pay raise for the employee. a. True b. False

True

32. Losses on rental property are classified as deductions for AGI. a. True b. False

True

21. The amount of the addition to the reserve for bad debts for an accrual method taxpayer is allowed as a deduction for tax purposes, but is not allowed for a cash method taxpayer. a. True b. False

False

23. Fines and penalties paid for violations of the law (e.g., illegal dumping of hazardous waste) are deductible only if they relate to a trade or business. a. True b. False

False

23. If the amount of the insurance recovery for a theft of business property is greater than the asset's fair market value but less than it's adjusted basis, a gain is recognized. a. True b. False

False

Dick participates in an activity for 90 hours during the year. He has no employees and there are no other participants. Dick is a material participant. a. True b. False

ANSWER: True RATIONALE: Dick's participation constitutes substantially all of the participation in the activity (Test 2).

24. A business theft loss is taken in the year of the theft. a. True b. False

False

42. If a taxpayer does not own a home but rents an apartment, the office in the home deduction is not available. a. True b. False

False

44. A taxpayer can carry back any NOL incurred 2 years and then forward up to 20 years. a. True b. False

False

44. If a vacation home is classified as primarily rental use, a deduction for all of the rental expenses is allowed. a. True b. False

False

Tonya owns an interest in an activity (not real estate) that converted recourse financing to nonrecourse financing. Recapture of previously allowed losses is required if Tonya's at-risk amount is reduced below zero as a result of the debt restructuring. a. True b. False

ANSWER: True RATIONALE: If an at-risk balance is reduced below zero, recapture is required.

Individuals can deduct from active or portfolio income losses of up to $25,000 from real estate rental activities in which they actively participate. a. True b. False

ANSWER: True RATIONALE: Individuals can deduct up to $25,000 of losses from real estate rental activities against active and portfolio income provided they are active participants.

33. A baseball team that pays a star player an annual salary of $25 million can deduct the entire $25 million as salary expense. If the same amount is paid to the CEO of IBM, only $1 million is deductible. a. True b. False

True

34. A theft loss of investment property is an itemized deduction not subject to the 2%-of-AGI floor. a. True b. False

True

Melinda earns wages of $80,000, income from a limited partnership of $10,000, and a $30,000 passive activity loss from a real estate rental activity in which she actively participates. Her modified adjusted gross income is $80,000. Of the $30,000 loss, Melinda may deduct: a. $0. b. $10,000. c. $25,000. d. $30,000. e. Some other amount.

ANSWER: d RATIONALE: The entire loss may be deducted: $10,000 is deducted against the income from the limited partnership (i.e., passive activity income) and the remaining $20,000 is deducted against Melinda's salary because she actively participates in the real estate activity.

Which of the following factors should be considered in determining whether an activity is treated as an appropriate economic unit? a. The similarities and differences in types of business. b. The extent of common control. c. The extent of common ownership. d. The geographic location. e. All of the above.

ANSWER: e

19. None of the prepaid rent paid on September 1 by a calendar year cash basis taxpayer for the next 18 months is deductible in the current period. a. True b. False

False

1. Deductions are allowed unless a specific provision in the tax law provides otherwise. a. True b. False

False

1. James is in the business of debt collection. He purchased a $20,000 account receivable from Green Corporation for $15,000. During the year, James collected $17,000 in final settlement of the account. James can take a $2,000 bad debt deduction in the current year. a. True b. False

False

1. One indicator of independent contractor (rather than employee) status is when the individual performing the services is paid based on time spent (rather than on tasks performed). a. True b. False`

False

11. After the automatic mileage rate has been set by the IRS for a year, it cannot later be changed by the IRS. a. True b. False

False

11. Generally, a closely-held family corporation is not permitted to take a deduction for a salary paid to a family member in calculating corporate taxable income. a. True b. False

False

11. The amount of partial worthlessness on a nonbusiness bad debt is deducted in the year partial worthlessness is determined. a. True b. False

False

12. A bona fide debt cannot arise on a loan between father and son. a. True b. False

False

12. A self-employed taxpayer who uses the automatic mileage method to compute auto expenses can also deduct the business portion of automobile club dues. a. True b. False

False

9. Aaron, a shareholder-employee of Pigeon, Inc., receives a $300,000 salary. The IRS classifies $100,000 of this amount as unreasonable compensation. The effect of this reclassification is to decrease Aaron's gross income by $100,000 and increase Pigeon's gross income by $100,000. a. True b. False

False

9. The work-related expenses of an independent contractor are treated as itemized deductions. a. True b. False

False

2. Mitch is in the 24% tax bracket. He may receive a different tax benefit for a $2,000 expenditure that is classified as a deduction from AGI than he will receive for a $2,000 expenditure that is classified as a deduction for AGI. a. True b. False

True

20. "Other casualty" means casualties similar to those associated with fires, storms, or shipwrecks. a. True b. False

True

George, an ophthalmologist, owns a separate business (not real estate) in which he participates. He has one employee who works part-time in the business. Which of the following statements is correct? a. If George participates for 500 hours and the employee participates for 520 hours during the year, George qualifies as a material participant. b. If George participates for 600 hours and the employee participates for 1,000 hours during the year, George qualifies as a material participant. c. If George participates for 120 hours and the employee participates for 120 hours during the year, George does not qualify as a material participant. d. If George participates for 95 hours and the employee participates for 5 hours during the year, George probably does not qualify as a material participant. e. None of the above.

NSWER: b RATIONALE: Option a. is incorrect; George would have to participate for more than 500 hours for statement a. to be correct (Test 1). Option b. is correct; an individual who participates for more than 500 hours is a material participant regardless of how much others participate (Test 1). Option c. is incorrect; George participates for more than 100 hours and this is not less than the participation of any other individual (Test 3). Option d. is incorrect; George's participation constitutes substantially all of the participation, even though George's participation is less than 100 hours.

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

True

21. A father cannot claim a loss on his daughter's rental use property. a. True b. False

True

22. All domestic bribes (i.e., to a U.S. official) are disallowed as deductions. a. True b. False

True

22. Beginning in 2018, a personal casualty loss deduction is only allowed for losses occurring in a Federally-declared disaster area. a. True b. False

True

38. If an activity involves horses, a profit in at least two of seven consecutive years meets the presumptive rule of § 183. a. True b. False

True

39. If a non-corporate taxpayer has an "excess business loss" for the year, it is not allowed. a. True b. False

True

4. A cash basis taxpayer must include as income the proceeds from the sale of an account receivable to a collection agency. a. True b. False

True

4. Section 212 expenses that are related to rent and royalty income are deductions for AGI. a. True b. False

True

25. The cost of legal advice associated with the preparation of an individual's Federal income tax return that is paid in 2018 is not deductible because it is a personal expense. a. True b. False

True

2. If a business debt previously deducted as partially worthless becomes totally worthless this year, only the amount not previously deducted can be deducted this year. a. True b. False

True

10. A nonbusiness bad debt can offset an unlimited amount of long-term capital gain. a. True b. False

True

10. A taxpayer who maintains an office in the home to conduct his only business will not have nondeductible commuting expense. a. True b. False

True

10. The portion of a shareholder-employee's salary that is classified as unreasonable has no effect on the amount of a shareholder-employee's gross income, but results in an increase in the taxable income of the corporation. a. True b. False

True

13. A bond held by an investor that is uncollectible will be treated as a worthless security and hence, produce a capital loss. a. True b. False

True

13. Carol is self-employed and uses her automobile solely in her business. If she uses the actual expense method to compute expenses, she can include any interest paid on the loan taken out to purchase the car. a. True b. False

True

13. The income of a sole proprietorship is reported on Schedule C (Profit or Loss from Business). a. True b. False

True

14. In choosing between the actual expense method and the automatic mileage method, a taxpayer should consider the cost of insurance on the automobile. a. True b. False

True

45. A taxpayer can carry an NOL forward indefinitely. a. True b. False

True

69. Which, if any, of the following factors is not a characteristic of independent contractor status? a. Work-related expenses are reported on Form 2106. b. Receipt of a Form 1099 reporting payments received. c. Workplace fringe benefits are not available. d. Services are performed for more than one party. e. None of these.

a

80. Allowing for the cutback adjustment (50% reduction for meals and entertainment), which of the following trips, if any, will qualify for the travel expense deduction? a. Dr. Jones, a general dentist, attends a two-day seminar on developing a dental practice. b. Dr. Brown, a surgeon, attends a two-day seminar on financial planning. c. Paul, a romance language high school teacher, spends summer break in France, Portugal, and Spain improving his language skills. d. Myrna went on a twoweek vacation in Boston. While there, she visited her employer's home office to have lunch with former co-workers. e. All of these.

a

85. As to meeting the time test for purposes of deducting moving expenses, which of the following statements is correct? a. Work at the new location must involve a fulltime job—parttime job will not suffice. b. The taxpayer has two years in which to satisfy the 39-weeks or 78-weeks requirement. c. The time test is waived for persons whose move follows retirement. d. The moving expense deduction cannot be claimed if the taxpayer has not yet met the time test. e. None of these.

a

90. Which, if any, of the following is subject to a cutback adjustment? a. An airline pilot for an executive jet rental company who pays his own travel expenses. b. Meals provided at cost to employees by a cafeteria funded by the employer. c. Fourth of July company picnic for employees. d. A trip to Bermuda awarded to the company's top salesperson. e. None of these.

a

90. Bob and April own a house at the beach. The house was rented to unrelated parties for 8 weeks during the year. April and the children used the house 12 days for their vacation during the year. After properly dividing the expenses between rental and personal use, it was determined that a loss was incurred as follows: Gross rental income $ 4,000 Less: Mortgage interest and property taxes $3,500 Other allocated expenses 2,000 (5,500) Net rental loss ($1,500) What is the correct treatment of the rental income and expenses on Bob and April's joint income tax return for the current year assuming the IRS approach is used if applicable? a. A $1,500 loss should be reported. b. Only the mortgage interest and property taxes should be deducted. c. Since the house was used more than 10 days personally by Bob and April, the rental expenses (other than mortgage interest and property taxes) are limited to the gross rental income in excess of deductions for interest and taxes allocated to the rental use. d. Since the house was used less than 50% personally by Bob and April, all expenses allocated to personal use may be deducted. e. Bob and April should include none of the income or expenses related to the beach house in their current year income tax return.

a. A $1,500 loss should be reported.

61. Which of the following is a deduction for AGI (itemized deduction)? a. Contribution to a traditional IRA. b. Roof repairs to a personal use home. c. Safe deposit box rental fee in which stock certificates are stored. d. Property tax on personal residence.

a. Contribution to a traditional IRA.

77. Regarding research and experimental expenditures, which of the following are not qualified expenditures? a. Costs of ordinary testing of materials. b. Costs to develop a plant process. c. Costs of developing a formula. d. Depreciation on a building used for research. e. All of these are qualified expenditures.

a. Costs of ordinary testing of materials.

87. If a residence is used primarily for personal use (rented for fewer than 15 days per year), which of the following is correct? a. No income is included in AGI. b. No expenses are deductible. c. Expenses must be allocated between rental and personal use. d. Only a. and b. are correct. e. a., b., and c. are correct.

a. No income is included in AGI.

74. In 2014, Sarah (who files as single) had silverware worth $10,000 (basis $6,000) stolen from her home. Sarah's insurance company told her that her policy did not cover the theft. Sarah's other itemized deductions last year were $2,000. She had AGI of $30,000 last year. In August of 2015, Sarah's insurance company decided that Sarah's policy did cover the theft of the silverware and they paid Sarah $5,000. Determine the tax treatment of the $5,000 received by Sarah during 2014. a. None of the $5,000 should be included in gross income. b. $2,900 should be included in gross income. c. $5,000 should be included in gross income. d. Last year's return should be amended to include the $5,000. e. None of these.

a. None of the $5,000 should be included in gross income.

98. Which of the following is not a related party for constructive ownership purposes under § 267? a. The taxpayer's aunt. b. The taxpayer's brother. c. The taxpayer's grandmother. d. A corporation owned more than 50% by the taxpayer. e. None of these.

a. The taxpayer's aunt.

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

b

76. When using the automatic mileage method, which, if any, of the following expenses also can be claimed? a. Engine tune-up. b. Parking. c. Interest on automobile loan. d. MACRS depreciation. e. None of these.

b

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

b

81. Which of the following statements is correct in connection with the investigation of a business? a. If the taxpayer is not already engaged in the trade or business, the expenses incurred are deductible if the project is abandoned. b. If the business is acquired, the expenses may be deducted immediately by a taxpayer engaged in a similar trade or business regardless of whether the business being investigated is acquired. c. That business must be related to the taxpayer's present business for any expense ever to be deductible. d. Regardless of whether the taxpayer is already engaged in the trade or business, the expenses must be capitalized and amortized. e. None of these.

b. If the business is acquired, the expenses may be deducted immediately by a taxpayer engaged in a similar trade or business regardless of whether the business being investigated is acquired.

