Chapter 5,6,13
If Houston Printing Co. purchases a new printing press during the current year for $30,000, pays sales taxes of $2,000, and pays $1,000 for installation, the cost basis for the printing press is $33,000.
Answer: TRUE
If a taxpayer has gains on Sec. 1231 assets, Secs. 1245 and 1250 must be applied first to determine any amounts recaptured as ordinary income, and any excess gain may then be netted with Sec. 1231 losses for possible long-term capital gain treatment.
Answer: TRUE
If an individual taxpayer's net long-term capital losses exceed the net short-term capital gains, the excess may be offset against ordinary income up to $3,000 per year. Any excess losses over $3,000 may be carried over indefinitely.
Answer: TRUE
If no gain is recognized in a nontaxable like-kind exchange involving Sec. 1245 or Sec. 1250 property, the recapture potential carries over to the replacement property.
Answer: TRUE
If property received as a gift has a basis of the fair market value of the property on the date of the gift, the donee's holding period starts on the day after the date of the gift.
Answer: TRUE
If realized gain from disposition of business equipment exceeds total depreciation or cost recovery, a portion of the gain will receive Sec. 1231 treatment if the equipment's holding period is more than one year.
Answer: TRUE
If the recognized losses resulting from involuntary conversions arising from casualty or theft exceed the recognized gains from such events (i.e., a net loss from the casualty), all of the involuntary conversions are treated as ordinary gains and losses.
Answer: TRUE
If the shares of stock sold or exchanged are not specifically identified, the FIFO (first-in, first-out) method of identification must be used.
Answer: TRUE
If the stock received as a nontaxable stock dividend is not the same type as the stock owned prior to the dividend, the allocation of basis is based on relative fair market values of the stock.
Answer: TRUE
Gain on sale of a patent by an inventor generally is ordinary income.
Answer: TRUE
Adjusted gross income (AGI) is the basis for a number of phase-outs of deductions.
True
Expenses incurred in a trade or business generally are deductions for AGI.
True
Corporate taxpayers may offset capital losses only against capital gains and may carry excess losses back three years and then forward five years.
Answer: TRUE
Costs of tangible personal business property which are expensed under Sec. 179 are subject to recapture if the property is converted to nonbusiness use before the end of the MACRS recovery period.
Answer: TRUE
Expenditures which do not add to the value or prolong the life of property may be expensed in the year in which they are incurred.
Answer: TRUE
Five different capital gain tax rates could apply to long-term capital assets sold by noncorporate taxpayers.
Answer: TRUE
Sheila sells stock, which has a basis of $12,000, to her daughter for $7,000, the stock's fair market value. Subsequently, the daughter sells the stock to an unrelated party for $5,000. Which of the following is true for Sheila and her daughter?
A) Sheila - recognizes no loss Daughter - recognizes loss of $2,000
Pat, an insurance executive, contributed $1,000,000 to the reelection campaign of Governor Stephens, in hopes that Stephens will appoint her to a coveted position on the State Board of Insurance. How much of the contribution can Pat deduct? A) $0 B) $100,000 C) $500,000 D) $1,000,000
A) $0
Tory considered opening a cupcake store in Denver. Tory is currently a full-time dentist. After spending $8,600 on a market study, he decided against opening the store on August 1. What is the maximum amount of deduction for the current year attributable to this expenditure? A) $0 B) $5,000 C) $5,600 D) $6,800
A) $0
Donald sells stock with an adjusted basis of $38,000 to his son, Kiefer, for its fair market value of $30,000. Kiefer sells the stock three years later for $32,000. Kiefer will recognize a gain on the subsequent sale of A) $0. B) $2,000. C) ($6,000). D) ($8,000).
A) $0.
Jones, Inc., a calendar-year taxpayer, is in the air conditioner repair business. The business uses the cash method. In December of the current year, Jones charged $100 of supplies at Refrigeration, Inc., (he will pay the credit card bill in January) and also purchased $600 of supplies at XYZ on open account (he will make a payment on the open account in January). What is the amount that is deductible by Jones, Inc., in the current year? A) $100 B) $600 C) $700 D) The amounts must be capitalized and charged to expense as used.
A) $100 Explanation: Credit card charges are deductible in the year the charge is made regardless of the year in which the payment is made, but open account charges are not deducted until paid.
Jimmy owns a trucking business. During the current year he incurred the following: Gasoline and oil $100,000 Maintenance $15,000 Fines for speeding $8,000 Bribes to government inspection officials $21,000 The fines for speeding were a necessary cost because missing deadlines would cause lost business and are ordinary in the industry. What is the total amount of deductible expenses? A) $115,000 B) $123,000 C) $108,000 D) $144,000
A) $115,000
On December 1, Robert, a cash-method taxpayer, borrows $10,000 from the bank for use in his business. Under the terms of the loan, the bank discounts the loan by $300, paying Robert the $9,700 cash proceeds. If Robert repays the loan next year, he may deduct A) $300 next year. B) $300 this year. C) $25 this year and $275 next year. D) nothing since the note is "noninterest-bearing."
A) $300 next year. Explanation: A cash-basis taxpayer gets the deduction in the year in which interest is paid.
In 2018, Sean, who is single and age 44, received $55,000 of gross income and had $5,000 of deductions for AGI and $5,600 of itemized deductions. Sean's taxable income is A) $38,000. B) $43,000. C) $44,400. D) None of the above.
A) $38,000.
During the current year, the United States files criminal and civil actions against Joe, the CEO of Box Corporation, and Jane, the president of Cable Corporation, for price fixing. Both enter pleas of no contest and appropriate judgments are entered. Subsequent to this action, Square Corporation sues both Box and Cable for treble damages of $6,000,000. In settlement, Box and Cable each pay Square $1,200,000. What is the maximum amount that Box and Cable may each deduct? A) $400,000 B) $1,200,000 C) $2,000,000 D) $6,000,000
A) $400,000
Charles is a single person, age 35, with no dependents. In 2018, Charles has gross income of $75,000 from his sole proprietorship. Charles also incurs $80,000 of deductible business expenses in connection with his proprietorship. He has interest and dividend income of $22,000. Charles has $7,000 of itemized deductions. Charles's taxable income is A) $5,000. B) $10,000. C) $17,000. D) None of the above.
A) $5,000.
Abby owns a condominium in the Great Smokey Mountains. During the year, Abby uses the condo a total of 21 days. The condo is also rented to tourists for a total of 79 days and generates rental income of $12,500. Abby incurs the following expenses: Expense: Amount Mortgage interest $ 4,100 Property taxes 1,900 Utilities 2,200 Insurance 1,200 Depreciation 10,000 Using the IRS method of allocating expenses, the amount of depreciation that Abby may take with respect to the rental property will be A) $5,074. B) $8,515. C) $7,900. D) $10,000.
A) $5,074.
Which of the following statements is false? A) A tax deduction is allowed to a taxpayer for estimated warranty expense. B) A tax deduction is allowed in association with a warranty only in the year in which warranty work is performed. C) A tax deduction is allowed for a contested amount if the amount is paid prior to final settlement. D) No tax deduction is allowed to an accrual-basis taxpayer for the amount of a down payment for a non-recurring expense when the work is to be performed in a subsequent period.
A) A tax deduction is allowed to a taxpayer for estimated warranty expense.
Business interest expense is limited for larger businesses. Which of the following statements is not correct with respect to this limitation? A) Businesses with current year gross receipts exceeding $10 million are subject to this limitation. B) Businesses will add back depreciation and amortization deductions to the taxable income in order to calculate the maximum interest deduction. C) The interest expense deduction is limited to business interest income plus 30% of adjusted taxable income. D) All of the above statements are accurate statements with respect to calculating the interest expense limitation.
A) Businesses with current year gross receipts exceeding $10 million are subject to this limitation. Explanation: The limitation applies to businesses with average annual gross receipts exceeding $25 million for the prior three year period.
Which of the following is not required for an accrual method taxpayer to currently deduct the cost of services received? A) The liability must be paid. B) The existence of a liability must be established. C) The amount of the liability is determined with reasonable accuracy. D) The services must actually be provided.
A) The liability must be paid.
Brent must substantiate his travel and entertainment expenses. Which of the following is not required for documentation? A) company expense report B) business relationship to the taxpayer of individuals entertained C) purpose of the expenditure D) time and place of the travel or entertainment
A) company expense report
All of the following deductible expenses are deductions for AGI except A) deductions reported on Schedule A. B) deductions reported on Schedule C. C) deductions reported on Schedule E. D) All of the above are deductions for AGI.
A) deductions reported on Schedule A. Explanation: Itemized deductions (deductions from AGI) are reported on Schedule A. Schedule C reports deductions for business-related expenses of sole proprietors. Schedule D reports deductions attributable to rent and royalty income.
Generally, deductions for adjusted gross income on an individual's tax return include all the following types of expenses except those A) incurred in gambling activities. B) incurred in a trade or business. C) incurred in the production of rent income. D) incurred in the production of royalty income.
A) incurred in gambling activities.
RollerQueens Inc., a calendar-year accrual method taxpayer, enters into a contract each September with a cleaning service to clean the arena after each game during the team's October through March season. Under the criteria of the economic performance test, the RollerQueens Inc.'s deduction for cleaning expense A) is allowed in full in the year RollerQueens Inc. and the cleaning service enter into the contract. B) is not allowed until the cleaning service contract is fully satisfied in the following year. C) must be amortized over the contract period. D) is not allowed until payment is made.
A) is allowed in full in the year RollerQueens Inc. and the cleaning service enter into the contract. Explanation: Because the all-events test is satisfied (the liability is fixed), the expense recurs every year, economic performance occurs within the requisite period of time, and the item is not material, the taxpayer can take the deduction for the entire expense in the year in which the taxpayer and service provider enter into the contract.
Which of the following is not required for an expenditure to be deductible as a business or investment expense? A) recurring in nature B) ordinary and necessary C) reasonable in amount D) incurred by the taxpayer
A) recurring in nature
For noncorporate taxpayers, depreciation recapture is not required on real property placed in service after 1986.
Answer: TRUE
Jordan paid $30,000 for equipment two years ago and has claimed total depreciation deductions of $15,600 for the two years. The cost of repairs during the same time period was $2,000 while a major overhaul which extended the life of the equipment cost $7,000. What is Jordan's adjusted basis in the equipment at the end of the two-year period? A) $14,400 B) $16,400 C) $21,400 D) $30,000
Answer: C
Josh purchases a personal residence for $278,000 but subsequently converts the property to rental property when its FMV is $275,000. Assume depreciation of $65,000 has been deducted after conversion to rental use. If Josh sells the property for $280,000, his gain or loss will be A) $2,000 gain. B) $5,000 gain. C) $67,000 gain. D) $70,000 gain.
Answer: C
Andrea died with an unused capital loss carryover of $3,300. The carryover A) may be carried back three years. B) will be fully used on Andrea's final income tax return. C) will be inherited by Andrea's heirs. D) expires with death.
Answer: D
Lucy, a noncorporate taxpayer, experienced the following Sec. 1231 gains and losses during the years 2013 through 2018. Her first disposition of a Sec. 1231 asset occurred in 2013. Assuming Lucy had no capital gains and losses during that time period, what is the tax treatment in each of the years listed? Sec. 1231 Gains Sec. 1231 Losses 2013 $10,000 $ 8,000 2014 $18,000 $23,000 2015 $ 9,000 $13,000 2016 $22,000 $16,000 2017 $25,000 $17,000 2018 $11,000 $18,000
Answer: 2013 $2,000 LTCG 2014 $5,000 Ordinary loss 2015 $4,000 Ordinary loss 2016 $6,000 ordinary income due to Sec. 1231 recapture; leaves $3,000 available for later recapture 2017 $8,000 net gain—recapture $3,000 as ordinary income; $5,000 balance will be LTCG 2018 $7,000 Ordinary loss
On June 1, 2015, Buffalo Corporation purchased and placed in service 7-year MACRS tangible property costing $100,000. On November 10, 2018, Buffalo sold the property for $102,000 after having taken MACRS $47,525 in depreciation deductions. What is the amount and character of Buffalo's gain?
Answer: Amount realized $102,000 Cost $100,000 Less: Accumulated depreciation (47,525) Adjusted basis (52,475) Gain realized $49,525 Sec. 1245 ordinary gain $47,525 Sec. 1231 gain 2,000 Total gain recognized $49,525
Julie sells her manufacturing plant and land originally purchased in 1980. Accelerated depreciation had been taken on the building, but the building is now fully depreciated. Julie is in the 37% marginal tax bracket. Other information is as follows: Property Original cost Total depreciation Adjusted basis Selling price Plant $2,800,000 $2,800,000 $0 $3,000,000 Land $ 500,000 $500,000 $800,000 She has not sold any other assets this year. A review of her file indicates that the only asset dispositions in the past five years was a truck sold for a $10,000 loss last year. What are the tax consequences of the sale (type of gain; rates at which taxed)?
Answer: Building realized gain ($3,000,000 - $0) $3,000,000 Sec. 1250 realized gain (fully depreciated) 0 Tentative Sec. 1231 gain 3,000,000 Ordinary income recapture due to lookback (37% tax rate) $ 10,000 Sec. 1231 gain, taxed as follows: $2,990,000 a. Unrecaptured Sec. 1250 - 25% tax rate $2,800,000 - 10,000 lookback recapture $2,790,000 b. Balance at 20% $200,000 Land Sec. 1231 gain taxed at 20% ($800,000 - 500,000) $300,000
WAM Corporation sold a warehouse during the current year for $830,000. The building had been acquired in 1993 at a cost of $730,000 and had total straight-line depreciation of $510,000. What is the amount and nature of the gain or loss on the sale of the warehouse?
Answer: Cost $730,000 Accumulated Depreciation 510,000 Adjusted Basis 220,000 Amount Realized $830,000 Adjusted Basis 220,000 Gain $310,000 Recapture under 1250 0 Recapture, if under 1245 310,000 Sec. 291 recapture 20% of 1245 recap. $ 62,000 Sec. 1231 gain ($310,000 - 62,000) $248,000
Connors Corporation sold a warehouse during the current year for $980,000. The building had been acquired in 1980 at a cost of $830,000. The building is fully depreciated. What is the amount and nature of the gain or loss on the sale of the warehouse?
Answer: Selling Price $980,000 Adjusted Basis 0 Gain $980,000 Tentative Sec. 1231 gain 980,000 Recapture under 1250 (fully depreciated) 0 Recapture, if under 1245 830,000 Sec. 291 recapture 20% of ($830,000 - 0) $166,000 Sec. 1231 gain ($980,000 - 166,000) $814,000
Jade is a single taxpayer in the top tax bracket, with salary of $500,000 and investment income of $100,000. She is considering the sale of some shares of stock which will result in a $50,000 gain. She purchased the shares three years ago. Taking all taxes into account, how much tax will she pay due to this gain?
Answer: Tax on LTCG at 20% $10,000 Medicare tax on investment gain at 3.8% 1,900 Total tax on gain $11,900
Jillian, a single taxpayer, had the following sales of Sec. 1231 property this year: Sale of land A at a gain of $15,000 Sale of land B at a gain of $12,000 Sale of land C at a loss of $8,000 a. Assume Jillian has taxable income from other sources exceeding $500,000. What is the amount of her resulting tax liability on the property sales? b. Assume instead that Jillian's taxable income from other sources is less than $15,000. What is the amount of her resulting tax liability on the property sales? c. Assume instead that Jillian's taxable income from other sources is in the 24% tax bracket. What is the amount of her resulting tax liability on the property sales?
Answer: a. The net 1231 gain is $15,000 + $12,000 - $8,000 = $19,000. At Jillian's level of taxable income, the Sec. 1231 gain is taxed at 20%. Thus, the tax is $19,000 × .20 = $3,800. b. There is no tax on capital gains for taxpayers with taxable income below $38,600. c. Because Jillian is in the 24% tax bracket, it is taxed at 15%. Thus, the tax is $19,000 × .15 = $2,850.
Pam, a single taxpayer, owns a building used in her trade or business that was placed into service in 2004. The building cost $450,000 and depreciation to date amounts to $200,000. Pam sells the building in 2018 for $380,000. It is the only asset she sells this year, and she has no nonrecaptured Sec. 1231 losses. a. What is the amount of recognized gain and the nature of the gain? b. Assume that Pam's taxable income before consideration of the building gain is $550,000. How will the gain be taxed? c. Assume that Pam's taxable income before consideration of the building gain is $100,000. How will the gain be taxed?
Answer: a. Amount realized $380,000 Less: Adjusted basis ($450,000 - $200,000) 250,000 Gain realized $130,000 The entire gain is Sec. 1231 gain taxed as Sec. 1250 unrecaptured gain at a rate not greater than 25% (the lesser of the gain or the depreciation allowable). There is no Sec. 1250 recapture taxed as ordinary income because all of the depreciation is straight-line. b. Since Pam's other sources of taxable income put her in the top tax bracket, the entire gain on the building will be taxed at 25%. c. Pam's gain on the building will be split into two tax brackets: (1) the portion of the gain which brings her taxable income to the top of the 24% bracket will be taxed at 24%—$157,500 - 100,000 = $57,500 taxed at 24%; and (2) the $72,500 balance of the gain will be taxed at 25%.
