Chapter 7

Section 1202 provides that owners of qualified small business stock that is sold during 2019 and has been held for at least five years can exclude up to _____ percent of the gain from taxation depending on the acquisition date.

100

If a taxpayer is an active participant in a rental activity, she may be allowed to deduct up to $________ in rental losses against other types of income.

25,000

Carly sold land that she purchased 10 years ago for $3,000. The selling price of the land was $7,000 and Carly paid broker's fees of $420. When she originally purchased the land, she paid $1,000 to clear some of the brush in order to make a walking path down to a nearby lake. In the ten years since the purchase, Carly paid $200 per year to keep the path maintained. Carly's amount realized on the sale was $_________ and her tax basis was $ _________ resulting in capital gain of $________ for the year.

6580, 4000, 2580

Bridget, a single taxpayer, sold a building used in her business during the current year. The realized gain on the sale was $135,000. Of this amount, $95,000 is unrecaptured Section 1250 gain. How will Bridget be taxed on this gain assuming her marginal tax rate is 32 percent and her LTCG rate is 15%? a. $95,000 will be taxed at 25 percent and $40,000 will be taxed at 15%. b. $95,000 will be taxed at 25 percent and $40,000 will be taxed at 32%. c. $135,000 will be taxed at 32% d. $135,000 will be taxed at 25%.

A

Courtney invested in RAD, Inc. stock nine months ago. She is considering tax planning strategies at the end of the year and is pondering whether or not to sell her investment in the stock. A friend has advised Courtney that she should hold the stock for at least three more months in order to have a long-term holding period. Which of the following considerations describes a valid reason for selling the stock now? a. Courtney is concerned that the value of the stock will decline in the near future. b. Courtney wants to sell the stock, donate the proceeds to a qualified charity, and utilize the tax deduction on this year's tax return. c. Courtney is currently in the 37% tax bracket. Consequently, she will not receive preferential treatment for long-term capital gains. d. Courtney currently has $2,000 in capital losses and she needs to generate at least $2,000 in capital gains to be able to deduct her capital losses.

A

What is the minimum level of participation required in order for a taxpayer to be able to deduct up to $25,000 in rental losses against other types of income? a. Active participation b. Material participation c. Full time participation d. Regular participation

A

Which of the following choices concerning the recognition of interest income for corporate bond are CORRECT? (Check all that apply.) a. If bonds are purchased at a premium in the secondary market, the premium can be amortized or added to the basis of the bond. b. The actual interest payments received are included in gross income. c. If bonds were issued at a discount, special original issue discount rules apply. d. If bonds are purchased at a discount in the secondary market, the discount is amortized over the remaining life of the bond. e. If bonds were issued at a premium, taxpayers must amortize the premium over the life of the bond resulting in an increase in interest income.

A, B, C

Which of the following choices determine the amount and the timing for recognizing interest income? (Check all that apply.) a. The actual interest payments received are included in gross income. b. If bonds were issued at a premium, taxpayers may amortize the premium over the life of the bond resulting in a decrease in interest income. c. If bonds are purchased at a premium in the secondary market, the premium cannot be amortized, but is added to the basis of the bonds. d. If bonds were issued at a premium, special original issue discount rules apply. e. If bonds are purchased at a discount in the secondary market, the discount is recognized as interest income at maturity.

A, B, E

Which of the characteristics below BEST describes the treatment of investment interest expense? (Check all that apply.) a. The interest deduction is limited to the taxpayer's net investment income for the year. b. This expense is NOT deductible. c. Any amount of this expense that is NOT deducted in the current year due to the investment income limitations may be carried forward indefinitely. d. This expense is deductible as an itemized deduction in the interest expense category. e. Any amount of this expense that is NOT able to be deducted in the current year cannot be carried forward. f. This expense is deductible as a for AGI deduction (adjustment)

A, C, D

Which of the following types of transactions result in capital losses that are NOT deductible for tax purposes? (Check all that apply.) a. Sales to related parties b. Sale of land held for investment c. Wash sales d. Sales of personal-use assets

A, C, D

Which of the following assets would qualify as capital assets? (Check all that apply.) a. Personal residence b. Warehouse used in a business c. Corporate stock d. Land held for investment e. Coin collection f. Inventory in a business

A, C, D, E

What is included in the calculation of the amount realized upon the sale of a capital asset? (Check all that apply.) a. Broker's fees and other selling costs are deducted b. Depreciation taken on the asset in prior years is deducted c. The original cost of the capital asset being sold d. Fair market value of any other property received by the seller e. Cash received by the seller

A, D, E

Which of the following statements are true when considering the deductibility of a suspended passive loss? (Check all that apply.) a. The suspended loss may be deducted against active or portfolio income when the taxpayer sells or divests of the passive activity. b. The suspended loss can only be deducted against passive income from the same passive activity that generated the loss. c. The taxpayer will lose the tax benefit of the suspended loss if he sells or divests of the passive activity. d. The suspended loss can reduce short and long-term capital gains, but NOT ordinary income. e. The suspended loss may be deducted when a taxpayer generates passive income from that activity or another passive activity.