66. Jim had a car accident in 2014 in which his car was completely destroyed. At the time of the accident, the car had a fair market value of $30,000 and an adjusted basis of $40,000. Jim used the car 100% of the time for business use. Jim received an insurance recovery of 70% of the value of the car at the time of the accident. If Jim's AGI for the year is $60,000, determine his deductible loss on the car. a. $900 b. $2,900 c. $3,000 d. $9,000 e. None of these

e. none of these

72. In 2014, Theo, an employee, had a salary of $30,000 and experienced the following losses: Loss from damage to rental property ($10,000) Unreimbursed loss from theft of business computer (5,000) Personal casualty gain 4,000 Personal casualty loss (after $100 floor) (9,000) Determine the amount of Theo's itemized deduction from these losses. a. $0 b. $2,800 c. $2,900 d. $4,580 e. None of these

e. none of these

30. Beginning in 2018, the moving expense deduction has been eliminated for all taxpayers. a. True b. False

False

30. If a taxpayer operates an illegal business, no deductions are permitted. a. True b. False

False

31. Qualified moving expenses of an employee that are not reimbursed are a deduction for AGI. a. True b. False

False

32. Jacques, who is not a U.S. citizen, makes a contribution to the campaign of a candidate for governor. Cassie, a U.S. citizen, also makes a contribution to the same campaign fund. If contributions by noncitizens are illegal under state law, the contribution by Cassie is deductible, while that by Jacques is not. a. True b. False

False

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

False

33. When a nonbusiness casualty loss is spread between two taxable years, the loss in the second year is reduced by 10% of adjusted gross income for the first year. a. True b. False

False

34. For a taxpayer who is engaged in a trade or business, the cost of investigating a business in the same field is deductible only if the taxpayer acquires the business. a. True b. False

False

35. Mallard Corporation pays for a trip to Aruba for its two top salespersons. This expense is subject to the overall limitation (50%). a. True b. False

False

36. In determining whether an activity should be classified as a business or as a hobby, the satisfaction of the presumption (i.e., profit in at least 3 out of 5 years) ensures treatment as a business. a. True b. False

False

37. If a taxpayer can satisfy the three-out-of-five year presumption test associated with hobby losses, then expenses from the activity can be deducted in excess of the gross income from the activity. a. True b. False

False

37. In 2018, a taxpayer takes six clients to an NBA playoff game. If all of the tickets (list price of $120 each) are purchased on the Internet for $1,800 ($300 each), only $60 ($120 × 50% overall limitation) per ticket is deductible. a. True b. False

False

38. Ethan, a bachelor with no immediate family, uses the Pine Shadows Country Club exclusively for his business entertaining. All of Ethan's annual dues for his club membership are deductible. a. True b. False

False

38. If an election is made to defer deduction of research expenditures, the amortization period is based on the expected life of the research project if less than 60 months. a. True b. False

False

39. Jackson gives his supervisor and her husband each a $30 box of chocolates at Christmas. Jackson may claim only $25 as a deduction. a. True b. False

False

40. If property taxes and home mortgage interest expense are related to a hobby, the excess amount of these items over the hobby income cannot be deducted even if the taxpayer itemizes deductions. a. True b. False

False

41. If a publicly-traded corporation hires a new CEO in 2018 and she earns $12,000,000 from a performance-based compensation plan, the corporation can deduct the entire $12,000,000. a. True b. False

False

41. The excess business loss rule applies to partnerships and S corporations (rather than partners and shareholders). a. True b. False

False

43. A taxpayer who claims the standard deduction will not be able to claim an office in the home deduction. a. True b. False

False

45. For tax year 2018, Taylor used the simplified method of determining her office in the home deduction. For 2019, Taylor must continue to use the simplified method and cannot switch to the regular (actual expense) method. a. True b. False

False

45. If a vacation home is classified as primarily personal use (i.e., rented for fewer than 15 days), none of the related expenses can be deducted. a. True b. False

False

46. The amount of a business loss cannot exceed the amount of the taxpayer's NOL for the taxable year. a. True b. False

False

46. Under the simplified method, the maximum office in the home deduction allowed is the greater of $1,500 or the office square feet × $5. a. True b. False

False

47. If a vacation home is classified as primarily personal use, part of the maintenance and utility expenses can be allocated and deducted as a rental expense. a. True b. False

False

47. Madison is an instructor of fine arts at a local community college. If she spends $600 (not reimbursed) on art supplies for her classes, $250 of this amount can be claimed as a deduction for AGI. a. True b. False

False

48. A vacation home at the beach which is rented for 200 days and used personally for 16 days is classified in the personal/rental use category. a. True b. False

False

49. If a vacation home is a personal/rental residence, no maintenance and utility expenses can be claimed as a deduction. a. True b. False

False

5. Alice incurs qualified moving expenses of $12,000 in 2018. If she is not reimbursed by her employer, the deduction is classified as a deduction for AGI. a. True b. False

False

5. Jake performs services for Maude. If Maude provides a helper and tools, this is indicative of independent contractor (rather than employee) status. a. True b. False

False

50. Beulah's personal residence has an adjusted basis of $450,000 and a fair market value of $390,000. Beulah converts the property to rental use this year. The vacation home rules that limit the amount of the deduction to the rental income will apply and the adjusted basis for depreciation is $390,000. a. True b. False

False

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

False

51. Walt wants to give his daughter $1,800 for Christmas. As an alternative, she suggests that he pay the property taxes on her residence. If Ralph pays the property taxes, he can deduct them. a. True b. False

False

Mary Jane participates for 100 hours during the year in an activity she owns. She has no employees and is the only participant in the activity. The activity is a significant participation activity. a. True b. False

ANSWER: False RATIONALE: To be considered a significant participation activity, the owner's participation in the activity must be for more than 100 hours per year.

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

True

57. If a married taxpayer is an active participant in another qualified retirement plan, the traditional IRA deduction phaseout begins at $101,000 of AGI for a joint return in 2018. a. True b. False

True

A taxpayer is considered to be a material participant in a significant participation activity if he or she spends at least 400 hours in the activity. a. True b. False

ANSWER: False RATIONALE: Under the 500-hour test, a taxpayer must devote more than 500 hours to an activity to meet the material participation standard. Further, the significant participation activity test does not apply because the aggregate participation does not exceed 500 hours.

59. The maximum annual contribution to a Roth IRA for an unmarried taxpayer who is age 35 is the smaller of $5,500 or the individual's compensation for the year in 2018. a. True b. False

True

Individuals with modified AGI of $100,000 can deduct against active or portfolio income losses of up to $25,000 from real estate rental activities in which they actively participate. a. True b. False

ANSWER: True RATIONALE: The $25,000 offset generally phases out at the rate of $0.50 for each dollar by which a taxpayer's modified AGI exceeds $100,000. Therefore, once modified AGI reaches $150,000, the deduction is phased-out completely. In this case, the phase out does not apply.

White Corporation, a closely held personal service corporation, has $150,000 of passive activity losses, $120,000 of active business income, and $30,000 of portfolio income. How much of the passive activity loss can White Corporation deduct? a. $0 b. $30,000 c. $120,000 d. $150,000 e. None of the above

ANSWER: a RATIONALE: White Corporation, a personal service corporation, cannot offset the passive activity loss against the active or portfolio income.

Carlos receives a gift of a passive activity from his father whose basis was $60,000. Suspended losses related to the activity are $18,000. Carlos will be allowed to offset the $18,000 suspended losses against future passive activity income. a. True b. False

ANSWER: False RATIONALE: A gift of a passive activity results in the suspended losses being added to the adjusted basis of the property.

Kathy, who qualifies as a real estate professional, owns an apartment building and devotes 550 hours to managing the activity. All losses from the rental activity will be considered nonpassive and deductible against active income. a. True b. False

ANSWER: False RATIONALE: A real estate professional is subject to the rule that requires more than 750 hours of participation in real property trades or businesses. As Kathy participated less than 750 hours, this is a passive activity. Nonetheless, she may qualify to deduct up to $25,000 in rental losses under the real estate rental exception.

Kelly, who earns a yearly salary of $120,000, sold an activity with a suspended passive activity loss of $44,000. The activity was sold at a loss and Kelly has no other passive activities. The suspended loss is not deductible. a. True b. False

ANSWER: False RATIONALE: A suspended passive activity loss may be deducted when the activity is sold, even if the sale of the activity results in a loss. The suspended loss can offset Kelly's active income from her job.

Gloria owns and works fulltime at a shop that rents watercraft of various types to tourists who are vacationing at the beach. If she generates a loss from that activity, the loss is subject to the passive activity loss rules because it is rental property. a. True b. False

ANSWER: False RATIONALE: Activities like this are not treated as a rental activity because of the strong likelihood that the watercraft is rented to tourists for seven days or less. Therefore, the watercraft business is subject to the material participation rules because it is not considered a rental activity under the passive activity loss rules. If Gloria is a material participant (e.g., she worked for more than 500 hours) it will not be treated as a passive activity.

Tom participates for 100 hours in Activity A and 450 hours in Activity B, both of which are nonrental businesses. Both activities are active. a. True b. False

ANSWER: False RATIONALE: Activity A is not a significant participation activity because Tom has not devoted more than 100 hours to it. Therefore, Activity A is not counted in applying the more- than-500-hour test and it is treated as passive. Activity B is a significant participation activity; however, the total hours are not greater than 500 hours and it is considered passive.

Aram owns a 20% interest in a partnership (not real estate) in which her at-risk amount was $35,000 at the beginning of the year. The partnership borrowed $50,000 on a recourse note and made a $40,000 profit during the year. Her at-risk amount at the end of the year is $43,000. a. True b. False

ANSWER: False RATIONALE: Aram is considered at-risk for amounts borrowed on a recourse note because she is personally liable for repayment of the debt. Therefore, her at-risk amount is increased by her share of the recourse debt incurred by the partnership. Aram's at- risk amount at the end of the year is $53,000 [$35,000 + (20% × $50,000 recourse note) + (20% × $40,000 profit)].

Bruce owns a small apartment building that produces a $25,000 loss during the year. His AGI before considering the rental loss is $85,000. Bruce must be a material participant with respect to the rental activity in order to deduct the $25,000 loss under the real estate rental exception. a. True b. False

ANSWER: False RATIONALE: Bruce must actively participate in the rental activity in order to deduct the $25,000 loss.

Wolf Corporation has active income of $55,000 and a passive activity loss of $33,000 in the current year. Wolf cannot deduct the $33,000 loss if it is a closely held C corporation that is not a personal service corporation. a. True b. False

ANSWER: False RATIONALE: Closely held C corporations that are not personal service corporations may offset passive activity losses against active income but not against portfolio income.

In the current year, Don has a $55,000 loss from a business he owns. His at-risk amount at the end of the year, prior to considering the current year loss, is $36,000. He will be allowed to deduct the $55,000 loss this year if he is a material participant in the business. a. True b. False

ANSWER: False RATIONALE: Don's loss deduction will be limited to $36,000 by the at-risk rules.

A qualified real estate professional is allowed to treat income or loss from any real estate venture as active except for income or loss from a rental activity. a. True b. False

ANSWER: False RATIONALE: Income and losses from real estate rental activities are treated as active (i.e., not passive) for qualified real estate professionals.

Investment income can include gross income from interest, dividends, annuities, and royalties not derived in the ordinary course of a trade or business; income from a passive activity; and income from a real estate activity in which the taxpayer actively participates. a. True b. False

ANSWER: False RATIONALE: Investment income includes gross income from interest, dividends, annuities, and royalties not derived in the ordinary course of a trade or business. However, income from a passive activity and income from a real estate activity in which the taxpayer actively participates are not considered investment income for this purpose.

Roger owns and actively participates in the operations of an apartment building which produces a $40,000 loss during the year. He has AGI of $150,000 from an active business. He may deduct $25,000 of the loss. a. True b. False

ANSWER: False RATIONALE: It is possible for individuals to deduct up to $25,000 of losses on real estate rental activities against active and portfolio income. However, the potential deduction of $25,000 is reduced by 50% of modified AGI in excess of $100,000. Therefore, Roger's potential loss deduction is fully phased out [$25,000 - 50%($150,000 - $100,000)].

Joyce, an architect, earns $100,000 from her practice in the current year. In addition, she receives $35,000 in dividends, capital gains, and annuity income during the year. Further, she incurs a loss of $35,000 from an investment in a passive activity. Joyce's AGI for the year after considering the passive investment is $100,000. a. True b. False

ANSWER: False RATIONALE: Joyce cannot deduct the passive activity loss against active or portfolio income. Therefore, her AGI after considering the passive investment is $135,000 ($100,000 active income + $35,000 portfolio income).

Anita owns Activity A which produces active income and Activity B which produces losses. From a tax planning perspective, Anita will be better off if Activity B is a passive activity. a. True b. False

ANSWER: False RATIONALE: Passive activity losses of individuals cannot be used to offset active income.

Oriole Corporation has active income of $45,000 and a passive activity loss of $23,000 in the current year. Under an exception, Oriole can deduct the $23,000 loss if it is a personal service corporation. a. True b. False

ANSWER: False RATIONALE: Personal service corporations may not offset passive activity losses against active income.

All of a taxpayer's tax credits relating to a passive activity can be utilized when the activity is sold at a loss. a. True b. False

ANSWER: False RATIONALE: Tax credits associated with a passive investment are lost if the investment is disposed of at a loss.

Lucy owns and actively participates in the operations of an apartment complex that produces a $50,000 loss during the year. Her modified AGI is $125,000 from an active business. Disregarding any at-risk amount limitation, she may deduct $25,000 of the loss, and the remaining $25,000 is a suspended passive activity loss. a. True b. False

ANSWER: False RATIONALE: The $25,000 deduction is reduced by 50% of modified AGI in excess of $100,000. Therefore, only $12,500 of Lucy's rental loss can be deducted this year [$25,000 - 50%($125,000 - $100,000)]. The remaining $37,500 ($50,000 - $12,500) is a suspended passive activity loss.

Jack owns a 10% interest in a partnership (not real estate) in which his at-risk amount is $42,000 at the beginning of the year. During the year, the partnership borrows $80,000 on a nonrecourse note and incurs a loss of $60,000 from operations. Jack's at-risk amount at the end of the year is $44,000. a. True b. False

ANSWER: False RATIONALE: The amount a taxpayer has at risk is increased by the taxpayer's share of additional recourse debt and decreased by the share of losses from the activity. The at-risk amount is not affected by nonrecourse debt. Jack's year-end at-risk amount is $36,000 [$42,000 - (10% × $60,000 loss)].

Stuart is the sole owner and a material participant in a business in which he has $50,000 at risk. If the business incurs a loss of $80,000 from operations, Stuart will be allowed the full amount as a deduction. a. True b. False

ANSWER: False RATIONALE: The at-risk provisions limit the deductibility of losses from business and income- producing activities for individuals and closely held corporations. The $80,000 loss reduces Stuart's at-risk amount to $0 and produces a $50,000 loss that is currently deductible. The $30,000 balance of the loss is suspended under the at-risk rules. The passive activity loss rules do not apply because Stuart is a material participant.

Sherri owns an interest in a business that is not a passive activity and in which she has $20,000 at risk. If the business incurs a loss from operations during the year and her share of the loss is $32,000, this loss will be fully deductible. a. True b. False

ANSWER: False RATIONALE: The at-risk provisions limit the deductibility of losses from business and income- producing activities for individuals and closely held corporations. The loss reduces Sherri's at-risk amount to $0 and results in a suspended loss of $12,000 under the at- risk rules.

Wayne owns a small apartment building that produces a $45,000 loss during the year. His AGI before considering the rental loss is $85,000. Because Wayne is an active participant with respect to the rental activity, he may deduct the $45,000 loss. a. True b. False

ANSWER: False RATIONALE: The ceiling on the deductibility of such losses is $25,000, not $45,000.

David earned investment income of $20,000, incurred investment interest expense of $12,000, and other investment expenses of $9,000 during the current year. David can deduct $12,000 of investment interest for this year. a. True b. False

ANSWER: False RATIONALE: The deduction for investment interest expense may not exceed net investment income for the year. As David's net investment income is $11,000 ($20,000 - $9,000), only this amount of investment interest can be deducted. The excess $1,000 is carried forward to future years.

Jackson Company incurs a $50,000 loss on a passive activity during the year. The company has active income of $34,000 and portfolio income of $24,000. If Jackson is a personal service corporation, it may deduct $34,000 of the passive activity loss. a. True b. False

ANSWER: False RATIONALE: The passive activity loss rules apply to individuals, estates, trusts, closely held C corporations, and personal service corporations. Since, Jackson is a personal service corporation, it is not allowed to offset passive activity losses against active or portfolio income.

6. A statutory employee is not a common law employee but is subject to Social Security tax. a. True b. False

True

Kim dies owning a passive activity with a basis of $75,000, a fair market value of $140,000, and suspended losses of $80,000. All of the $80,000 passive activity loss can be deducted on Kim's final income tax return. a. True b. False

ANSWER: False RATIONALE: Upon death, it is possible that a taxpayer can lose all or part of his/her suspended losses. Suspended passive activity losses are deductible only to the extent they exceed the step-up in basis for the decedent's property. Here, the step-up in basis is $65,000 ($140,000 fair market value - $75,000 basis). As a result, Kim can deduct $15,000 ($80,000 suspended passive activity loss - $65,000 step-up in basis).