Jed sells an office building during the current year for $800,000. The building was purchased in 1980 for $350,000. Jed had depreciated the building under an accelerated method, but it is now fully depreciated. Jed has never had any other Sec. 1231 transactions. a. What is the recognized gain or loss on the sale of the building and the character of the gain? b. How will the gain be taxed? c. Assume the building was purchased in 1981 and depreciated under ACRS. How will the gain be taxed?
Answer: a. Amount realized $800,000 Less: Adjusted basis ($350,000 - 350,000) 0 Gain realized $800,000 1250 ordinary income (fully depreciated) $ 0 1231 gain—treated as 1250 unrecaptured $350,000 1231 gain—treated as LTCG $450,000 b. The $300,000 1250 unrecaptured gain is taxed at 25%; the remaining 1231 gain is taxed as LTCG at 15% or 20% depending on the level of the taxpayer's other taxable income. c. The gain will be subject to Sec. 1245 recapture, rather than Sec. 1250. $350,000 of the gain will be ordinary gain. The $450,000 balance will be Sec. 1231 gain, receiving LTCG treatment.
Melissa acquired oil and gas properties for $600,000. During 2016, she elected to expense the $180,000 of IDC. Total depletion allowed was $50,000. At the end of the current year, Melissa sells the property for $700,000. a. What is the amount of and nature of her gain using the facts above? b. What is the amount of and nature of her gain assuming that she sold the property for $850,000?
Answer: a. Melissa has realized gain of $150,000 [$700,000 selling price - $550,000 ($600,000 - $50,000) adjusted basis]. All of her gain is ordinary income due to the recapture of $180,000 IDC and $50,000 depletion. b. Melissa has realized gain of $300,000 [$850,000 selling price - $550,000 ($600,000 - $50,000) adjusted basis]. Her gain is ordinary income to the extent of recapture of $230,000 ($180,000 IDC and $50,000 depletion). The remaining gain of $70,000 is 1231 gain.
Pete sells equipment for $15,000 to Marcel, his son. The equipment cost $20,000 and has accumulated depreciation of $12,000. Marcel will use the equipment in his business. a. What is the amount and character of Pete's gain on the sale? b. How does your answer change if the sales price is $22,000?
Answer: a. Sales price $15,000 Cost of equipment $20,000 Accumulated depreciation 12,000 Adjusted basis 8,000 Gain $ 7,000 The gain is less than the $12,000 depreciation taken, so it will consist entirely of ordinary income under Sec. 1245. b. Sales price $22,000 Cost of equipment $20,000 Accumulated depreciation 12,000 Adjusted basis 8,000 Gain $14,000 Depreciation recapture 12,000 Sec. 1239 gain 2,000 The gain is ordinary income according to Sec. 1239 since it involves a sale between related parties.
Indicate whether each of the following assets are capital assets, Sec. 1231 assets, or ordinary income property (property which, if sold, results in ordinary income). Assume that all of the property is held for more than one year. a. XYZ Corporation owns land used as an employee parking lot. How is the parking lot classified for tax purposes? b. Montana Corporation owns land held as an investment. How is the land classified for tax purposes? c. John, a self-employed electrician, owns an automobile he uses strictly for personal use. How is the automobile classified for tax purposes? d. Jan, a self-employed contractor, owns a truck she uses exclusively in her trade or business. How is the truck classified for tax purposes? e. Leslie owns an office building where her accounting practice is located. What is the classification of the building? f. Yvonne owns a computer for use in her job as a sales representative. She does not use the computer for personal purposes. How is the computer classified for tax purposes?
Answer: a. Sec. 1231 property b. Capital asset c. Capital asset (although a loss cannot be recognized) d. Sec. 1231 property e. Sec. 1231 property f. Sec. 1231 property
Elaine owns equipment ($23,000 basis and $15,000 FMV) and a building ($136,000 basis and $148,000 FMV), which are used in her business. Elaine uses straight-line depreciation for both assets, which were acquired several years ago. Both the equipment and the building are destroyed in a fire, and Elaine collects insurance proceeds equal to the assets' FMV. a. What is the tax treatment of these two transactions? b. Assume that Elaine is only able to collect $3,000 from the insurance company for the equipment loss. What is the tax treatment of the two transactions (assume the basis and insurance reimbursement remain the same for the building).
Answer: a. Since they are destroyed in a casualty and since the gain of $12,000 ($148,000 FMV - $136,000) exceeds the loss of $8,000 ($15,000 FMV - $23,000), both items are treated as Sec. 1231 gains and losses. b. The $20,000 loss on the equipment exceeds the $12,000 gain on the building. The net $8,000 loss will be treated as an ordinary loss.
Jacqueline dies while owning a building with a $1,000,000 FMV. The building is classified as Sec. 1245 property acquired in 1985 for $850,000. Cost-recovery deductions of $850,000 have been claimed. Pam inherits the property. a. What is the amount of Pam's basis in the property? b. What is the amount of cost-recovery deductions that Pam must recover if she immediately sells the building?
Answer: a. The basis of the property is the FMV of $1,000,000. b. There is no depreciation recapture. The transfer of appreciated property at death does not carry over to the person who receives the property from the decedent.
Tina purchases a personal residence for $278,000, but subsequently converts the property to rental property when its FMV is $275,000. Assume depreciation of $65,000 has been deducted after conversion to rental use. If Tina sells the property for $200,000, her realized gain or loss will be A) ($10,000) loss. B) ($13,000) loss. C) ($75,000) loss. D) ($78,000) loss.
Answer: A
Network Corporation purchased $200,000 of five-year equipment on March 24, 2016. They elected to expense $60,000 of the cost under Sec. 179 in effect that year. After depreciating the equipment $28,000 in 2017 and $22,400 in 2018, the equipment was sold for $190,000. a. What is the amount of the realized gain (or loss) on the sale? b. How is the gain or loss taxed?
Answer: a. The realized gain is $100,400 [$190,000 amount realized less $89,600 ($200,000 - $60,000 - $28,000 - $22,400)]. b. All of the gain is Sec. 1245 ordinary income.
Describe the tax treatment for a noncorporate taxpayer in the 37% marginal tax bracket who sells each of the first two assets for $500,000 and each of the second two assets for $750,000. Each asset was purchased in 2014 and is used in a trade or business. There are no other gains and losses and no nonrecaptured Sec. 1231 losses. Original Basis Adjusted Basis Land $350,000 $350,000 Equipment 1 $600,000 $450,000 Equipment 2 $600,000 $500,000 Building $550,000 $450,000
Answer: • Land: $150,000 Sec. 1231 gain taxed at 20%. • Equipment 1: $50,000 Section 1245 ordinary income taxed at 37%. All gain is due to depreciation. • Equipment 2: $100,000 Section 1245 ordinary income taxed at 37% and $150,000 Sec. 1231 gain taxed at 20%. • Building: $300,000 Sec. 1231 gain with $200,000 taxed at 20% and $100,000 unrecaptured Section 1250 gain taxed at 25%.
A corporation owns many acres of timber, which it acquired three years ago, and which has a $150,000 basis for depletion. The timber is cut during the current year for use in the corporation's business. The FMV of the timber on the first day of the current year is $280,000. If the corporation makes the appropriate election, the tax result is A) recognition of a Sec. 1231 gain of $130,000. B) no recognition of gain or loss since the timber is used in the business. C) recognition of a gain at the time of sale if the timber is later sold with the gain equal to the sales price less the basis in the timber. D) recognition of a gain if the timber is later sold with the gain equal to the sales price less $280,000 (FMV on the first day of the year of the cutting).
Answer: A
A taxpayer sells a patent on a new algorithm for a gain. Which taxpayer will be allowed capital gain treatment for the sale? Assume that the patent had not been placed in service as of the acquisition date. A) a sole proprietor who purchased the patent from the inventor B) a corporation who purchased the patent from the inventor C) Both of the above. D) None of the above.
Answer: A
Alejandro purchased a building in 1985, which he uses in his manufacturing business. Alejandro used the ACRS statutory rates to determine the cost-recovery deduction for the building. Alejandro's original cost for the building is $500,000 and cost-recovery deductions allowed are $500,000. If the building is sold for $800,000, the tax results to Alejandro are A) $500,000 Sec. 1245 ordinary income and $300,000 Sec. 1231 gain. B) $800,000 Sec. 1245 ordinary income. C) $500,000 Sec. 1245 ordinary income and $300,000 Sec. 1250 income. D) $800,000 Sec. 1231 gain.
Answer: A
All of the following are considered related parties for purposes of Sec. 1239 recapture with the exception of A) an individual and a partnership where the individual has a one-fourth interest in the partnership. B) an individual and a corporation where the individual owns more than 50% of the value of the outstanding stock of the corporation. C) an individual and a corporation where the individual's spouse owns more than 50% of the value of the outstanding stock of the corporation. D) an individual and a partnership where the individual owns more than 50% of the capital of the partnership.
Answer: A
Billy and Sue are married and live in Texas, a community property state. They jointly own real property with an adjusted basis of $200,000. When the property has a FMV of $450,000, Billy dies leaving all of the property to Sue. If she later sells the property for $650,000, what is Sue's gain on the sale? A) $200,000 B) $225,000 C) $325,000 D) $450,000
Answer: A
Clarise bought a building three years ago for $180,000 to use in her business. The straight-line method of depreciation was used and $15,000 of depreciation deductions were allowed. During the current year, Clarise sells the building to her wholly owned corporation for $235,000. The tax results to Clarise are A) $70,000 ordinary income. B) $70,000 of Sec. 1231 gain. C) $55,000 ordinary income and $15,000 Sec. 1231 gain. D) $15,000 of ordinary income and $55,000 Sec. 1231 gain.
Answer: A
During the current year, George recognizes a $30,000 Sec. 1231 gain on sale of land and a $18,000 Sec. 1231 loss on the sale of land. Prior to this, George's only Sec. 1231 item was a $14,000 loss six years ago. George must report a A) $12,000 net LTCG. B) $12,000 ordinary income. C) $14,000 ordinary income. D) $10,000 ordinary income and $2,000 net LTCG.
Answer: A
During the current year, Kayla recognizes a $40,000 Sec. 1231 gain on sale of land and a $22,000 Sec. 1231 loss on the sale of land. Prior to this, Kayla's only Sec. 1231 item was a $10,000 loss six years ago. Kayla is in the 24% marginal tax bracket. The amount of tax resulting from these transactions is A) $2,700. B) $3,600. C) $4,000. D) $5,040.
Answer: A
Dustin purchased 50 shares of Short Corporation for $500. During the current year, Short declared a nontaxable 10% stock dividend. What is the basis per share before and after the stock dividend is distributed? A) Before After $10 $9.09 B) Before After $10 $10 C) Before After $10 $11 D) Before After $9.09 $10
Answer: A
Erik purchased qualified small business corporation stock on December 1, 2010 and sold it for a $500,000 gain on December 12, 2018. The gain subject to tax is A) $0. B) $500,000. C) $250,000. D) $125,000.
Answer: A
Everest Inc. reports taxable income of $900,000 before considering sales of stock. Everest Inc. sold two stockholdings this year, resulting in a long-term capital gain of $15,000 on stock A and a short-term capital loss of $5,000 on stock B. What is the extra tax that Everest will pay due to the sales of these stocks? A) $2,100 B) $1,500 C) $2,000 D) $3,150
Answer: A
If Sec. 1231 applies to the sale or exchange of an unharvested crop sold with land, the costs of producing the crop are A) capitalized. B) deducted as an expense of operations when incurred and also deducted from the sales price at the time of the sale. C) deducted when incurred if the land is sold but capitalized if the land is exchanged. D) deducted as an expense of operations when incurred.
Answer: A
Which of the following assets is 1231 property? A) a machine used in the company's manufacturing operations B) an investment in corporate stock C) land held for investment D) items held for resale by a retailer
Answer: A
In 2016, Toni purchased 100 shares of common stock in Blue Corporation for $5,280. In 2017, Blue declared a stock dividend of one share of its common stock for each 10 shares held. In 2018, Blue's common stock split 2-for-1 at a time when the FMV was $80 a share. What is Toni's basis in each of her shares of the Blue Corporation stock if both of the earlier stock dividends were tax-free? A) $24 per share B) $48 for 110 shares and $0 for all additional shares C) $52.80 for 100 shares and $0 for all additional shares D) $80 per share
Answer: A
Jaiyoun sells Sec. 1231 property this year, resulting in a $4,000 gain. This is the first time he has disposed of any Sec. 1231 property. Jaiyoun's tax rate is 10%. His tax on the Sec. 1231 gain will be A) $0. B) $400. C) $600. D) $1,120.
Answer: A
Jeremy has $18,000 of Sec. 1231 gains and $23,000 of Sec. 1231 losses. The gains and losses are characterized as A) Capital Gain Capital Loss Ordinary Income Ordinary Loss $18,000 $23,000 B) Capital Gain Capital Loss Ordinary Income Ordinary Loss $18,000 $23,000 C) Capital Gain Capital Loss Ordinary Income Ordinary Loss $18,000 $23,000 D) Capital Gain Capital Loss Ordinary Income Ordinary Loss $18,000 $3,000 $20,000
Answer: A
Jessica owned 200 shares of OK Corporation with a basis of $12,000 and a FMV of $24,000. Jessica received 20 stock rights as a nontaxable distribution with a total FMV of $8,000. Jessica sold the stock rights for $4,000. Jessica's gain or loss on the sale was A) $1,000. B) $3,000. C) $4,000. D) ($4,000).
Answer: A
Kate subdivides land held as an investment and Section 1237 is satisfied. The lots sell for $30,000 per lot (basis $10,000). Kate sells five lots in the first year. Kate's ordinary income is A) $0. B) $20,000. C) $100,000. D) $150,000.
Answer: A
Kendrick, whose tax rate is 32%, had the following results from transactions during the year: Collectibles gain $20,000 Short-term capital loss 4,000 Long-term capital gain 8,000 After offsetting the STCL, what is (are) the resulting gain(s)? A) $16,000 collectibles gain, $8,000 LTCG B) $20,000 collectibles gain, $4,000 LTCG C) $24,000 LTCG D) $20,000 collectibles gain, $8,000 LTCG
Answer: A
Marta purchased residential rental property for $600,000 on January 1, 1985. Total ACRS deductions for 1985 through the date of sale amounted to $600,000. If the straight-line method of depreciation had been used, depreciation would have been $600,000. The property is sold for $750,000 on January 1 of the current year. The amount and character of the gain is A) $750,000 Sec. 1231 gain. B) $150,000 Sec. 1231 gain and $600,000 ordinary income. C) $750,000 ordinary gain due to Sec 1245. D) $750,000 ordinary gain due to Sec. 1250.
Answer: A
Maya expects to report about $2 million of AGI and $1.7 million of taxable income. Her AGI is composed of $1.25 million of salary, and the balance is investment income. Maya is thinking about selling some stock before year-end. She purchased the stock three years ago and expects to recognize a $500,000 gain. How much federal tax will she pay in total on the stock gain? A) $119,000 B) $100,000 C) $75,000 D) $185,000
Answer: A
Nate sold two securities in 2018: Purchased Sold Sales Price Basis MASH 1-1-2017 5-10-2018 $12,000 $10,000 KMZ 12-2-2017 9-22-2018 $4,000 $5,000 Nate has a 24% marginal tax rate. What is the additional tax resulting from the above sales? A) $150 B) $240 C) $60 D) $300
Answer: A
Octet Corporation placed a small storage building in service in 2002. Octet's original cost for the building is $800,000 and the cost recovery deductions are $300,000. This year the building is sold for $1,100,000. The amount and character of the gain are A) ordinary gain of $60,000 and Sec. 1231 gain of $540,000. B) ordinary gain of $300,000 and Sec. 1231 gain of $300,000. C) ordinary gain of $600,000. D) Sec. 1231 gain of $600,000.
Answer: A
On January 31 of the current year, Sophia pays $1,000 for an option to acquire 100 shares of Texas Corporation common stock for $105 per share at any time prior to December 31. As of December 31, Sophia had not exercised the option or sold it. Which of the following statements is correct? A) Sophia may recognize a $1,000 STCL. B) Sophia may recognize a $1,000 LTCL. C) Sophia may recognize a $1,000 ordinary income. D) Sophia may not recognize a loss.
Answer: A
On January 31 of this year, Mallory pays $800 for an option to acquire 100 shares of Mesa Corporation common stock for $85 per share. As a result of an increase in the market value of the Mesa stock, the market price of the option increases and Mallory sells the option for $1,000 on August 4. As a result of the sale, Mallory must recognize A) $200 STCG. B) $800 STCG. C) $200 ordinary income. D) $800 ordinary income.
Answer: A
On July 25, 2017, Karen gives stock with a FMV of $7,500 and a basis of $8,000 to her nephew Bill. Karen had purchased the stock on March 18, 2017. Bill sold the stock on April 18, 2018 for $6,000. As a result of the sale, what must Bill report on his 2018 tax return? A) ($1,500) STCL B) ($1,500) LTCL C) ($2,000) STCL D) ($2,000) LTCL
Answer: A
Rita, who has a marginal tax rate of 37%, is planning to make a gift to her grandson who is in the lowest tax bracket. Which of the following holdings of stock would be the most tax advantageous gift from Rita's perspective? A) Stock FMV Adjusted Basis A $25,000 $12,000 B) Stock FMV Adjusted Basis B $25,000 $25,000 C) Stock FMV Adjusted Basis A $25,000 $32,000 D) For income tax purposes, Rita will be indifferent as to choice of stock to gift.
