Unit 5 MCQs

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

$0 This answer is correct.While the correct amount of realized gain is $85,000, Sec. 121 excludes the gain on the sale of a principal residence, up to $250,000 per taxpayer, subject to certain rules and limitations. As none of the facts would lead us to reduce this exclusion, no gain is recognized on the disposition of the home.

On September 18, 2019, Dennis was killed in an automobile accident. In October 2019, his widow received a lump-sum death benefit from his employer in the amount of $15,000. Dennis had no right to the $15,000 prior to death. For 2019, what amount should his widow include in adjusted gross income, assuming a joint tax return was filed?

$15,000 This answer is correct.Gross income includes amounts received by the beneficiaries or the estate of an employee although such amounts are paid by or on behalf of an employer and are paid by reason of the death of the employee.

Given the following wage information, what are the total gross wages subject to Federal Unemployment Tax for the current year? Employee Wages Paid during the Current Year T $ 4,200 E 5,800 M 22,900

$17,000 This answer is correct.Under Sec. 3306(b)(1), wages are taxed for federal unemployment taxes up to $7,000 for each employee. Wages earned in excess of $7,000 are not subject to federal unemployment taxes. The full amount of wages paid during the current year to employee T and employee E is taxable. Only $7,000 of the wages paid to M is subject to federal unemployment taxes. Thus, the total amount of wages paid in the current year that is subject to federal unemployment taxes is $17,000.

See attached

$260,196 This answer is correct.The net profit or (loss) from self-employment is the gross business receipts reduced by the business expenses. The net profit or (loss) therefore should be $281,750 ($350,000 gross business receipts - $35,000 cost of goods sold - $28,000 rent expense - $5,250 liability insurance premium). Line 4 on Schedule SE requires the tax preparer to multiply the net profit or (loss) by 0.9235 ($281,750 × 0.9235 = $260,196) to determine the net earnings from self-employment [also calculated as NI from self-employment - (0.0765 × NI from self-employment)]. The net earnings from self-employment should be $260,196.

Bank Corp., a calendar-year corporation, reimburses employees for properly substantiated qualifying business meal expenses. The employees are present at the meals, which are neither lavish nor extravagant, and the reimbursement is not treated as wages subject to withholdings. For 2019, what percentage of the meal expense may Bank deduct?

50% This answer is correct.Properly substantiated qualifying business meal expenses are deductible by 50% of the meal expense incurred. Since the employees are fully reimbursed for these expenses, Bank's deduction is subject to the 50% limitation.

A notice of disbarment or suspension of a certified public accountant from practice before the Internal Revenue Service is issued to which of the following?

All of the answers are correct. This answer is correct.Section 10.80 of Circular 230 outlines the parties that should receive notice of disbarment or suspension. The list includes IRS employees, interested departments and agencies of the federal government, as well as the appropriate state authorities.

Which of the following is not a tax return preparer?

Someone who prepares a return or claim for refund for his or her employer. This answer is correct.Under Sec. 7701(a)(36), a tax return preparer is any person who prepares for compensation, or employs others to prepare for compensation, any tax return or claim for refund under Title 26. However, a person who prepares a return for his or her regular employer is disqualified as a tax return preparer.

George, a sole proprietor, may deduct various taxes imposed by federal, state, local, and foreign governments, if he incurs them in the ordinary course of his business. All of the following are deductible on Schedule C, Form 1040, except

State and local income taxes on net income. This answer is correct.State income taxes are imposed on an individual after income from all taxable sources is aggregated. State income taxes are a personal expense (deductible under Sec. 164) and not an expense of the source of income, e.g., a sole proprietorship. They are deducted from adjusted gross income and are reported as an itemized deduction on Schedule A.

In 2015, Ross was granted an incentive stock option (ISO) by his employer as part of an executive compensation package. Ross exercised the ISO in 2017 and sold the stock in 2019 at a gain. Ross's profit was subject to the income tax for the year in which the

Stock was sold. This answer is correct.According to the Internal Revenue Code, an employee will have no income tax consequences on the grant date or the exercise date of an incentive stock option if that employee meets two requirements. First, the employee cannot dispose of the stock within 2 years after the grant date or within 1 year after the exercise date. Second, the employee must be employed by the company on the grant date until 3 months prior to the exercise date. Since Ross meets these requirements, he is not subject to any tax on the grant or exercise dates. Ross did, however, recognize a capital gain when he sold the stock in 2019.

Which of the following allows a taxpayer to legally avoid paying income tax?

Treating a portion of compensation as a tax-free fringe benefit. This answer is correct.Tax avoidance is the minimization of tax liability through legal arrangements and transactions. Avoidance maneuvers take place prior to incurring a tax liability. By converting an employer payment to an employee from wages to a tax exempt benefit, the taxpayer legally avoids paying income tax that would otherwise be owed.

Which of the following elements is not part of the directly related test for business meals?

The meal took place directly before or after a business discussion. This answer is correct.The directly related test for business meals requires the meal expense to be incurred in a clear business setting. A meal that occurs directly before or after a business discussion does not satisfy this test. It would, however, meet the requirements for the "associated with" test for meals. The directly related test requires business to be actually conducted during the meal for the purpose of receiving some business benefit.

The Saturn Titans of the Planetary Football League have a team spaceship. The spaceship developed a leak between the power source and living area causing dangerous fumes to enter occasionally. This was fixed at a cost of $100,000. The power source also needed an overhaul, which was done at a cost of $500,000. As a result of the overhaul, the useful life of the spaceship was not changed, but it can now make the trip to the players' home in the United States on Earth in half the former time and at a substantial fuel savings. How should these expenditures be treated?