From January through November, Vern participated for 420 hours as a salesman in a partnership in which he owns a 50% interest. The partnership has four full-time employees. During December, Vern spends 110 hours cleaning the store and painting the walls in order to meet the material participation standards. Vern qualifies as a material participant. a. True b. False

ANSWER: False RATIONALE: Work performed in an individual's capacity as an investor or in performance of duties not normally performed by owners does not count toward material participation if such work is performed primarily to meet the material participation requirements

When determining whether an individual is a material participant, participation by an owner's spouse generally counts. a. True b. False

ANSWER: True RATIONALE: A spouse's participation is counted in applying the material participation tests.

Joyce owns an activity (not real estate) in which she participates for 100 hours a year; her spouse participates for 450 hours. Joyce qualifies as a material participant. a. True b. False

ANSWER: True RATIONALE: A spouse's participation is counted in applying the material participation tests. Joyce and her spouse together participated more than 500 hours, thus making Joyce a material participant.

Eric makes an installment sale of a passive activity having suspended losses of $40,000. He collects 25% of the sales price in the current year, and will collect 25% in each of the next three years. Eric can deduct $10,000 of the passive activity loss this year. a. True b. False

ANSWER: True RATIONALE: An installment sale of a taxpayer's entire interest in a passive activity entitles the taxpayer to deduct suspended losses on the installment basis. Therefore, Eric can deduct 25% of the $40,000 suspended passive activity loss each year as installments are collected.

In the current year, Louise invests $50,000 for a 20% interest in a passive activity. Her share of the loss this year is $10,000. If this is her only passive activity, the $10,000 loss from the activity this year is suspended for use in a future year. a. True b. False

ANSWER: True RATIONALE: Assuming Louise had no passive activity income during the year, she may not deduct any of the loss from the activity in the current year.

Bob realized a long-term capital gain of $8,000. In calculating his net investment income, Bob may elect to include the gain in investment income. a. True b. False

ANSWER: True RATIONALE: Bob may elect to include the gain in investment income if he agrees to reduce the amount qualifying for the preferential capital gains rate by the same amount.

Harry earned investment income of $18,500, incurred investment interest expense of $15,500, and other investment expenses of $9,000 during the current year. Harry may deduct $9,500 of investment interest expense this year and carry forward $6,000 to future years. a. True b. False

ANSWER: True RATIONALE: Harry's investment interest deduction is $9,500 ($18,500 investment income - $9,000 other investment expenses) this year. The portion of investment interest not deducted ($6,000) is carried forward to future years.

Linda owns investments that produce portfolio income and Activity A that produces losses. From a tax perspective, Linda will be better off if Activity A is not passive. a. True b. False

ANSWER: True RATIONALE: Linda benefits from Activity A's losses only if the activity is not a passive activity. If it is a passive activity, Linda needs to generate passive activity income to absorb the passive activity losses.

Services performed by an employee are treated as being related to a real estate trade or business if the employee performing the services has more than a 5% ownership interest in the employer. a. True b. False

ANSWER: True RATIONALE: Services performed by an employee are treated as being related to a real estate trade or business only if the employee performing the services has more than a 5% ownership interest in the employer.

This year Seth had investment income of $31,000, investment expenses of $28,000, and a long-term capital gain of $8,000 on an investment. In calculating his net investment income for the current year, Seth may deduct a maximum of $11,000 investment interest. a. True b. False

ANSWER: True RATIONALE: Seth may elect to include the $8,000 gain in investment income if he agrees to reduce the amount qualifying for the alternative capital gains rate by the same amount. His maximum deduction for investment interest is $11,000 ($31,000 + $8,000 - $28,000).

In the current year, Kelly had a $35,000 loss from a real estate rental activity in which she is a 10% owner. If she is an active participant and if her modified AGI is $100,000, she can deduct $25,000 of the loss. a. True b. False

ANSWER: True RATIONALE: She meets both the active participation test and the ownership test. Further, Kelly's modified AGI has not reached the level (beyond $100,000) where any of the $25,000 loss is phased out.

Nathan owns Activity A, which produces income, and Activity B, which produces passive activity losses. From a tax planning perspective, Nathan will be better off if Activity A is passive. a. True b. False

ANSWER: True RATIONALE: Taxpayers who have passive activity losses generally benefit by having profitable activities classified as passive so that the passive activity losses can offset the passive activity income.

A taxpayer is considered to be a material participant if he or she spends more than 500 hours in the activity. a. True b. False

ANSWER: True RATIONALE: The "more than 500 hours" test is the first test of material participation.

If an owner participates for more than 500 hours in a bicycle rental activity located at a beach resort, any loss from that activity is treated as an active loss that can offset active income. a. True b. False

ANSWER: True RATIONALE: The bicycle rental activity is subject to the material participation rules because it is not treated as a rental activity. A person who rents property for seven days or less is generally required to provide significant services to the customer (so it is a service business, not a rental business). As the owner participated more than 500 hours, this is not a passive activity.

Jared earned investment income of $22,000 and incurred investment interest expense of $14,000 during the year. He incurred other investment expenses of $7,000 during the year. Jared may deduct $14,000 of investment interest in the current year. a. True b. False

ANSWER: True RATIONALE: The deduction for investment interest expense may not exceed net investment income for the year. Jared's net investment income is $15,000 ($22,000 - $7,000). As a result, the entire $14,000 can be deducted.

Gray Company, a closely held C corporation, incurs a $50,000 loss on a passive activity during the year. The company has active income of $34,000 and portfolio income of $24,000. If Gray is not a personal service corporation, it may deduct $34,000 of the passive activity loss. a. True b. False

ANSWER: True RATIONALE: The passive activity loss rules apply to individuals, estates, trusts, personal service corporations, and closely held C corporations. Only closely held C corporations that are not personal service corporations are allowed to offset passive activity losses against active income.

Jennifer gave her interest in a passive activity (fair market value of $75,000 and basis of $60,000) to Harrison. Associated with the interest is a suspended passive activity loss of $8,000. Upon making the gift, the suspended passive activity loss is not deductible to Jennifer, but it will benefit Harrison. a. True b. False

ANSWER: True RATIONALE: The suspended loss becomes permanently nondeductible to both Jennifer and Harrison. However, the suspended loss is added to the basis of the property in Harrison's hands. The increased basis to Harrison could lead to larger depreciation deductions and/or lower gain when he disposes of the asset in a taxable transaction.

Tomas participates for 300 hours in Activity A and 250 hours in Activity B, both of which are nonrental businesses. Both activities are active. a. True b. False

ANSWER: True RATIONALE: Tomas has participated for more than 500 hours in the two activities, both of which are significant participation activities.

Rita earns a salary of $150,000, and invests $40,000 for a 20% interest in a passive activity. Operations of the activity result in a loss of $250,000, of which Rita's share is $50,000. How is her loss characterized? a. $40,000 is suspended under the passive activity loss rules and $10,000 is suspended under the at-risk rules. b. $40,000 is suspended under the at-risk rules and $10,000 is suspended under the passive activity loss rules. c. $50,000 is suspended under the passive activity loss rules. d. $50,000 is suspended under the at-risk rules. e. None of the above.

ANSWER: a RATIONALE: $10,000 of Rita's loss is suspended under the at-risk rules, leaving a potential deduction of $40,000. However, the $40,000 loss is suspended under the passive activity loss rules.

Jenny spends 32 hours a week, 50 weeks a year, operating a bicycle rental store that she owns at a resort community. She also owns a music store in another city that is operated by a full-time employee. Jenny spends 140 hours per year working at the music store. She elects not to group them together as a single activity under the "appropriate economic unit" standard. a. Neither store is a passive activity. b. Both stores are passive activities. c. Only the bicycle rental store is a passive activity. d. Only the music store is a passive activity. e. None of the above.

ANSWER: a RATIONALE: A bicycle rental store is not treated as a rental activity because the average period of customer use is 7 days or less. Because Jenny participates for more than 500 hours during the year, the bicycle rental store is treated as an active business. Jenny participates for more than 100 hours in the music store, which makes it a significant participation activity. Her total participation in the two significant participation activities is more than 500 hours, so neither business is treated as passive.

Tara owns a shoe store and a bookstore. Both businesses are operated in a mall. She also owns a restaurant across the street and a jewelry store several blocks away. a. All four businesses can be treated as a single activity if Tara elects to do so. b. Only the shoe store and bookstore can be treated as a single activity, the restaurant must be treated as a separate activity, and the jewelry store must be treated as a separate activity. c. The shoe store, bookstore, and restaurant can be treated as a single activity, and the jewelry store must be treated as a separate activity. d. All four businesses must be treated as separate activities. e. None of the above.

ANSWER: a RATIONALE: All four businesses may be treated as a single activity because of common ownership.

Vic's at-risk amount in a passive activity is $200,000 at the beginning of the current year. His current loss from the activity is $80,000. Vic had no passive activity income during the year. At the end of the current year: a. Vic has an at-risk amount in the activity of $120,000 and a suspended passive activity loss of $80,000. b. Vic has an at-risk amount in the activity of $200,000 and a suspended passive activity loss of $80,000. c. Vic has an at-risk amount in the activity of $120,000 and no suspended passive activity loss. d. Vic has an at-risk amount in the activity of $200,000 and no suspended passive activity loss. e. None of the above.

ANSWER: a RATIONALE: The $80,000 passive activity loss reduces the at-risk amount to $120,000. The passive activity loss is suspended because Vic has no passive activity income.

Kate dies owning a passive activity with an adjusted basis of $100,000. Its fair market value at that date is $130,000. Suspended losses relating to the property were $45,000. a. The heir's adjusted basis is $130,000, and Kate's final deduction is $15,000. b. The heir's adjusted basis is $130,000, and Kate's final deduction is $45,000. c. The heir's adjusted basis is $100,000, and Kate's final deduction is $45,000. d. The heir's adjusted basis is $175,000, and Kate has no final deduction. e. None of the above.

ANSWER: a RATIONALE: The heir receives a $30,000 step-up in basis ($130,000 FMV - $100,000 decedent's basis). A $15,000 passive activity loss deduction is allowed on the decedent's final return ($45,000 suspended loss - $30,000 step-up in basis).

60. Contributions to a Roth IRA can be made up to the due date (excluding extensions) of the taxpayer's income tax return. a. True b. False

True

Sandra acquired a passive activity three years ago. Until last year, the activity was profitable and her at-risk amount was $300,000. Last year, the activity produced a loss of $100,000, and in the current year, the loss is $50,000. Assuming Sandra has received no passive activity income in the current or prior years, her suspended passive activity loss from the activity is: a. $90,000 from last year and $50,000 from the current year. b. $100,000 from last year and $50,000 from the current year. c. $0 from last year and $0 from the current year. d. $50,000 from the current year. e. None of the above.

ANSWER: b RATIONALE: $100,000 from last year and $50,000 from the current year is suspended. POINTS: 1 DIFFICULTY: Easy QUESTION TYPE: Multiple Choice HAS VARIABLES: False

Several years ago, Joy acquired a passive activity. Until 2016, the activity was profitable. Joy's at-risk amount at the beginning of 2016 was $250,000. The activity produced losses of $100,000 in 2016, $80,000 in 2017, and $90,000 in 2018. During the same period, no passive activity income was recognized. How much is suspended under the at-risk rules and the passive activity loss rules at the beginning of 2019? At-risk Passive activity loss a. $0 $270,000. b. $20,000. $250,000. c. $30,000. $240,000. d. $260,000. $10,000. e. None of the above.

ANSWER: b RATIONALE: $250,000 of the losses are reclassified as passive and suspended because no passive activity income was recognized during the period. $270,000 losses - $250,000 reclassified as passive = $20,000 losses suspended under the at-risk rules.

Rachel acquired a passive activity several years ago. Until 2015, the activity was profitable, and Rachel's at-risk amount at the beginning of 2015 was $300,000. The activity produced losses of $80,000 in 2015, $50,000 in 2016, and $70,000 in 2017. In 2018, the activity produced income of $90,000. How much is Rachel's suspended passive activity loss at the beginning of 2019? a. $150,000. b. $110,000. c. $60,000. d. $0. e. None of the above.

ANSWER: b RATIONALE: $80,000 suspended loss from 2015 + $50,000 suspended loss from 2016 + $70,000 suspended loss from 2017 = $200,000 suspended losses at end of 2017 - $90,000 passive activity income in 2018 = $110,000 suspended passive activity loss at beginning of 2019. The at-risk amount at the beginning of 2019 is $190,000 ($300,000 - $80,000 - $50,000 - $70,000 + $90,000).

Josie, an unmarried taxpayer, has $155,000 in salary, $10,000 in income from a limited partnership, and a $26,000 passive activity loss from a real estate rental activity in which she actively participates. If her modified adjusted gross income is $155,000, how much of the $26,000 loss is deductible? a. $0 b. $10,000 c. $25,000 d. $26,000 e. None of the above

ANSWER: b RATIONALE: A rental loss of $10,000 is deducted against the passive activity income from the limited partnership interest. None of the remaining $16,000 rental loss is deducted against Josie's salary, even though she actively participates in the activity. The special $25,000 offset for real estate rental activities is reduced to $0 [$25,000 - 50%($155,000 - $100,000)]. Therefore, of the remaining $16,000 loss, none can be deducted in the current year.

Leigh, who owns a 50% interest in a sporting goods store, was a material participant in the activity for the last fifteen years. She retired from the sporting goods store at the end of last year and will not participate in the activity in the future. However, she continues to be a material participant in an office supply store in which she is a 50% partner. The operations of the sporting goods store resulted in a loss for the current year and Leigh's share of the loss is $40,000. Leigh's share of the income from the office supply store is $75,000. She does not own interests in any other activities. a. Leigh cannot deduct the $40,000 loss from the sporting goods store because she is not a material participant. b. Leigh can offset the $40,000 loss from the sporting goods store against the $75,000 of income from the office supply store. c. Leigh will not be able to deduct any losses from the sporting goods store until future years. d. Leigh will not be able to deduct any losses from the sporting goods store until she has been retired for at least four years. e. None of the above.

ANSWER: b RATIONALE: Because Leigh materially participated in the sporting goods activity for at least five of the last ten taxable years before the current year (Test 5), she is still considered an active participant in that activity. Therefore, her loss is an active loss that can be offset against her active income from the office supply store.

Maria, who owns a 50% interest in a restaurant, has been a material participant in the restaurant activity for the last 20 years. She retired from the restaurant at the end of last year and will not participate in the restaurant activity in the future. However, she continues to be a material participant in a retail store in which she is a 50% partner. The restaurant operations produce a loss for the current year, and Maria's share of the loss is $80,000. Her share of the income from the retail store is $150,000. She does not own interests in any other activities. a. Maria cannot deduct the $80,000 loss from the restaurant because she is not a material participant. b. Maria can offset the $80,000 loss against the $150,000 of income from the retail store. c. Maria will not be able to deduct any losses from the restaurant until she has been retired for at least three years. d. Assuming Maria continues to hold the interest in the restaurant, she will always treat the losses as active. e. None of the above.

ANSWER: b RATIONALE: Because Maria materially participated in the restaurant activity for at least five of the last ten taxable years before the current year (Test 5), she is still considered an active participant in the activity. Therefore, her loss is an active loss that can be offset against her active income from the retail store. However, in the future after no longer meeting the five-year test, the classification of the losses will depend on Maria's level of involvement in the restaurant activity.