Answer: A
Sanjay is single and has taxable income of $23,000 without considering the sale of a capital asset in November of 2018 for $15,000. That asset was purchased six years earlier and has a tax basis of $5,000. The tax liability applicable to only the capital gain is A) $0. B) $500. C) $1,200. D) $1,500.
Answer: A
This year Jenna had the gains and losses noted below on property, plant and equipment used in her business. Each asset had been held longer than one year. Jenna has not previously disposed of any business assets. Loss due to insurance reimbursement for fire $(17,000) Loss due to condemnation (12,000) Gain on sale of Sec. 1231 property 21,000 Jenna will recognize A) Ordinary gain (loss) LTCG(L) $(17,000) $9,000 B) Ordinary gain (loss) LTCG(L) $(29,000) $21,000 C) Ordinary gain (loss) LTCG(L) $(8,000) $0 D) Ordinary gain (loss) LTCG(L) $(12,000) $4,000
Answer: A
Which of the following is not a capital asset? A) a patent developed by the taxpayer B) a family's cottage at the beach C) a husband's wedding ring D) All of the above are capital assets.
Answer: A
With respect to residential rental property A) 80% or more of the gross rental income from the building or structure must be rental income from dwelling units in order for it to be classified as residential rental property. B) hotels are not included in this category if less than half of the units are used on a transient basis. C) 80% or more of the net rental income from the building or structure must be rental income from dwelling units in order for it to be classified as residential rental property. D) gain is not subject to the depreciation recapture provisions if the property is held more than one year.
Answer: A
Jesse installed solar panels in front of his office building in 2017. The panels are not attached to the building. After using the solar panels for 13 months, Jesse decided to replace them with a newer model to obtain a greater savings on electricity costs. Jesse sold the old solar panels for an amount greater than his original purchase price. What tax issues should be considered with purchase, use and sale of the original solar panels?
Answer: Are the solar panels 1245 or 1250 property? Did Jesse take a tax credit on the purchase of the solar panels? Did Jesse depreciate the panels? If so, how much? Did Jesse take a Sec. 179 deduction on the panels? Will Jesse have any depreciation or credit recapture on the sale?
What are arguments for and against preferential treatment of capital gains?
Answer: Arguments for preferential treatment: 1. Mobility of capital 2. Preferential treatment mitigates effects of inflation and the progressive tax system. 3. Lower cost of capital. Argument against preferential treatment: 1. Preferential treatment leads to complexity in the tax laws and a waste of resources in devising plans to convert ordinary gains into capital gains.
Hilton, a single taxpayer in the 24% marginal tax bracket, has $16,000 of nonrecaptured net Sec. 1231 losses, at the beginning of a year in which he had the following transactions: -Sale of Asset A at a $10,000 1231 gain, all of which is unrecaptured Sec. 1250 gain -Sale of Asset B at a $13,000 1231 gain How are the items reported this year and at which rate(s) are the amounts taxed?
Answer: Asset A- The entire gain from the sale of Asset A is ordinary income due to the five-year lookback. The full $10,000 gain will be taxed at 24%. Asset B- As a result of the five-year lookback rule, $6,000 of the gain on the sale of Asset B is ordinary income ($16,000 nonrecaptured losses less $10,000 ordinary income on sale of asset A) taxed at 24%; the remaining $7,000 1231 gain is taxed at 15%.
Joy purchased 200 shares of HiLo Mutual Fund on July 15, 2014, for $10,500, and has been reinvesting dividends. On December 15, 2018, she sells 100 shares. Amount No. of shares Purchase July 15, 2014 $10,500 200 Reinvested dividends, Oct 1, 2015 800 10 Reinvested dividends, Oct 1, 2016 970 20 Reinvested dividends, Oct 1, 2017 980 20 $13,250 250 What is the basis for the shares sold assuming (1) FIFO and (2) average cost method?
Answer: Assuming FIFO, the basis in the shares is $5,250 [($10,500/200) × 100]. The average cost per share is $13,250 / 250 = $53 for a total $5,300.
All of the following statements regarding Sec. 1245 are true except A) Sec. 1245 does not apply to any buildings placed in service after 1986. B) Sec. 1245 applies to assets sold or exchanged at a gain or at a loss. C) Sec. 1245 property includes nonresidential real estate that qualified as recovery property under the ACRS rules unless the taxpayer elected to use the straight-line method of cost recovery. D) Sec. 1245 ordinary gain treatment applies to total depreciation or amortization allowed or allowable but not more than the realized gain.
Answer: B
Amanda, whose tax rate is 32%, has NSTCL of $25,000, a $30,000 LTCG from sale of a rare coin held 15 months and a $18,000 LTCG from the sale of stock held for three years. By what amount will Amanda's tax liability increase? A) $3,450 B) $4,100 C) $5,880 D) $4,300
Answer: B
Antonio is single and has taxable income of $170,000 without considering the sale of a capital asset (land held for investment) in September of 2018 for $25,000. That asset was purchased six years earlier and has a tax basis of $5,000. The tax liability applicable to only the capital gain (without consideration of any additional Medicare tax) is A) $3,750. B) $3,000. C) $6,400. D) $4,000.
Answer: B
Antonio owns land held for investment with a basis of $28,000. The city of Lafayette exercises the right of eminent domain and Antonio receives a payment of $48,000. What is Antonio's realized gain? A) $0 B) $20,000 C) $28,000 D) $48,000
Answer: B
Bob owns 100 shares of ACT Corporation common stock with a basis of $3,500 and a FMV of $12,000. Bob receives 10 stock rights as a nontaxable distribution, and no basis is allocated to the stock rights. With each stock right, Bob may acquire one share of stock for $25. Bob exercises all 10 stock rights. The total basis of the newly acquired stock is A) $0. B) $250. C) $350. D) $1,200.
Answer: B
Brad owns 100 shares of AAA Corporation with a basis of $6,000 and a FMV of $24,000. Brad receives 15 stock rights as a nontaxable distribution with a total FMV of $6,000. Brad allows the stock rights to expire. Brad's loss recognized and the basis of the original 100 shares after expiration of the stock rights is A) $0 and $4,800. B) $0 and $6,000. C) ($1,200) and $4,800. D) ($1,200) and $6,000.
Answer: B
Dale gave property with a basis of $16,000 to Sarah when it had a FMV of $12,000. No gift taxes were due. Sarah later sold the property for $22,000 resulting in a recognized gain of A) $0. B) $4,000. C) $6,000. D) $12,000.
Answer: C
All recognized gains and losses must eventually be classified either as capital or ordinary.
Answer: TRUE
Cassie owns equipment ($45,000 basis and $30,000 FMV) and a building ($152,000 basis and $158,000 FMV), which are used in Cassie's business. Cassie has used straight-line depreciation for both assets, which were acquired two years ago. Both the equipment and the building are destroyed in a fire, and Cassie collects insurance proceeds equal to the assets' FMV. The tax result to Cassie for this transaction is a A) $15,000 Sec. 1231 loss and a $6,000 ordinary gain. B) $15,000 ordinary loss and a $6,000 ordinary gain. C) $15,000 ordinary loss and a $6,000 Sec. 1231 gain. D) $15,000 Sec. 1231 loss and a $6,000 Sec. 1231 gain.
Answer: B
Cobra Inc. sold stock for a $25,000 loss five years ago. It has been carrying over the capital loss for five years, and the loss will expire at the end of this year because Cobra has not had any capital gains. Earlier this year Cobra sold a parcel of land held four years for business use and will recognize a $30,000 gain. Cobra is thinking about selling some machinery used in its business for the past three years. During this time technology has dramatically changed so Cobra will recognize a $32,000 loss on the sale of the machinery. Cobra is trying to decide whether to sell the machinery at year-end or early next year. Cobra is profitable and has a consistent marginal tax rate of 21%. When should Cobra sell the equipment? A) current year B) early next year C) current year, but arrange an installment sale to spread the loss recognition over the two years D) either the current year or next year
Answer: B
Coretta sold the following securities during 2018: Date Acquired Date Sold Sales Price Basis A 6-15-2013 3-30-2018 $ 6,500 $12,500 B 7-12-2018 10-1-2018 $ 2,000 $ 9,000 C 7-15-2017 6-21-2018 $14,000 $13,000 D 4-2-2014 12-29-2018 $36,000 $15,000 What is Coretta's net capital gain or loss result for the year? A) NSTCL of $3,000 and NLTCG of $15,000 B) $9,000 ANCG C) $0 D) $12,000 ANCG
Answer: B
Courtney sells a cottage at the lake that the family had used for their summer vacations. The purchaser paid Courtney $100,000 and assumed the mortgage which had a principal balance of $50,000. Courtney had purchased the cottage five years ago for $170,000. Courtney will recognize A) a gain of $20,000. B) no gain or loss. C) a loss of $70,000. D) a loss of $20,000.
Answer: B
Daniel recognizes $35,000 of Sec. 1231 gains and $25,000 of Sec. 1231 losses during the current year. The only other Sec. 1231 item was a $4,000 loss three years ago. This year, Daniel must report A) NLTCG Ordinary Income $10,000 $0 B) NLTCG Ordinary Income $6,000 $4,000 C) NLTCG Ordinary Income $4,000 $6,000 D) NLTCG Ordinary Income $4,000 $10,000
Answer: B
Dinah owned land with a FMV of $130,000 (adjusted basis $120,000) which is investment property (a capital asset). Dinah owned a second tract of land, a 1231 asset, with a FMV of $46,000 (adjusted basis $50,000). Both tracts were acquired in 2001 and condemned by the state this year. The state paid an amount equal to FMV. If there are no other transactions involving capital assets or 1231 assets, Dinah must report on her current year return A) $6,000 net ordinary income. B) $6,000 net Sec. 1231 gain treated as a net capital gain. C) a LTCG of $10,000 and a 1231 loss of $4,000. D) a LTCG of $10,000 and a nondeductible loss of $4,000.
Answer: B
During the current year, Danika recognizes a $30,000 Sec. 1231 gain and a $22,000 Sec. 1231 loss. Prior to this, Danika's only Sec. 1231 item was a $15,000 loss two years ago. Danika must report a(n) A) $8,000 net LTCG. B) $8,000 ordinary income. C) $15,000 ordinary income. D) $8,000 ordinary income and $7,000 net LTCG.
Answer: B
During the current year, Nancy had the following transactions: Short-term capital loss ($1,800) Short-term capital gain 3,600 Short-term capital loss carryover from last year ( 2,200) Long-term capital gain 7,000 Long-term capital loss (15,000) What is the amount of her capital loss deduction for the current year, and what is the amount and character of her capital loss carryover? A) Deduction Carryover $4,000 $400 short-term and $5,000 long-term B) Deduction Carryover $3,000 $5,400 LTCL carryover C) Deduction Carryover $3,000 $5,000 long-term D) Deduction Carryover $12,100 $ 0
Answer: B
Emily, whose tax rate is 32%, owns an office building which she purchased for $900,000 on March 18 of last year. The building is sold for $950,000 on February 20 of this year when the adjusted basis of the building was $876,000. The tax results to Emily are A) $74,000 1231 gain taxed at 15%. B) $74,000 ordinary income taxed at 32%. C) $24,000 1250 unrecaptured gain taxed at 25% and $50,000 1231 gain taxed at 15%. D) $24,000 1231 gain taxed at 15% and $50,000 ordinary income taxed at 32%.
Answer: B
For a business, Sec. 1231 property does not include A) timber, coal, or domestic iron ore. B) inventory purchased 24 months ago. C) an office building purchased five years ago. D) land used in the business that was purchased two years ago.
Answer: B
Gertie has a NSTCL of $9,000 and a NLTCG of $5,500 during the current taxable year. After gains and losses are offset, Gertie reports A) An offset against ordinary income Loss carryforward $3,000 $0 B) An offset against ordinary income Loss carryforward $3,000 $500 C) An offset against ordinary income Loss carryforward $3,500 $0 D) An offset against ordinary income Loss carryforward $3,000 $6,000
Answer: B
Harry owns equipment ($50,000 basis and $38,000 FMV) and a building ($140,000 basis and $156,000 FMV), which are used in his business. Harry uses straight-line depreciation for both assets, which were acquired several years ago. Both the equipment and the building are destroyed in a fire, and Harry collects insurance proceeds equal to the assets' FMV. The tax result to Harry for this transaction is A) the involuntary conversions are treated as ordinary gains and losses. B) the involuntary conversions are treated as Sec. 1231 gains and losses. C) the loss on involuntary conversion is treated as a Sec. 1231 loss while the gain is treated as an ordinary gain. D) the loss on involuntary conversion is treated as an ordinary loss while the gain is treated as a Sec. 1231 gain.
Answer: B
In 1980, Artima Corporation purchased an office building for $400,000 for use in its business. The building is sold during the current year for $550,000. Total depreciation allowed for the building was $390,000; straight-line would have been $360,000. As result of the sale, how much Sec. 1231 gain will Artima Corporation report? A) $150,000 B) $398,000 C) $510,000 D) $540,000
Answer: B
Darla sold an antique clock in 2018 for $3,000. She had purchased the clock in 2009 for $2,000. If she is otherwise in the 32% marginal tax bracket, what is the maximum tax rate on the capital gain on the sale of the clock? A) 32% B) 15% C) 28% D) 25%
Answer: C
In a community property state, jointly owned property left to the surviving spouse will have a basis after the estate is settled equal to A) the decedent's basis before death. B) the total fair market value of the entire property at the date of death (if the alternative valuation date was not elected). C) half of the fair market value of the entire property at the date of death (if the alternative valuation date was not elected). D) half of the basis just before death, plus half of the fair market value at the date of death (if the alternative valuation date was not elected).
Answer: B
In the current year, Andrew received a gift of property from his uncle. At the time of the gift, the property had a FMV of $115,000 and an adjusted basis to his uncle of $70,000. After deducting the annual exclusion, the amount of the gift was $100,000. Andrew's uncle paid a gift tax on the property of $24,000. What is the amount of Andrew's basis in the property? A) $70,000 B) $80,800 C) $94,000 D) $115,000
Answer: B
Joel has four transactions involving the sale of capital assets during the year resulting in a STCG of $5,000, a STCL of $12,000, a LTCG of $1,800 and a LTCL of $1,000. As a result of these transactions, Joel will A) deduct net losses of $6,200 against ordinary income. B) deduct losses of $3,000 against ordinary income and carry $3,200 of STCL forward. C) deduct losses of $3,000 against ordinary income and carry $3,200 of LTCL forward. D) deduct losses of $3,000 against ordinary income and carry $3,200 of losses back two years.
Answer: B
Joycelyn gave a diamond necklace to her granddaughter Emma. Joycelyn had purchased the necklace in 1980 for $20,000. The FMV of the necklace at the time of the gift was $50,000. After deducting the annual exclusion, the amount of the gift was $35,000. Gift taxes of $10,000 were paid. What is Emma's adjusted basis in the necklace? A) $20,000 B) $28,571 C) $30,000 D) $50,000
Answer: B
Kathleen received land as a gift from her grandfather. At the time of the gift, the land had a FMV of $85,000 and an adjusted basis of $110,000 to Kathleen's grandfather. One year later, Kathleen sold the land for $80,000. What was her gain or (loss) on this transaction? A) no gain or loss B) ($5,000) C) $5,000 D) $30,000
Answer: B
Luly will report $800,000 of taxable income in 2018. Included in the taxable income is one sale of an investment asset. Luly sold a building she had owned for three years, resulting in a $100,000 unrecaptured Sec. 1250 gain. Her tax on the gain (without consideration of the additional Medicare tax) will be A) $28,000. B) $25,000. C) $20,000. D) $15,000.
Answer: B
Margaret died on September 16, 2018, when she owned securities with a basis of $50,000 and a FMV of $60,000. Caroline inherited the property and sold it on December 19, 2018 for $67,000. What is Caroline's reported gain on this sale? A) $7,000 STCG B) $7,000 LTCG C) $17,000 STCG D) $17,000 LTCG
Answer: B
Olivia, a single taxpayer, has AGI of $280,000 which includes $220,000 of salary and $60,000 of investment income. She will pay Medicare tax on the $60,000 of investment income of A) $0. B) $2,280. C) $9,000. D) $870.
Answer: B
Pierce has a $16,000 Sec. 1231 loss, a $12,000 Sec. 1231 gain, and a salary of $50,000. What is the treatment of these items in Pierce's AGI? A) Pierce has a LTCG of $12,000 and a net ordinary income of $34,000. B) The 1231 gains and losses are treated as ordinary gains and losses making Pierce's AGI for the year $46,000. C) Pierce has a $3,000 LTCL which is deductible for AGI making AGI $47,000. He also has a $1,000 LTCL carryover. D) Pierce has net LTCG of $9,000 and $37,000 of net ordinary income.
Answer: B
Rita died on January 1, 2018 owning an asset with a FMV of $730,000 that she purchased in 2010 for $600,000. Bert inherited the asset from Rita. When Bert sells the asset for $800,000 on August 20, 2018, he must recognize a A) STCG of $70,000. B) LTCG of $70,000. C) STCG of $200,000. D) LTCG of $200,000.
Answer: B
Sec. 1245 recapture applies to all the following except A) depreciable personal property sold at a gain. B) depreciable personal property sold at a loss. C) property expensed under Sec. 179. D) amortizable intangible personal property.