The repair of the leak should be deducted, while the overhaul should be capitalized. This answer is correct.Repairs and maintenance that do not materially add to the value of property or prolong its life may be deducted. All other repair and improvement expenditures should be capitalized and depreciated (Reg. 1.162-4). Expenditures to repair damage and put the property back in the same condition as it was before the damage are generally deductible as repairs, provided that they do not materially add to the value of the property or prolong its life. The expenditure for fixing the leak would be deductible. However, the cost of a major overhaul that changes the operation of a vehicle, such as increasing its speed and saving fuel costs, would be considered to add materially to the value of the property. Therefore, the overhaul of the power source in the spaceship may not be deducted. It must be capitalized and depreciated.

To whom must a CPA pay license fees in order to maintain a CPA license?

The state board of accountancy of the CPA's state of licensure. This answer is correct.A valid state-issued license is required to practice as a CPA. CPAs pay license fees to the state board of accountancy of the CPA's state of licensure to maintain the CPA license.

Recasto owns a second residence that is used for both personal and rental purposes. During 2019, Recasto used the second residence for 50 days and rented the residence to Louis for 200 days. Which of the following statements is true?

Utilities and maintenance on the property must be divided between personal and rental use. This answer is correct.The expenses for rental property must be allocated between personal and rental use. Deductions are only allowed for those expenses related to the rental expense. In order to qualify to deduct these amounts, the taxpayer must pass the "Minimum Rental Use" test, which states that the property must be rented for at least 15 days to qualify as business use. In addition, if the taxpayer uses the residence for personal use more than either 14 days or 10% of the days it is rented, the deductions are further limited.

Which type of income is not subject to self-employment tax?

Wages, salaries, and tips received as an employee. This answer is correct.In some instances, a self-employed individual may also earn wages while working as a full- or part-time employee. In such a case, the income is not subject to self-employment tax, but is subject to withholding.

The Social Security tax does not apply to which of the following?

Medical and hospital reimbursements by the employer that are excluded from gross income. This answer is correct.The Social Security tax imposed by the Federal Insurance Contribution Act (FICA) applies to virtually all compensation received for employment, including money or other forms of wages, bonuses, commissions, vacation pay, severance allowances, and tips. Reimbursements by one's employers for medical and hospital expenses that are not included in gross income are not subject to FICA [Sec. 3121(a)(2)]. However, sick pay, which is a wage payment paid when unable to work, is subject to FICA.

The federal Social Security Act

Provides that bonuses and commissions paid as compensation are included as wages in the calculation of employer-employee contributions. This answer is correct.The definition of wages on which contributions are based includes all remuneration for employment [Sec. 3121(a)]. Bonuses and commissions are wages and are used in the calculation of the employer-employee contributions.

Walters & Whitlow, CPAs, failed to discover a fraudulent scheme used by Davis Corporation's head cashier to embezzle corporate funds during the past 5 years. Walters & Whitlow would have discovered the embezzlements promptly if they had not been negligent in their annual preparation of tax returns. The information provided by Davis for this purpose was incorrect on its face, but the CPAs made no inquiries. Under the circumstances, Walters & Whitlow will normally not be liable in a common law action for

Punitive damages. This answer is correct.If the CPAs have merely been negligent, they will not be liable for punitive damages. Punitive damages are awarded only when the circumstances are extreme or aggravated.

Terry, a self-employed laboratory consultant specializing in white mice, provided consulting services at a laboratory in Paris concerning the care and feeding of white mice. Terry's expenses were $1,600 for airfare, $400 for food, and $400 for lodging. Terry spent 5 days at the laboratory and 3 days visiting friends. How much can she deduct for the trip?

$1,375 This answer is correct. This trip is subject to the rules under Sec. 274(c), which require all foreign travel for more than 1 week to be allocated between business and personal time when more than 25% of the time is spent on nonbusiness affairs. Therefore, Terry may deduct only 5/8 of the transportation, food, and lodging expenses. Meals are limited to 50% of total cost. Her deduction is as follows:

Flora Corporation made the following awards of tangible personal property to employees during the current year under a written, qualified, nondiscriminatory plan: Name Reason for Award Value Received Mike 20 years' employment $250 Kurt 20 years' employment 250 Steve 35 years' employment 450 Casey 40 years' employment 550 George 5-year safety award 200 No other safety awards were awarded during the current year. The amount Flora can deduct related to these awards is

$1,700 This answer is correct.Section 274(j) limits the deduction for employment achievement awards (tangible personal property awarded to an employee by reason of length of service or safety achievement) to $400 per employee per year or $1,600 per employee per year if it is a qualified plan award. A qualified plan award is an item awarded as part of a permanent, written plan or program that does not discriminate in favor of highly compensated employees. An item may not be treated as a qualified plan award if the average cost of all items awarded exceeds $400. Under Sec. 274(j)(4), further limitations on employee awards are provided whereby length-of-service awards must not be awarded until after the recipient has worked over 5 years. Also, the recipient must not have received any such award during the applicable year or any of the 4 prior years. Safety achievement awards are also not deductible if, during the taxable year, such awards have previously been awarded to more than 10% of the other employees or to a manager, clerical employee, or other professional employee. Here, since all the requirements of a qualified plan award are met, the full amount of each award, or a total of $1,700, is deductible.

Dr. Merry, a self-employed dentist, incurred the following expenses: Investment expenses $ 700 Custodial fees related to Dr. Merry's Keogh plan 40 Work uniforms for Dr. Merry and Dr. Merry's employees 320 Subscriptions for medical periodicals used in the waiting room 110 Dental education seminar 1,300 What is the amount of expenses the doctor can deduct as business expenses on Schedule C,Profit or Loss from Business?