In 2018, Joanne invested $90,000 for a 20% interest in a limited liability company (LLC) in which she is a material participant. The LLC reported losses of $340,000 in 2018 and $180,000 in 2019. Joanne's share of the LLC's losses was $68,000 in 2018 and $36,000 in 2019. How much of these losses can Joanne deduct? a. $68,000 in 2018; $36,000 in 2019. b. $68,000 in 2018; $22,000 in 2019. c. $0 in 2018; $0 in 2019. d. $68,000 in 2018; $0 in 2019. e. None of the above.

ANSWER: b RATIONALE: Joanne's losses are not subject to the passive activity loss rules in either year because she is a material participant in the activity. However, the at-risk rules limit her total losses to $90,000 ($68,000 in 2018 and $22,000 in 2019).

Lew owns five activities, and he elects not to group them together as a single activity under the "appropriate economic unit" standard. During the year, he participates for 120 hours in Activity A, 150 hours in Activity B, 140 hours in Activity C, 110 hours in Activity D, and 100 hours in Activity E. Which of the following statements is correct? a. Activities A, B, C, D, and E are all significant participation activities. b. Lew is a material participant in Activities A, B, C, and D only. c. Lew is a material participant in Activities A, B, C, D, and E. d. None of the above.

ANSWER: b RATIONALE: Lew's participation in significant participation activities (A, B, C, and D) exceeds 500 hours (120 + 150 + 140 + 110 = 520). Therefore, Lew is a material participant with respect to those activities. Activity E is not a significant participation activity because Lew did not participate for more than 100 hours.

Rick, a computer consultant, owns a separate business (not real estate) in which he participates. He has one employee who works part-time in the business. a. If Rick participates for 500 hours and the employee participates for 620 hours during the year, Rick qualifies as a material participant. b. If Rick participates for 550 hours and the employee participates for 2,000 hours during the year, Rick qualifies as a material participant. c. If Rick participates for 120 hours and the employee participates for 120 hours during the year, Rick does not qualify as a material participant. d. If Rick participates for 95 hours and the employee participates for 5 hours during the year, Rick probably does not qualify as a material participant. e. None of the above.

ANSWER: b RATIONALE: Option a. is incorrect; Rick would have to participate for more than 500 hours for statement a. to be correct (Test 1). Option b. is correct; an individual who participates for more than 500 hours is a material participant regardless of how much others participate (Test 1). Option c. is incorrect; Rick participates for more than 100 hours and this is not less than the participation of any other individual (Test 3). Option d. is incorrect; Rick's participation constitutes substantially all of the participation, even though Rick's participation is less than 100 hours (Test 2).

Ahmad owns four activities. He participated for 120 hours in Activity A, 150 hours in Activity B, 140 hours in Activity C, and 100 hours in Activity D. Which of the following statements is correct? a. Activities A, B, C, and D are all significant participation activities. b. Activities A, B, and C are significant participation activities. c. Ahmad is a material participant with respect to Activities A, B, and C. d. Ahmad is a material participant with respect to Activities A, B, C, and D. e. None of the above.

ANSWER: b RATIONALE: Statement b. is correct. Activities A, B, and C are all significant participation activities. A significant participation activity is one in which the individual's participation exceeds 100 hours during the year. However, the material participation standard is not met because total participation in significant participation activities (120 + 150 + 140) does not exceed 500 hours.

Matt has three passive activities and has at-risk amounts in excess of $100,000 for each. During the year, the activities produced the following income (losses). Activity A ($60,000) Activity B (40,000) Activity C 75,000 Net passive activity loss ($25,000) Matt's suspended losses are as follows: a. $25,000 is allocated to C; $0 to A and B. b. $12,500 is allocated to A; $12,500 to B. c. $15,000 is allocated to A; $10,000 to B. d. $8,333 is allocated to A, B, and C. e. None of the above.

ANSWER: c RATIONALE: $60,000/$100,000 × $25,000 = $15,000 allocated to Activity A $40,000/$100,000 × $25,000 = $10,000 allocated to Activity B

Green Corporation earns active income of $50,000 and receives $40,000 in dividends during the year. In addition, Green incurs a loss of $70,000 from an investment in a passive activity acquired several years ago. Consider the following two statements: (1) Green's current deduction for passive activity losses is $50,000 if it is a closely held C corporation that is not a personal service corporation. (2) Green's current deduction for passive activity losses is $0 if it is a personal service corporation. Which of the following answers is correct? a. Only statement 1. b. Only statement 2. c. Both statements 1 and 2. d. Neither statement 1 or 2. e. None of the above.

ANSWER: c RATIONALE: A closely held C corporation that is not a personal service corporation can offset passive activity losses against active income, but a personal service corporation cannot. Both statements are correct.

In the current year, Crow Corporation, a closely held C corporation that is not a personal service corporation, has $100,000 of passive activity losses, $80,000 of active business income, and $20,000 of portfolio income. How much of the passive activity loss may Crow deduct in the current year? a. $0. b. $20,000. c. $80,000. d. $100,000. e. None of the above.

ANSWER: c RATIONALE: Crow Corporation may offset the passive activity loss against the active income.

In 2018, Liam invested $100,000 for a 25% interest in a partnership involved in an activity in which he is a material participant. The partnership reported losses of $340,000 in 2018 and $180,000 in 2019 with Liam's share being $85,000 in 2018 and $45,000 in 2019. How much of the losses can Liam deduct? a. $0 in 2018, $0 in 2019. b. $85,000 in 2018, $0 in 2019. c. $85,000 in 2018, $15,000 in 2019. d. $85,000 in 2018, $45,000 in 2019. e. None of the above.

ANSWER: c RATIONALE: Liam's losses are not subject to the passive activity loss rules in either year because he is a material participant. However, the at-risk rules limit his losses to $100,000 over the period ($85,000 in 2018 and $15,000 in 2019).

Faye dies owning an interest in a passive activity property (adjusted basis of $150,000, suspended losses of $52,000, and a fair market value of $180,000). What, if any, can be deducted on her final income tax return? a. $52,000. b. $30,000. c. $22,000. d. $0. e. None of the above.

ANSWER: c RATIONALE: On Faye's final income tax return, a deduction of $22,000 is allowed, determined as follows: FMV of property at death $180,000 Adjusted basis of property (150,000) Increase (step-up) in basis $ 30,000 Suspended loss ($52,000) Increase in basis 30,000 Suspended loss allowable on Faye's final income tax return ($22,000)

Which of the following decreases a taxpayer's at-risk amount? a. Cash and the adjusted basis of property contributed to the activity. b. Amounts borrowed for use in the activity for which the taxpayer is personally liable or has pledged as security property not used in the activity. c. Taxpayer's share of amounts borrowed for use in the activity that is qualified nonrecourse financing. d. Taxpayer's share of the activity's income. e. None of the above.

ANSWER: e RATIONALE: Choices a. through d. reflect increases to a taxpayer's at-risk amount.

Raul is married and files a joint tax return. His current investment interest expense of $95,000 is related to a loan used to purchase a parcel of unimproved land being held as an investment. Income from investments [dividends (not qualified) and interest] total $18,000. Raul paid and deducted $5,000 of real estate taxes on the unimproved land. He also has a $4,500 net long-term capital gain from the sale of another parcel of unimproved land. Raul's maximum investment interest deduction for the year is: a. $95,000. b. $18,000. c. $17,500. d. $13,000. e. None of the above.

ANSWER: c RATIONALE: Raul's net investment income is computed as follows: Income from investments: Interest and dividends $18,000 Long-term capital gain* 4,500 Less: Investment expenses (real estate taxes) (5,000) Net investment income $17,500 *Net capital gain generally is not included in investment income. In order to maximize his current investment interest deduction, Raul may elect to treat capital gain as investment income. If this election is made, however, the beneficial tax rate on capital gains will not apply. Raul's current investment interest expense deduction is limited to $17,500, the amount of net investment income, and $77,500 would be disallowed: Total investment interest expense $95,000 Less: Net investment interest income (17,500) Investment interest disallowed in the current year $77,500 The amount of investment interest disallowed carries over and becomes investment interest expense in the subsequent year (subject to the net investment income limitation).

Josh has investments in two passive activities. Activity A (acquired three years ago) produces income of $30,000 this year, while Activity B (acquired two years ago) produces a loss of $50,000. What is the amount of Josh's suspended loss for the year? a. $0 b. $18,000 c. $20,000 d. $50,000 e. None of the above

ANSWER: c RATIONALE: The $30,000 of passive activity income is offset by $30,000 of the $50,000 passive activity loss, leaving a net passive activity loss of $20,000. None of the $20,000 net passive activity loss is deductible in the current year and it is all suspended.

Josh has investments in two passive activities. Activity A, acquired three years ago, produces income in the current year of $60,000. Activity B, acquired last year, produces a loss of $100,000 in the current year. At the beginning of this year, Josh's at-risk amounts in Activities A and B are $10,000 and $100,000, respectively. What is the amount of Josh's suspended passive activity loss with respect to these activities at the end of the current year? a. $0 b. $36,000 c. $40,000 d. $100,000 e. None of the above

ANSWER: c RATIONALE: The $60,000 of passive activity income from Activity A is offset by $60,000 of the passive activity loss from Activity B, leaving a net passive activity loss of $40,000. None of the $40,000 net passive activity loss is deductible in the current year. The $40,000 net passive activity loss is suspended.

Ramon incurred $83,100 of interest expense related to his investments this year. His investment income included $34,500 of interest and a $37,500 net capital gain on the sale of securities. Ramon has asked you to compute the amount of his deduction for investment interest, taking into consideration any options he might have. What is the maximum amount of Ramon's investment interest expense deduction in the current year? a. $19,500. b. $34,500. c. $72,000. d. $83,100. e. None of the above.

ANSWER: c RATIONALE: The deduction for investment interest is limited to the amount of net investment income reported. If Ramon elects to treat the net capital gain as investment income for purposes of computing the investment interest expense limitation, the deduction will be $72,000 ($34,500 interest + $37,500 net capital gain). If Ramon elects to include the capital gains as investment income, the $37,500 net capital gain will not qualify for beneficial alternative tax rate treatment. Therefore, he must decide between the tax benefit of an additional deduction of $37,500 versus the benefit of the reduced tax rates applicable to net capital gain.

Nell sells a passive activity with an adjusted basis of $45,000 for $105,000. Suspended losses attributable to this property total $45,000. The total gain and the taxable gain are: a. $60,000 total gain; $105,000 taxable gain. b. $10,000 total gain; $15,000 taxable gain. c. $60,000 total gain; $0 taxable gain. d. $60,000 total gain; $15,000 taxable gain. e. None of the above.

ANSWER: d RATIONALE: $105,000 amount realized - $45,000 adjusted basis = $60,000 total gain - $45,000 suspended loss = $15,000 taxable gain.

Dena owns interests in five businesses and has full-time employees in each business. She participates for 100 hours in Activity A, 120 hours in Activity B, 130 hours in Activity C, 140 hours in Activity D, and 125 hours in Activity E. a. All five of Dena's activities are significant participation activities. b. Dena is a material participant with respect to all five activities. c. Dena is not a material participant in any of the activities. d. Dena is a material participant with respect to Activities B, C, D, and E. e. None of the above.

ANSWER: d RATIONALE: Activity A is not a significant participation activity because Dena does not participate for more than 100 hours. She is not a material participant with respect to Activity A because this activity is not a significant participation activity. She is a material participant in Activities B, C, D, and E under the significant participation test (Test 4).

Carl, a physician, earns $200,000 from his medical practice in the current year. He receives $45,000 in dividends and interest during the year as well as $5,000 of income from a passive activity. In addition, he incurs a loss of $50,000 from an investment in a passive activity. What is Carl's AGI for the current year after considering the passive investment? a. $195,000 b. $200,000 c. $240,000 d. $245,000 e. None of the above

ANSWER: d RATIONALE: Carl's net income after considering the passive investments is $245,000 ($200,000 active income + $45,000 portfolio income). He is not allowed to offset the net passive activity loss against active or portfolio income.

Identify from the list below the type of disposition of a passive activity where the taxpayer keeps the suspended losses of the disposed activity and utilizes them on a subsequent taxable disposition. a. Disposition of a passive activity by gift. b. Disposition of a passive activity at death. c. Installment sale of a passive activity. d. All of the above. e. None of the above.

ANSWER: e RATIONALE: Each of the situations identified results in either the losses being used or lost

Charles owns a business with two separate departments. Department A produces $100,000 of income and Department B incurs a $60,000 loss. Charles participates for 550 hours in Department A and 100 hours in Department B. He has full-time employees in both departments. a. If Charles elects to treat both departments as a single activity, he cannot offset the $60,000 loss against the $100,000 income. b. Charles may not treat Department A and Department B as separate activities because they are parts of one business. c. If Charles elects to treat the two departments as separate activities, he can offset the $60,000 loss against the $100,000 income. d. If Charles elects to treat both departments as a single activity, he can offset the $60,000 loss against the $100,000 income. e. None of the above.

ANSWER: d RATIONALE: Charles may choose to treat the two departments as either a single activity or as separate activities. If the two departments are treated as a single activity, Charles is a material participant and the loss can be offset against the income. If the two departments are treated as separate activities, Charles is a material participant with respect to Department A (the more-than-500-hour test is met) and the income from Department A is active. However, the loss from Department B would be passive because none of the material participation tests would be met. Passive activity losses cannot be offset against active income.

During the current year, Ethan performs personal services as follows: 800 hours in his information technology consulting practice, 625 hours in a real estate development business, and 510 hours in a condominium leasing operation. He expects that losses will be realized from the two real estate ventures while his consulting practice will show a profit. Ethan files a joint return with his spouse whose salary is $125,000. The income and losses from the following ventures is considered active and not subject to the passive activity loss limitations: a. Only the information technology consulting practice. b. Only the information technology consulting practice and the real estate development business. c. Only the information technology consulting practice and the condominium leasing operation. d. All three of the ventures are considered active and not subject to the passive activity loss limitations. e. None of the above.

ANSWER: d RATIONALE: Ethan is considered a material participant in all three ventures, so the income and loss from these operations is treated as active and will be fully reflected on his income tax return. The losses from the real estate activities will not be subject to the passive activity loss rules because more than 50% of his personal services were devoted to real property trades or businesses in which he is a material participant, and this participation exceeded 750 hours. Thus, the losses from these activities can offset the income from his information technology consulting practice and his spouse's salary.

Art's at-risk amount in a passive activity was $60,000 at the beginning of 2017. His loss from the activity in 2017 is $80,000, and he had no passive activity income during the year. Art had $20,000 of passive activity income from the activity in 2018. Under the passive activity loss rules, Art's suspended loss at the end of 2018 is: a. $15,000. b. $20,000. c. $45,000. d. $60,000. e. None of the above.