Answer: B
Sergio acquires a $100,000 Ternco Corporation bond (5%, 20-year bond) on January 1, 2018 for $75,000. The bond had been issued on January 1, 2016. If Sergio holds the bond to maturity, at redemption he will recognize A) $0 gain or loss. B) ordinary income. C) a long-term capital gain. D) a mix of ordinary income and long-term capital gain.
Answer: B
Topaz Corporation had the following income and expenses during the current year: Revenues $80,000 Expenses 30,000 Gains on sale of capital assets 5,000 Losses on sale of capital assets (25,000) What is Topaz's taxable income? A) $30,000 B) $50,000 C) $55,000 D) $47,000
Answer: B
Which one of the following is a capital asset? A) automobile held by car dealer for sale B) automobile used for personal purposes C) automobile used in taxpayer's trade or business D) B and C only
Answer: B
With regard to noncorporate taxpayers, all of the following statements are true regarding Sec. 1250 recapture except A) Sec. 1250 affects the character of the gain, not the amount of the gain. B) Sec. 1250 applies to assets sold or exchanged at either a gain or a loss. C) Sec. 1250 ordinary income does not exist if the straight-line method of depreciation is used. D) Sec. 1250 ordinary income is never more than the additional depreciation allowed.
Answer: B
Yelenis, whose tax rate is 32%, sells one Sec. 1231 asset this year, resulting in a $50,000 gain. Included in the $50,000 Sec. 1231 gain is $30,000 of unrecaptured Sec. 1250 gain. A review of Yelenis tax files for the past five years indicates one prior Sec. 1231 sale which resulted in a $14,000 loss. The gain will be taxed as A) 15% 25% 32% $20,000 $16,000 $0 B) 15% 25% 32% $20,000 $16,000 $14,000 C) 15% 25% 32% $6,000 $30,000 $0 D) 15% 25% 32% $6,000 $30,000 $14,000
Answer: B
David gave property with a basis of $133,000 to Hannah when the property had a FMV of $100,000 and paid gift taxes of $8,000. If Hannah later sells the property for $140,000, Hannah's basis (to determine gain) in the property immediately before the sale is A) $100,000. B) $108,000. C) $133,000. D) $141,000.
Answer: C
Any gain or loss resulting from the sale or disposition of depreciable property used in trade or business and held one year or less is considered ordinary.
Answer: TRUE
An unincorporated business sold two warehouses during the current year. The straight-line depreciation method was used for the first building and the accelerated method (ACRS) was used for the second building. Information about those buildings is presented below. Building No. 1 Building No. 2 Date acquired 1986 1986 Cost $800,000 $900,000 Accum. Depreciation Straight-line 800,000 ACRS depreciation 900,000 Selling Price 80,000 400,000 How much gain from these sales should be reported as Sec. 1231 gain and ordinary income due to depreciation recapture by the owner of the business? A) Sec. 1231 Gain Ordinary Income $480,000 $0 B) Sec. 1231 Gain Ordinary Income $80,000 $400,000 C) Sec. 1231 Gain Ordinary Income $0 $480,000 D) Sec. 1231 Gain Ordinary Income $400,000 $80,000
Answer: B Explanation: Building No. 2 is considered Sec. 1245 property because ACRS was used. Building No. 1 Building No. 2 Date acquired 1986 1986 Cost $800,000 $900,000 Accum. Depreciation 800,000 900,000 Adjusted Basis 0 0 Selling Price 80,000 400,000 Gain 80,000 $400,000 Sec. 1231 Gain $ 80,000 Sec. 1245 Ordinary Income $400,000
Gina owns 100 shares of XYZ common stock with a $12,000 basis and a $25,000 FMV. She receives 100 stock rights with a total FMV of $15,000. Answer the following: a. What is the basis of the 100 shares of stock? b. What is the basis of the 100 stock rights?
Answer: Because the FMV of the stock rights is at least 15% of the FMV of the stock, the $12,000 basis must be allocated between the stock rights and the stock. a. The basis of the stock is: [($25,000/$40,000) × $12,000] = $7,500. b. The basis of the stock rights is: [($15,000/$40,000) × $12,000] = $4,500.
An unincorporated business sold two warehouses during the current year. The straight-line depreciation method was used for Building No. 1 and the accelerated method (ACRS) was used for Building No. 2. Information about those buildings is presented below. Building No. 1 Building No. 2 Date acquired 1984 1984 Cost $510,000 $650,000 Accum. Depreciation Straight-line 510,000 ACRS depreciation 650,000 Selling Price 750,000 825,000 How much gain from these sales should be reported as Sec. 1231 gain and ordinary income due to depreciation recapture?
Answer: Building No. 2 is considered Sec. 1245 property because ACRS was used. Building No. 1 Building No. 2 Date acquired 1984 1984 Cost $510,000 $650,000 Accum. Depreciation 510,000 650,000 Adjusted Basis 0 0 Selling Price 750,000 825,000 Gain 750,000 825,000 Sec. 1245 Ordinary Income N/A $650,000 Sec. 1231 Gain $750,000 $175,000
A corporation owns many acres of timber, which it acquired three years ago, and which has a $120,000 basis. The timber was cut last year for use in the corporation's business. The FMV of the timber on the first day of last year was $270,000. The corporation made the appropriate election to treat the cutting as a sale or exchange. The timber is sold for $300,000 this year. The tax result this year is A) recognition of capital gain of $30,000. B) recognition of Sec. 1231 gain of $30,000. C) recognition of ordinary income of $30,000. D) no income recognized since all recognition occurs in the year of the cutting of the timber.
Answer: C
A taxpayer purchased a factory building in 1985 for $800,000. After claiming ACRS-accelerated depreciation of $800,000, she sells the asset for $1,000,000 during the current year. No payment is received during the current year, and the $1,000,000 balance to be paid with interest at the interest rate in four annual payments beginning one year from date of sale. The installment sales method is adopted. How much ordinary income is recognized in the current year? A) $0 B) $200,000 C) $800,000 D) $1,000,000
Answer: C
A taxpayer reports capital gains and losses on A) Schedule D of Form 1040. B) Form 8949. C) Schedule D of Form 1040 and Form 8949. D) None of the above.
Answer: C
Aamir has $25,000 of net Sec. 1231 gains this year on business assets. In addition, he incurred $18,000 of loss on the sale of stock held six months. Aamir will include in his AGI A) $3,000 short-term capital loss and $25,000 ordinary gain. B) $22,000 net capital gain. C) $7,000 net capital gain. D) $7,000 short-term capital gain.
Answer: C
All of the following are capital assets with the exception of A) personal residence. B) corporate stock held for investment. C) equipment used in a trade or business. D) a Rembrandt painting held in a private collection.
Answer: C
Arthur, age 99, holds some stock purchased many years ago for $10,000 which is now worth $100,000. He is trying to plan for the eventual disposition of this stock. Arthur's only remaining family member is his grandson. For income tax purposes, Arthur should A) sell the stock and gift the proceeds to his grandson. B) gift the stock to his grandson. C) leave the stock to his grandson as an inheritance. D) All of the above will result in the same income tax consequences.
Answer: C
Blair, whose tax rate is 24%, sells one tract of land at a gain of $29,000 and another tract of land at a gain of $11,000. Both tracts of land are Sec. 1231 property. She has never had any other Sec. 1231 transactions. How are the gains taxed? A) ordinary income of $40,000 taxed at 28% B) a net capital gain of $40,000 which is not taxed C) a net capital gain of $40,000 taxed at 15% D) ordinary income of $40,000 taxed at 25%
Answer: C
Douglas bought office furniture two years and four months ago for $25,000 to use in his business and elected to expense all of it under Sec. 179. Depreciation of $3,500 would have been taken under the MACRS rules. If Douglas converts the furniture to nonbusiness use today, Douglas must A) amend the prior two years tax returns. B) include $3,500 in gross income in year of conversion. C) include $21,500 in gross income in year of conversion. D) include $25,000 in gross income in year of conversion.
Answer: C
During the current year, Don's aunt Natalie gave him a house. At the time of the gift, the house had a FMV of $145,000 and his aunt's adjusted basis was $134,000. After deducting the annual exclusion, the amount of the gift was $130,000. His aunt paid a gift tax of $20,000 on the house. What is Don's basis in the house for purposes of determining gain? A) $130,000 B) $134,000 C) $135,692 D) $145,000
Answer: C
During the current year, Hugo sells equipment for $150,000. The equipment cost $175,000 when placed in service two years ago, and $55,000 of depreciation deductions were allowed. The results of the sale are A) LTCG of $30,000. B) Sec. 1231 gain of $30,000. C) Sec. 1245 ordinary income $30,000. D) Sec. 1250 ordinary income of $30,000.
Answer: C
During the current year, Tony purchased new car wash equipment for use in his service station business. Tony's costs in connection with the new equipment this year were as follows: Cost of the equipment $45,000 Sales tax on the equipment 4,000 Delivery charges 600 Installation and testing charges 3,000 Expenses of operating the equipment 2,000 What is Tony's basis in the car wash equipment? A) $49,000 B) $49,600 C) $52,600 D) $54,600
Answer: C
Edward purchased stock last year as follows: Month Shares Total Cost March 100 $270 July 200 600 October 600 $1,200 In April of this year, Edward sells 80 shares for $250. Edward cannot specifically identify the stock sold. The basis for the 80 shares sold is A) $160. B) $184. C) $216. D) $240.
Answer: C
Empire Corporation purchased an office building for $500,000 cash on April 1. Prior to renting it out to tenants on July 1, Empire spent $200,000 on materials and labor to renovate the property. It funded $50,000 of the renovation cost with its own funds and borrowed the remaining $150,000. As of July 1, $2,000 of interest had been paid to the bank, but none of the principal had been repaid. The basis of the building on July 1 is A) $500,000. B) $700,000. C) $702,000. D) $502,000.
Answer: C
Eric purchased a building in 2007 that he uses in his business. Eric uses the straight-line method for the building. Eric's original cost for the building is $420,000 and cost-recovery deductions are $120,000. Eric is in the top tax bracket and has never sold any other business assets. If the building is sold for $560,000, the tax results are A) $260,000 Sec. 1231 gain, all taxable at 20%. B) $260,000 unrecaptured Sec. 1250 gain, all taxable at 25%. C) $260,000 Sec. 1231 gain, of which $120,000 is unrecaptured Sec. 1250 gain taxable at 25% and the $140,000 balance is taxable at 20%. D) $120,000 Sec. 1245 ordinary income, $140,000 Sec. 1231 gain taxable at 20%.
Answer: C
For livestock to be considered Sec. 1231 property, A) the livestock must be held for draft, breeding or dairy purposes, but not for sport. B) cattle and horses must be held for at least 12 months from the date of acquisition. C) cattle and horses must be held for at least 24 months from the date of acquisition. D) livestock other than cattle and horses must be held for at least 24 months from the date of acquisition.
Answer: C
Four years ago, Otto purchased farmland for $600,000 and spent an additional $40,000 on soil and water conservation which was deducted in the year of purchase. Otto has just sold the land for $900,000. How much of the $300,000 gain will be treated as ordinary income? A) $0 B) $24,000 C) $40,000 D) $300,000
Answer: C
Heather purchased undeveloped land to drill for oil and gas. She spent $800,000 on intangible drilling costs during the year of purchase, which she elected to immediately deduct. During the three years of the well's operation, Heather deducted $1.2 million of cost depletion. Heather has sold the property for a $3 million gain. The gain will be treated as A) $3 million Sec. 1231 gain. B) $3 million ordinary gain. C) $2 million ordinary income and $1 million Sec. 1231 gain. D) $1.2 million ordinary income and $1.8 million Sec. 1231 gain.
Answer: C
How long must a capital asset be held to qualify for long-term treatment? A) 6 months B) one year C) one year and one day D) same trade date one year from purchase
Answer: C
If a nontaxable stock dividend is received and is not the same type of stock as that owned before the dividend, the original stock's basis is allocated to all shares A) based on the par value of the stock. B) equally to all shares owned after the stock dividend. C) based on relative fair market values at the time of the stock dividend. D) None of the above.
Answer: C
In 1980, Mr. Lyle purchased a factory building to use in business for $480,000. When Mr. Lyle sells the building for $580,000, he has taken depreciation of $470,000. Straight-line depreciation would have been $400,000. Mr. Lyle must report A) $570,000 of ordinary gain. B) $570,000 of Sec. 1231 gain. C) $70,000 of ordinary income and $500,000 of Sec. 1231 gain. D) $470,000 of ordinary gain and $100,000 of Sec. 1231 gain.
Answer: C
In the current year, ABC Corporation had the following items of income, expense, gains, and losses: Sales $500,000 Cost of sales 270,000 Operating expenses 100,000 Interest on savings account 14,000 Gain on sale of AT&T stock 6,000 Loss on sale of IBM stock 15,000 What is taxable income for the year? A) $135,000 B) $141,000 C) $144,000 D) $150,000
Answer: C
Jack exchanged land with an adjusted basis of $65,000 subject to a liability of $22,000 for $50,000 (FMV) of stock owned by Hayden. Hayden takes the land subject to the liability. Jack incurs $500 of selling expenses. What is the amount of Jack's realized gain on the exchange? A) ($14,000) loss B) ($14,500) loss C) $6,500 gain D) $7,000 gain
Answer: C
Jamahl and Indira are married and live in a common law state. They jointly own real property with an adjusted basis of $200,000. When the property has a FMV of $450,000, Jamahl dies leaving all of the property to Indira. If she later sells the property for $700,000, what is Indira's gain on the sale? A) $250,000 B) $475,000 C) $375,000 D) $500,000
Answer: C
Because of the locked-in effect, high capital gains tax rates may discourage taxpayer's from selling appreciated capital assets.
Answer: TRUE
Maura makes a gift of a van to a local food bank run by a charity. Maura had used the van in her trade or business. The van has a FMV of $6,500; a cost of $31,000; and $27,000 depreciation claimed. What is the amount of Maura's charitable contribution deduction? A) $6,500 B) $31,000 C) $4,000 D) $2,500
Answer: C
Melanie, a single taxpayer, has AGI of $220,000 which includes $160,000 of salary and $60,000 of investment income. She will pay Medicare tax on the $60,000 of investment income of A) $0. B) $2,280. C) $760. D) $870.
Answer: C
Melody inherited 1,000 shares of Corporation Zappa stock from her mother who died on March 4 of the current year. Her mother paid $30 per share for the stock on September 2, 2005. The FMV of the stock on the date of death was $65 per share. On September 4 of the current year, the FMV of the stock was $70 per share. Melody sold the stock for $85 per share on December 3. The estate qualified for, and the executor elected, the alternate valuation method for these and other assets in the estate. An estate tax return was filed. What was Melody's basis in the stock on the date of the sale? A) $30,000 B) $65,000 C) $70,000 D) $85,000
Answer: C
Michelle purchased her home for $150,000, and subsequently added a garage costing $25,000 and a new porch costing $5,000. Repairs to the home's plumbing cost $1,000. The adjusted basis in the home is A) $150,000. B) $151,000. C) $180,000. D) $181,000.
Answer: C
Monte inherited 1,000 shares of Corporation Zero stock from his father who died on March 4 of the current year. His father paid $30 per share for the stock on September 2, 2005. The FMV of the stock on the date of death was $50 per share. On September 4 this year, the FMV of the stock was $55 per share. The executor did not elect the alternate valuation date. Monte sold the stock for $65 per share on December 3. What is the amount and nature of any gain or loss? A) $10,000 LTCG B) $35,000 LTCG C) $15,000 LTCG D) $15,000 STCG
Answer: C
Ross purchased a building in 1985, which he uses in his manufacturing business. Ross used the ACRS statutory rates to determine the cost-recovery deduction for the building. Ross's original cost for the building is $500,000 and cost-recovery deductions allowed are $500,000. If the building is sold for $340,000, the tax results to Ross are A) $340,000 LTCG. B) $340,000 Sec. 1231 gain. C) $340,000 Sec. 1245 ordinary income. D) $340,000 Sec. 1250 ordinary income.
Answer: C
Sec. 1231 property will generally have all the following characteristics except A) real or depreciable property. B) used in trade or business. C) held for sale to customers. D) held for more than one year.
Answer: C
Stella has two transactions involving the sale of capital assets during the year resulting in a STCL of $5,200 and LTCL of $2,400. As a result, Stella can offset A) $5,200 of ordinary income and have a LTCL carryforward of $2,400. B) $3,000 of ordinary income and have a $4,600 STCL carryforward. C) $3,000 of ordinary income and have a $2,200 STCL carryforward and $2,400 LTCL carryforward. D) $7,600 of ordinary income.
Answer: C
Terrell and Michelle are married and living in New York, which is a not a community property state. They jointly own property with an adjusted basis of $240,000. On December 2 of this year, Michelle died when the property had a fair market value of $260,000. Terrell's basis in the property after Michelle's death is A) $0. B) $240,000. C) $250,000. D) $260,000.
