Chapter 9

33) Tessa is a self-employed CPA whose 2016 net earnings from her business (before the H.R. 10 plan contribution but after the deduction for one-half of self-employment taxes) is $400,000. What is the maximum contribution that Tessa can make on her behalf to her H.R. 10 (Keogh) plan in 2016? A) $100,000 B) $80,000 C) $66,250 D) $53,000

53,000

7) Edward incurs the following moving expenses: Direct moving expenses $4,000 Indirect moving expense 6,000 The employer reimburses Edward for the full $10,000. What is the amount to be reported as income by Edward? A) $0 B) $4,000 C) $6,000 D) $10,000

6,000

6) Ron obtained a new job and moved from Houston to Washington. He incurred the following moving expenses: Transportation of household goods $3,200 House-hunting trips 1,500 Temporary living expenses (20 days) 3,400 Commissions on new lease 500 Costs of settling old lease 250 Mileage for personal automobile 1,400 miles Assuming Ron is eligible to deduct his moving expenses, what is the amount of the deduction? A) $3,466 B) $6,600 C) $9,066 D) $8,366

$3,466

32) Frank is a self-employed CPA whose 2016 net earnings from his trade or business (before the H.R. 10 plan contribution but after the deduction for one-half of self-employment taxes) is $240,000. What is the maximum contribution that Frank can make on his behalf to his H.R. 10 (Keogh) plan in 2016? A) $66,250 B) $48,000 C) $53,000 D) $60,000

$48,000

41) Tucker (age 52) and Elizabeth (age 48) are a married couple. Tucker is covered under a qualified retirement plan at his job and earned $90,000 in 2016. Elizabeth is employed as a lab technician and earned $30,000 but is not covered under a qualified retirement plan. They file a joint return; have interest and dividend income of $25,000. What is the maximum amount of tax deductible contributions may be made to a traditional IRA? A) $0 B) $11,000 C) $5,500 D) $12,000

5500

11) Sarah incurred employee business expenses of $5,000 consisting of $3,000 business meals and $2,000 customer entertainment. She provided an adequate accounting to her employer's accountable plan and received reimbursement for one-half of the total expenses. How much of the meals and entertainment will be deductible by Sarah without consideration of the 2% of AGI limit? A) $0 B) $1,250 C) $2,500 D) $5,000

1,250

7) Brittany, who is an employee, drove her automobile a total of 20,000 business miles in 2016. This represents about 75% of the auto's use. She has receipts as follows: Parking (business only) $500 Tolls (business only) 200 Repairs $1,000 Brittany's AGI for the year of $50,000, and her employer does not provide any reimbursement. She uses the standard mileage rate method. After application of any relevant floors or other limitations, Brittany can deduct A) $10,500. B) $12,500. C) $11,500. D) $9,800.

10,500

6) Chelsea, who is self-employed, drove her automobile a total of 20,000 business miles in 2016. This represents about 75% of the auto's use. She has receipts as follows: Parking (business only) $500 Tolls (business only) 200 Repairs $1,000 Chelsea has an AGI for the year of $50,000. Chelsea uses the standard mileage rate method. After application of any relevant floors or other limitations, she can deduct A) $11,500. B) $12,200. C) $10,800. D) $11,325.

11,500

By how many miles does the move exceed the minimum distance requirement for the moving expense deduction? A) 12 miles B) 20 miles C) 62 miles D) none of the above

12 miles

13) Joe is a self-employed tax attorney who frequently entertains his clients at his country club. Joe's club expenses include the following: Annual dues $ 5,400 Initiation fees 1,200 Charges for personal meals with his family 3,100 Meal and entertainment charges related to business use 4,000 Assuming the business meals and entertainment qualify as deductible entertainment expenses, Joe may deduct A) $2,000. B) $4,700. C) $5,300. D) $4,000.