ANSWER: d RATIONALE: In 2017, Art had an $80,000 loss, $20,000 of which was suspended under the at-risk rules; $60,000 was suspended under the passive activity loss rules. The $20,000 of passive activity income in 2018 increases Art's at-risk amount and allows for reclassification as a passive activity loss $20,000 of the 2017 loss suspended under the at-risk rules. Therefore, Art has a total loss of $60,000 suspended under the passive activity loss rules ($60,000 in 2017 + $20,000 reclassified in 2018 - $20,000 of passive activity losses offset against passive activity income).

Jon owns an apartment building in which he is a material participant and also owns a computer consulting business. Of the 2,000 hours he spends on these activities during the year, 55% of the time is spent operating the apartment building and 45% of the time is spent in the computer consulting business. a. The computer consulting business is a passive activity but the apartment building is not. b. The apartment building is a passive activity but the computer consulting business is not. c. Both the apartment building and the computer consulting business are passive activities. d. Neither the apartment building nor the computer consulting business is a passive activity. e. None of the above.

ANSWER: d RATIONALE: More than half of Jon's personal services are spent in a real property trade or business in which he materially participates, and the time spent exceeds 750 hours. Thus, the apartment building is not a passive activity. Because Jon participates for more than 500 hours in the computer consulting business, it also is not a passive activity.

Ned, a college professor, owns a separate business (not real estate) in which he participates in the current year. He has one employee who works part-time in the business. a. If Ned participates for 120 hours and the employee participates for 120 hours during the year, Ned does not qualify as a material participant. b. If Ned participates for 95 hours and the employee participates for 5 hours during the year, Ned probably does not qualify as material participant. c. If Ned participates for 500 hours and the employee participates for 520 hours during the year, Ned qualifies as material participant. d. If Ned participates for 600 hours and the employee participates for 2,000 hours during the year, Ned qualifies as a material participant. e. None of the above.

ANSWER: d RATIONALE: Option a. is incorrect; Ned participates for more than 100 hours and this is not less than the participation of any other individual (Test 3). Option b. is incorrect; Ned's participation constitutes substantially all of the participation, even though Ned's participation is less than 100 hours (Test 2). Option c. is incorrect; Ned would have to participate for more than 500 hours for statement c. to be correct (Test 1). Option d. is correct; an individual who participates for more than 500 hours is a material participant regardless of how much others participate (Test 1)

Paula owns four separate activities. She elects not to group them together as a single activity under the "appropriate economic unit" standard. Paula participates for 130 hours in Activity A, 115 hours in Activity B, 260 hours in Activity C, and 100 hours in Activity D. She has one employee, who works 125 hours in Activity D. Which of the following statements is correct? a. Activities A, B, C, and D are all significant participation activities. b. Paula is a material participant with respect to Activities A, B, C, and D. c. Paula is not a material participant with respect to Activities A, B, C, and D. d. Losses from all of the activities can be used to offset Paula's active income. e. None of the above.

ANSWER: e RATIONALE: Activities A, B, and C are all significant participation activities, but Activity D is not. A significant participation activity is one in which the individual's participation exceeds 100 hours during the year. The material participation standards are met with respect to Activities A, B, and C because total participation in significant participation activities (130 + 115 + 260) exceeds 500 hours.

Tess owns a building in which she rents apartments to tenants and operates a restaurant. Which of the following statements is incorrect? a. If 60% of Tess's gross income is from apartment rentals and 40% is from the restaurant, the rental operation and the restaurant business must be treated as separate activities. b. If 95% of Tess's gross income is from apartment rentals and 5% is from the restaurant, she may treat the rental operation and the restaurant business as a single activity that is a rental activity. c. If 5% of Tess's gross income is from apartment rentals and 95% is from the restaurant, she may treat the rental operation and the restaurant business as a single activity that is not a rental activity. d. If 98% of Tess's gross income is from apartment rentals and 2% is from the restaurant, the rental operation and the restaurant business must be treated as a single activity that is not a rental activity. e. None of the above.

ANSWER: d RATIONALE: Rental and nonrental operations are generally treated as separate activities. However, when an insubstantial portion of the gross income is attributable to either rental or nonrental operations, both activities may be treated as a single activity. The single activity is treated as rental or nonrental, depending on which made the predominant contribution to gross income. Since the Regulations do not require a grouping of rental and nonrental activities, the statement that they must be treated as a single activity is incorrect.

Last year, Ted invested $100,000 for a 50% interest in a partnership in which he was a material participant. The partnership incurred a loss, and Ted's share was $150,000. Which of the following statements is incorrect? a. Ted's nondeductible loss of $50,000 can be carried over and used in the future (subject to the at-risk provisions). b. If Ted has taxable income of $50,000 from the partnership in the current year and no other transactions that affect his at-risk amount, he can use all of the $50,000 loss carried over. c. Since Ted has only $100,000 of capital at risk, he cannot deduct more than $100,000 against his other income. d. None of the above is incorrect.

ANSWER: d RATIONALE: Statements a., b., and c. are all correct.

In 2018, Wang invests $80,000 for a 20% interest in a partnership in which he is a material participant. The partnership incurs a loss with $100,000 being Wang's share. Which of the following statements is incorrect? a. Since Wang has only $80,000 of capital at risk, he cannot deduct any more than this amount against his other income. b. Wang's nondeductible loss of $20,000 can be carried over and used in future years (subject to the at-risk provisions). c. If Wang has taxable income of $40,000 from the partnership in 2019 and there are no other transactions that affect his at-risk amount, he can use all of the $20,000 loss carried over from 2018. d. Wang's $100,000 loss is nondeductible in 2018 and 2019 under the passive activity loss provisions. e. All of the statements are correct.

ANSWER: d RATIONALE: Statements a., b., and c. are correct. The passive activity loss provisions do not apply because Wang is a material participant.

Wes's at-risk amount in a passive activity is $25,000 at the beginning of the current year. His current loss from the activity is $35,000 and he has no passive activity income. At the end of the current year, which of the following statements is incorrect? a. Wes has a loss of $25,000 suspended under the passive activity loss rules. b. Wes has an at-risk amount in the activity of $0. c. Wes has a loss of $10,000 suspended under the at-risk rules. d. Wes has a loss of $35,000 suspended under the passive activity loss rules. e. None of the above is incorrect.

ANSWER: d RATIONALE: The at-risk amount of $25,000 is reduced to zero by $25,000 of the passive activity loss. As a result, the $10,000 unused loss is suspended under the at-risk rules. The $25,000 of passive activity loss is suspended under the passive activity loss rules because Wes has no passive activity income.

Jed spends 32 hours a week, 50 weeks a year, operating a bicycle rental store that he owns at a resort community. He also owns a music store in another city that is operated by a full-time employee. He elects not to group them together as a single activity under the "appropriate economic unit" standard. Jed spends 40 hours per year working at the music store. a. Neither store is a passive activity. b. Both stores are passive activities. c. Only the bicycle rental store is a passive activity. d. Only the music store is a passive activity. e. None of the above.

ANSWER: d RATIONALE: The bicycle rental store is not treated as a rental activity because the average period of customer use is 7 days or less. Jed participates for more than 500 hours during the year; therefore, the bicycle rental store is treated as an active business. However, because Jed does not materially participate in the operations of the music store, it is a passive activity.

Chen incurred $58,500 of interest expense this year related to his investments. His investment income includes $15,000 of interest, $9,000 of qualified dividends, and a $22,500 net capital gain on the sale of securities. The maximum amount of Chen's investment interest expense deduction for the year is: a. $15,000. b. $24,000. c. $37,500. d. $46,500. e. None of the above.

ANSWER: d RATIONALE: The deduction for investment interest is limited to the amount of net investment income reported. If Chen elects to treat the capital gain and qualified dividends as investment income, the deduction is $46,500 ($15,000 interest + $9,000 qualified dividends + $22,500 net capital gain). However, if he so elects, his capital gain and qualified dividends will not be eligible for beneficial capital gains tax rate treatment.

Pablo, who is single, has $95,000 of salary, $10,000 of income from a limited partnership, and a $27,000 passive activity loss from a real estate rental activity in which he actively participates. His modified adjusted gross income is $95,000. Of the $27,000 loss, how much is deductible? a. $0 b. $10,000 c. $25,000 d. $27,000 e. None of the above

ANSWER: d RATIONALE: The entire loss may be deducted: $10,000 of the loss is deducted against the passive activity income from the limited partnership and the remaining $17,000 rental real estate loss is deducted against Pablo's salary because he actively participates in the activity.

Which of the following is not a factor that should be considered in determining whether an activity is treated as an appropriate economic unit? a. The interdependencies between the activities. b. The extent of common control. c. The extent of common ownership. d. The geographical location. e. All of the above are relevant factors.

ANSWER: e

In 2018, Kipp invested $65,000 for a 30% interest in a partnership conducting a passive activity. The partnership reported losses of $200,000 in 2018 and $100,000 in 2019, Kipp's share being $60,000 in 2018 and $30,000 in 2019. How much of the losses from the partnership can Kipp deduct assuming he owns no other investments and does not participate in the partnership's operations? a. $0 in 2018; $30,000 in 2019. b. $60,000 in 2018; $30,000 in 2019. c. $60,000 in 2018; $5,000 in 2019. d. $60,000 in 2018; $0 in 2019. e. None of the above.

ANSWER: e RATIONALE: No losses are deductible in either year because the activity is passive and he owns no passive activity income-producing investments. Had the passive activity loss rules not applied, the at-risk rules would have limited the deduction to $65,000 over the two-year period.

Caroyl made a gift to Tim of a passive activity (adjusted basis of $50,000, suspended losses of $20,000, and a fair market value of $80,000). No gift tax resulted from the transfer. a. Tim's adjusted basis is $80,000, and Tim can deduct the $20,000 of suspended losses in the future. b. Tim's adjusted basis is $80,000. c. Tim's adjusted basis is $50,000, and the suspended losses are lost. d. Tim's adjusted basis is $50,000, and Tim can deduct the $20,000 of suspended losses in the future. e. None of the above.

ANSWER: e RATIONALE: Since the $20,000 suspended loss is included in basis, Tim's basis in the property is $70,000 ($50,000 + $20,000).

61. An individual, age 40, who is not subject to the phase-out provision may contribute a nondeductible amount to a Roth IRA up to $5,500 per year in 2018. a. True b. False

True

52. LD Partnership, a cash basis taxpayer, purchases land and a building for $200,000 with $150,000 of the cost being allocated to the building. The gross receipts of the partnership are less than $100,000. LD must capitalize the $50,000 paid for the land, but can deduct the $150,000 paid for the building in the current tax year. a. True b. False

False

53. Purchased goodwill must be capitalized, but can be amortized over a 60-month period. a. True b. False

False

54. Every year, Teal Corporation gives each employee a turkey and a bottle of wine at the December holiday season. These gifts are subject to the 50% limitation. a. True b. False

False

62. A participant who is at least age 59 1/2 can make a tax-free qualified withdrawal from a Roth IRA after a five-year holding period. a. True b. False

True

66. For the spousal IRA provision to apply, a joint return must be filed. a. True b. False

True

7. The Code does not specifically define what constitutes a trade or business. a. True b. False

True

54. Marge sells land to her adult son, Jason, for its $20,000 appraised value. Her adjusted basis for the land is $25,000. Marge's recognized loss is $5,000 and Jason's adjusted basis for the land is $25,000 ($20,000 cost + $5,000 recognized gain of Marge). a. True b. False

False

8. An expense need not be recurring in order to be "ordinary." a. True b. False

True

55. For purposes of the § 267 loss disallowance provision, a taxpayer's aunt is a related party. a. True b. False

False

56. A participant has an adjusted basis of $0 in any nondeductible contributions to a traditional IRA. a. True b. False

False

56. An advance payment received in June 2018 by an accrual basis and calendar year taxpayer for services to be provided over a 36-month period can be spread over four tax years. a. True b. False

False

58. If an individual is ineligible to make a deductible contribution to a traditional IRA, nondeductible contributions of any amount can be made to a traditional IRA. a. True b. False

False

6. A nonbusiness bad debt deduction can be taken any year after the debt becomes totally worthless. a. True b. False

False

6. Investment related expenses, such as paying a fee to an investment manager, generally are deductions from adjusted gross income in 2018. a. True b. False

False

63. Distributions from a Roth IRA that are subject to taxation are treated first as from earnings and last as from contributions. a. True b. False

False

64. On February 1, 2018, Tuan withdrew $15,000 from his IRA #1. He deposited the funds back into IRA #1 within 60 days (a"rollover"). Tuan may do one more nontaxable rollover distribution from either IRA #1 or IRA #2 in April 2018. a. True b. False

False

65. An individual is considered an active participant in an employer-sponsored retirement plan merely because an individual's spouse is an active participant for any part of a plan year in applying the IRA phase-out provision. a. True b. False

False

7. A business bad debt is a debt unrelated to the taxpayer's trade or business either when it was created or when it became worthless. a. True b. False

False

7. For tax purposes, a statutory employee is treated the same as a common law employee. a. True b. False

False

8. In determining whether a debt is a business or nonbusiness bad debt, the debtor's use of the borrowed funds is important. a. True b. False

False

9. A corporation which makes a loan to a shareholder can have a nonbusiness bad debt deduction. a. True b. False

False

8. If an individual is subject to the direction or control of another only to the extent of the end result but not as to the means of accomplishment, an employer-employee relationship does not exist. a. True b. False

True

3. Last year, taxpayer had a $10,000 nonbusiness bad debt. Taxpayer also had an $8,000 short-term capital gain and taxable income of $35,000. If taxpayer collects the entire $10,000 during the current year, $8,000 needs to be included in gross income. a. True b. False

False

12. Only under limited circumstances can a loss on the sale of a personal use asset be deducted. a. True b. False

False

14. A loss from a worthless security is always treated as a short-term capital loss. a. True b. False

False

14. Depending on the nature of the expenditure, expenses incurred in a trade or business may be deductible for or from AGI. a. True b. False

False

15. The cash method can always be used by a corporation even if inventory and cost of goods sold are a significant income producing factor in the business. a. True b. False

False

16. A deduction for parking and other traffic violations incurred during business use of the automobile is allowed under the actual cost method but not the automatic mileage method. a. True b. False

False

16. A taxpayer's note or promise to pay satisfies the "actually paid" requirement for the cash basis method of accounting. a. True b. False

False

16. Several years ago, John purchased 2,000 shares of Red Corporation § 1244 stock from Mark for $40,000. Last year, John sold one-half of his Red Corporation stock to Mike for $12,000. During the current year, John sold the remaining Red Corporation stock for $3,000. John has a $17,000 ($3,000 - $20,000) ordinary loss for the current year. a. True b. False

False

17. If a taxpayer sells their § 1244 stock at a loss, all of the loss will be ordinary loss. a. True b. False

False

18. Al, who is single, has a gain of $40,000 on the sale of § 1244 stock (small business stock) and a loss of $80,000 on the sale of § 1244 stock. As a result, Al has a $40,000 ordinary loss. a. True b. False

False

18. Under the automatic mileage method, depreciation is not taken into account in the mileage rate allowed. a. True b. False

False

2. In some cases it may be appropriate for a taxpayer to deduct work-related expenses as both a sole proprietor and an employee. a. True b. False

False

21. Amy lives and works in St. Louis. In the morning she flies to Boston, has a three-hour business meeting, and returns to St. Louis that evening. For tax purposes, Amy was away from home. a. True b. False

False

23. Marvin lives with his family in Alabama. He has two jobs: one in Alabama and one in North Carolina. Marvin's tax home is where he lives (Alabama). a. True b. False

False

24. A self-employed taxpayer who lives and works in Kansas City travels to Chicago on an eight-day business trip. While in Chicago, taxpayer uses the hotel valet service to have some laundry done. The valet charge is a nondeductible personal travel expense. a. True b. False

False

24. Susan is a sales representative for a U.S. weapons manufacturer. She makes a $100,000 "grease" payment to a U.S. government official associated with a weapons purchase by the U.S. Army. She makes a similar payment to a Saudi Arabian government official associated with a similar sale. Neither of these payments is deductible by Susan's employer. a. True b. False

False

26. A taxpayer who lives and works in Tulsa travels to Buffalo for five days. If three days are spent on business and two days are spent on visiting relatives, only 60% of the airfare is deductible. a. True b. False

False

26. If investment property is stolen, the amount of the loss is the adjusted basis of the property at the time of the theft reduced by $100 and 10% of AGI. a. True b. False

False

27. The cost of repairs to damaged property is not an acceptable measure of the loss in value of the property. a. True b. False

False

28. Legal expenses incurred in connection with rental property are deductions from AGI. a. True b. False

False

28. Taxpayer's home was destroyed by a storm in the current year in a Federally-declared disaster area. If the taxpayer elects to treat the loss as having occurred in the prior year, it will be subject to the 10%-of-AGI reduction based on the AGI of the current year. a. True b. False

False

29. Legal fees incurred in connection with a criminal defense are not deductible even if the crime is associated with a trade or business. a. True b. False

False

29. The amount of loss for partial destruction of business property is the decline in fair market value of the business property. a. True b. False

False

3. In 2018, unreimbursed employment related expenses are classified as deductions for AGI. a. True b. False

False

3. Janet works at Green Company's call center. If Janet's compensation is based on the number of calls she handles, she is an independent contractor. a. True b. False

False

83. In the computation of a net operating loss, which of the following items is not added to the negative taxable income? a. Losses incurred in a transaction entered into for profit. b. Deductible alimony payments. c. Personal theft loss. d. Losses from theft of securities. e. None of these.

b. Deductible alimony payments.