$1,730 This answer is correct.A deduction from gross income is allowed for all ordinary and necessary expenses paid or incurred during a tax year in carrying on a trade or business. Dr. Merry's deductible business expenses include work uniforms, subscriptions for medical periodicals related to the trade or business, and the dental education seminar. Thus, total deductible expenses on Schedule C equal $1,730 ($320 + $110 + $1,300).

Shirley, a single taxpayer, has taxable income of $160,000. She has qualified business income (QBI) of $50,000 and no qualified property. The qualified business paid a total of $15,000 in wages. Under Sec. 199A, what is Shirley's deductible amount for the qualified business?

$10,000 This answer is correct.Because Shirley's taxable income of $160,000 is less than $160,700, the W-2 wages/qualified property limit does not apply. Therefore, the deductible amount equals 20% of QBI, or $10,000.

Ernesto was an employee of Med-Tech Corporation for all of 2019. He earned $134,400 in salary. What is the amount of FICA tax paid by Med-Tech Corporation with respect to Ernesto?

$10,189 This answer is correct.Beginning in 1994, only the OASDI (old-age, survivors, and disability insurance) component of the FICA tax has a wage ceiling. The OASDI rate is 6.20% for employers up to a maximum of $132,900 (in 2019). For the Medicare component, which has no wage ceiling, the rate is 1.45% for employers and employees. The employment taxes paid by Med-Tech with respect to Ernesto in 2019 are as follows:

On New Year's Eve, Hal sent three bottles of champagne to the three owners of the Day & Night Cleaners to thank them for their business during the year. Each bottle of champagne cost $75. Each of the owners took the champagne home. Earlier in the year, Hal had given a video game to the 10 year old son of one of the owners. The value of the game was $50. To show his appreciation to another customer for his business, Hal took the customer to a football game. The value of the tickets for the customer was $100. What is the total amount Hal can deduct as business gifts?

$100 This answer is correct.Expenditures for business gifts are deductible. The deduction is limited to $25 per recipient per year. Hal may deduct $100 ($25 × 4 recipients) for business gifts. The gift to the son of the owner is considered given to the owner.

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

$100,414 This answer is correct.The cost of group term life insurance up to a coverage amount of $50,000 is excluded from the employee's gross income. Premiums paid by the employer for coverage in excess of $50,000 are included in gross income. As a result, $150,000 ($200,000 life insurance coverage - $50,000 exemption) of the coverage is taxable. Since Johnson must also include his salary in gross income, Johnson has gross income of $100,414 {$100,000 + [($150,000 ÷ $1,000) × $2.76]}.

On December 1, 2018, Michael, a self-employed cash-basis taxpayer, borrowed $100,000 to use in his business. The loan was to be repaid on November 30, 2019. Michael paid the entire interest of $12,000 on December 1, 2018. What amount of interest was deductible on Michael's 2019 income tax return?

$11,000 This answer is correct.Deductions are allowed under the cash method of accounting in the taxable year when paid. However, prepaid interest must be capitalized. Thus, $11,000 of interest attributable to the 2019 tax year may be deducted on Michael's 2019 income tax return and not earlier.

During the current year, Mr. Y, a cash-basis sole proprietor, paid the following: Base wages to his 4 employees $100,000 Year-end bonuses paid to 2 employees for establishing new sales records 20,000 Employee achievement awards to his 4 employees in appreciation for past services ($50 per gift) 200 What is the total amount Mr. Y can deduct on his current-year income tax return?

$120,200 This answer is correct.Section 162(a)(1) permits a deduction for a reasonable allowance for salaries or other personal services actually rendered, including bonuses. In addition, the $200 of employee achievement awards is deductible. Mr. Y may deduct $120,200 on his current-year return ($100,000 base wages + $20,000 bonuses + $200 employee achievement awards).

ABC Corp. leases two buildings. The first lease started January 1, 2019, and was for 3 years at $10,000 per year rent. ABC paid $30,000 in January for the entire 3-year term. The second lease started July 1, 2019, and was for 5 years at $6,000 per year rent. ABC paid $30,000 in June for the entire 5-year term. What is the total rent expense ABC Corp. may deduct in 2019?

$13,000 This answer is correct.Assuming that ABC Corp. is a cash-basis taxpayer, generally, rental expenses are deductible by a cash-basis taxpayer-lessee in the tax year in which they are paid. However, the general rule does not apply to advance rental payments. Advance rental payments made by a cash-basis taxpayer-lessee are generally not deductible in the tax year in which they are made but must be allocated over the period of time for which the premises may be used as a result of such payments. ABC will deduct $13,000 as rent expense in the current year [($10,000 × 1 year) + ($6,000 × 1/2 year)].

Rich is a cash-basis, self-employed air-conditioning repair technician with current-year gross business receipts of $20,000. Rich's cash disbursements were as follows: Air-conditioning parts $2,500 Yellow Pages listing 2,000 Estimated federal income taxes on self-employment income 1,000 Business long-distance telephone calls 400 Charitable contributions 200 What amount should Rich report as net earnings from self-employment?

$13,945 This answer is correct.The $20,000 gross receipts would be reduced by the $2,500 for parts, the $2,000 in advertising expense, and the $400 in telephone expense. This $15,100 is net income from self-employment. Net earnings from self-employment is net income from self-employment reduced by the employer's portion of FICA taxes (0.0765) times the taxpayer's net income from self-employment. Thus, the $15,100 should be reduced by an additional $1,155 ($15,100 × 0.0765), resulting in net earnings from self-employment of $13,945.

Frank Clarke, an employee, was covered under a noncontributory pension plan. Frank died on April 15, 2019, at age 64 and, pursuant to the plan, his widow received monthly pension payments of $500 beginning May 1, 2019. Mrs. Clarke also received an employee death payment of $10,000 in May 2019. How much should she include in her gross income for 2019?