Answer: C
This year, Lauren sold several shares of stock held for investment. The following is a summary of her capital transactions for 2018: Acquired Sold This Year Selling Price Cost 09/25/2018 12/2018 $800 $1,000 02/15/2018 07/2018 2,200 1,750 06/25/2014 08/2018 3,500 2,300 12/28/2015 06/2018 750 900 What are the amounts of Lauren's capital gains (losses) for this year? A) NLTG NSTG $ 1,300 $0 B) NLTG NSTG $ 850 $450 C) NLTG NSTG $ 1,050 $250 D) NLTG NSTG ($1,050) ($250)
Answer: C
Which one of the following does not affect the adjusted basis of a house held as rental property? A) depreciation deduction B) adding a new room to the house C) painting of more than 50% of the rooms in the home D) installation of a completely new heating system
Answer: C
A corporation sold a warehouse during the current year. The straight-line depreciation method was used. Information about the building is presented below: Date acquired 1985 Cost $800,000 Accumulated Depreciation - Straight-line 620,000 Selling Price 890,000 How much gain should the corporation report as Sec. 1231 gain? A) $124,000 B) $620,000 C) $586,000 D) $710,000
Answer: C Explanation: Date acquired 1985 Cost $800,000 Accumulated Depreciation 620,000 Adjusted Basis 180,000 Selling Price 890,000 Gain 710,000 Tentative Sec. 1231 gain $710,000 Recapture under 1250 0 Recapture, if under 1245 620,000 Section 291 recapture 20% of 1245 recap. $124,000 $710,000 total gain - $124,000 Sec. 291 recapture = $586,000 Sec. 1231 gain
A building used in a business for more than a year is sold. Sec. 1250 will not cause depreciation recapture if A) the building is fully depreciated. B) the building was placed in service after 1986. C) straight-line depreciation was used. D) All of the above.
Answer: D
Adam purchased 1,000 shares of Airco Inc. common stock for $22,000 on February 3, 2014. On April 1, 2018, Adam received 100 new shares in a nontaxable stock dividend. As of April 1, the stock was trading at $25 per share. Adam sells the 100 new shares on June 15, 2018 for $2,400. Due to the stock sale, Adam will recognize a A) $100 STCL. B) $2,400 STCG. C) $400 STCG. D) $400 LTCG.
Answer: D
Allison buys equipment and pays cash of $50,000, signs a note of $10,000 and assumes a liability on the property for $3,000. In addition, Allison pays an installation cost of $500 and a delivery cost of $800. Allison's basis in the asset is A) $60,000. B) $63,000. C) $63,500. D) $64,300.
Answer: D
An individual taxpayer who is not a dealer in real estate plans to subdivide a parcel of land into four lots and sell them at a substantial gain. The parcel of land had been held six years. In order to qualify for capital gain treatment, the individual must satisfy all of the requirements except A) the individual must not hold any other real property primarily for sale in the ordinary course of business. B) no substantial improvements can be made while holding the lots if the improvements substantially increase the value of the lots. C) the parcel of land (or any part of it) cannot have been held primarily for sale to customers in the individual's business. D) All of the above criteria must be satisfied to allow capital gain treatment.
Answer: D
Candice owns a mutual fund that reinvests her dividends and capital gains earned during the year. The mutual fund reported to her that her share of earnings was: $500 in dividends, $1,500 in short-term net capital gains, and $1,300 in long-term net capital gains. She reported the items on her tax return and paid the appropriate tax on these earnings. If her basis in the fund was $25,000 at the beginning of the year, what is her basis at the end of the year? A) $25,000 B) $25,500 C) $27,000 D) $28,300
Answer: D
Douglas and Julie are a married couple who live in Louisiana, a community property state. They jointly own property with an adjusted basis of $140,000. On December 2 of this year, Julie died when the property had a fair market value of $160,000. Douglas's basis in the property after Julie's death is A) $0. B) $140,000. C) $150,000. D) $160,000.
Answer: D
During the current year, a corporation sells equipment for $300,000. The equipment cost $270,000 when purchased and placed in service two years ago and $60,000 of depreciation deductions were allowed. The results of the sale are A) ordinary income of $90,000. B) Sec. 1231 gain of $90,000. C) ordinary income of $60,000 and LTCG of $30,000. D) ordinary income of $60,000 and Sec. 1231 gain of $30,000.
Answer: D
Emma owns a small building ($120,000 basis and $123,000 FMV) and equipment ($35,000 basis and $22,000 FMV). Both assets were acquired three years ago, are used in Emma's business, and are depreciated using straight-line depreciation. Both are destroyed by fire. Insurance proceeds were equal to their FMVs. Only one other transfer of an asset occurs during the year, and a $3,000 LTCL is recognized. After considering all transactions, the tax result to Emma is a A) $13,000 NLTCL. B) $13,000 ordinary loss. C) $3,000 LTCG; $3,000 LTCL; and $13,000 ordinary loss. D) $10,000 net ordinary loss and a $3,000 NLTCL.
Answer: D
In a common law state, jointly owned property left to the surviving spouse will have a basis after the estate is settled equal to A) the decedent's basis before death. B) the total fair market value of the entire property at the date of death (the alternative valuation date was not elected). C) half of the fair market value of the entire property at the date of death (the alternative valuation date was not elected). D) half of the basis just before death, plus half of the fair market value at the date of death (the alternative valuation date was not elected).
Answer: D
In order to be considered Sec. 1231 property, all of the following livestock must be held for 12 months or more from date of acquisition except A) goats. B) hogs. C) sheep. D) cattle.
Answer: D
Kathleen received land as a gift from her grandfather. At the time of the gift, the land had a FMV of $105,000 and an adjusted basis of $85,000 to Kathleen's grandfather. The grandfather did not have any gift taxes due. One year later, Kathleen sold the land for $110,000. What was her gain or (loss) on this transaction? A) no gain or loss B) ($5,000) C) $20,000 D) $25,000
Answer: D
Mike, a dealer in securities and calendar-year taxpayer, purchased a security for inventory on November 18, 2017 for $15,000. The FMV on December 31, 2017 was $16,000. The security was sold on December 19, 2018 for $16,500. These transactions result in A) $0 ordinary income in 2017; $1,500 ordinary income in 2018. B) $0 ordinary income in 2017; $1,500 LTCG in 2018. C) $1,000 ordinary income in 2017; $500 LTCG in 2018. D) $1,000 ordinary income in 2017; $500 ordinary income in 2018.
Answer: D
Mr. Dennis purchased a machine for use in his business. Mr. Dennis' costs in connection with this purchase were as follows: Note to seller $33,000 Cash paid to seller 5,000 State sales tax 2,400 Freight to place of business 1,500 Wages paid to workers to install machine 4,200 What is the amount of Mr. Dennis' basis in the machine? A) $33,000 B) $40,400 C) $41,900 D) $46,100
Answer: D
On January 31 of this year, Jennifer pays $700 for an option to acquire 100 shares of Lifetime Corporation common stock for $70 per share. Jennifer exercises the option on June 2. Jennifer sells the stock on April 30 of next year for $10,000. Jennifer's basis for the stock immediately before the sale is A) $0. B) $700. C) $7,000. D) $7,700.
Answer: D
On July 25, 2017, Marilyn gives stock with a FMV of $7,500 and a basis of $5,000 to her nephew Darryl. Marilyn had purchased the stock on March 18, 2017. Darryl sold the stock on April 18, 2018 for $7,800. As a result of the sale, what will Darryl report on his 2018 tax return? A) $300 STCG B) $300 LTCG C) $2,800 STCG D) $2,800 LTCG
Answer: D
Rachel holds 110 shares of Argon Mutual Fund. She is planning to sell 90 shares. Her record of the share purchases is noted below. What could be her basis for the 90 shares to be sold for purposes of determining gain? Cost per Share No. of Shares Purchase April 1, 2016 $100 100 Reinvested Dividends April 1, 2017 $150 10 A) $9,000 B) $9,500 C) $9,409 D) Any of the above could be used as basis for the 90 shares sold.
Answer: D
Rana purchases a 5%, $100,000 corporate bond at issuance on January 1, 2018 for $91,500. The bond matures in five years. In 2018 Rana will recognize interest income of A) $0. B) $5,000. C) an amount less than $5,000 (but more than $0). D) an amount greater than $5,000.
Answer: D
Renee is single and has taxable income of $480,000 without considering the sale of a capital asset (land held for investment) in September of 2018 for $25,000. That asset was purchased six years earlier and has a tax basis of $5,000. The tax liability applicable to only the capital gain (without consideration of the additional Medicare tax) is A) $7,000. B) $5,600. C) $3,000. D) $4,000.
Answer: D
Richard exchanges a building with a basis of $35,000, and subject to a liability of $25,000, for land with a FMV of $50,000 owned by Bill. Bill takes the building subject to the liability. What is the amount of Richard's realized gain? A) $0 B) $15,000 C) $25,000 D) $40,000
Answer: D
Sachi is single and has taxable income of $33,000 without considering the sale of a capital asset in November of 2018 for $20,000. That asset was purchased six years earlier and has a tax basis of $5,000. The tax liability applicable to only the capital gain is A) $0. B) $2,250. C) $3,000. D) $1,410.
Answer: D
Terra Corp. purchased a new enterprise software system and incurred the following costs: Cost of the system $800,000 Installation of system 5,000 Testing of system 6,000 Initial training of employees 9,000 What is Terra Corp.'s basis in the software system? A) $800,000 B) $805,000 C) $811,000 D) $820,000
Answer: D
Terry has sold equipment used in her business. She acquired the equipment three years ago for $50,000 and has recognized $30,000 of depreciation across the years in use. In order to recognize any Sec. 1231 gain, she must sell the equipment for more than A) $0. B) $20,000. C) $30,000. D) $50,000.
Answer: D
The taxable portion of a gain from qualified small business stock is taxed at a top tax rate of A) 15%. B) 25%. C) 20%. D) 28%.
Answer: D
This year Pranav had the gains and losses noted below on property, plant and equipment used in his business. Each asset had been held longer than one year. Gain due to insurance reimbursement for fire $17,000 Loss due to condemnation (12,000) Gain on sale of Sec. 1231 property 21,000 A review of Pranav's reporting of Sec. 1231 transactions for the prior five years indicates a net Sec. 1231 loss of $14,000 three years ago and a net Sec. 1231 gain of $8,000 last year (before the five-year lookback). Pranav will recognize A) Ordinary gain (loss) LTCG(L) $(6,000) $26,000 B) Ordinary gain (loss) LTCG(L) $(18,000) $38,000 C) Ordinary gain (loss) LTCG(L) $0 $18,000 D) Ordinary gain (loss) LTCG(L) $6,000 $20,000
Answer: D
To be considered a Section 1202 gain, the stock being sold must meet all of the following characteristics except A) the stock must be issued after August 10, 1993. B) the stock must be held more than five years. C) the corporation which issued the stock must be a C corporation. D) at least 50% of the value of the corporation's assets must be used in the active conduct of one or more qualified trades or businesses.
Answer: D
Why did Congress establish favorable treatment for 1231 assets? A) to encourage the mobility of capital B) to allow a larger deduction for losses C) to help business owners replace assets which had declined in value D) All of the above.
Answer: D
Will exchanges a building with a basis of $35,000, and subject to a liability of $30,000, for land with a FMV of $50,000 owned by Jane. Jane takes the land subject to the liability. The amount realized by Will is A) $30,000. B) $35,000. C) $50,000. D) $80,000.
Answer: D
A building used in a trade or business is a capital asset.
Answer: FALSE
A business plans to sell its office building which it acquired and placed in service in 1995. Sec. 1250 requires a portion of gain realized on the sale of a building used in a business and depreciated under MACRS to be recaptured as ordinary gain.
Answer: FALSE
A single taxpayer realizes long-term capital gains in 2018. Her taxable income puts her in the 37% tax bracket. She will enjoy a substantial tax savings due to the 15% preferential tax rate that will apply to her adjusted net capital gain.
Answer: FALSE
A taxpayer acquired new machinery costing $50,000 three years ago. The taxpayer had elected Sec. 179 expensing to deduct the full cost in the year of acquisition. The taxpayer sells the machinery this year and realizes a $32,000 gain. Sec. 1245 will not require any ordinary income recapture on the sale of this asset due to the Sec. 179 expensing.
Answer: FALSE
A taxpayer owns 200 shares of stock in a corporation purchased in two blocks of 100 shares for different amounts and at different dates. The taxpayer sells 100 shares. Barring any specific instructions, the brokerage firm will report the cost basis using the higher cost block of stock first.
Answer: FALSE
Abra Corporation generated $100,000 of taxable income from operations this year and realized a $4,000 loss on the sale of Starbucks stock. Abra Corporation will pay taxes on $97,000 of taxable income.
Answer: FALSE
All realized gains and losses are recognized for tax purposes.
Answer: FALSE
An individual taxpayer sells a business building placed in service five years ago and recognizes a gain. This is the taxpayer's first and only sale of Sec. 1231 property. Since the gain will be treated as LTCG, the details of the sale should be reported on Schedule D of Form 1040.
Answer: FALSE
An uncle gifts a parcel of land to his niece, and he has to pay $25,000 of gift taxes. The land has appreciated substantially since he purchased it 20 year ago. The niece's basis in the land will be the uncle's cost increased by the $25,000 of gift taxes paid by the uncle.
Answer: FALSE
Bad debt losses from nonbusiness debts are deductible as short-term or long-term capital losses depending on how long the debt was outstanding.
Answer: FALSE
Capital recoveries increase the adjusted basis of an asset.
Answer: FALSE
Depreciable property placed in service nine months earlier is considered Sec. 1231 property.
Answer: FALSE
Bev owns approximately $13 million of assets primarily composed of a very valuable parcel of real estate and a savings account of $500,000. Bev has four grandchildren and is planning to give them each an annual gift in equal amounts. Bev can gift $56,000 in total in 2018 to her grandchildren without creating taxable gifts.
Answer: TRUE
Echo Corporation plans to sell a small building to Nate, its 65% shareholder. The building was placed in service five years ago. An independent appraisal will be obtained to set the selling price at an appropriate market price, and a $50,000 gain is expected to result. The only asset previously sold by Echo was a stock investment five years ago which resulted in a $40,000 loss. If the sale of the building closes before year-end, the gain on the building will allow recognition of the capital loss carryover before it expires.
Answer: FALSE
For purposes of calculating depreciation, property converted from personal use to business use will take on a basis equal to the greater of its FMV or its adjusted basis on the date of the conversion.
Answer: FALSE
Frisco Inc., a C corporation, placed a building in service in 2002 and deducted straight-line depreciation under the MACRS system in the normal manner. It sold the building this year for a substantial gain. Because straight-line depreciation was used, Frisco will not need to recognize any ordinary gain.
Answer: FALSE
Funds borrowed and used to pay for an asset are not included in the cost until the borrowed funds are repaid.
Answer: FALSE
Gain due to depreciation recapture is included in the netting of Sec. 1231 gains and losses.
Answer: FALSE
Gain recognized on the sale or exchange of property between related parties is capital if the property is subject to depreciation in the hands of the transferee.
Answer: FALSE
Gains and losses are recognized when property is disposed of by gift or bequest.
Answer: FALSE
Gains and losses from involuntary conversions of property used in a trade or business generally are classified as capital gains and losses.
Answer: FALSE
Gains and losses resulting from condemnations of Sec. 1231 property and capital assets held more than one year are classified as ordinary gains and losses.
Answer: FALSE
Galvin Corporation has owned all of the stock of Rialto Corporation for five years. Rialto Corporation has been actively engaged in manufacturing in Kansas, but it is now bankrupt, and the stock is worthless. Galvin Corporation will recognize a long-term capital loss.
Answer: FALSE
Generally, gains resulting from the sale of collectibles such as antiques, stamps, or artwork are taxed to individual taxpayers at a maximum rate of 25%.
Answer: FALSE
Gifts of appreciated depreciable property may trigger recapture of depreciation of cost-recovery deductions to the donor as of the date of gift.
Answer: FALSE
If a capital asset held for one year or more is sold at a gain, the gain is classified as long-term capital gain.
Answer: FALSE
If an individual taxpayer's net long-term capital losses exceed the net short-term capital gains, the excess may be offset against ordinary income up to $3,000 per year. Any excess losses over $3,000 may be carried back three years and carried forward five years.
Answer: FALSE
If the accumulated depreciation on business equipment held longer than one year exceeds realized gain on the sale of the equipment, all of the realized gain will be treated as Sec. 1231 gain.
Answer: FALSE
If the shares of stock sold or exchanged are not specifically identified, the average cost method of identification must be used.
Answer: FALSE
In a basket purchase, the total cost is apportioned among the assets purchased according to the relative adjusted basis of the assets.
Answer: FALSE
Mark owns an unincorporated business and has $20,000 of Sec. 1231 gains and $22,000 of Sec. 1231 losses. He must report a net capital loss of $2,000 on his tax return.
Answer: FALSE
On January 1 of this year, Brad purchased 100 shares of stock at $4,000. By December 31 of this year, the stock had declined in value to $2,200, but Brad still held the shares. Brad has realized a $1,800 loss for tax purposes this year.
Answer: FALSE
Purchase of a bond at a significant discount will result in the investor recognizing a capital gain when the bond matures.
Answer: FALSE
Rick sells stock of Ty Corporation, which has an adjusted basis of $20,000, for $22,000. He pays a sales commission of $500. In computing his gain or loss, the amount realized by Rick is $1,500.
Answer: FALSE
Sec. 1245 can increase the amount of gain recognized on an asset.
Answer: FALSE
Section 1221 of the Code includes a comprehensive list of assets properly classified as capital assets.
Answer: FALSE
Stock purchased on December 15, 2017, which becomes worthless in March 2018, produces a STCL since the holding period is one year or less.
Answer: FALSE
The additional recapture under Sec. 291 is 25% of the difference between the amount that would have been recaptured if the property was Sec. 1245 property and the actual recapture under Sec. 1250.