2,000

8) Alex is a self-employed dentist who operates a qualifying office in his home. Alex has $180,000 gross income from his practice and $160,000 of expenses directly related to the business, i.e., non-home office expenses. Alex's allocable home office expenses for mortgage interest expenses and property taxes are $14,000 and other home office expenses are $9,000. What is Alex's total allowable home office deduction? A) $9,000 B) $14,000 C) $20,000 D) $23,000

20,000

9) Charles is a self-employed CPA who maintains a qualifying office in his home. Charles has $110,000 gross income from his practice and incurs $88,000 in salaries, supplies, computer services, etc. Charles's mortgage interest and real estate taxes allocable to the office total $10,000. Other expenses total $14,000 and consist of depreciation, utilities, insurance, and maintenance. What is Charles' total home office expense deduction? A) $10,000 B) $14,000 C) $22,000 D) $24,000

22,000

10) David acquired an automobile for $30,000 for use in his unincorporated business at the beginning of 2016 and used the standard mileage rate method in 2016. He plans to switch to the actual expense method for 2017. The automobile was used 25,000 miles in 2016. What is the amount of the adjusted basis of the automobile for purposes of computing depreciation in 2017? A) $30,000 B) $15,625 C) $24,000 D) $20,000

24,000

19) Sam retired last year and will receive annuity payments for life from his employer's qualified retirement plan of $30,000 per year starting this year. During his years of employment, Sam contributed $130,000 to the plan on an after-tax basis. Based on IRS tables, his life expectancy is 260 months.This year, Sam will include what amount in income? A) 0 B) $6,000 C) $24,000 D) $30,000

24,000

20) Hunter retired last year and will receive annuity payments for life from his employer's qualified retirement plan of $30,000 per year starting this year. During his years of employment, Hunter contributed $130,000 to the plan. Based on IRS tables, his life expectancy is 260 months. All of the contributions were on a pre-tax basis. This year, Hunter will include what amount in income? A) $0 B) $6,000 C) $24,000 D) $30,000

30,000

11 Copyright © 2017 Pearson Education, Inc. 8) Rajiv, a self-employed consultant, drove his auto 20,000 miles this year, 15,000 to meetings with clients and 5,000 for commuting and personal use. The cost of operating the auto for the year was as follows: Gasoline and repairs $7,000 Insurance 1,000 Depreciation 4,000 Rajiv's AGI is $100,000 before considering the auto costs. Rajiv has used the actual cost method in the past. What is Rajiv's deduction for the use of the auto after application of all relevant limitations? A) $8,325 B) $9,000 C) $6,325 D) $7,000

9,000

12) Austin incurs $3,600 for business meals while traveling for his employer, Tex, Inc. Austin is reimbursed in full by Tex pursuant to an accountable plan. What amounts can Austin and Tex deduct? A) Austin Tex $0 $1,800 B) Austin Tex $0 $3,600 C) Austin Tex $1,800 $1,800 D) Austin Tex

A

29) Martin Corporation granted a nonqualified stock option to employee Caroline on January 1, 2013. The option price was $150, and the FMV of the Martin stock was also $150 on the grant date. The option allowed Caroline to purchase 1,000 shares of Martin stock. The option itself does not have a readily ascertainable FMV. Caroline exercised the option on August 1, 2016 when the stock's FMV was $250. If Caroline sells the stock on September 5, 2017 for $300 per share, she must recognize A) 2016 2017 $100,000 ordinary income $50,000 LTCG B) 2016 2017 0 $150,000 LTCG C) 2016 2017 $100,000 ordinary income $50,000 ordinary income D) 2016 2017 0 $150,000 ordinary income

A

49) Angie starts a new job and becomes covered under the employer's health insurance plan which has an annual deductible of $2,400. Angie contributes the maximum amount into a Health Savings Account. Which of the following statements regarding Angie's Health Savings Account is correct? A) Angie can contribute and deduct $1,200 for AGI. B) Angie's contribution will be deductible if she itemizes, and the contribution along with her out-of-pocket medical expenses exceed 10% of AGI. C) If Angie withdraws $500 to pay for X-rays, the $500 is taxable. D) Interest income earned on the HCA is taxable.

A) Angie can contribute and deduct $1,200 for AGI.