$14,000 This answer is correct.All death benefits received by the beneficiaries or the estate of an employee from, or on behalf of, an employer are included in gross income. The pension payments must be included unless Frank made contributions to the pension plan.

Carroll, a 40 year old unmarried taxpayer with an adjusted gross income of $75,000, incurred and paid the following unreimbursed medical expenses for the current year: Doctor bills resulting from a serious fall $ 5,000 Cosmetic surgery that was necessary to correct a congenital deformity 20,000 Carroll had no medical insurance. For regular income tax purposes, what was Carroll's maximum allowable medical expense deduction, after the applicable threshold limitation, for the year?

$17,500 This answer is correct.Amounts paid for qualified medical expenses that exceed 10% of AGI may be deducted for regular income tax purposes if unreimbursed. The doctor bills resulting from the serious fall are deductible to the extent they exceed 10% of AGI. In addition, the cosmetic surgery to correct the congenital deformity is also deductible to the extent it exceeds the threshold. The cost of cosmetic surgery is generally not deductible unless it is necessary to ameliorate a deformity arising from, or directly related to, a congenital abnormality, a personal injury resulting from an accident or trauma, or disfiguring disease. Therefore, Carroll's qualifying medical expenses are $25,000. The deductible expenses are those in excess of $7,500 ($75,000 × 10%) or $17,500.

On December 1, 2019, Krest, a self-employed cash-basis taxpayer, borrowed $200,000 to use in her business. The loan was to be repaid on November 30, 2020. Krest paid the entire interest amount of $24,000 on December 1, 2019. What amount of interest was deductible on Krest's 2019 income tax return?

$2,000 This answer is correct.Costs of business borrowing are generally deductible, but prepaid interest in any form must be amortized over the period of the loan. Only 1 month of the loan has expired, so $2,000 [$24,000 × (1 ÷ 12)] is deductible.

Which of the following fringe benefits is not excludable from an employee's wages?

$2,500 of group term life insurance covering the death of an employee's spouse or dependent. This answer is correct.Under the IRC, the cost of qualified group term life insurance paid by an employer is included in the employee's gross income to the extent that such cost exceeds the cost of $50,000 of such insurance. The exclusion only applies to coverage of the employee. Payments for coverage of an employee's spouse or dependent are included in an employee's wages.

Alt Partnership, a cash-basis, calendar-year entity, began business on October 1, 2019. Alt incurred and paid the following in 2019: Legal fees to prepare the partnership agreement $12,000 Accounting fees to prepare the representations in offering materials 15,000 Alt elected to amortize costs. What was the maximum amount (ignoring any immediate expensing allowed) that Alt may deduct on the 2019 partnership return?

$200 This answer is correct.Organization expenses are incurred in the formation of the partnership. The partnership may elect to amortize organization expenses over a period of not less than 180 months. The fees related to preparing the partnership agreement are organization expenses, but the expenses related to the issuance or sale of partnership interests (syndication fees) are specifically excluded. The partnership may recognize a maximum of 3 months of amortization expense this year, or $200 ($12,000 ÷ 180 × 3).

Basic Partnership, a cash-basis, calendar-year entity, began business on February 1, 2019. Basic incurred and paid the following in 2019: Filing fees incident to the creation of the partnership $ 3,600 Accounting fees to prepare the representations in offering materials 12,000 Basic elected to amortize costs. What is the maximum amount that Basic may deduct on the 2019 partnership return?

$3,600 This answer is correct.A partnership may elect to deduct up to $5,000 of any qualified organizational expenses (in addition to $5,000 of any startup costs) it incurs in the tax year in which it begins business. The $5,000 deducted for organizational expenses must be reduced by the amount by which the expenses exceed $50,000. Any remaining balance of organizational expenditures that are not immediately deductible must be amortized over a 15-year period. Organizational costs include costs associated with the formation of the partnership. They do not include syndication fees. Thus, the filing fees are the only fees that may be deducted. The maximum amount that Basic may deduct is $3,600.

AMJ Enterprises is a small book publisher. It incurred the following as its miscellaneous expenses: Bank service charges $ 70 Office supplies 100 Advertising 600 Fees to attorneys and CPAs 2,400 Interest for the entire period of a 5-year loan taken out on January 1 2,500 How much of the above may AMJ Enterprises deduct for the current year?

$3,670 This answer is correct.Professional fees are deductible under Sec. 162, the same as compensation to an employee, provided they are reasonable in amount. Advertising and bank service charges are deductible as general expenses. Office supplies are also deductible under Reg. 1.162-3. Sec. 461(g) requires prepaid interest to be capitalized and allocated to the periods to which it relates. Since the interest was prepaid for 5 years, only one-fifth of the interest may be deducted in the current year.

Michael operates his health food store as a sole proprietorship out of a building he owns. Based on the following information regarding Year 6, compute his net self-employment income (for SE tax purposes) for Year 6. Gross receipts $100,000 Cost of Goods Sold 49,000 Utilities 6,000 Real estate taxes 1,000 Gain on sale of business truck 2,000 Depreciation expense 5,000 Section 179 expense 1,000 Mortgage interest on building 7,000 Contributions to Keogh retirement plan 2,000 Net operating loss (NOL) from Year 5 10,000

$31,000 This answer is correct.Net earnings from self employment are gross income derived from a trade or business, less allowable deductions attributable to the trade or business. Capital gains and losses and contributions to retirement plans are not considered income or expenses for self-employment purposes. Also, net operating losses are not considered for self-employment purposes. Michael's net self-employment income is computed as follows:

Employee Y, who is 44 years old, is provided with $120,000 of nondiscriminatory group term life insurance by his employer. Based on the IRS uniform premium cost table, the total annual cost of a policy of this type is $1.20 per $1,000 of coverage. Y's required contribution to the cost of the policy is $4.00 per month. Y was covered for the entire year. How much of the cost must Y include in his income?