Answer: FALSE
The holding period of property received from a decedent is based on the actual time the property is held by the decedent.
Answer: FALSE
Trena LLC, a tax partnership owned equally by Trent and Nina, sells a building it had placed in service five years ago. Sec. 291 will require that part of the gain (up to 20% of accumulated depreciation) be treated as ordinary gain, with the balance treated as Sec. 1231 gain.
Answer: FALSE
Unlike an individual taxpayer, the corporate taxpayer does not utilize the 25% and 28% specialty capital gain rates, but it does apply the 15% tax rate to adjusted net capital gain.
Answer: FALSE
When appreciated property is transferred at death, the recapture potential carries over to the person who receives the property from the decedent.
Answer: FALSE
When corporate and noncorporate taxpayers sell real property placed in service after 1986, all depreciation taken will be taxed at a maximum rate of 25%.
Answer: FALSE
Emma Grace acquires three machines for $80,000, which have FMVs of $32,000, $28,000, and $20,000 respectively. The delivery cost is $500, and installation costs amount to $2,500. What is the basis of each machine?
Answer: First allocate common costs: Machine No 1: × $3,000 = $1,200. 0 Machine No 2: × $3,000 = $1,050. 0 Machine No 3: × $3,000 = $ 750. Add the common cost to the FMV of each asset: Machine No 1: $32,000 + $1,200 = $33,200 Machine No 2: $28,000 + $1,050 = 29,050 Machine No 3: $20,000 + $750 = 20,750 Total $83,000
Donald has retired from his job as a corporate manager. He buys and sells stocks on a daily basis. He spends 8-9 hours daily studying prospective stock purchases and market news. What tax issues should Donald consider?
Answer: Is Donald an investor or dealer? Note that a dealer will have ordinary income or loss on the sale of securities, but an investor will have capital gain or loss.
In 2012, Regina purchased a home in Las Vegas which cost $280,000. Due to increase in the market value of the home, she refinanced her mortgage and her debt on the home totaled $300,000 at the end of 2014. Regina accepted a new job in Dallas in April 2015. Unable to sell her home, she rented it in November 2015, at which time its fair market value was $240,000. In June 2018, she sold the home for $230,000. What tax issues should Regina consider?
Answer: Is the home a capital asset since she has rented it out since November 2015? Has the home been converted to property held for the production of income? Is the loss on the sale deductible? Note that the loss on the sale is $10,000, determined by comparing its FMV on the date of conversion to rental property to the sales price.
Chen had the following capital asset transactions during 2018: Date acquired Date sold Basis Sales Price Sydney stock 2/5/2012 3/2 $5,000 $7,000 Lawrence stock 4/2/2014 5/1 10,000 14,500 Collectibles 9/1/2015 9/1 300 1,000 Autumn stock 1/2/2018 8/1 6,700 5,500 What is the adjusted net capital gain or loss and the related tax due to the above transactions, assuming Chen has a 24% marginal tax rate?
Answer: Long-term Sydney stock $7,000 - 5,000 = $2,000 LTCG Lawrence stock $14,500 - 10,000 = 4,500 LTCG NLTCG $6,500 Collectibles $1,000 - 300 = $ 700 Collectibles gain Short-term Autumn stock $5,500 - 6,700 = $1,200 STCL Application of STCL: (1) Apply to reduce collectibles gain $700 - 1,200 = $500 STCL remaining (2) Apply remaining loss to NLTCG $6,500 - 500 = $6,000 Adjusted Net Capital Gain Tax: $6,000 ANCG × .15 = $900
What type of property should be transferred to heirs at a decedent's death and why? Should estate planning also mean that some property is transferred prior to death? Why?
Answer: Property transferred at decedent's death should be highly appreciated property since this property will receive a step-up in basis. Property that has declined in value (i.e., FMV is less than basis) should be sold prior to death to obtain a deduction for the loss. If this property is transferred at decedent's death, its basis is reduced to its FMV.
Mike sold the following shares of stock in 2018: Date Purchased Adjusted Basis Date Sold Sales Proceeds S Corp. 7/25/2011 $4,800 9/25 $9,500 O Corp. 5/17/2013 1,600 6/07 1,100 C Corp. 1/04/2015 3,900 8/25 7,500 K Corp. 11/02/2017 2,500 10/01 1,800 What are the tax consequences of these transactions, assuming his marginal tax rate is (a) 32% and (b) 37%? Ignore the medicare tax on net investment income.
Answer: S-LTCG: $4,700 O-LTCL: ( 500) C-LTCG: 3,600 Net long-term capital gain $7,800 K-STCL: ( 700) Adjusted Net Capital Gain $ 7,100 (a) Tax on ANCG at 15% $1,065 (b) Tax on ANCG at 20% $1,420 The net capital gain will be taxed at 15% or 20% depending upon the amount of the taxpayer's total taxable income.
Max sold the following capital assets this year: 250 shares of Bravo stock held 4 months (1,400) loss 20 shares of ABC stock held 3 months 2,200 gain 100 shares of K Corp stock held 22 months (4,700) loss Personal jewelry held 2 years 800 gain Personal car held 1 year (200) loss What is the amount of and nature of (LT or ST) capital gain or loss?
Answer: SHORT-TERM LONG-TERM ________________________________________________________ Bravo (1,400) |K Corp (4,700) ABC 2,200 |Jewelry 800 | $800 STCG (3,900) LTCL = ($3,100) NLTCL realized Only $3,000 of the NLTCL will be recognized this year. The remainder, $100, is carried over to next year as a LTCL. The loss on the sale of a personal-use asset (car) is disallowed.
Trista, a taxpayer in the 32% marginal tax bracket sold the following capital assets this year: 250 shares of Bravo stock held 4 months (2,500) loss 20 shares of ABC stock held 3 months 4,000 gain 100 shares of K Corp stock held 22 months (1,700) loss Personal jewelry held 2 years 4,800 gain What is the amount of and nature of (LT or ST) capital gain or loss? Be specific as to the rates at which gains, if any, are taxed.
Answer: SHORT-TERM LONG-TERM ________________________________________________________ Bravo (2,500) |K Corp (1,700) ABC 4,000 |Jewelry 4,800 | $1,500 STCG $3,100 NLTCG The STCG is taxed at the taxpayer's marginal tax rate of 32%; the net LTCG is due to the jewelry (a collectible) and will be taxed at 28%.
Niral is single and provides you with the following tax information for 2018: Salary $180,000 Bank account interest 1,000 Capital gain on an asset (stock) held for 11 months 4,000 Capital gain on an asset (stock) held for 16 months 9,000 Capital gain on an asset (antique doll) held for 30 months 5,000 Itemized deductions 18,000 Compute her tax liability. [Show all calculations in good form.]
Answer: Salary $180,000 Interest 1,000 Total capital gains 18,000 AGI $199,000 Itemized deduction ( 18,000) Taxable income $181,000 Taxable income taxed at regular rates = $181,000 - $9,000 ANCG- $5,000 collectible = $167,000. Tax at regular rates $32,089.50 + [.32($167,000 - 157,500)] $35,130 Tax on ANCG $9,000 ANCG × .15 1,350 Tax on collectible $5,000 × .28 1,400 Total tax liability $37,880
A net Sec. 1231 gain is treated as ordinary income to the extent of any nonrecaptured net Sec. 1231 losses for the preceding five years.
Answer: TRUE
A nonbusiness bad debt is deductible only in the year in which the debt becomes totally worthless.
Answer: TRUE
A taxpayer has a gain on Sec. 1245 property. None of the gain will be treated as Sec. 1231 gain unless the sale price exceeds the original cost.
Answer: TRUE
A taxpayer purchased an asset for $50,000 several years ago. He is now planning to sell it. Under the recovery of basis doctrine the taxpayer will not recognize any gain or pay any related taxes unless he sells the asset for more than $50,000.
Answer: TRUE
A taxpayer sells an asset with a basis of $25,000 to an unrelated party for $28,000. The taxpayer has a realized gain of $3,000.
Answer: TRUE
In 2018, Thomas, a single taxpayer who has a marginal tax rate of 10%, sells land that is Sec. 1231 property at a gain of $4,000. If he has no other 1231 transactions or capital asset transactions and has no nonrecaptured 1231 gain, Thomas will pay no tax on the $4,000 gain.
Answer: TRUE
In addition to the normal recapture rules of Sec. 1250, corporations which sell depreciable real estate are subject to additional recapture rules of Sec. 291.
Answer: TRUE
Installment sales of depreciable property which result in recaptured income under Secs. 1245 or 1250 require that the recaptured income be recognized in the year of sale.
Answer: TRUE
Losses are generally deductible if incurred in carrying on a trade or business or incurred in an activity engaged in for profit.
Answer: TRUE
Net long-term capital gains receive preferential tax treatment if they exceed net short-term capital losses.
Answer: TRUE
Normally, a security dealer reports ordinary income on the sale of securities unless it is specifically identified as a security being held for investment.
Answer: TRUE
Sec. 1231 property must satisfy a holding period of more than one year.
Answer: TRUE
Sec. 1245 applies to gains on the sale of depreciable personal property, but it generally does not apply to depreciable real property.
Answer: TRUE
Sec. 1245 ordinary income recapture can apply to buildings placed in service prior to 1987.
Answer: TRUE
Section 1221 specifically states that inventory or property held primarily for sale to customers is not classified as a capital asset of the trade or business.
Answer: TRUE
Section 1250 does not apply to assets sold or exchanged at a loss.
Answer: TRUE
Taj Corporation has started construction of a new mall with a cost estimate of $50 million. The mall is expected to be ready to open in 18 months. Taj cannot deduct the interest expense on the construction loan.
Answer: TRUE
Taxpayers who own mutual funds recognize their share of capital gains even if no distributions are received.
Answer: TRUE
The amount recaptured as ordinary income under either Sec. 1245 or Sec. 1250 can never exceed the realized gain.
Answer: TRUE
The gain or loss on an asset purchased on March 31, 2017, and sold on March 31, 2018, is classified as short-term.
Answer: TRUE
The purpose of Sec. 1245 is to eliminate the advantage taxpayers would have if they were able to reduce ordinary income by depreciation deductions and also receive favorable Sec. 1231 treatment when the asset was sold.
Answer: TRUE
The sale of inventory results in ordinary gain or loss.
Answer: TRUE
Unless the alternate valuation date is elected, the basis of property received from a decedent is generally the property's fair market value at the date of decedent's death.
Answer: TRUE
Unrecaptured 1250 gain is the amount of long-term capital gain which would be taxed as ordinary income if Sec. 1250 provided for the recapture of all depreciation and not just additional depreciation.
Answer: TRUE
When a donee disposes of appreciated gift property, the recapture amount for the donee is computed by including the recapture amount attributable to the donor.
Answer: TRUE
When an individual taxpayer has NSTCL and NLTCG, the loss is offset against NLTCG from the 28% group, then NLTCG from the 25% group, and finally against NLTCG from the 15% or 20% group.
Answer: TRUE
When gain is recognized on an involuntary conversion, gain is subject to recapture under Sec. 1245 or Sec.1250.
Answer: TRUE
With regard to taxable gifts after 1976, no gift tax is added to the basis of the property if the donor's basis is greater than the FMV of the property.
Answer: TRUE
Tina, whose marginal tax rate is 32%, has the following capital gains this year: STCG $20,000 LTCG (Facebook stock) 40,000 LTCG (qualified small business stock acquired in 2005) 20,000 LTCG (artwork) 10,000 What is the increase in income tax caused by these items (ignore the Medicare tax on net investment income)?
Answer: Tax on STCG: $20,000 × .32 = $6,400 Tax on LTCG-Facebook stock-ANCG $40,000 × .15 = 6,000 Tax on LTCG-QSBS-.50 × 20,000 = $10,000 × .28 = 2,800 Tax on LTCG-artwork-Collectible gain $10,000 × .28 = 2,800 Total increase in tax $18,000
Sarah owned land with a FMV of $150,000 (adjusted basis $135,000) which is investment property (a capital asset). Sarah owned a second tract of land, a 1231 asset, with a FMV of $38,000 (adjusted basis $55,000). Both tracts were acquired in 2000 and condemned by the state this year. The state paid an amount equal to FMV. If there are no other transactions involving capital assets or 1231 assets, what is the amount that Sarah must report on her current year return?
Answer: The $15,000 gain ($150,000 - $135,000) on the condemnation of the land held for investment is treated as a Sec. 1231 gain and the $17,000 ($38,000 - $55,000) loss due to the condemnation of the business land is a Sec. 1231 loss. Since the 1231 losses exceed the 1231 gains, both are treated as ordinary gains and losses.
The following are gains and losses recognized in 2018 on Ann's business assets that were held for more than one year. The assets qualify as Sec. 1231 property. Gain due to insurance reimbursement for casualty $20,000 Gain due to a condemnation 30,000 Loss due to the sale of Sec. 1231 property 17,000 A summary of Ann's net Sec. 1231 gains and losses for the previous five-year period is as follows: Year Sec. 1231 Gain Sec. 1231 Loss 2013 $5,000 2014 $3,000 2015 $17,000 2016 $12,000 2017 $10,000 Describe the specific tax treatment of each of the current year transactions.
Answer: The $20,000 gain from the casualty is treated as Sec. 1231 gain since casualty gains exceed casualty losses. The $30,000 gain due to the condemnation is also Sec. 1231 gain. Thus, the net Sec. 1231 gain is $33,000 [($20,000 + $30,000) - $17,000). However, $18,000 of the gain must be recaptured as ordinary income as a result of the $18,000 cumulative nonrecaptured net 1231 losses from 2013 and 2015 (see below). The remaining $15,000 is treated as LTCG. Cumulative Nonrecaptured Year Sec. 1231 Gain Sec. 1231 Loss Net 1231 Losses 2013 $5,000 $0 2014 $3,000 $3,000 2015 $17,000 $20,000 2016 $12,000 $8,000 2017 $10,000 $18,000
The following gains and losses pertain to Jimmy's business assets that qualify as Sec. 1231 property. Jimmy does not have any nonrecaptured net Sec. 1231 losses from previous years, and the portion of gain recaptured as ordinary income due to the depreciation recapture provisions has been eliminated. Gain due to insurance reimbursement for hurricane damage $24,000 Loss due to condemnation $21,000 Gain due to the sale of Sec. 1231 property $18,000 Describe the specific tax treatment of each of these transactions.
Answer: The $24,000 casualty gain is treated as a 1231 gain since casualty gains exceed casualty losses. Thus, the total 1231 gain is $42,000 ($24,000 + $18,000). The condemnation loss is a Sec. 1231 loss of $21,000. Since 1231 gains exceed 1231 losses, each is treated as a capital gain or loss. Thus, the net capital gain is $21,000 (LTCG $42,000 - LTCL $21,000).
The following gains and losses pertain to Arnold's business assets that qualify as Sec. 1231 property. Arnold does not have any nonrecaptured net Sec. 1231 losses from previous years, and the portion of gain recaptured as ordinary income due to the depreciation recapture provisions has been eliminated. Loss from hurricane damage $25,000 Loss due to condemnation $20,000 Gain due to the sale of Sec. 1231 property $16,000 Describe the specific tax treatment of each of these transactions.
Answer: The $25,000 casualty loss is an ordinary loss deductible for AGI since casualty losses exceed casualty gains. The condemnation loss is a Sec. 1231 loss of $20,000; the $16,000 gain is a Sec. 1231 gain. Because Sec. 1231 losses exceed Sec. 1231 gains, each is treated as ordinary resulting in a net $4,000 ordinary loss to be added to the $25,000 casualty ordinary loss for a total loss of $29,000.
Distinguish between the Corn Products doctrine and the ruling in the Arkansas Best Corporation case.
Answer: The Corn Products case involved the hedging of futures contracts related to the purchase of raw materials. The Supreme Court held that the purchase of such futures contracts and the subsequent sale of unneeded contracts represented an integral part of the business for the purpose of protecting the company's manufacturing operations and that the gains and losses were ordinary in nature. In Arkansas Best Corporation, the bank holding company sold shares of a bank's stock that had been acquired for the purpose of protecting its business reputation and deducted the loss as an ordinary loss. The Supreme Court ruled, however, that the purpose for acquiring assets is irrelevant to the question of whether the assets are capital assets. The loss incurred by Arkansas Best Corporation was held to be a capital loss.
What is the purpose of Sec. 1245 and what is its significance?
Answer: The purpose of Sec. 1245 is to eliminate the advantage a taxpayer might receive if the taxpayer were permitted to reduce ordinary income by deducting depreciation and subsequently receive Sec. 1231 treatment when the asset was sold.Sec. 1231 is particularly advantageous for individual taxpayers since an overall net 1231 gain reduces the maximum tax rate on long-term capital gains to the 15% or 20% capital gains rate, depending on the level of other taxable income. In the case of buildings, part of the Sec. 1231 gain will be taxed at 25% due to unrecaptured Sec. 1250 gain. These rates compare favorably to the tax rate on ordinary income which can be as high as 37%. The effect of converting Sec. 1231 gains to Sec. 1245 ordinary income prevents taxpayers from offsetting Sec. 1231 gains against net capital losses in situations where capital gains do not exist.
Brian purchased some equipment in 2018 which he intends to use in his trade or business. He approaches you to assist him in planning for the ultimate disposal of the asset—whether it be by sale, charitable contribution to the local university, gift to his sister for use in her business, or some other means. Discuss the tax considerations.