Having recently been to a company seminar on tax laws, Steven makes sure that business is discussed at the various dinners, and that the entertainment is on the same day as the meetings with customers. Steven is reimbursed $2,000 by his employer under an accountable plan. Steven's AGI for the year is $50,000, and while he itemizes deductions, he has no other miscellaneous itemized deductions. What is the amount and character of Steven's deduction after any limitations? A) $500 from AGI B) $500 for AGI C) $2,000 from AGI D) $2,000 for AGI

A) $500 from AGI

14) Gwen traveled to New York City on a business trip for her employer. Gwen spent 4 days in business meetings and conferences and then spent 2 days sightseeing in the area. Gwen's plane fare for the trip was $250. Meals cost $160 per day. Hotels and other incidental expenses amounted to $250 per day. Gwen was not reimbursed by her employer for any expenses. Her AGI for the year is $50,000 and she itemizes but has no other miscellaneous itemized deductions. Gwen may deduct (after limitations) A) $570. B) $890. C) $1,890. D) $1,570.

A) $570.

16) Gayle, a doctor with significant investments in the stock market, traveled on a cruise ship to Bermuda. Investment specialists provided daily seminars which Gayle attended. The cost of the cruise for four days is $2,500. Gayle can deduct (before application of any floors) A) $0. B) $1,250. C) $2,000. D) $2,500.

A) 0

40) Tyler (age 50) and Connie (age 48) are a married couple. Tyler is covered under a qualified retirement plan at his job and earned $175,000 in 2016. Connie is employed as a lab technician and earned $30,000 but is not covered under a qualified retirement plan. They file a joint return; have interest and dividend income of $30,000. What is their maximum for AGI deduction for contributions to a traditional IRA? A) $0 B) $5,500 C) $6,500 D) $12,000

A) 0

14) Shane, an employee, makes the following gifts, none of which are reimbursed: Shane's manager $30 Shane's personal assistant 40 4 customers ($27 each) 108 What amount of the gifts is deductible before application of the 2% of AGI floor for miscellaneous itemized deductions? A) $125 B) $150 C) $75 D) $178

A) 125

9) West's adjusted gross income was $90,000. During the current year he incurred and paid the following: Professional journals $2,000 Tax return preparation fee 1,000 Dues to professional organizations 1,500 Fees for will preparation (no tax advice) 800 Life insurance premiums 1,400 None of the expenses were reimbursed. Assuming he can itemize deductions, how much should West claim as miscellaneous itemized deductions (after limitations have been applied)? A) $2,700 B) $4,500 C) $3,500 D) $5,300

A) 2,700

15) Norman traveled to San Francisco for four days on vacation, and while there spent another two days conducting business for his employer. Norman's plane fare for the trip was $500; meals cost $150 per day; hotels cost $300 per day; and a rental car cost $150 per day that was used for all six days. Norman was not reimbursed by his employer for any expenses. Norman's AGI for the year is $40,000 and he did not have any other miscellaneous itemized deductions. Norman may deduct (after limitations) A) $250. B) $800. C) $1,050. D) $1,200.

A) 250

47) Which of the following statements regarding Coverdell Education Savings Accounts is incorrect, disregarding any AGI limits? A) Distributions cannot be used for elementary and secondary education expenses. B) Distributions to the beneficiary are not taxable as long as they are used for tuition, fees, room and board. C) Contributions can be made until the beneficiary reaches 18. D) Contributors can make nondeductible contributions of up to $2,000 for each beneficiary.

A) Distributions cannot be used for elementary and secondary education expenses.

8) Which of the following statements regarding independent contractors and employees is true? A) Independent contractors pay Social Security and Medicare tax of 15.3%. B) Employees must pay unemployment taxes. C) Independent contractors and employees pay the same Social Security and Medicare tax rates. D) Independent contractors deduct their business expenses "from AGI."

A) Independent contractors pay Social Security and Medicare tax of 15.3%.

44) Which of the following is true about future qualified distributions from a Roth IRA by a person who will be 65 years old at the time the distributions begin? Assume the individual opened the account before age 60. A) The entire amount of the distributions will be tax-free. B) Only the accumulated earnings will be tax-free. C) Only the previous contributions will be tax-free. D) The entire amount of the distribution will be taxable.