$36 This answer is correct.Under the IRC, the cost of qualified group term life insurance paid by an employer is included in the employee's gross income to the extent that such cost exceeds the cost of $50,000 of such insurance. The includible cost is determined on the basis of uniform premiums prescribed by regulations, rather than actual cost. Therefore, we do not need to know what the employer's actual premiums were in order to compute the answer. The includible cost is the total cost minus the cost of the first $50,000, minus the cost paid by the employee. Computation is below:

You are the accountant for Company R, and you are requested to file Form 941, Employer's Quarterly Federal Tax Return for Federal Income Tax Withheld from Wages and for Federal Insurance Contributions Act Taxes, for the third quarter of 2019. Given the following information, what is the total FICA tax due for the third quarter (rounded to the nearest dollar)? Wages Paid Wages Paid Employee Third Quarter First Two Quarters X $ 5,000 $ 5,000 Y 20,000 113,900 Z 5,000 0

$4,466 This answer is correct.The two components of the FICA tax [Social Security (SS) and Medicare] must be reported separately on Form 941. The rate for SS is 6.2% for employers and employees on wages up to $132,900 (in 2019). The rate for Medicare is 1.45% each for employers and employees, with no wage ceiling. With respect to the SS component, the tax is paid until the wage ceiling is reached. Then no SS tax is paid for the rest of the year; i.e., it is not paid ratably over the year. The total wages subject to the SS component in the third quarter of 2019 amount to $29,000 since Y's wages exceed the SS limitation before the end of the quarter. The total FICA tax is 7.65% in 2019. However, the employee and the employer are each required to pay the 7.65%, and the combined percentage of 15.3% is reported on Form 941, separated into its two components.

Phil Armonic is actively engaged in the oil business and owns numerous oil leases in the Southwest. During 2019, he made several trips to inspect oil wells on the leases. As a result of these overnight trips, he paid the following: Plane fares $4,000 Hotels 1,000 Meals 800 Entertaining lessees 500 Of the $6,300 in expenses incurred, he can claim as deductible expenses

$5,400 This answer is correct.A deduction is allowed for travel expenses while away from home in the pursuit of a trade or business. Meal expenses are limited to 50% of their cost. Generally, entertainment expenses have not been deductible since 2017. Assuming that Armonic's expenses meet the business relation requirements, his total deduction is

On April 1 of the current year, Sam, a cash-basis taxpayer, leased office space from Executive Plaza for 5 years, beginning May 1 of the current year, for $700 per month. During the year, he paid $7,000, of which $1,400 was for advance rent, to Executive Plaza. What is the amount Sam can deduct for the current year?

$5,600 This answer is correct.Prepaid rent may not be deducted by either a cash-basis or accrual-basis taxpayer. To do so would violate the requirement that the taxpayer's method of accounting must clearly reflect income [Sec. 446(b)]. Furthermore, an expenditure that creates an asset having a useful life extending substantially beyond the close of the taxable year is not deductible [Reg. 1.461-1(a)]. Only the $5,600 of rental expense allocable to the current year ($7,000 - $1,400) is deductible in the current year.

Mr. B paid the following amounts in the current year in connection with his business property: New motor purchased in December for a truck that extended its useful life by 3 years $ 600 Replacement parts to maintain machinery in efficient operating condition 3,000 Labor to maintain the above equipment 1,800 Cost of replacing gravel driveway with heavy-duty concrete 12,000 Cost of repainting factory building 1,400 What is Mr. B's allowable deduction for repairs and maintenance expense on his current year Schedule C, Form 1040?

$6,200 This answer is correct.Repairs and maintenance that do not materially add to the value of property or prolong its life may be deducted. All other expenditures should be capitalized and depreciated (Reg. 1.162-4). The expenditures made for a new truck motor with a useful life of 3 years and the cost of replacing the driveway should be capitalized. The $3,000 cost of replacement parts and the $1,800 in labor costs to maintain the equipment in operating condition are deductible. The $1,400 cost of repainting the factory building is also deductible as a repair and maintenance item. These costs total $6,200 for repair and maintenance expenses, which are deductible in the current year.

Clyde operated a food distribution business. He leased a small warehouse in 2017 for $60,000 per year for a 3-year term. The lease was to start on July 1, 2017. Clyde paid the first 2 years' rent in advance in May 2017. Clyde then began to make monthly payments of $5,000 starting on July 1, 2019, and continuing on the first of the month for the balance of 2019. What rent expense may Clyde claim in 2019?

$60,000 This answer is correct.Assuming that Clyde is a cash-basis taxpayer, generally, rental expenses are deductible by a cash-basis taxpayer-lessee in the tax year in which they are paid. However, the general rule does not apply to advance rental payments. Advance rental payments made by a cash-basis taxpayer-lessee are generally not deductible in the tax year in which they are made but must be allocated over the period of time for which the premises may be used as a result of such payments. Clyde will be able to deduct $60,000 of rent because he can deduct the allocated portion of the $30,000 prepaid rent and the $30,000 of current rent expenses paid. Because the prepayment extends beyond the tax year following prepayment and there is no contractual obligation to prepay each year, the exception in Reg. 1.263(a)-4(f)(8) does not apply.