42. Martha rents part of her personal residence in the summer for 3 weeks for $3,000. Anne rents all of her personal residence for one week in December for $2,500. Anne is not required to include the $2,500 in her gross income whereas Martha is required to include the $3,000 in her gross income. a. True b. False

True

43. A net operating loss occurring in 2018 can only be carried forward and can offset no more than 80% of taxable income in a subsequent year. a. True b. False

True

43. If a vacation home is rented for less than 15 days during a year, the only expenses that can be deducted are mortgage interest, property taxes, and personal casualty losses. a. True b. False

True

44. Under the regular (actual expense) method, the portion of the office in the home deduction that exceeds the income from the business can be carried over to future years. a. True b. False

True

46. The portion of property tax on a vacation home that is attributable to personal use is an itemized deduction. a. True b. False

True

47. A theft of investment property can create or increase a net operating loss for an individual. a. True b. False

True

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

True

49. When contributions are made to a traditional IRA, they are deductible by the participant. Later distributions from the IRA upon retirement are fully taxed. a. True b. False

True

5. If an account receivable written off during a prior year is subsequently collected during the current year, the amount collected must be included in the gross income of the current year to the extent it created a tax benefit in the prior year. a. True b. False

True

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

True

52. For self-employed taxpayers, travel expenses are deductions for AGI. a. True b. False

True

15. A loss is not allowed for a security that declines in value. a. True b. False

True

15. A taxpayer who uses the automatic mileage method to compute auto expenses can also deduct the business portion of tolls and parking. a. True b. False

True

17. A taxpayer who uses the automatic mileage method for the business use of an automobile can change to the actual cost method in a later year. a. True b. False

True

17. Isabella owns two business entities. She may be able to use the cash method for one and the accrual method for the other. a. True b. False

True

18. Under the "twelve month rule" for the current period deduction of prepaid expenses of cash basis taxpayers, the asset must expire or be consumed by the end of the tax year following the year of payment. a. True b. False

True

19. An individual may deduct a loss on rental property even if it does not meet the definition of a casualty loss. a. True b. False

True

20. The period in which an accrual basis taxpayer can deduct an expense is determined by applying the economic performance and all events tests. a. True b. False

True

22. James has a job that compels him to go to many different states during the year. It is possible that James was never away from his tax home during the year. a. True b. False

True

25. In 2017, Amos had AGI of $50,000. Amos also had a diamond ring stolen which cost $20,000 and was worth $17,000 at the time of the theft. He itemized deductions on last year's tax return. In 2018, Amos recovered $17,000 from the insurance company. Therefore, he must include $11,900 in gross income on the tax return for the current year. a. True b. False`

True

25. The tax law specifically provides that a taxpayer cannot be temporarily away from home for any period of employment that exceeds one year. a. True b. False

True

26. Two-thirds of treble damage payments under the antitrust law are not deductible. a. True b. False

True

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

True

27. The legal cost of having a will prepared is not deductible. a. True b. False

True

28. Bob lives and works in Newark, NJ. He travels to London for a three-day business meeting, after which he spends three days touring Scotland. All of his air fare is deductible. a. True b. False

True

29. Eileen lives and works in Mobile. She travels to Rome for an eight-day business meeting, after which she spends two days touring Italy. All of Eileen's airfare is deductible. a. True b. False

True

31. Ordinary and necessary business expenses, other than cost of goods sold, of an illegal drug trafficking business do not reduce taxable income. a. True b. False

True

34. Under the right circumstances, a taxpayer's meals and lodging expense can qualify as a deductible education expense. a. True b. False

True

35. In 2018, personal casualty gains are allowed to offset personal casualty losses. If an excess casualty loss results, it is not deductible (unless attributable to a Federally-declared disaster). a. True b. False

True

35. Investigation of a business unrelated to one's present business never results in a current period deduction of the entire amount if the amount of the investigation expenses exceeds $5,000. a. True b. False

True

36. Flamingo Corporation furnishes meals at cost to its employees by means of a cafeteria it maintains. The cost of operating the cafeteria is not subject to the overall limitation (50%). a. True b. False

True

36. Research and experimental expenditures do not include the cost of consumer surveys. a. True b. False

True

37. The cost of depreciable property is not a research and experimental expenditure. a. True b. False

True

39. A hobby activity results in all of the hobby income being included in AGI and no deductions being allowed for hobby related expenses. a. True b. False

True

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

True

40. On their birthdays, Lily sends gift certificates (each valued at $25) to Caden (a key client) and to each of Caden's two minor children. Lily can deduct only $25 as to these gifts. a. True b. False

True

40. The purpose of the "excess business loss" rules are to limit the amount of non-business income (e.g., salaries, interest, dividends, etc.) that can be "sheltered" from tax as a result of business losses. a. True b. False

True

41. In the case of an office in the home deduction, the exclusive business use test does not apply when the home is used as a daycare center. a. True b. False

True

42. A net operating loss occurring in 2018 can only be carried forward (no carryback exists). a. True b. False

True

53. Employees who render an adequate accounting to the employer and are fully reimbursed will shift the 50% overall limitation on meal expenses to their employer. a. True b. False

True

92. Tracy, the regional sales director for a manufacturer of exercise equipment, pays $2,500 to rent a skybox for a visiting performance of the Harlem Globetrotters. The skybox holds 10 seats, and Tracy invites 7 clients to the event. Nonluxury seats range in price from $80 to $120. The refreshments provided during the event cost $600. If Tracy meets all of the requirements for deductibility (i.e., business discussion, substantiation), she may deduct: a. $900. b. $1,100. c. $1,260. d. $1,500. e. $1,550.

a

94. Which, if any, of the following is an advantage of using the simplified method for determining the office in the home deduction? a. No depreciation on the personal residence has to be computed. b. The exclusive use requirement does not have to be met. c. Allows the expense to be classified as a deduction for AGI. d. Can also be used for a residence that is rented (not owned) by the taxpayer. e. None of these.

a

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

a

78. Blue Corporation incurred the following expenses in connection with the development of a new product: Salaries $100,000 Utilities 18,000 Materials 25,000 Advertising 5,000 Market survey 3,000 Depreciation on machine 9,000 Blue expects to begin selling the product next year. If Blue elects to amortize research and experimental expenditures over 60 months, determine the amount of the deduction for research and experimental expenditures for the current year. a. $0 b. $118,000 c. $143,000 d. $152,000 e. $160,000

a. $0

53. On June 2, 2013, Fred's TV Sales sold Mark a large HD TV, on account, for $12,000. Fred's TV Sales uses the accrual method. In 2014, when the balance on the account was $8,000, Mark filed for bankruptcy. Fred was notified that he could not expect to receive any of the amount owed to him. In 2015, final settlement was made and Fred received $1,000. How much bad debt loss can Fred deduct in 2015? a. $0 b. $7,000 c. $8,000 d. $12,000 e. None of these

a. $0

68. In 2014, Grant's personal residence was completely destroyed by fire. Grant was insured for 100% of his actual loss, and he received the insurance settlement. Grant had adjusted gross income, before considering the casualty item, of $30,000. Pertinent data with respect to the residence follows: Cost basis $280,000 Value before casualty 250,000 Value after casualty -0- What is Grant's allowable casualty loss deduction? a. $0 b. $6,500 c. $6,900 d. $10,000 e. $80,000

a. $0

69. John had adjusted gross income of $60,000. During the year his personal use summer home was damaged by a fire. Pertinent data with respect to the home follows: Cost basis $260,000 Value before the fire 400,000 Value after the fire 100,000 Insurance recovery 270,000 John had an accident with his personal use car. As a result of the accident, John was cited with reckless driving and willful negligence. Pertinent data with respect to the car follows: Cost basis $80,000 Value before the accident 56,000 Value after the accident 20,000 Insurance recovery 18,000 What is John's itemized casualty loss deduction? a. $0 b. $2,000 c. $17,000 d. $18,000 e. None of these

a. $0

74. Andrew, who operates a laundry business, incurred the following expenses during the year. • Parking ticket of $250 for one of his delivery vans that parked illegally. • Parking ticket of $75 when he parked illegally while attending a rock concert in Tulsa. • DUI ticket of $500 while returning from the rock concert. • Attorney's fee of $600 associated with the DUI ticket. What amount can Andrew deduct for these expenses? a. $0. b. $250. c. $600. d. $1,425. e. None of these.

a. $0.

92. Melba incurred the following expenses for her dependent daughter during the current year: Payment of principal on daughter's automobile loan $3,600 Payment of interest on above loan 2,900 Payment of daughter's property taxes 1,800 Payment of principal on daughter's personal residence loan 2,800 Payment of interest on daughter's personal residence loan 7,000 How much may Melba deduct in computing her itemized deductions? a. $0. b. $8,800. c. $11,700. d. $18,100. e. None of these.

a. $0.

70. In 2014, Mary had the following items: Salary $30,000 Personal use casualty gain 10,000 Personal use casualty loss (after $100 floor) 17,000 Other itemized deductions 4,000 Assuming that Mary files as head of household (has one dependent child), determine her taxable income for 2015. a. $12,750 b. $13,000 c. $14,000 d. $22,000 e. None of these

a. $12,750

73. Rex, a cash basis calendar year taxpayer, runs a bingo operation which is illegal under state law. During 2014, a bill designated H.R. 9 is introduced into the state legislature which, if enacted, would legitimize bingo games. In 2014, Rex had the following expenses: Operating expenses in conducting bingo games $247,000 Payoff money to state and local police 24,000 Newspaper ads supporting H.R. 9 3,000 Political contributions to legislators who support H.R. 9 8,000 Of these expenditures, Rex may deduct: a. $247,000. b. $250,000. c. $258,000. d. $282,000. e. None of these.

a. $247,000.

62. Bruce, who is single, had the following items for the current year: • Salary of $80,000. • Gain of $20,000 on the sale of § 1244 stock acquired two years earlier. • Loss of $75,000 on the sale of § 1244 stock acquired three years earlier. • Worthless stock of $15,000. The stock was acquired on February 1 of the prior year and became worthless on January 15 of the current year. Determine Bruce's AGI for the current year. a. $27,000 b. $38,000 c. $42,000 d. $47,000 e. None of these

a. $27,000

73. Alicia was involved in an automobile accident in 2015. Her car was used 60% for business and 40% for personal use. The car had originally cost $40,000. At the time of the accident, the car was worth $20,000 and Alicia had taken $8,000 of depreciation. The car was totally destroyed and Alicia had let her car insurance expire. If Alicia's AGI is $50,000 (before considering the loss), determine her itemized deduction for the casualty loss. a. $4,500 b. $6,100 c. $8,000 d. $24,000 e. None of these

a. $4,500

81. In the current year, Amber Corporation has taxable income of $880,000, alternative minimum taxable income of $600,000, and qualified production activities income (QPAI) of $640,000. The total W-2 wages paid to employees engaged in qualified domestic production activities are $116,000. Amber's DPAD for 2014 is: a. $54,000. b. $57,600. c. $58,000. d. $79,200. e. None of these.

a. $54,000

93. Ralph made the following business gifts during the year. To Robert (a key client) at Christmas $50 To Angel (Robert's 8year old daughter) on her birthday 20 To Art (Ralph's secretary) on his birthday ($3 was for gift wrapping) 30 To Paige (Ralph's boss) at Christmas 40 Presuming proper substantiation, Ralph's deduction is: a. $0. b. $53. c. $73. d. $78. e. $98.

b

98. Which, if any, of the following expenses are not subject to the 2%-of-AGI floor? a. Safety shoes purchased by an employed plumber. b. Reimbursed employee expenses. Taxpayer-employee renders an adequate accounting to the employer. c. Unreimbursed employee expenses. d. Tax return preparation fee paid by a non-employed retiree. e. None of these.

b

61. John files a return as a single taxpayer. In 2014, he had the following items: • Salary of $40,000. • Loss of $65,000 on the sale of § 1244 stock acquired two years ago. • Interest income of $6,000. Determine John's AGI for 2014. a. ($5,000). b. $0. c. $45,000. d. $51,000. e. None of these.

b. $0

87. Rachel is single and has a college degree in finance. She is employed as a loan officer at a bank; her yearly AGI approximates $50,000. During the year, she enrolled in a weekend MBA program and incurred the following nonreimbursed expenses: $4,100 (tuition), $300 (books), $200 (other school supplies), and $200 (transportation to and from campus). Disregarding the 2%-of-AGI limitation, as to the MBA program, Rachel has a: a. Deduction for and deduction from AGI of $0. b. Deduction for AGI of $4,000 and deduction from AGI of $800. c. Deduction for AGI of $4,000 and deduction from AGI of $700. d. Deduction for AGI of $4,100 and deduction from AGI of $700. e. None of these.

b

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

b

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

b

71. Petal, Inc. is an accrual basis taxpayer. Petal uses the aging approach to calculate the reserve for bad debts. During 2014, the following occur associated with bad debts. Credit sales $400,000 Collections on credit sales 250,000 Amount added to the reserve 10,000 Beginning balance in the reserve -0- Identifiable bad debts during 2014 12,000 The amount of the deduction for bad debt expense for Petal for 2014 is: a. $10,000. b. $12,000. c. $22,000. d. $140,000. e. None of these.

b. $12,000.