A) The entire amount of the distributions will be tax-free.

26) Mirasol Corporation granted an incentive stock option to employee Josephine two years ago. The option price was $150 and the FMV of the Mirasol stock was also $150 on the grant date. The option allowed Josephine to purchase 160 shares of Mirasol stock. Josephine exercised the option this year when the stock's FMV was $250. Unless otherwise stated, assume Josephine is a qualifying employee. The results of the above transactions to Mirasol Corporation will be A) no compensation deduction. B) a compensation deduction of $16,000 on the grant date. C) a tax preference item of $16,000 on the exercise date. D) a compensation deduction of $16,000 on the exercise date.

A) no compensation deduction.

25) Wilson Corporation granted an incentive stock option to Reva on January 1, two years ago. The option price was $300, and the FMV of the Wilson stock was also $300 on the grant date. The option allowed Reva to purchase 150 shares of Wilson stock. Reva exercised the option on August 1, this year, when the stock's FMV was $400. Unless otherwise stated, assume Reva is a qualifying employee. The results of the above transactions to Reva will be A) no income to Reva on the grant date or exercise date but there is an alternative minimum tax adjustment item to Reva of $15,000. B) no income tax or alternative minimum tax effect for Reva. C) ordinary income to Reva on the exercise date of $15,000. D) capital gain to Reva on the exercise date of $15,000.

A) no income to Reva on the grant date or exercise date but there is an alternative minimum tax adjustment item to Reva of $15,000.

30) Martin Corporation granted a nonqualified stock option to employee Caroline on January 1, 2013. The option price was $150, and the FMV of the Martin stock was also $150 on the grant date. The option allowed Caroline to purchase 1,000 shares of Martin stock. The option itself does not have a readily ascertainable FMV. Caroline exercised the option on August 1, 2016 when the stock's FMV was $250. Caroline sells the stock on September 5, 2017 for $300 per share. Martin Corporation will be allowed a deduction of A) $150,000 in 2013. B) $100,000 in 2016. C) $50,000 in 2017. D) $100,000 in 2016 and $50,000 in 2017.

B) $100,000 in 2016.

10) Allison, who is single, incurred $4,000 for unreimbursed employee expenses, $10,000 for mortgage interest and real estate taxes on her home, and $500 for investment counseling fees. Allison's AGI is $80,000. Allison's allowable deductions from AGI are (after limitations have been applied) A) $10,500. B) $12,900. C) $14,000. D) $14,500.

B) 12,900

5) Bill obtained a new job in Boston. He incurred the following moving expenses: Transportation of household goods and personal effects $2,600 Cost of transporting Bill's family 2,000 House-hunting trip 1,700 Payments to landlord to cancel a lease 500 Assuming Bill is entitled to deduct moving expenses, what is the amount of the deduction? A) $2,600 B) $4,600 C) $6,300 D) $6,800

B) 4,600

9) Jordan, an employee, drove his auto 20,000 miles this year, 15,000 to meetings with clients and 5,000 for commuting and personal use. The cost of operating the auto for the year was as follows: Gasoline and repairs $7,000 Insurance 1,000 Depreciation 4,000 Jordan submitted appropriate reports to his employer, and the employer paid a reimbursement of $ .50 per mile. Jordan has used the actual cost method in the past. Jordan's AGI is $50,000. What is Jordan's deduction for the use of the auto after application of all relevant limitations? A) $1,500 B) $500 C) $1,000 D) $8,000

B) 500

42 Copyright © 2017 Pearson Education, Inc. 48) Which of the following statements regarding Health Savings Accounts is incorrect? A) Taxpayers are allowed to deduct contributions to a health savings account for AGI. B) All taxpayers are eligible to establish a health savings account. C) Distributions from a health savings account are excluded from gross income if used to pay qualified medical expenses. D) Health savings account contributions are limited to the lesser of 100% of annual deductible under high deductible health plan or $3,350 for taxpayers without family coverage.

B) All taxpayers are eligible to establish a health savings account.