Mr. C, a calendar-year taxpayer, uses the accrual method of accounting. He pays his employees on the third day of each month. As of December 31 of the current year, accrued wages for the month of December were $30,000. Wages paid October 3 totaled $20,000; November 3, $25,000; and December 3, $22,000. Mr. C's fourth-quarter return, Form 941, should show total wages of

$67,000 This answer is correct.Taxable wages and employment taxes are reported only when wages are actually paid. Employment taxes are imposed by a separate part of the Internal Revenue Code and have no relationship to the employer's method of accounting for income tax purposes. Therefore, accrued wages are not included on Form 941; only wages actually paid are included. Mr. C's fourth-quarter return should show total wages of

Mr. Hawk, a factory assembly line worker, received the following benefits from his employer: Medical insurance plan policy $250 Christmas bonus 125 Reimbursement for college undergraduate physics course during the current year under a nondiscriminatory written plan 450 $40,000 nondiscriminatory group term life insurance policy 475 Membership in a local health club 550 How much is includible in Mr. Hawk's income for the current year?

$675 This answer is correct.Benefits received from an employer are compensation for services and included in gross income unless provided otherwise. The IRC excludes from gross income contributions to accident or health plans (a medical insurance plan) made by an employer on behalf of the employee. The IRC provides for the inclusion in gross income of the cost of group term life insurance paid by the employer, but only to the extent that such cost exceeds the cost of $50,000 of such insurance provided the plan is not discriminatory. Hence, the cost of Mr. Hawk's group term life insurance is not included in gross income. The IRC provides an exclusion of payments up to $5,250 per year made to reimburse an employee for educational expenses to cover expenses for undergraduate and graduate courses. Therefore, the reimbursement for the physics course is excluded. There is no provision excluding Christmas bonuses or memberships in off-premises health clubs so $675 ($125 bonus + $550 membership) is includible in gross income.

Happy Lucky drove her car a total of 18,000 miles during 2019. Of this, 12,000 miles was related to business for JR Enterprises. Happy paid $4,500 for gas, $5,500 for repairs, and $500 for tires during the year. Happy accounted to JR for these actual expenses and received a reimbursement for the business portion. How much may JR deduct as travel and transportation expense?

$7,000 This answer is correct.Under Sec. 162(a), an employer may deduct reimbursements paid to an employee for use of his or her personal car, subject to the substantiation rules of Sec. 274. Although an employee is allowed to report to an employer either the actual expenses or a standard mileage rate for the business miles driven, the employer is allowed to deduct only what is actually reimbursed to the employee. JR reimbursed Happy $7,000 [$10,500 × (12,000 miles ÷ 18,000 miles)]. This represented an allocation of Happy's total automobile expenses, based on the number of business miles driven as compared to the total miles driven. JR may only deduct $7,000.

Sarah owns and operates a retail sporting goods business as a sole proprietor. Her store is located on the ground floor of a two-story building that she owns. Based on the following information regarding 2019, compute her net self-employment income (for SE tax purposes) to be put onto Schedule C for that year. Gross profit from sporting goods business $100,000 Rental income from upper level (45%) of building 20,000 Building depreciation expense 10,000 Utilities for ground floor (Tenant pays own utilities.) 4,500 Depreciation on vehicles used in business 3,000 Gain on sale of van used 100% in business 2,000 Contributions to her Keogh retirement plan 5,500 Sarah's health insurance premiums 4,000 Mortgage interest on building 10,000 Other expenses of running her sporting goods business 11,500

$70,000 This answer is correct.Net earnings from self-employment are gross income derived from a trade or business, less allowable deductions attributable to the trade or business. The rental income is not self-employment income since rental property is not Sarah's ordinary course of business and she is not a real estate broker. Therefore, any rental expenses do not offset the self-employment income from the sporting goods business. Also, 100% of the health insurance premiums are deductible on Form 1040 as an adjustment but are not deducted against self-employment income. Capital gains and losses and contributions to retirement plans are not considered income or expenses for self-employment purposes. Sarah's net self-employment income is computed as follows:

Taxpayer B filed a declaration of estimated tax for the current year and paid $2,000 in four equal installments of $500. He had $6,000 withheld from his salary during the current year. The actual tax for the year was $12,000. B's current-year adjusted gross income decreased by $4,000 from the previous year. Taxpayer B had no other credits or payments. What is his underpayment of tax for each installment?

$700 This answer is correct.A penalty is provided in Sec. 6654(a) for the underpayment of estimated taxes. The amount of underpayment of each installment is the excess of the installment due if the estimated tax was 90% of that shown on the return over the amount of the installment timely paid. The estimated tax is due in four installments. Income tax withheld is considered paid equally on each installment date [Sec. 6654(g)(1)]. Therefore, the taxpayer is considered to have made estimated payments of $2,000 in each quarterly installment ($500 + 1/4 of $6,000). The amount of each installment payment should have been $2,700 (1/4 × 90% × $12,000 actual tax). B's underpayment of tax for each installment is $700 ($2,700 - $2,000).

Bobby is a sole proprietor. During 2019, he incurred the following expenses: Rental payments for the next 2 years (i.e., 2020 and 2021) $3,000 Country club dues (Bobby frequently entertains clients at the country club) 7,500 Meal expenses incurred while meeting with clients 1,500 What is the amount of Bobby's expenses that are deductible for 2019?

$750 This answer is correct.A deduction from gross income is allowed for meal expenses, up to 50% of the actual expense. However entertainment expenses are not deductible, and advance rental payments may be deducted by the lessee only during the tax periods to which the payments apply. Accordingly, Bobby is entitled to a deduction in 2019 of $750 ($1,500 meal expenses × 50%).

In January 2019, Mr. D, who is self-employed, purchased a new automobile, which he uses 100% for business. During 2019, he drove the car 14,000 miles. Mr. D also owns another automobile, which he uses occasionally for business but primarily for personal purposes. During 2019, he drove the second car 2,000 business miles. The second car is not fully depreciated. What is the amount of Mr. D's automobile expense deduction using the standard mileage rate?