Answer: Upon disposal, in general, Brian would pay the least amount of tax if the gain is classified as 1231 gain which could ultimately be taxed at a maximum of 15% or 20%, depending on the level of the rest of his taxable income. However, to the extent the gain is due to the accumulated depreciation, it will be ordinary gain recaptured under Sec. 1245. Sec. 1231 gain on equipment would only result if he sold it at a price greater than the original cost. The only instance in which recapture is avoided is at Brian's death. Recapture provisions do not carry over to the beneficiary. On the other hand, recapture cannot be avoided by transferring property by gift as the recapture potential carries over to the donee (Brian's sister). Also, if Brian makes a charitable contribution of the property during his life, his charitable contribution would be reduced by the amount of the potential recapture.
Armanti received a football championship ring in college. During difficult economic times, Armanti sold the ring at a pawn shop. What are the tax issues of the sale to Armanti?
Answer: Will Armanti have capital gain or ordinary income from the sale? Is the ring a capital asset? If it is a capital gain, will it be taxed at 15% or as a collectible?
Chana purchased 400 shares of Tronco Corporation stock for $40,000 in 2014. On December 27, 2018, Chana sells the 400 shares for $24,000. Chana purchases 300 shares of Tronco Corporation stock on January 16, 2019 for $8,000. Chana's recognized loss on sale of the 400 shares in 2018 and her basis in her 300 new shares are A) Recognized Loss Basis $0 $32,000. B) Recognized Loss Basis $4,000 $20,000. C) Recognized Loss Basis $12,000 $20,000. D) Recognized Loss Basis $16,000 $8,000.
B) Recognized Loss $4,000 Basis $20,000. The realized loss on the 400 shares is $16,000 ($24,000 - $40,000). $16,000 × 300/400 = $12,000 is disallowed due to the wash sale. $16,000 - $12,000 = $4,000 allowed loss in 2018. The basis of the new shares is the $8,000 cost plus the $12,000 unrecognized loss = $20,000 basis in new stock.
Rob sells stock with a cost of $3,000 to his daughter for $2,200, which is its fair market value. Later the daughter sells the stock for $3,200 to an unrelated party. Which of the following describes the tax treatment to Rob and Daughter? A)
B) Rob - Recognizes no loss Daughter- Recognizes gain of $200
On August 1 of this year, Sharon, a cash-method taxpayer, signs a lease for office space and begins business. The lease is for 3 years. At the time the lease is signed, Sharon pays the $12,600 rent for the entire 36-month lease term. How much can Sharon deduct this year? A) $350 B) $1,750 C) $5,950 D) $12,600
B) $1,750
On August 1 of the current year, Terry refinances her home and borrows $240,000. Terry is required to pay two points on the loan. The loan is secured by the residence and the charging of points is an established business practice in the area. The term of the loan is 20 years, beginning on August 1 of the current year. How much, if any, of the points may Terry deduct in the current year? A) $0 B) $100 C) $240 D) $4,800
B) $100
Leigh pays the following legal and accounting fees during the year: Legal fees in connection with a contract dispute in her trade or business $8,800 Legal fees related to resolving a tax deficiency related to business 4,000 Tax return preparation fees: Allocable to Schedules A and B 1,000 Tax return preparation fees: Allocable to Schedule C 1,200 Legal fees incident to a divorce 5,000 What is the total amount of her for AGI deduction for these fees? A) $10,800 B) $14,000 C) $15,000 D) $20,000
B) $14,000 Explanation: $8,800 + $4,000 + $1,200 = $14,000; the tax return fees allocable to Schedules A and B and legal fees incident to a divorce are not deductible.
On July 1 of the current year, Marcia purchases a small office building to use in her business and borrows $320,000. Marcia is required to pay two points on the loan. The loan is secured by the property and the charging of points is an established business practice in the area. The term of the loan is 20 years, beginning on July 1 of the current year. How much, if any, of the points may Marcia deduct in the current year? A) $0 B) $160 C) $3,200 D) $6,400
B) $160
Victor, a calendar-year taxpayer, owns 100 shares of AB Corporation stock, which was purchased three years ago for $5,000. Victor sells all 100 shares on December 27, of the current year, for $4,000 and on January 5, of the following year, purchases 60 shares of AB Corporation stock. Victor's recognized loss will be A) $0. B) $400. C) $600. D) $1,000.
B) $400. Explanation: (40/100) × ($5,000 - $4,000) = $400. The wash sale rules limit the loss recognition to the loss on the shares that are not repurchased.
Maria pays the following legal and accounting fees during the year: Legal fees in connection with ongoing operations of a trade or business $4,000 Legal fees related to purchase of personal residence 2,600 Legal fees related to tax deficiency related to Schedule A itemized deductions 500 Tax return preparation fees: Allocable to preparation of Schedule C 2,000 Tax return preparation fees: Allocable to preparation of remainder of return 2,100 What is the total amount of her for AGI deduction for these fees? A) $4,000 B) $6,000 C) $8,100 D) $11,200
B) $6,000 Explanation: $4,000 business legal fees + 2,000 business accounting fees = $6,000
Laura, the controlling shareholder and an employee of Southtown Corporation, receives an annual salary of $750,000. Based on several factors including the size of the corporation's operations and a comparison of salary received by officers of comparably sized corporations, the IRS contends that Laura's salary should be no higher than $600,000. The Court upheld the IRS's position. As a result, which of the following is true? A) $600,000 is deductible by the corporation; $600,000 is taxable to Laura. B) $600,000 is deductible by the corporation; $750,000 is taxable to Laura. C) $750,000 is deductible by the corporation; $750,000 is taxable to Laura. D) $750,000 is deductible by the corporation; $600,000 is taxable to Laura.
B) $600,000 is deductible by the corporation; $750,000 is taxable to Laura.
Bart owns 100% of the stock of Octo Corporation, which uses the accrual method. Bart's sister Samantha, a cash-method taxpayer, did some advertising work for Octo in November 2018. In December, Octo received a billing statement from Samantha for $5,000 and paid Samantha the $5,000 in January 2019. Samantha is a calendar-year taxpayer. When may Octo deduct the $5,000? A) 2018 B) 2019 C) Either 2018 or 2019 D) The expense is not deductible since Samantha is Bart's sister.
B) 2019
Erin, Sarah, and Timmy are equal partners in EST Partnership. Sarah also owns 40% of Elton Corporation. The remaining shareholders of Elton Corporation are: Erin (24%) and Sarah's uncle (36%). What percent ownership does Sarah directly or constructively own in Elton Corporation? A) 40% B) 64% C) 76% D) 100%
B) 64%
Mark and his brother, Rick, each own farms. Rick is experiencing severe financial difficulties and cannot afford to buy feed for his cattle. Mark purchases $2,000 of feed and gives Rick one-half of the feed. Mark tells Rick that there is no need to repay him and to consider the feed a gift. Which of the following statements is true? A) Mark can deduct $2,000 for the feed. B) Mark can deduct $1,000 for the feed. C) Rick must report $1,000 as income. D) None of the above is true.
B) Mark can deduct $1,000 for the feed. Explanation: Taxpayers cannot take a deduction for the expense of another person. Mark can only deduct the $1,000, the cost of the feed he used.
Three years ago, Myriah refinanced her home mortgage and was required to pay two points on the refinanced loan. The loan was secured by the property, and the charging of points was the established lending practice in the area. The term of the loan was 20 years. Myriah sold the house earlier this year and paid off the refinanced mortgage. In this year of the home sale, is Myriah allowed any deduction with respect to the points paid on the refinanced mortgage? A) Yes, she can deduct the full amount of the refinanced loan points in the year of sale because none of these points have been previously deducted. B) Yes, she can deduct the unamortized balance of the refinanced loan points in the year of sale. C) No, the full amount of the refinanced loan points were already deducted in the year the home mortgage was refinanced. D) No, points paid to refinance a home mortgage are never deductible.
B) Yes, she can deduct the unamortized balance of the refinanced loan points in the year of sale.
Kelsey enjoys making cupcakes as a hobby and occasionally sells them for parties. Kelsey receives $1,000 in revenues from cupcake sales this year and pays $1,300 for supplies. Kelsey takes the standard deduction each year. The net effect of the cupcake activity on Kelsey's taxable income is A) $0. B) an increase of $1,000. C) a decrease of $300. D) a decrease of $280.
B) an increase of $1,000. Explanation: Expenses related to activity classified as a hobby are not deductible so her taxable income will include the full $1,000 revenue.
Pamela was an officer in Green Restaurant which subsequently went bankrupt. Pamela started a new restaurant and, to establish goodwill, paid off the debts of $100,000 of Green Restaurant. She was under no obligation to do so. The $100,000 is A) deductible currently as an itemized deduction. B) capitalized because the expenses are not ordinary. C) deductible currently as a trade or business expense since the expenses are considered ordinary and necessary business expenses. D) None of the above.
B) capitalized because the expenses are not ordinary.
Assume Congress wishes to encourage healthy eating and is considering a deduction for broccoli purchases. In order to maximize the value of this tax deduction for taxpayers, Congress should provide for a(n) A) itemized deduction. B) deduction for AGI. C) deduction from AGI. D) All of the above would provide the same tax savings to taxpayers
B) deduction for AGI.
On Form 1040, deductions for adjusted gross income include the amounts paid for all of the following except A) one-half of self employment tax. B) home mortgage interest. C) student loan interest. D) contributions to a Health Savings Account.
B) home mortgage interest.
Gabby owns and operates a part-time art gallery, now in its fifth year. She views it as a business activity, but she is concerned that the IRS will challenge her classification and consider it a hobby. Her business results, using the cash method of accounting, were net losses in the first and fourth years and small profits in the second and third years. It is now almost year-end and based on projections, the business is showing a small profit of $6,000. Repairs to the security system and to the heating/cooling system were recently completed and these bills total $7,000. When should Gabby pay these bills? A) before year-end to get the current year deduction B) next year C) split into $6,000 this year and $1,000 next year D) It does not matter when she pays the bills. The work was performed this year, so the costs will be deducted this year.
B) next year
To be tax deductible by an accrual-basis taxpayer, an expense must be all of the following except A) ordinary and necessary. B) paid in cash. C) reasonable in amount. D) an expense of the taxpayer.
B) paid in cash.
In which of the following situations are points paid on a home mortgage loan not deductible in the year of payment? A) purchase B) refinance C) construction D) improvement
B) refinance
Vanessa owns a houseboat on Lake Las Vegas that she personally uses for 25 days out of the year and rents for 280 days. For tax purposes, the houseboat is classified as A) neither a residence nor rental property. Because it is rented a nominal number of personal-use days, both revenue and expenses (other than those otherwise allowable) are ignored. B) rental property. Expenses in excess of income may be deducted although net income or loss is subject to the passive activity rules. C) property that is treated as a hobby, not allowing any deductions. D) a combination of the taxpayer's residence and rental property. The deduction for expenses is limited to the amount of income generated by the property.
B) rental property. Expenses in excess of income may be deducted although net income or loss is subject to the passive activity rules. Explanation: Since Vanessa's personal use of 25 days does not exceed 10% of the rental days (280 × .10 = 28 days), then the houseboat is not considered a residence under Section 280A. Neither is the use considered nominal since rental days exceed 14. Therefore, the houseboat is classified as rental property.
Riva works at a full-time job, but also restores her antique doll collection and sells them on eBay. She received $10,000 of sales revenue and paid $12,000 of supplies expense. A number of factors must be weighed to determine the appropriate classification of the activity. Depending on that classification, the net effect on her taxable income will be
Business a reduction of $2,000. Hobby an increase of $10,000.
FIFO Corporation, a public-traded corporation, pays its CFO a basic salary of $900,000 and a $500,000 bonus awarded for exceptional service. Her compensation package is considered reasonable compensation when compared to other similar corporations and her level of responsibilities. FIFO can deduct A) $500,000. B) $900,000. C) $1,000,000. D) $1,400,000.
C) $1,000,000. Explanation: Compensation deductions are limited to $1,000,000 for public corporations paying "covered employees." A CFO is included in the category of covered employee.
Jason sells stock with an adjusted basis of $66,000 to JJ Inc., his 60% owned corporation, for its fair market value of $60,000. JJ Inc. sells the stock three years later for $67,000. JJ Inc.'s recognized gain or loss on the sale will be A) $0. B) ($3,000). C) $1,000. D) $4,000.
C) $1,000.
2020 Enterprises, owned by Xio who also manages the businesses, has generated more than $25 million of sales for each of the past five years. This year it is reporting the following income and deduction amounts: Sales $35,000,000 Cost of goods sold (22,000,000) Other operating expenses (8,000,000) Depreciation (2,000,000) Preliminary taxable income $ 3,000,000 Xio just received a statement from the bank reporting interest expense of $1,800,000 on a loan to 2020 Enterprises to fund operations and equipment purchases. How much of the interest expense can 2020 Enterprises deduct in computing this year's taxable income? A) $540,000 B) $900,000 C) $1,500,000 D) $1,800,000
C) $1,500,000 Explanation: Interest expense is limited to 30% of adjusted taxable income. .30($3,000,000 + 2,000,000 depreciation) = $1,500,000
Troy incurs the following expenses in his business, an illegal gambling establishment: Salaries to employees $200,000 Insurance expense 60,000 Utilities expense 70,000 Bribes to police 50,000 His deductible expenses are A) $0. B) $200,000. C) $330,000. D) $380,000.
C) $330,000.
In March of the current year, Marcus began investigating the possibility of opening a specialty clothing store. From March through June, he spent $2,300 on a market survey, $2,700 in consulting fees to find the best location and $3,600 in professional fees setting up an accounting and inventory system. Although he had never run his own business before, on August 1 he opened his doors for business. What is the maximum amount of deduction for the current year attributable to these expenditures? A) $0 B) $5,000 C) $5,100 D) $8,600
C) $5,100 Explanation: Marcus may elect to deduct lesser of the $8,600 expenses incurred or $5,000 currently. He can amortize the remaining $3,600 over 180 months, resulting in $20 per month. His current year amortization is $20 × 5 = $100, for a total deduction of $5,100. Page Ref.: I:6-15 and I:6-16; Figure I:6-1
Mackensie owns a condominium in the Rocky Mountains. During the year, Mackensie uses the condo a total of 23 days. The condo is also rented to tourists for a total of 77 days and generates rental income of $10,900. Mackensie incurs the following expenses in the condo: Expense Amount Mortgage interest $5,000 Property taxes 3,500 Utilities 2,500 Insurance 1,800 Depreciation 11,000 Using the court's method of allocating expenses, the amount of depreciation that Mackensie may take with respect to the rental property will be A) $0. B) $1,044. C) $5,796. D) $11,000
C) $5,796. Rental income $10,900 Minus: Tier 1-Mortgage interest (77/365 × $5,000) ( 1,055) Property taxes (77/365 × $3,500) ( 738) Minus: Tier 2- Utilities (77/100 × $2,500) (1,925) Insurance (77/100 × $1,800) ( 1,386) Minus: Tier 3- Depreciation (Remaining income) ( 5,796) Taxable rental income $ 0 The taxpayer's use exceeds 10% of the rental days so the property is limited by the vacation home rules. Note that the potential depreciation deduction is 77/100 × $11,000 = $8,470, but it is limited to the remaining income after taking all other deductions into account.
Liz, who is single in 2018, lives in a single family home and owns a second single family home that she rented for the entire year at a fair rental rate. Liz had the following items of income and expense during the current year. Income: Gross salary and commissions from Ace Corporation $50,000 Rent received from tenant in Liz's rental house 13,000 Dividends received on her portfolio of stocks 5,000 Expenses: Interest and property taxes on her own home 9,000 Taxes, interest and repair expenses on rental house 3,500 Depreciation expense on rental house 2,300 What is her adjusted gross income for the year? A) $64,300 B) $53,200 C) $62,200 D) $68,000
C) $62,200
Dana purchased an asset from her brother for $15,000. Her brother's basis was $20,000. If Dana sells the asset to an unrelated party for $12,000, she will recognize. A) $0. B) ($1,000) loss. C) ($3,000) loss. D) ($4,000) loss.
C) ($3,000) loss.
During the current year, Ivan begins construction of an office building and a hotel. He incurs $10,000 in property taxes during the construction of the office building and $15,000 for the hotel. Which of the following statements is true of the property taxes during the construction period? A) Ivan must capitalize the property taxes on both properties each year if an election is made. B) Ivan must deduct the property taxes on both properties each year. C) Ivan may elect to capitalize the property taxes on one of the properties while deducting the property taxes on the other for each year. D) Ivan may elect to capitalize the property taxes for the properties in one year and then deduct the property taxes on the properties the next year.
C) Ivan may elect to capitalize the property taxes on one of the properties while deducting the property taxes on the other for each year.
For the years 2014 through 2018 (inclusive) Mary, a best-selling author, has been involved in operating an antique store. In 2014, 2015 and 2016 her revenue exceeded the expenses from the activity. In 2017 and 2018, the antique store generated a loss. Which statement is correct? A) The activity is a business. The IRS cannot prove it is a hobby. B) The activity is a hobby. Mary cannot prove it is a business. C) The activity is presumed to be a business. However, the IRS may prove it is a hobby. D) The activity is presumed to be a hobby. However, Mary may prove it is a business.
C) The activity is presumed to be a business. However, the IRS may prove it is a hobby.