22) Which of the following statements is incorrect regarding unfunded deferred compensation plans? A) The employee is not taxed on the compensation amount when it is deposited in an escrow account. B) An accrual-basis employer can deduct the compensation amount when it is accrued in the year service. C) An employee is taxed when the amount is actually paid or made available. D) A 20% excise tax will apply if the employee can voluntarily elect to receive payment early.

B) An accrual-basis employer can deduct the compensation amount when it is accrued in the year service.

23) Tobey receives 1,000 shares of YouDog! stock as part of his compensation package. Tobey's employment contract with YouDog!, Inc. states that if he leaves before completion of three years of employment, he will forfeit the stock. The stock currently has a fair market value of $12 per share. Which of the following statements regarding Tobey's choices is not true? A) Tobey does not have to recognize any income from receiving the stock until his rights to the stock are fully vested. B) Tobey must report $12,000 as income due to the receipt of the stock in the current year. C) Tobey may elect to report the $12,000 FMV of the stock as ordinary income in the current year. D) If Tobey elects to report $12,000 as income in the current year and the stock price falls to $5 per share when his rights to the stock are vested, Tobey is not allowed to deduct a loss.

B) Tobey must report $12,000 as income due to the receipt of the stock in the current year.

35) Which of the following statements is incorrect regarding the SEP IRA? A) Both employers and employees can contribute to the plan. B) Contributions made by the due date of the tax return can be treated as made on the last day of the related tax year. C) Employer contributions must be nondiscriminatory. D) The maximum contribution for 2016 is $53,000.

Both employers and employees can contribute to the plan.

43) Feng, a single 40 year old lawyer, is covered by a qualified retirement at work. His salary is $110,000, and his total AGI is $126,000. The maximum contribution he can make to a Roth IRA in 2016 is A) 0. B) $3,300. C) $2,200. D) $5,500.

C) 2200

Objective: 9 37) Tyne is a 48-year-old an unmarried taxpayer who is not an active participant in an employer-sponsored qualified retirement plan. Before IRA contributions, her AGI is $64,000 in 2016. What is the maximum amount she may contribute to a tax deductible IRA? A) $ 0 B) $4,400 C) $5,500 D) $6,500

C) 5,500

7) In which of the following situations is the individual is more likely to be classified as an independent contractor rather than an employee? A) A nurse who is directly supervised by doctors in an office B) A computer programmer who is instructed as to what projects to undertake, programming language and format, and hours of work C) A nurse who travels to several different patients. She sets her own hours and is responsible for the delivery of nursing care and end result D) A teacher whose hours, classroom responsibilities, content and methods of instruction are established by the school

C) A nurse who travels to several different patients. She sets her own hours and is responsible for the delivery of nursing care and end result

21) Which of the following statements is correct regarding limitations on employer's contributions to qualified retirement plans in 2016? A) Defined benefit plans are limited to an annual benefit to an employee of the lesser of $53,000 or 100% of the employee's average compensation for the highest three years. B) Defined contribution plan contributions are limited to the lesser of $210,000 or 25% of an employee's compensation. C) Defined contribution plan contributions are limited to the lesser of $53,000 or 100% of an employee's compensation. D) If an employer has more than one type of qualified plan, a maximum deduction of 100% of compensation is allowed.

C) Defined contribution plan contributions are limited to the lesser of $53,000 or 100% of an employee's compensation

17) Characteristics of profit-sharing plans include all of the following with the exception of: A) A predetermined formula is used to allocate employer contributions to individual employees and to establish benefit payments. B) Forfeitures of benefits under the plan may be reallocated to the remaining participants. C) The company must make contributions to the plan if it has profits during the year. D) Annual employer contributions are not required, but substantial, recurring contributions must be made to satisfy the requirement that the plan be permanent.

C) The company must make contributions to the plan if it has profits during the year.

3) Which of the following conditions would generally not favor the rollover of an untaxed retirement fund (e.g. traditional IRA or 401(k) plan) to a Roth account? A) expected higher tax rates at retirement B) significant after-tax funds available to pay taxes C) an advanced age of the taxpayer D) All of the above create favorable conditions for a rollover to a Roth.