77. Tom operates an illegal drug-running operation and incurred the following expenses: Salaries $ 75,000 Illegal kickbacks 20,000 Bribes to border guards 25,000 Cost of goods sold 160,000 Rent 8,000 Interest 10,000 Insurance on furniture and fixtures 6,000 Utilities and telephone 20,000 Which of the above amounts reduces his taxable income? a. $0. b. $160,000. c. $279,000. d. $324,000. e. None of these.

b. $160,000.

57. Five years ago, Tom loaned his son John $20,000 to start a business. A note was executed with an interest rate of 8%, which is the Federal rate. The note required monthly payments of the interest with the $20,000 due at the end of ten years. John always made the interest payments until last year. During the current year, John notified his father that he was bankrupt and would not be able to repay the $20,000 or the accrued interest of $1,800. Tom is an accrual basis taxpayer whose only income is salary and interest income. The proper treatment for the nonpayment of the note is: a. No deduction. b. $3,000 deduction. c. $20,000 deduction. d. $21,800 deduction. e. None of these.

b. $3,000 deduction

85. Cory incurred and paid the following expenses: Tax return preparation fee $ 600 Moving expenses 2,000 Investment expenses 500 Expenses associated with rental property 1,500 Interest expense associated with loan to finance tax-exempt bonds 400 Calculate the amount that Cory can deduct (before any percentage limitations). a. $5,000. b. $4,600. c. $3,000. d. $1,500. e. None of these.

b. $4,600.

59. Marsha is single, had gross income of $50,000, and incurred the following expenses: Charitable contribution $2,000 Taxes and interest on home 7,000 Legal fees incurred in a tax dispute 1,000 Medical expenses 3,000 Penalty on early withdrawal of savings 250 Her AGI is: a. $39,750. b. $49,750. c. $40,000. d. $39,750. e. None of these.

b. $49,750.

79. Last year, Green Corporation incurred the following expenditures in the development of a new plant process: Salaries $250,000 Materials 90,000 Utilities 20,000 Quality control testing costs 40,000 Management study costs 5,000 Depreciation of equipment 18,000 During the current year, benefits from the project began being realized in May. If Green Corporation elects a 60 month deferral and amortization period, determine the amount of the deduction for the current year. a. $48,000 b. $50,400 c. $54,667 d. $57,067 e. None of these

b. $50,400

54. Mary incurred a $20,000 nonbusiness bad debt last year. She also had an $8,000 long-term capital gain last year. Her taxable income for last year was an NOL of $15,000. During the current year, she unexpectedly collected $12,000 on the debt. How should Mary account for the collection? a. $0 income b. $8,000 income c. $11,000 income d. $12,000 income e. None of these

b. $8,000 income

80. Iris, a calendar year cash basis taxpayer, owns and operates several TV rental outlets in Florida, and wants to expand to other states. During 2014, she spends $14,000 to investigate TV rental stores in South Carolina and $9,000 to investigate TV rental stores in Georgia. She acquires the South Carolina operations, but not the outlets in Georgia. As to these expenses, Iris should: a. Capitalize $14,000 and not deduct $9,000. b. Expense $23,000 for 2014. c. Expense $9,000 for 2014 and capitalize $14,000. d. Capitalize $23,000. e. None of these.

b. Expense $23,000 for 2014.

69. Benita incurred a business expense on December 10, 2014, which she charged on her bank credit card. She paid the credit card statement which included the charge on January 5, 2015. Which of the following is correct? a. If Benita is a cash method taxpayer, she cannot deduct the expense until 2015. b. If Benita is an accrual method taxpayer, she can deduct the expense in 2014. c. If Benita uses the accrual method, she can choose to deduct the expense in either 2014 or 2015. d. Only b. and c. are correct. e. a., b., and c. are correct.

b. If Benita is an accrual method taxpayer, she can deduct the expense in 2014.

76. Terry and Jim are both involved in operating illegal businesses. Terry operates a gambling business and Jim operates a drug running business. Both businesses have gross revenues of $500,000. The businesses incur the following expenses. Terry Jim Employee salaries $200,000 $200,000 Bribes to police 25,000 25,000 Rent and utilities 50,000 50,000 Cost of goods sold -0- 125,000 Which of the following statements is correct? a. Neither Terry nor Jim can deduct any of the above items in calculating the business profit. b. Terry should report profit from his business of $250,000. c. Jim should report profit from his business of $500,000. d. Jim should report profit from his business of $250,000. e. None of these.

b. Terry should report profit from his business of $250,000.

82. Which of the following is not relevant in determining whether an activity is profit-seeking or a hobby? a. Whether the activity is enjoyed by the taxpayer. b. The expertise of the taxpayers or their advisers. c. The time and effort expended. d. The relationship of profits earned and losses incurred. e. All of these are relevant factors.

e. All of these are relevant factors.

64. Which of the following is incorrect? a. Alimony is a deduction for AGI. b. The expenses associated with royalty property are a deduction from AGI. c. Contributions to a traditional IRA are a deduction for AGI. d. Property taxes on taxpayer's personal residence are a deduction from AGI e. All of these are correct.

b. The expenses associated with royalty property are a deduction from AGI.

67. Aiden performs services for Lucas. Which, if any, of the following factors indicate that Aiden is an employee, rather than an independent contractor? a. Aiden provides his own support services (e.g., work assistants). b. Aiden obtained his training (i.e., job skills) from his father. c. Aiden is paid based on hours worked. d. Aiden makes his services available to others. e. None of these.

c

70. A worker may prefer to be treated as an independent contractor (rather than an employee) for which of the following reasons: a. Avoids the cutback adjustment as to business meals. b. All of the self-employment tax is deductible for income tax purposes. c. Work-related expenses are not subject to the 2%-of-AGI floor. d. A Schedule C does not have to be filed. e. None of these.

c

78. Under the actual cost method, which, if any, of the following expenses will not be allowed? a. Car registration fees. b. Auto insurance. c. Interest expense on a car loan (taxpayer is an employee). d. Dues to auto clubs. e. All of these will be allowed.

c

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

c

83. During the year, Walt travels from Seattle to Tokyo (Japan) on business. His time was spent as follows: 2 days travel (one day each way), 2 days business, and 2 days personal. His expenses for the trip were as follows (meals and lodging reflect only the business portion): Air fare $3,000 Lodging 2,000 Meals and entertainment 1,000 Presuming no reimbursement, Walt's deductible expenses are: a. $3,500. b. $4,500. c. $5,500. d. $6,000. e. None of these.

c

97. Which, if any, of the following expenses is subject to the 2%-of-AGI floor? a. Gambling losses (to the extent of gambling gains). b. Moving expenses (not reimbursed by employer). c. Teaching supplies (in excess of $250) purchased by a fifth grade teacher. d. Union dues of self-employed machinist. e. None of these.

c

58. Al is single, age 60, and has gross income of $140,000. His deductible expenses are as follows: Alimony $20,000 Charitable contributions 4,000 Contribution to a traditional IRA 5,500 Expenses paid on rental property 7,500 Interest on home mortgage and property taxes on personal residence 7,200 State income tax 2,200 What is Al's AGI? a. $94,100. b. $103,000. c. $107,000. d. $127,000. e. None of these.

c. $107,000.

58. Three years ago, Sharon loaned her sister $30,000 to buy a car. A note was issued for the loan with the provision for monthly payments of principal and interest. Last year, Sharon purchased a car from the same dealer, Hank's Auto. As partial payment for the car, the dealer accepted the note from Sharon's sister. At the time Sharon purchased the car, the note had a balance of $18,000. During the current year, Sharon's sister died. Hank's Auto was notified that no further payments on the note would be received. At the time of the notification, the note had a balance due of $15,500. What is the amount of loss, with respect to the note, that Hank's Auto may claim on the current year tax return? a. $0 b. $3,000 c. $15,500 d. $18,000 e. None of these

c. $15,500

93. Velma and Bud divorced. Velma's attorney fee of $5,000 is allocated as follows: General representation in obtaining the divorce $1,500 Services in obtaining custody of the child 900 Services in settlement of martial property 600 Determining the tax consequences of: Dependency deduction for child 700 Property settlement 1,300 Of the $5,000 Velma pays to her attorney, the amount she may deduct as an itemized deduction is: a. $0. b. $700. c. $2,000. d. $5,000. e. None of these.

c. $2,000.

95. On January 2, 2014, Fran acquires a business from Chuck. Among the assets purchased are the following intangibles: patent with a 7-year remaining life, a covenant not to compete for 10 years, and goodwill. Of the purchase price, $140,000 was paid for the patent and $60,000 for the covenant. The amount of the excess of the purchase price over the identifiable assets was $100,000. What is the amount of the amortization deduction for 2014? a. $10,667. b. $16,000. c. $20,000. d. $32,667. e. None of these.

c. $20,000.

52. Jed is an electrician. Jed and his wife are accrual basis taxpayers and file a joint return. Jed wired a new house for Alison and billed her $15,000. Alison paid Jed $10,000 and refused to pay the remainder of the bill, claiming the fee to be exorbitant. Jed took Alison to Small Claims Court for the unpaid amount and was awarded a $2,000 judgment. Jed was able to collect the judgment but not the remainder of the bill from Alison. What amount of loss may Jed deduct in the current year? a. $0 b. $2,000 c. $3,000 d. $5,000 e. None of these

c. $3,000

67. Norm's car, which he uses 100% for personal purposes, was completely destroyed in an accident in 2014. The car's adjusted basis at the time of the accident was $13,000. Its fair market value was $10,000. The car was covered by a $2,000 deductible insurance policy. Norm did not file a claim against the insurance policy because of a fear that reporting the accident would result in a substantial increase in his insurance rates. His adjusted gross income was $14,000 (before considering the loss). What is Norm's deductible loss? a. $0 b. $100 c. $500 d. $9,500 e. None of these

c. $500

80. Ivory, Inc., has taxable income of $600,000 and qualified production activities income (QPAI) of $700,000 in 2014. Ivory's domestic production activities deduction is: a. $36,000. b. $42,000. c. $54,000. d. $63,000. e. None of these.

c. $54,000

60. On February 20, 2013, Bill purchased stock in Pink Corporation (the stock is not small business stock) for $1,000. On May 1, 2014, the stock became worthless. During 2014, Bill also had an $8,000 loss on § 1244 small business stock purchased two years ago, a $9,000 loss on a nonbusiness bad debt, and a $5,000 long-term capital gain. How should Bill treat these items on his 2014 tax return? a. $4,000 long-term capital loss and $9,000 short-term capital loss. b. $4,000 long-term capital loss and $3,000 short-term capital loss. c. $8,000 ordinary loss and $3,000 short-term capital loss. d. $8,000 ordinary loss and $5,000 short-term capital loss. e. $8,000 long-term capital loss and $6,000 short-term capital loss.

c. $8,000 ordinary loss and $3,000 short-term capital loss.

83. For an activity classified as a hobby, the expenses are categorized as follows: (1) Amounts that affect adjusted basis and would be deductible under other Code sections if the activity had been engaged in for profit (e.g., depreciation, amortization, and depletion). (2) Amounts deductible under other Code sections without regard to the nature of the activity, such as property taxes and home mortgage interest. (3) Amounts deductible under other Code sections if the activity had been engaged in for profit, but only if those amounts do not affect adjusted basis (e.g., maintenance, utilities, and supplies). If these expenses exceed the gross income from the activity and are thus limited, the sequence in which they are deductible is: a. (1), (2), (3). b. (1), (3), (2). c. (2), (3), (1). d. (2), (1), (3). e. (3), (2), (1).

c. (2), (3), (1).

94. Which of the following must be capitalized by a business? a. Replacement of a windshield of a business truck which was broken in an accident. b. Repair of a roof of a building used in business. c. Amount paid for a covenant not to compete. d. Only b. and c. must be capitalized. e. a., b., and c. can be expensed rather than capitalized.

c. Amount paid for a covenant not to compete.

84. If a taxpayer has an NOL in 2014 of $20,000, of which $8,000 is attributable to a theft of rental use property, the taxpayer may: a. Carry all of the NOL of $20,000 back 5 years. b. Carry all of the NOL of $20,000 back 3 years. c. Carry $8,000 of the NOL back 3 years and the remainder of the NOL of $12,000 back 2 years. d. All of the above. e. None of these.

c. Carry $8,000 of the NOL back 3 years and the remainder of the NOL of $12,000 back 2 years.

57. Trade and business expenses should be treated as: a. A deduction from AGI subject to the 2%-of-AGI floor. b. A deduction from AGI not subject to the 2%-of-AGI floor. c. Deductible for AGI. d. An itemized deduction if not reimbursed. e. None of these.

c. Deductible for AGI.

97. Nikeya sells land (adjusted basis of $120,000) to her adult son, Shamed, for its appraised value of $95,000. Which of the following statements is correct? a. Nikeya's recognized loss is $25,000 ($95,000 amount realized - $120,000 adjusted basis). b. Shamed's adjusted basis for the land is $120,000 ($95,000 cost + $25,000 disallowed loss for Nikeya). c. If Shamed subsequently sells the land for $112,000, he has no recognized gain or loss. d. Only a. and b. are correct. e. a., b., and c. are correct.

c. If Shamed subsequently sells the land for $112,000, he has no recognized gain or loss.

75. Which of the following may be deductible? a. Bribes that relate to a U.S. business. b. Fines paid for violations of the law. c. Interest on a loan used in a hobby. d. All of the above. e. None of these.

c. Interest on a loan used in a hobby.

63. Which of the following are deductions for AGI? a. Mortgage interest on a personal residence. b. Property taxes on a personal residence. c. Mortgage interest on a building used in a business. d. Fines and penalties incurred in a trade or business. e. None of these.

c. Mortgage interest on a building used in a business.

70. Payments by a cash basis taxpayer of capital expenditures: a. Must be expensed at the time of payment. b. Must be expensed by the end of the first year after the asset is acquired. c. Must be deducted over the actual or statutory life of the asset. d. Can be deducted in the year the taxpayer chooses. e. None of these.

c. Must be deducted over the actual or statutory life of the asset.

65. Which of the following is not a "trade or business" expense? a. Interest on business indebtedness. b. Property taxes on business property. c. Parking ticket paid on business auto. d. Depreciation on business property. e. All of these are "trade or business" expenses.

c. Parking ticket paid on business auto.