Carole owns 75% of Pet Foods, Inc. As CEO, Carole must travel extensively and does so on the company jet. In addition, she also uses the jet to take several personal vacations. Carole reports the value of the personal use of the jet, $40,000, as additional compensation. Which of the following is true in terms of the corporation? A) The corporation includes $40,000 as miscellaneous income. B) The $40,000 has no impact on the corporation's income tax. C) The corporation takes a deduction of $40,000 for compensation expense. D) The corporation takes a deduction of $40,000 for dividend expense.
C) The corporation takes a deduction of $40,000 for compensation expense.
Various criteria will disqualify the deduction of a business or investment related expenditure. Which of the following criteria will not disqualify a business or investment expenditure? A) capital expenditure B) expenses related to tax-exempt income C) expenses are not incurred annually D) expenses are illegal or in violation of public policy
C) expenses are not incurred annually
Juanita knits blankets as a hobby and sells them. In the current year, she earns $5,000 from her blanket sales and incurs expenses of $600. On her tax return, she should A) report $5,000 of hobby income and deduct $600 of hobby expenses from AGI. B) report $5,000 of hobby income and deduct $600 of hobby expenses for AGI. C) report $5,000 of hobby income, but she will not be able to take any deductions. D) report no hobby income and no hobby deductions.
C) report $5,000 of hobby income, but she will not be able to take any deductions.
Which of the following individuals is not considered a relative for purposes of the related parties loss disallowance rules under Sec. 267? A) brother B) husband C) sister-in-law D) grandfather
C) sister-in-law
Doug, a self-employed consultant, has been a firm believer in maintaining a paperless office. Unfortunately, he recently lost all of his business records in a ransomware attack, and his backup system was also compromised. Which of the following cases should Doug investigate to better understand substantiation requirements for business expenses? A) the tax benefit rule B) the Corn Products doctrine C) the Cohan rule D) the Arkansas Best doctrine
C) the Cohan rule Under the Cohan rule, the courts will allow a deduction that is not properly substantiated by the taxpayer if an expenditure clearly has been made. The Cohan rule will not apply to all categories of expenses such as travel and entertainment.
Under the accrual method, recurring liabilities may be deducted currently and paid in the next period if all of the following are present except for A) the all-events test is met. B) the expense is recurring. C) the expense is material. D) economic performance occurs within the shorter of 8 1/2 months after the close of the year or a reasonable period after the close of the year.
C) the expense is material.
Emeril borrows $340,000 to finance taxable and tax-exempt investments. He incurs $18,000 investment interest expense, allocated equally between the taxable and tax-exempt investments. Ignore any possible investment interest expense limitation. How much of the interest expense is deductible, and where is it deductible? A) $18,000 for AGI B) $18,000 from AGI C) $9,000 for AGI D) $9,000 from AGI
D) $9,000 from AGI
Deductions for AGI may be located A) on the front page of Form 1040. B) on Schedule C as a deduction. C) on Schedule E as a deduction. D) All of the above are true.
D) All of the above are true.
Efrain owns 1,000 shares of RJ Inc. common stock which he purchased three years ago for $36,000. Efrain sells the 1,000 shares on October 15, 2018, for $10,000. On November 12, he purchases 400 shares of RJ Inc. preferred stock for $8,000. Efrain's recognized loss on the sale of the 1,000 shares will be A) $0. B) $10,400. C) $15,600. D) $26,000
D) $26,000 Explanation: Preferred stock is not considered substantially identical to common stock of the same corporation and wash sale rules will not apply. Therefore, the loss of $26,000 ($10,000 - $36,000) is allowed.
During the current year, Martin purchases undeveloped land as an investment. Martin intends to rent the land as pastureland and hopefully sell it later for a profit. In the current year, Martin receives no rent but he does pay taxes of $2,800, mortgage interest of $900 and liability insurance of $500. How much of these expenses can Martin deduct (before any limitations) on his current tax return? A) $0 B) $1,400 C) $3,700 D) $4,200
D) $4,200 Explanation: $2,800 + $900 + $500 = $4,200. These are ordinary and necessary expenses related to the income he hopes to produce.
On July 1 of the current year, Marcia purchases a new home and borrows $320,000. Marcia is required to pay two points on the loan. The loan is secured by the residence and the charging of points is an established business practice in the area. The term of the loan is 20 years, beginning on July 1 of the current year. How much, if any, of the points may Marcia deduct in the current year? A) $0 B) $160 C) $3,200 D) $6,400
D) $6,400
Toby, owner of a cupcake shop in New York, had been considering opening a similar business (i.e., a cupcake shop) in Phoenix. After spending $6,800 investigating such possibilities in Phoenix, Toby decided against opening the store on July 1. What is the maximum amount of deduction for the current year attributable to these expenditures? A) $0 B) $5,000 C) $5,600 D) $6,800
D) $6,800
Paul, a business consultant, regularly takes clients and potential clients out to dinner. In order to deduct these expenses, Paul must maintain records substantiating all of the following except A) the time and place of the dinners. B) the business relationship with the person invited. C) the business purpose of the dinners. D) All of the above information must be substantiated in order to deduct the entertainment costs.
D) All of the above information must be substantiated in order to deduct the entertainment costs.
Which of the following factors is important in distinguishing between capital and revenue expenditures? A) The expenditure improves the property, adding to the value of the property. B) The expenditure provides a betterment, adding to the value of the property. C) The expenditure restores the property. D) All of the above.
D) All of the above.
Toni owns a gourmet dog treat shop downtown. She spends $2,800 investigating opening another dog treat shop in Northtown and an additional $3,100 investigating a new location in Southtown. Toni does open the Northtown shop, but does not open the Southtown shop. A) Toni must capitalize and amortize the Northtown investigation costs, but can immediately deduct the Southtown investigation costs. B) Toni must capitalize and amortize the Northtown investigation costs, but the Southtown investigation costs are not deductible at all. C) Both the Northtown and the Southtown investigation costs must be capitalized and amortized. D) Both the Northtown and the Southtown investigation costs are currently deductible.
D) Both the Northtown and the Southtown investigation costs are currently deductible.
For the years 2014 through 2018 (inclusive) Max, a surgeon, has been involved in bowling competitions. Only in 2017 and 2018 did his revenue exceed the expenses from the activity. Which statement is correct? A) The activity is a business. The IRS cannot prove it is a hobby. B) The activity is a hobby. Max cannot prove it is a business. C) The activity is presumed to be a business. However, the IRS may prove it is a hobby. D) The activity is presumed to be a hobby. However, Max may prove it is a business.
D) The activity is presumed to be a hobby. However, Max may prove it is a business. Explanation: Under the presumption rule, if an activity results in a loss for 3 of 5 years, the burden of proof falls to the taxpayer to prove that the activity is a business rather than a hobby. Page Ref.: I:6-29
The Super Bowl is played in Tasha's home town. Tasha moves out of her house for 10 days and stays with her parents. She rents her house for a very high fee to a crew from ESPN. With respect to this rental activity, Tasha will A) report the rental income but be allowed a deduction for AGI for the related expenses (e.g., interest, taxes, utilities, depreciation). B) report the rental income but be allowed a deduction from AGI for the related expenses (e.g., interest, taxes, utilities, depreciation). C) report the rental income, but she will not be allowed any deductions other than the mortgage interest and property taxes. D) not be required to report the income, but she will not take any deductions other than her normal mortgage interest and property taxes.
D) not be required to report the income, but she will not take any deductions other than her normal mortgage interest and property taxes. Explanation: The 10 days of rental qualifies under the exception for rental for a nominal number of rental days (i.e., less than 15). She will not be required to report the income, but she will not take any deductions other than her normal mortgage interest and property taxes.
Self-employed individuals may claim, as a deduction for adjusted gross income, 50 percent of their A) traditional IRA contributions. B) disability insurance premiums. C) health insurance premiums. D) self-employment tax.
D) self-employment tax.
Which of the following factors is not used to determine whether an activity is a hobby or a business? A) the taxpayer's expertise in the activity B) the taxpayer's financial status C) the personal pleasure derived from the activity D) the success of the taxpayer in other dissimilar activities
D) the success of the taxpayer in other dissimilar activities
Deductions for adjusted gross income include all of the following except A) contributions to certain retirement plan arrangements. B) professional fees and supplies paid by elementary and high school teachers. C) expenses attributable to production of rental income. D) unreimbursed employee business expenses.
D) unreimbursed employee business expenses.
A sole proprietor contributes to the election campaign of a state governor. The candidate has promised to change a law that severely limits the growth of the sole proprietor's business. Given the direct benefit, the sole proprietor can deduct the contribution.
FALSE Explanation: Contributions to political candidates or political parties are never allowed as a deduction.
Expenses related to a hobby are deductible only to the extent of the gross income from the hobby.
FALSE Explanation: Expenses related to a hobby cannot be recognized.
Expenses relating to a hobby, limited to the receipts of the hobby, are deductible as "for AGI" deductions.
FALSE Explanation: Hobby-related expenses are not deductible.
Tess has started a new part-time business. She is concerned that the IRS will call it a hobby if her return is audited. This first year of business showed a small profit, and she expects it to continue to show modest profits. She would like to take advantage of the three out of five year profit rule to shift the burden of proof to the IRS. Because of the three-year statute of limitations, this will not be possible for the first year of business.
FALSE Explanation: Tess can file a special election to defer the determination until the fifth year of operation.
Fines and penalties are tax deductible if related to the taxpayer's trade or business.
FALSE
Kaitlyn owns a hotel in Phoenix, Arizona. The city of Phoenix has proposed legislation to increase the hotel room tax. Kaitlyn incurs $1,000 of lobbying expenses to discourage passage of the legislation. Kaitlyn can deduct the $1,000.
FALSE
Kickbacks and bribes paid to federal officials are deductible only if related to the taxpayer's trade or business.
FALSE
Taxpayers may deduct lobbying expenses incurred to influence legislation if the legislation is of direct interest to the taxpayer's trade or business.
FALSE
Accrual-basis taxpayers are allowed to deduct expenses when they meet either the economic performance test or the all-events test.
FALSE Explanation: Both criteria must be satisfied.
Brienne sells land to her brother, Abe, at a loss. A few years later, Abe sells the land to an unrelated party for a substantial gain. Brienne can recognize her realized loss on the land when Abe sells the land to an unrelated party.
FALSE Explanation: Brienne will never recognize the loss. Abe will be able to offset his gain by Brienne's loss.
Generally, expenses incurred in an investment activity other than those incurred to produce rent and royalties are deductions from AGI.
FALSE Explanation: Effective in 2018, expenses incurred in an investment activity other than rental and royalty properties are not deductible.
wash sale occurs when a taxpayer realizes a loss on the sale of stock or securities and the taxpayer acquires substantially identical stock or securities within a 61-day period after the date of sale.
FALSE Explanation: The 61-day period of time extends from 30 days before the date of the sale to 30 days after the date of the sale.
Rachel, a self-employed business consultant, has significant expenses for travel business meals with clients in her work, but she has not kept receipts. She will be able to deduct a reasonable amount of these ordinary and necessary expenses under the Cohan rule.
FALSE Explanation: The Cohan rule does not apply to travel and entertainment. The Code does not allow any travel and entertainment deductions unless strict documentation requirements are met.
Expenses paid with a credit card are deductible at the time a cash-basis taxpayer pays for the charge.
FALSE Explanation: The expenses are deductible at the time of the charge.
A small business uses the accrual method of accounting for its financial statements. It must also use the accrual method for computing taxable income
FALSE Explanation: The tax law does not require book-tax accounting conformity except in the case of using LIFO for inventory accounting.
A sole proprietor paid legal fees in connection with the acquisition of a building that he uses in his business. The sole proprietor can deduct the legal fees for AGI.
FALSE Explanation: All costs related to acquiring the asset and placing it in service must be capitalized into the basis of the asset.
In 2018 the IRS audits a company's 2016 tax return and determines that the president's salary was excessive and disallowed $100,000 of the salary deduction. Under the terms of the hedge (payback) agreement in the corporate bylaws, the president repays $100,000 of her salary to her employer in 2018. The president will amend her 2016 tax return to get a refund of the taxes paid on the excess salary.
FALSE Explanation: The president will take a deduction for AGI for the year of repayment.
If an activity produces a profit for at least two years during a consecutive five-year period, the burden of proof shifts to the IRS to show that the activity is not profit-motivated.
FALSE Explanation: The time period is three out of five years.
Points paid to refinance a mortgage on a principal residence are fully deductible in the year paid.
FALSE Explanation: They are treated as prepaid interest and amortized over the term of the loan.
A change to adjusted gross income cannot affect a taxpayer's itemized deductions.
False
A deduction will be allowed for an expenditure unless the Internal Revenue Code specifically disallows it.
False
A single taxpayer has adjusted gross income of $325,000 and has total itemized deductions in various categories totaling $20,000. The taxpayer discovers some additional deductions for AGI. The extra deductions can not affect his itemized deductions.
False
According to the tax formula, individuals can deduct the greater of for AGI deductions or from AGI deductions.
False
Itemized deductions are deductions for AGI.
False
Losses on sales of property between a taxpayer and his/her siblings are disallowed.
TRUE Explanation: Losses on sales between related parties are not allowed.
If a loss is disallowed under Section 267, a gain on a subsequent sale of the property by the related purchaser may be offset by the previously unrecognized loss.
TRUE Explanation: The original seller of the property in a related party sale will never recognize the loss, but if the purchaser later sells the property for a gain, the purchaser can offset the gain with the unrecognized loss.
Losses incurred on wash sales of stock or securities are generally disallowed in the year of sale.
TRUE Explanation: The wash sale limitations prevent the creation of artificial losses for tax purposes.
Expenses incurred in connection with conducting a trade or business activity or in connection with production of income are generally deductible, but personal expenses are generally not deductible.
True
Under the wash sale rule, if all of the sold shares are not repurchased within the relevant time period, a portion of the loss on the sale is allowed.
TRUE Explanation: The portion of the loss relating to the shares not replaced will be allowed.
Individuals are generally allowed to deduct the greater of the standard deduction or itemized deductions.
True
The vacation home limitations of Section 280A may also apply to boats and mobile homes.
TRUE Explanation: The term "dwelling unit" is very expansive and is based on whether the property provides shelter and accommodations for eating and sleeping.
A taxpayer owns a cottage at the beach for family vacations, but also rents it out for one month of the summer. Expenses attributable to the rental use of a taxpayer's vacation home are limited to the gross income generated by the property. The residence is considered to fall into the mixed personal and rental dimension.
TRUE Explanation: A net loss cannot be recognized on a vacation home.
Generally, Section 267 requires that the deduction of unpaid (accrued) expenses be deferred until the year in which the related payee recognizes the amount as income.
TRUE Explanation: An accrual-basis taxpayer cannot deduct accrued expenses owed to a cash-basis related party.
Fees paid to prepare a taxpayer's Schedule C of the tax return (Profit or Loss from Business) are for AGI deductions.
TRUE Explanation: Legal and accounting fees related to self-employment activity are deductions for AGI.
An expense is considered necessary if it is "appropriate and helpful" in the taxpayer's business.
TRUE
Capital expenditures add to the value, substantially prolong the useful life, or restore the life of the property.
TRUE
In order for an expense to be ordinary, it must be reasonable in amount and it must bear a reasonable and proximate relationship to the income-producing activity or property.
TRUE
Interest expense on debt incurred to purchase or carry tax-exempt securities is not tax deductible.
TRUE
Losses on the sale of property between a taxpayer and his/her more than 50-percent-owned corporation are disallowed.
TRUE Explanation: Losses on sales between related parties are not allowed. A shareholder and his more than 50-percent-owned corporation are related parties.
Points paid in connection with the purchase of a principal residence may be deducted in the year paid.
TRUE Explanation: Normally prepaid interest must be amortized over the life of the loan, but an exception allows immediate deduction in the case of the purchase of a principal residence.
An accrual-basis taxpayer may elect to accrue real property taxes ratably over the period to which the taxes relate.
TRUE Explanation: The economic performance test would normally require payment, but an election is allowed under Sec. 461 for a ratable deduction for accrual-basis taxpayers.
The term "principal place of business" includes a home office used by a taxpayer for administrative or management activities of the business if no fixed location exists where the taxpayer conducts these activities.
TRUE Explanation: The term "principal place of business" includes a home office used by the taxpayer for administrative or management activities of the business if no other fixed location exists where these activities are performed.
A taxpayer opens a new business this year. Prior to opening, she incurred $45,000 of business investigation and preopening costs. The taxpayer can elect to currently deduct $5,000 and amortize the balance over 180 months.
TRUE Explanation: A taxpayer can elect to immediately deduct up to $5,000 of start-up expenditures, with the balance amortized over 180 months. Limitations apply when expenditures exceed $50,000.
Business investigation expenses incurred by a taxpayer who is already involved in a similar business and who enters the new business are deductible currently.
TRUE Explanation: For new business ventures, the key to current deduction of business investigation and pre-opening costs or capitalization and amortization of those costs rests on whether the taxpayer is already engaged in a similar business.
If property that qualifies as a taxpayer's residence is rented for less than 15 days per year, the taxpayer includes no rental income in gross income and similarly may claim no expenses related to the property other than interest and taxes.
TRUE Explanation: Rental of a personal residence for less than 15 days is considered nominal. Rental receipts are not recognized, nor are rental-related expenses deductible (other than the regular itemized deductions for mortgage interest and property taxes).