C) an advanced age of the taxpayer

45) All of the following are true with regard to a Roth IRA except A) contributions to Roth IRAs are subject to special modified AGI limitations that are higher than those for traditional IRAs. B) contributions to Roth IRAs are never tax deductible. C) contributions to Roth IRAs must cease after the owner has reached age 70 1/2. D) contributions to existing Roth IRAs must be made by the due date of the return.

C) contributions to Roth IRAs must cease after the owner has reached age 70 1/2.

13) Ron is a university professor who accepts a visiting position at another university for six months and obtains a leave of absence from his current employer. Ron rents an apartment near the university and purchases his food. These living expenses incurred by Ron while visiting the university will be A) deductible for AGI. B) deductible from AGI, without application of a floor. C) deductible from AGI, subject to the 2% of AGI floor. D) nondeductible.

C) deductible from AGI, subject to the 2% of AGI floor.

46) Tanya is considering whether to rollover her traditional IRA to a Roth IRA. Factors important to consider include all of the following except A) current marginal tax rate. B) expected tax rate after retirement. C) whether the current year's AGI will exceed $100,000. D) her age.

C) whether the current year's AGI will exceed $100,000.

36) Which statement is correct regarding SIMPLE retirement plans? A) SIMPLE plans are not subject to nondiscrimination rules. B) This plan can only be adopted by employers with 50 or fewer employees. C) Only the employer can contribute to the plan. D) Employer contributions must vest within three years.

SIMPLE plans are not subject to

18) Ross works for Houston Corporation, which has a contributory defined contribution pension plan. The employer's monthly contribution to the plan is 8 percent of each participating employee's monthly salary, while the employee contributes only 6 percent. Which of the following statements best describes the benefits of the plan? A) Houston receives a deduction for its contributions to the plan when Ross receives a distribution from the plan. B) While Ross is taxed on the employer's contributions to the plan, his own contributions are not taxed until he receives a distribution from the plan. C) Ross may deduct his own contributions to the pension plan, and Ross reports income from the plan each year until he receives distributions from the plan. D) The amounts contributed to the plan and the earnings on those contributions are not taxed to Ross until he retires or receives a distribution from the plan.

D)

38) Hannah is a 52-year-old an unmarried taxpayer who is not an active participant in an employer-sponsored qualified retirement plan. Before IRA contributions, her AGI is $64,000 in 2016. What is the maximum amount she may contribute to a tax deductible IRA? A) $4,400 B) $5,200 C) $5,500 D) $6,500

D) $6,500

39) H (age 50) and W (age 48) are married but only W is employed. She is not covered by a retirement plan at work. She earns $75,000 during the year and they have combined AGI of $78,000 before any IRA contribution. In 2016, the maximum amount together they may contribute to tax deductible IRAs is A) $5,500. B) $6,500. C) $11,000. D) $12,000.

D) 12,000

12) All of the following are allowed a "for AGI" deduction except: A) Cora owns her own CPA firm and travels from Lafayette, LA. to Washington, D.C. to attend a tax conference. B) Jennifer, who lives in Houston, is the owner or several apartment buildings in Salt Lake City and travels there to inspect and manage her investments. C) Alan is self-employed and is away from home overnight on job-related business. D) Alison is an employee who is required to travel to company facilities throughout the U.S. in the conduct of her management responsibilities. She is not reimbursed by her employer.

D) Alison is an employee who is required to travel to company facilities throughout the U.S. in the conduct of her management responsibilities. She is not reimbursed by her employer.

4) Matt is a sales representative for a local company. He entertains customers as part of his job. During the current year he spends $3,000 on business entertainment. The company provides him an expense allowance of $2,000 under a nonaccountable plan. How will Matt treat the $2,000 partial reimbursement and the $3,000 entertainment expense? A) He will deduct the $1,000 net expense as a miscellaneous itemized deduction, subject to the 2% of AGI floor. B) He will deduct $500 of the net expense as a miscellaneous itemized deduction, subject to the 2% of AGI floor. C) He will recognize $2,000 of income and deduct $3,000 as a miscellaneous itemized deduction, subject to the 2% of AGI floor. D) He will recognize $2,000 of income and deduct $1,500 as a miscellaneous itemized deduction, subject to the 2% of AGI floor.