$9,280 This answer is correct.Automobile expenses pertaining to a trade or business are deductible under Sec. 162 as ordinary and necessary business expenses. The taxpayer may either deduct the portion of actual operating cost of the automobile attributed to business use or compute the deduction based on the standard mileage rate. For 2019, the standard mileage rate is $0.58 per mile for all miles of business use. Mr. D's deduction for 2019 is $9,280 (16,000 miles × $0.58). The standard mileage rate is adjusted annually by the IRS to the extent warranted.

Gary Judd is an individual proprietor trading as Lake Stores, an accrual basis enterprise that had been using the allowance method for determining bad debt expense for both book and tax purposes. At December 31, 2018, Lake's allowance for doubtful accounts ("bad debt reserve") was $20,000. In Lake's 2019 budget, it was estimated that $3,000 of trade accounts receivable would become worthless in 2019. However, actual bad debts amounted to $4,000 in 2019. In Lake's 2019 Schedule C of Form 1040, Lake is allowed

A $4,000 deduction for bad debts and does not have to include any portion of the "reserve" in taxable income. This answer is correct.An accrual basis taxpayer includes trade receivables in gross income, and a trade receivable is deductible as a business bad debt to the extent it is worthless. The allowance method of deducting bad debts is not allowed, so Gary must use the specific write-off method.

Mr. E, a sole proprietor, made the following payments in the current year. Which payment is not a capital expenditure?

A payment to have machinery moved from one location to another. This answer is correct.Capital expenditures include those that add to the value or prolong the life of property, or adapt the property to a new or different use. Moving machinery to a new location does not increase the value of the machinery, prolong its life, or adapt it to a new or different use. Therefore, the cost of moving the machinery is not a capital expenditure (it is deductible under Sec. 162).

All of the following expenses incurred in the course of operating a business are deductible business expenses except

Advertising in a convention program of a political party. The proceeds from the publication of the program are for the local use of the political party. This answer is correct.Section 276 provides that advertising in a publication of a political party is not deductible as a business expense. The proceeds from the convention program are for the use of a political party. Therefore, the expenses incurred to advertise in that program are not deductible.

The Social Security Act provides for the imposition of taxes and the disbursement of benefits. Which of the following is a true statement regarding these taxes and disbursements in the current year?

As between an employer and its employee, the tax rates are the same. This answer is correct.Under the Federal Insurance Contributions Act (FICA), the tax rate for employers and employees is the same (7.65% for 2017). This requirement of shared responsibility has been followed since the Social Security Act was enacted in 1935.

Sara Hance, who is single and lives alone in Idaho, has no income of her own and is supported in full by the following persons: Amount of Percent Support of Total Alma (an unrelated friend) $2,400 48 Ben (Sara's brother) 2,150 43 Carl (Sara's son) 450 9 Total $5,000 100 Under a multiple support agreement, Sara can be claimed as a dependent by

Ben. This answer is correct.The taxpayer must provide over one-half of the support of a dependent. An exception to the support test permits one of a group of taxpayers, who are otherwise eligible to claim the dependent and who together furnish more than one-half of the support of a dependent, to claim the dependent even when no one person provides more than 50% of the support. Any such individual who contributed more than 10% of the support is entitled to claim the dependent if each of the other persons in the group who contributed more than 10% signs a written consent filed with the return of the claiming taxpayer.

Nan, a cash basis taxpayer, borrowed money from a bank and signed a 10-year interest-bearing note on business property on January 1 of the current year. The cash flow from Nan's business enabled Nan to prepay the first 3 years of interest attributable to the note on December 31 of the current year. How should Nan treat the prepayment of interest for tax purposes?

Deduct the current year's interest and amortize the balance over the next 2 years. This answer is correct.Despite being a cash-basis taxpayer, the interest expense must be apportioned to the periods to which it is attributable. As the first 3 years' portion is paid in Year 1, the Year 1 portion is currently deductible. The remainder must be deducted in the year to which it is attributable (Year 2 in Year 2 and Year 3 in Year 3), regardless of when paid.

All of the following individuals who perform services for a business are subject to taxes under the Federal Insurance Contributions Act (FICA) and the Federal Unemployment Tax Act (FUTA) except

Director of a corporation. This answer is correct.Employers are subject to both FICA and FUTA. Self-employed persons are subject to self-employment taxes but not unemployment taxes. The director of a corporation is a self-employed individual, not an employee, so (s)he is not subject to FUTA.

An individual starts paying student loan interest in the current year. For how many years may the individual deduct a portion of the student loan interest?

Duration of time that interest is paid. This answer is correct.Taxpayers are allowed a deduction for interest paid on qualified educational loans. In 2019, a taxpayer may deduct $2,500 of interest paid on qualified educational loans subject to phaseouts based on AGI. There is no time limit on how many years the individual may deduct a portion of the student loan interest. However, in order to be deducted, interest must actually be paid.

Mock operates a retail business selling illegal narcotic substances. When Mock calculates business income, he may adjust for I. Cost of merchandise II. Business expenses other than the cost of merchandise

I only. This answer is correct.An adjustment to gross receipts is permitted for the cost of merchandise related to the selling of illegal narcotic substances (Sec. 280E), even if the narcotics are listed in the Controlled Substances Act. However, all other business expenses related to the sales are not deductible.

The theatrical agency of Power & Tyrone employs two people full-time. Which of the following is true with regard to federal unemployment insurance?

In terms of industry and number of employees, Power & Tyrone is within the class of employers covered by the Federal Unemployment Tax Act. This answer is correct.An employer that (1) employs one or more persons covered by the Social Security Act for at least part of a day in each of 20 different calendar weeks in a year or the preceding year or (2) pays wages of $1,500 or more during any calendar quarter in a year or the preceding year must pay a federal unemployment tax on the first $7,000 of each employee's wages [Sec. 3306(a)]. Thus, a theatrical agency employing two persons full-time would fall within the class of employers covered by the federal unemployment tax.