73. Corey is the city sales manager for "RIBS," a national fast food franchise. Every working day, Corey drives his car as follows: Home to office Miles 20 Office to RIBS No. 1 15 RIBS No. 1 to No. 2 18 RIBS No. 2 to No. 3 13 RIBS No. 3 to home 30 Corey's deductible mileage is: a. 0 miles. b. 50 miles. c. 66 miles. d. 76 miles. e. None of these.

e

100. One of the tax advantages of being self-employed (rather than being an employee) is: a. The self-employment tax is lower than the Social Security tax. b. The cutback adjustment does not apply. c. The actual cost method for deducting the business use of an automobile can be selected. d. Job-related expenses are deductions for AGI. e. A deduction for an office in the home is available.

d

68. Jordan performs services for Ryan. Which, if any, of the following factors indicate that Jordan is an independent contractor, rather than an employee? a. Ryan sets the work schedule. b. Ryan provides the tools used. c. Jordan files a Form 2106 with his Form 1040. d. Jordan is paid based on tasks performed. e. None of these.

d

72. Statutory employees: a. Report their expenses on Form 2106. b. Include common law employees. c. Are subject to income tax withholdings. d. Claim their expenses as deductions for AGI. e. None of these.

d

74. Amy works as an auditor for a large major CPA firm. During the months of September through November of each year, she is permanently assigned to the team auditing Garnet Corporation. As a result, every day she drives from her home to Garnet and returns home after work. Mileage is as follows: Miles Home to office 10 Home to Garnet 30 Office to Garnet 35 For these three months, Amy's deductible mileage for each workday is: a. 0. b. 30. c. 35. d. 60. e. None of these.

d

79. Dave is the regional manager for a national chain of auto-parts stores and is based in Salt Lake City. When the company opens new stores in Boise, Dave is given the task of supervising their initial operation. For three months, he works weekdays in Boise and returns home on weekends. He spends $350 returning to Salt Lake City but would have spent $410 had he stayed in Boise for the weekend. As to the weekend trips, how much, if any, qualifies as a deduction? a. $0, since the trips are personal and not work related. b. $0, since Dave's tax home has changed from Salt Lake City to Boise. c. $60 d. $350 e. $410

d

84. In terms of meeting the distance test for purposes of deducting moving expenses, which of the following statements is correct? a. The taxpayer's new job location must be at least 50 miles away from the old job. b. The taxpayer's new residence must be at least 50 miles away from the new job. c. The taxpayer's new residence must be at least 50 miles away from the old residence. d. The taxpayer's new job location must be at least 50 miles farther from the old residence than the old residence was to the old job. e. None of these.

d

89. The § 222 deduction for tuition and related expenses is available: a. Regardless of the amount of a taxpayer's MAGI. b. To cover room and board expenses to attend college. c. To a married taxpayer filing a separate return. d. Even if a taxpayer does claim the standard deduction. e. None of these.

d

95. Which of the following expenses, if any, qualify as deductible? a. Contributions to a Coverdell Education Savings Account (CESA). b. Contributions to a qualified tuition program (§ 529 plan). c. Job hunting expense of FBI agent who applies for the job of city manager of Beaumont (TX). d. Contribution to a traditional IRA. e. None of these.

d

88. Robyn rents her beach house for 60 days and uses it for personal use for 30 days during the year. The rental income is $6,000 and the expenses are as follows: Mortgage interest $9,000 Real estate taxes 3,000 Utilities 2,000 Maintenance 1,000 Insurance 500 Depreciation (rental part) 4,000 Using the IRS approach, total expenses that Robyn can deduct on her tax return associated with the beach house are: a. $0. b. $6,000. c. $8,000. d. $12,000. e. None of these.

d. $12,000.

75. Alma is in the business of dairy farming. During the year, one of her barns was completely destroyed by fire. The adjusted basis of the barn was $90,000. The fair market value of the barn before the fire was $75,000. The barn was insured for 95% of its fair market value, and Alma recovered this amount under the insurance policy. Alma has adjusted gross income for the year of $40,000 (before considering the casualty). Determine the amount of loss she can deduct on her tax return for the current year. a. $3,750 b. $14,650 c. $14,750 d. $18,750 e. None of these

d. $18,750

82. Cream, Inc.'s taxable income for the current year before any deduction for an NOL carryforward of $30,000 is $70,000. Cream's qualified production activities income (QPAI) is $60,000. What is the amount of Cream's domestic production activities deduction (DPAD) for 2014? a. $1,200 b. $1,800 c. $2,400 d. $3,600 e. None of these

d. $3,600

71. In 2014, Morley, a single taxpayer, had an AGI of $30,000 before considering the following items: Loss from damage to rental property ($6,000) Loss from theft of bonds (3,000) Personal casualty gain 4,000 Personal casualty loss (after $100 floor) (9,000) Determine the amount of Morley's itemized deduction from the losses. a. $0 b. $2,900 c. $5,120 d. $5,600 e. None of these

d. $5,600

66. Which of the following is a required test for the deduction of a business expense? a. Ordinary b. Necessary c. Reasonable d. All of the above e. None of these

d. All of the above

86. Which of the following is not deductible? a. Moving expenses in excess of reimbursement. b. Tax return preparation fees of an individual. c. Expenses incurred associated with investments in stocks and bonds. d. Allowable hobby expenses in excess of hobby income. e. None of these.

d. Allowable hobby expenses in excess of hobby income.

96. In January, Lance sold stock with a cost basis of $26,000 to his brother, James, for $24,000, the fair market value of the stock on the date of sale. Five months later, James sold the same stock through his broker for $27,000. What is the tax effect of these transactions? a. Disallowed loss to James of $2,000; gain to Lance of $1,000. b. Disallowed loss to Lance of $2,000; gain to James of $3,000. c. Deductible loss to Lance of $2,000; gain to James of $3,000. d. Disallowed loss to Lance of $2,000; gain to James of $1,000. e. None of these.

d. Disallowed loss to Lance of $2,000; gain to James of $1,000.

68. During 2013, the first year of operations, Silver, Inc., pays salaries of $175,000. At the end of the year, employees have earned salaries of $20,000, which are not paid by Silver until early in 2014. What is the amount of the deduction for salary expense? a. If Silver uses the cash method, $175,000 in 2013 and $0 in 2014. b. If Silver uses the cash method, $0 in 2013 and $195,000 in 2014. c. If Silver uses the accrual method, $175,000 in 2013 and $20,000 in 2014. d. If Silver uses the accrual method, $195,000 in 2013 and $0 in 2014. e. None of these is correct.

d. If Silver uses the accrual method, $195,000 in 2013 and $0 in 2014.

75. Aaron is a self-employed practical nurse who works out of his home. He provides nursing care for disabled persons living in their residences. During the day he drives his car as follows. Miles Aaron's home to patient Louise 12 Patient Louise to patient Carl 4 Patient Carl to patient Betty 6 Patient Betty to Aaron's home 10 Aaron's deductible mileage for each workday is: a. 10 miles. b. 12 miles. c. 20 miles. d. 22 miles. e. 32 miles.

e

72. Which of the following legal expenses are deductible for AGI? a. Incurred in connection with a trade or business. b. Incurred in connection with rental or royalty property held for the production of income. c. Incurred for tax advice relative to the preparation of an individual's income tax return. d. Only a. and b. qualify. e. a., b., and c. qualify.

d. Only a. and b. qualify.

89. If a vacation home is determined to be a personal/rental use residence, which of the following statements is correct? a. All rental income is included in gross income. b. All rental related expenses that are deductible are classified as deductions from AGI. c. Expenses must be allocated between rental and personal use. d. Only a. and c. are correct. e. a., b., and c. are correct.

d. Only a. and c. are correct.

91. Because Scott is three months delinquent on the mortgage payments for his personal residence, Jeanette (his sister) is going to cover the arrearage. Based on past experience, she does not expect to be repaid by Scott. Which of the following statements is correct? a. If Scott receives the money from Jeanette and pays the mortgage company, Jeanette can deduct the interest part. b. If Jeanette pays the mortgage company directly, neither Scott nor Jeanette can deduct the interest part. c. If Jeanette pays the mortgage company directly, she cannot deduct the interest part. d. Only b. and c. are correct. e. a., b., and c. are correct.

d. Only b. and c. are correct.

77. In which, if any, of the following situations is the automatic mileage available? a. A limousine to be rented by the owner for special occasions (e.g., weddings, high school proms). b. The auto belongs to taxpayer's mother. c. One of seven cars used to deliver pizzas. d. MACRS statutory percentage method has been claimed on the automobile. e. None of these.

e

88. The § 222 deduction for tuition and related expenses is available: a. Only if the taxpayer itemizes deductions from AGI. b. To deduct that portion of the tuition in excess of that allowed under the lifetime learning credit. c. To cover the tuition of a son who does not qualify as taxpayer's dependent. d. Only if job related. e. None of these.

e

96. Which, if any, of the following expenses is subject to the 2%-of-AGI floor? a. Qualified tuition expenses under § 222. b. Contribution to traditional IRA. c. Cost of a CPA exam review course—taxpayer just began employment with an accounting firm. d. Office in the home deduction for a self-employed taxpayer. e. None of these.

e

67. Paula is the sole shareholder of Violet, Inc. For 2014, she receives from Violet a salary of $300,000 and dividends of $100,000. Violet's taxable income for 2014 is $500,000. On audit, the IRS treats $100,000 of Paula's salary as unreasonable. Which of the following statements is correct? a. Paula's gross income will increase by $100,000 as a result of the IRS adjustment. b. Violet's taxable income will not be affected by the IRS adjustment. c. Paula's gross income will decrease by $100,000 as a result of the IRS adjustment. d. Violet's taxable income will decrease by $100,000 as a result of the IRS adjustment. e. None of these is correct.

e. None of these is correct.

56. Sammy, a calendar year cash basis taxpayer who is age 66, has the following transactions: Salary from job $90,000 Alimony received from ex-wife 10,000 Medical expenses 8,000 Based on this information, Sammy has: a. AGI of $90,000. b. AGI of $95,000. c. AGI of $99,500. d. Deduction for medical expenses of $0. e. None of these.

e. None of these.

60. Which of the following can be claimed as a deduction for AGI? a. Personal casualty losses. b. Investment interest expenses. c. Medical expenses. d. Property taxes on personal use real estate. e. None of these.

e. None of these.

84. Priscella pursued a hobby of making bedspreads in her spare time. Her AGI before considering the hobby is $40,000. During the year she sold the bedspreads for $10,000. She incurred expenses as follows: Supplies $4,000 Interest on loan to get business started 500 Advertising 6,500 Assuming that the activity is deemed a hobby, how should she report these items on her tax return? a. Include $10,000 in income and deduct $11,000 for AGI. b. Ignore both income and expenses since hobby losses are disallowed. c. Include $10,000 in income, deduct nothing for AGI, and claim $11,000 of the expenses as itemized deductions. d. Include $10,000 in income and deduct interest of $500 for AGI. e. None of these.

e. None of these.

79. Tommy, an automobile mechanic employed by an auto dealership, is considering opening a fast food franchise. If Tommy decides not to acquire the fast food franchise, any investigation expenses are: a. A deduction for AGI. b. A deduction from AGI, subject to the 2 percent floor. c. A deduction from AGI, not subject to the 2 percent floor. d. Deductible up to $5,000 in the current year with the balance being amortized over a 180-month period. e. Not deductible.

e. Not deductible.

62. Which of the following is correct? a. A personal casualty loss is classified as a deduction from AGI. b. Real estate taxes on a taxpayer's personal residence are classified as deductions from AGI. c. An expense associated with rental property is classified as a deduction for AGI. d. Only a. and b. are correct. e. a., b., and c., are correct.

e. a., b., and c., are correct.

78. For a president of a publicly held corporation, which of the following are not subject to the $1 million limit on executive compensation? a. Contribution to medical insurance plan. b. Contribution to pension plan. c. Premiums on group term life insurance of $50,000. d. Only b. and c. are not subject to the limit. e. a., b., and c., are not subject to the limit.

e. a., b., and c., are not subject to the limit.

51. Peggy is in the business of factoring accounts receivable. Last year, she purchased a $30,000 account receivable for $25,000. This year, the account was settled for $25,000. How much loss can Peggy deduct and in which year? a. $5,000 for the current year. b. $5,000 for the prior year and $5,000 for the current year. c. $5,000 for the prior year. d. $10,000 for the current year. e. None of these.

e. none of these

55. Last year, Lucy purchased a $100,000 account receivable for $90,000. During the current year, Lucy collected $97,000 on the account. What are the tax consequences to Lucy associated with the collection of the account receivable? No subsequent collections are expected. a. $0 b. $2,000 gain c. $3,000 loss d. $13,000 loss e. None of these

e. none of these

56. Two years ago, Gina loaned Tom $50,000. Tom signed a note the terms of which called for monthly payments of $2,000 plus 6% interest on the outstanding balance. Last year, when the balance owing on the loan was $18,000, Tom defaulted on the note. As of the end of last year, there appeared to be no reasonable prospect of Gina recovering the $18,000. As a consequence, Gina claimed the $18,000 as a nonbusiness bad debt. Last year, Gina had AGI of a negative $6,000 which included $5,000 net long-term capital gains and $4,000 of qualified dividends. Gina did not itemize her deductions. During the current year, Tom paid Gina $13,000 in final settlement of the loan. How should Gina account for the payment in the current year? a. File an amended tax return for last year. b. Report no income for the current year. c. Report $8,000 of income for the current year. d. Report $12,000 of income for the current year. e. None of these.

e. none of these

59. On September 3, 2013, Able, a single individual, purchased § 1244 stock in Red Corporation from his friend Al for $60,000. On December 31, 2013, the stock was worth $85,000. On August 15, 2014, Able was notified that the stock was worthless. How should Able report this item on his 2014 tax return? a. $85,000 capital loss. b. $85,000 ordinary loss. c. $50,000 ordinary loss and $35,000 capital loss. d. $60,000 ordinary loss. e. None of these.

e. none of these

63. On July 20, 2013, Matt (who files a joint return) purchased 3,000 shares of Orange Corporation stock (the stock is § 1244 small business stock) for $24,000. On November 10, 2013, Matt purchased an additional 1,000 shares of Orange Corporation stock from a friend for $150,000. On September 15, 2014, Matt sold the 4,000 shares of stock for $120,000. How should Matt treat the sale of the stock on his 2014 return? a. $54,000 ordinary loss. b. $100,000 ordinary loss; $46,000 net capital gain. c. $100,000 ordinary loss; $20,000 STCL. d. $130,000 ordinary loss; $66,000 LTCG. e. None of these.

e. none of these

64. Which of the following events would produce a deductible loss? a. Erosion of personal use land due to rain or wind. b. Termite infestation of a personal residence over a several year period. c. Damages to personal automobile resulting from a taxpayer's willful negligence. d. A misplaced diamond ring. e. None of these.

e. none of these

65. In 2014, Wally had the following insured personal casualty losses (arising from one casualty). Wally also had $42,000 AGI for the year before considering the casualty. Fair Market Value Wally's casualty loss deduction is: a. $1,500. b. $1,600. c. $4,800. d. $58,000. e. None of these.

e. none of these

76. In the current year, Juan's home was burglarized. Juan had the following items stolen: • Securities worth $25,000. Juan purchased the securities four years ago for $20,000. • New tools which Juan had purchased two weeks earlier for $8,000. Juan uses the tools in making repairs at an apartment house that he owns and manages. • An antique worth $15,000. Juan inherited the antique (a family keepsake) when the property was worth $11,000. Juan's homeowner's policy had a $50,000 deductible clause for thefts. If Juan's salary for the year is $50,000, determine the amount of his itemized deductions as a result of the theft. a. $3,100 b. $6,000 c. $26,100 d. $26,500 e. None of these

e. none of these