D) He will recognize $2,000 of income and deduct $1,500 as a miscellaneous itemized deduction, subject to the 2% of AGI floor.

27) Martin Corporation granted an incentive stock option to employee Caroline on January 1, 2012. The option price was $150, and the FMV of the Martin stock was also $150 on the grant date. The option allowed Caroline to purchase 160 shares of Martin stock. Caroline exercised the option on August 1, 2015 when the stock's FMV was $250. Unless otherwise stated, assume Caroline is a qualifying employee. If Caroline sells the stock on September 5, 2016 for $350 per share, she must recognize (ignore alternative minimum tax) A) 0. No gain or loss is recognized at exercise or sale with incentive stock options. B) long-term capital gain of $16,000 in 2016. C) ordinary income of $16,000 on the exercise date and a long-term capital gain of $16,000 in 2016. D) long-term capital gain of $32,000 in 2016.

D) long-term capital gain of $32,000 in 2016.

28) Jackson Corporation granted an incentive stock option to employee Caroline on January 1, two years ago. The option price was $150, and the FMV of the Jackson stock was also $150 on the grant date. The option allowed Caroline to purchase 160 shares of Jackson stock. Caroline exercised the option on August 1, 2015, when the stock's FMV was $250. Unless otherwise stated, assume Caroline is a qualifying employee. If Caroline sells the stock on July 5, 2016 for $400 per share, she must recognize A) long-term capital gain of $40,000 in the year of sale. B) long-term capital gain of $24,000 in the year of sale. C) ordinary income of $16,000 on the exercise date and a long-term capital gain of $24,000 in the year of sale. D) ordinary income of $16,000 and a short-term capital gain of $24,000 in the year of sale.

D) ordinary income of $16,000 and a short-term capital gain of $24,000 in the year of sale.

16) In a contributory defined contribution pension plan, all of the following are true with the exception of A) a separate account is established for each participant. B) both the employee and employer can make contributions to the plan. C) amounts are contributed to the plan based upon a specific formula. D) retirement benefits are a fixed amount based on the level of compensation earned by the employee during the working years.

D) retirement benefits are a fixed amount based on the level of compensation earned by the employee during the working years.

34 Copyright © 2017 Pearson Education, Inc. 24) All of the following characteristics are true of an incentive stock option with the exception of: A) the option price must be equal to or greater than the stock's FMV on the option's grant date. B) the employee cannot own more than ten percent of the voting power of the employer corporation's stock immediately prior to the option's grant date. C) the option must be granted within ten years from the date the plan is adopted and the employee must exercise the stock option within ten years from the grant date. D) there is no limit to the value of the options that become exercisable to an employee in a single year.

D) there is no limit to the value of the options that become exercisable to an employee in a single year.

Who is entitled to a home office deduction? A) Dr Austin B) Dr. Austin and June C) Cassie and June D) All of the taxpayers are entitled to a deduction.

Dr. Austin and June

4) Which of the following situations will disqualify a taxpayer from taking a deduction for moving expenses? A) Pam moves from Phoenix to Los Angeles to take a new job. She works at the Los Angeles job for 45 weeks before starting a new job in Las Vegas. B) Paul moves from Boston to Miami to start a new business selling t-shirts. The business is not successful and Paul returns to Boston after 52 weeks. C) Phyllis moves from Seattle to San Francisco to open a coffee bar. She still owns the coffee bar and lives in San Francisco 90 weeks after her move. D) Marva moves from Dallas to Washington D.C. in her job as an IRS agent. She is still working at the IRS Washington office after one year.

Paul moves from Boston to Miami to start a new business selling t-shirts. The business is not successful and Paul returns to Boston after 52 weeks.

31) A partnership plans to set up a retirement plan to benefit the partners and the employees. All of the following retirement plans are appropriate except A) an H.R. 10 (Keogh) plan. B) a SEP IRA. C) a SIMPLE plan. D) a Solo 401(k).

a Solo 401(k).