A, E

Which of the following choices describe collectibles? (Check all that apply.) a. A gain on collectibles is taxed at a maximum rate of 28 percent. b. A gain on collectibles is taxed at a maximum rate of 15 percent. c. A gain on collectibles is taxed at a maximum rate of 25 percent. d. Corporate stock held in an investment portfolio may qualify as a collectible. e. Collectibles held less than twelve months may still qualify for preferential tax treatment. f. Alcoholic beverages held over a year can qualify as a collectible. g. Coin collections and stamp collections may qualify as collectibles.

A, F, G

Bailey stood in line for hours and purchased the new game system the day it became available for $600. Knowing that there was a high demand for the game system and a limited supply, she decided to put the item on E-bay rather than keep it. She sold it for $950. She also sold her five-year old car for $5,000. She had purchased the car for $13,000. What is the taxable nature of these transactions? a. Bailey has a taxable short-term capital gain of $350 and a deductible long-term capital loss. b. Bailey has a taxable short-term capital gain of $350, but no deductible loss for the car. c. Bailey does not have to pay tax on the game system, but she deductible long-term capital loss. d. Bailey has no tax consequences for these transactions because the assets sold were "personal use" assets.

B

If a taxpayer sells a personal-use asset at a gain, the taxpayer ______ recognize a capital gain. If a taxpayer sells a personal-use asset at a loss, the taxpayer ______ recognize a capital loss. a. will not; will not b. will; will not c. will not; will d. will; will

B

In order for a taxpayer to be able to deduct the loss on a business activity that he is involved in, which of the following must be true? a. The taxpayer must actively participate in the business. b. The taxpayer must materially participate in the business. c. The taxpayer must own over half of the business. d. The taxpayer must manage and direct the operations of the business.

B

Please choose the statement that is INCORRECT regarding portfolio and passive investments? a. Losses from passive investments not subject to at-risk limits will be deducted at ordinary rates. b. Losses from portfolio investments are deductible in full against ordinary income. c. Losses from passive investments may be deducted immediately or they may have to be deferred. d. Losses from portfolio investments are deferred until the investment is sold.

B

Please choose the statement that is INCORRECT? A. Gains on the sale of capital assets are taxed at rates lower than a taxpayer's marginal rate if the assets were held for more than one year. B. The tax advantages of holding an asset for more than a year overrides the risk of declining values in the investment. C. Taxpayers should balance the tax benefits of holding assets with the risk that the asset values will have declined by the time they are sold. D. Investing in capital assets allows taxpayers to defer recognizing gains until the assets are sold resulting in a lower PV of capital gains tax.

B

Which of the following statements is INCORRECT regarding flow-through entities? a. Operating income from flow-through entities is taxed as ordinary income to the taxpayer-owners of the entities. b. Operating income from flow-through entities may or may NOT be taxable in the current year, depending on certain limits imposed on the taxpayer. c. Operating losses from flow-through entities are deductible in the current year. d. Operating losses are treated as ordinary losses for taxpayers to the extent they are deductible.

B

Which of the following types of assets does NOT qualify as a capital asset? a. Assets held as investments b. Assets used in a trade or business c. Assets classified as "personal use"

B

Which one of the following tax rates does NOT currently apply to long-term capital gains? a. 28% b. 37% c. 20% d. 25% e. 15%

B

Which of the following assets would qualify as capital assets? (Check all that apply.) a. Inventory in a business b. Land held for investment c. Personal residence d. Coin collection e. Warehouse used in a business f. Corporate stock

B, C, D, F

Which of the following answers pertain to short-term capital gains and losses? (Check all that apply.) a. The gains are taxed at lower, preferential tax rates. b. The holding period is one year or less. c. The holding period is five years or less. d. The gains are taxed at ordinary tax rates. e. The gains may be taxed at one of three preferential (15%, 25%, 28%) rates. f. The holding period is more than two years.

B, D

Chad incurred capital gains and losses during the current year. He has a $7,000 net short-term capital gain; a $14,000 long-term capital loss in the 15% category; and a $10,000 long-term capital gain taxed at 28%. How will these transactions be taxed after the gains and losses are combined? a. $3,000 will be taxed at 15%. b. $3,000 will be taxed at 28%. c. $3,000 will be taxed at marginal rates. d. $7,000 will be taxed at taxed at the marginal rate, and the $4,000 excess long-term capital loss will be carried forward.