The 50% limit on deductibility of business-related expenses applies to which of the following?

Meals while traveling away from home on business and meals provided to customers at your place of business. This answer is correct.When the taxpayer is reimbursed for the meal expense, the limitation is imposed on the party making reimbursement, not the taxpayer, i.e., employee. For employees whose expenses are not reimbursed, there is no (itemized) deduction after 2017.

Mr. M, a cash-basis sole proprietor, secured two business loans from two different banks. The following information pertains to the loans. Assume all costs have been paid by M. Loan 1 Loan 2 Date of loan 1/1/Yr 1 1/1/Yr 3 Term 10 years 10 years Loan origination fee $1,000 $2,000 Mortgage commission 250 500 Abstract fees 150 300 Recording fees 100 200 Interest for Year 3 5,000 7,000 On December 31, Year 3, Mr. M paid off Loan 1 and had to pay a prepayment penalty of $1,500. What deductions can Mr. M take in Year 3 with respect to these loans?

Interest Expense Other Costs $14,500 $500 This answer is correct.Interest is deductible under Sec. 163 as well as other payments made in lieu of interest. The prepayment penalty is in lieu of interest. The loan origination fees are also in lieu of interest since they are unreasonably large to be actual fees for processing a loan. As prepaid interest, the loan origination fees must be amortized over the period of each loan, but the balance of unpaid origination fees on Loan 1 is deductible in Year 3 when the loan was paid off. All other expenditures are costs of obtaining a loan and are deductible over the period of each loan as Sec. 162 business expenses. The balance of the costs on Loan 1 is deductible in Year 3 when the loan was paid off.

Juan recently started operating a flower shop as a proprietorship. In its first year of operations, the shop had a taxable income of $60,000. Assuming that Juan had no other employment-related earnings,

Juan must pay self-employment tax on the earnings of the business. This answer is correct.Self-employed taxpayers must pay a self-employment tax on the earnings of their business. The FICA tax liability is imposed on net earnings from self-employment at the employer rate plus the employee rate.

A cash-basis taxpayer made a bona fide, nonbusiness loan to an acquaintance in Year 1. At the end of Year 2, it is determined that the taxpayer will likely be able to collect only 20% of the principal, and no interest has been or will be collected. How should the loss be treated for tax purposes in Year 2?

None of the loss is deductible in Year 2. This answer is correct.A taxpayer can take a bad debt deduction only in the year the debt becomes worthless. A taxpayer does not have to wait until a debt is due to determine whether it is worthless. A debt becomes worthless when there is no longer any chance that the amount owed will be paid. Thus, a partially worthless nonbusiness bad debt is not deductible.

The self-employment tax is

Partially deductible from gross income in arriving at adjusted gross income. This answer is correct.To arrive at AGI, a self-employed person may deduct the employer's portion of the self-employment tax paid. This is an above-the-line deduction.

All of the following expenses paid or incurred in the course of operating a business are deductible as business expenses except

Political contributions. This answer is correct.Contributions to a political party or candidate are not deductible as business expenses under Sec. 162(e).

Jim Domuch, a calendar-year taxpayer, operates a novelty shop as a sole proprietor. During the current year, he incurred the following expenses in his business. Which is not deductible in the current year?

Sales taxes on the purchase of $50,000 of equipment used in the business. This answer is correct.Section 164(a) lists the taxes that may be deducted by any person. Section 164(a) also provides that taxes not listed but paid or accrued in a trade or business may be deducted, except that any tax not listed that is paid or accrued with respect to a property purchase is treated as part of the cost of the property. Therefore, the sales tax on the equipment must be capitalized and only deducted as depreciation over the recovery period of the asset.

State X imposes a tax based upon the amount of fixed assets a business owns. An individual proprietor would deduct this tax on which schedule?

Schedule C. This answer is correct.A tax imposed on business assets is an expense of that business and is deductible under Sec. 162. As an ordinary and necessary expense of the business, it is reported on Schedule C, which is used to report the income and expenses of a sole proprietorship, the net income (or loss) of which is carried onto Schedule 1 of Form 1040.

Which of the following factors, by itself, requires a corporation to comply with the reporting requirements of the Securities Exchange Act of 1934?

Shares listed on a national securities exchange. This answer is correct.The following must file periodic reports under the 1934 act: (1) national securities exchanges, (2) an issuer with more than $10 million in total gross assets and a class of equity securities with (a) at least 2,000 shareholders or (b) 500 who are not accredited investors, (3) an issuer whose securities are listed on a national exchange, and (4) an issuer that has registered under the 1933 act. These issuers must file annual (10-K), quarterly (10-Q), and material events (8-K) reports and send similar reports to shareholders.

During the examination of the financial statements of Viscount Manufacturing Corporation, the CPAs noted that, although Viscount had 860 full-time and part-time employees, it had completely overlooked its responsibilities under the Federal Insurance Contributions Act (FICA). Under these circumstances, which of the following is true?

Since employers and employees owe FICA taxes and since the employer must withhold the employees' tax from their wages as paid, Viscount must remit to the government a tax equal to the amount assessed directly against the employer and the employee. This answer is correct.Employers and employees are each liable for FICA taxes. Under Sec. 3102(a), an employer is liable for collecting (withholding) the employees' tax from wages. Employers who fail to collect these taxes are responsible for the employees' tax, in addition to their own [Sec. 3111(a)]. Furthermore, the officers and employees of Viscount could be subject to a 100% penalty under Sec. 6672 if the failure to withhold or pay is willful.