C

Please choose the statement that is INCORRECT when referring to net passive income? a. Net passive income may be subject to the net investment income tax of 3.8% in addition to regular income tax. b. Net investment income includes net passive income. c. Net passive income is taxed at long-term capital gains rates.

C

What is the rate of the additional tax that is assessed on net investment income when it exceeds specified thresholds? a. 15.3% b. 1.45% c. 3.8% d. 6.2%

C

What type of gain is taxed at a maximum long-term capital gains rate of 25%? a. Gain from the sale of intangible investments, such as stock b. Gain from the sale of personal use assets c. Unrecaptured Section 1250 gain from the sale of business property d. Gain from the sale of collectibles

C

Which of the following statements is FALSE regarding the tests for material participation in a trade or business activity? a. A taxpayer's involvement does NOT have to exceed 500 hours a year in one activity to be considered materially participating if other tests are met. b. A taxpayer can be deemed to be materially participating due to prior years of service. c. A taxpayer must be involved in the business on a full-time basis throughout the year to be considered materially participating. d. A taxpayer can be materially participating by being involved in more than one activity if the total hours of involvement meet certain levels.

C

Which of the following statements is FALSE regarding the tests for material participation in a trade or business activity? a. A taxpayer's involvement does NOT have to exceed 500 hours a year in one activity to be considered materially participating if other tests are met. b. A taxpayer can be materially participating by being involved in more than one activity if the total hours of involvement meet certain levels. c. A taxpayer must be involved in the business on a full-time basis throughout the year to be considered materially participating. d. A taxpayer can be deemed to be materially participating due to prior years of service.

C

Which of the following statements is TRUE regarding the tests for material participation in a trade or business activity? a. A taxpayer's involvement is measured only in the current year and can NOT be deemed to be materially participating due to prior years of service. b. A taxpayer must be involved in the business on a full-time basis throughout the year to be considered materially participating. c. A taxpayer can be materially participating by being involved in more than one activity if the total hours of involvement meet certain levels. d. A taxpayer's involvement must exceed 500 hours a year in one activity to be considered materially participating.

C

Which of the following statements is correct? a. Dividend income from tax exempt organizations is exempt from tax. b. Interest income may be deferred and recognized in a later year. c. Interest income is typically taxed at ordinary rates. d. Dividend income is generally taxed at ordinary rates.

C

Qi, Julian, and Omar are all in the 24% tax bracket. Qi has received $3000 in corporate bond interest, Omar $2500 in savings account interest, and Julian $2500 in dividends from a US corporation. Rank the taxpayers by their tax liability from the amounts received, from least to greatest. a. Omar's $2,500 b. Qi's $3,000 c. Julian's $2,500

C, A, B

Regarding portfolio investments, which types of income generally are taxed at a rate lower than the taxpayer's marginal tax rate? (Check all that apply.) a. Nonqualified dividends b. Interest on corporate bonds c. Qualified dividends d. Long-term capital gains e. Short-term capital gains

C, D

Angie incurred capital gains and losses during the current year. She has a $12,000 net short-term capital loss; a $5,000 long-term capital gain in the 15% category; and a $15,000 long-term capital gain in the 28% category. How will these transactions be taxed after the gains and losses are combined? a. $2,000 will be taxed at 15% and $15,000 will be taxed at 28%. b. $5,000 will be taxed at 15% and $12,000 will be taxed at 28%. c. $8,000 will be taxed at 28%. d. $3,000 will be taxed at 28% and $5,000 will be taxed at 15%.

D

Bridget, a single taxpayer, sold a building used in her business during the current year. The realized gain on the sale was $135,000. Of this amount, $95,000 is unrecaptured Section 1250 gain. How will Bridget be taxed on this gain assuming her marginal tax rate is 32 percent and her LTCG rate is 15%? a. $95,000 will be taxed at 25 percent and $40,000 will be taxed at 32%. b. $135,000 will be taxed at 25%. c. $135,000 will be taxed at 32% d. $95,000 will be taxed at 25 percent and $40,000 will be taxed at 15%.

D

What term is used to denote the interest incurred on loans used to acquire investments? a. Net investment income b. Investment expense c. Net investment expense d. Investment interest expense

D

What type of gain is taxed at a maximum long-term capital gains rate of 25%? a. Gain from the sale of intangible investments, such as stock b. Gain from the sale of personal use assets c. Gain from the sale of collectibles d. Unrecaptured Section 1250 gain from the sale of business property

D

Which of the following statements is CORRECT regarding the sale of qualified small business stock (Sec. 1202 stock)? a. The effective capital gains tax rate is 28%. b. The taxable gain is taxed as ordinary income c. The stock must have a long-term holding period of at least one year. d. Up to 100% of the gain could be excluded depending on the acquisition date.

D

Which of the following types of income is generated from passive investments rather than portfolio investments? a. Capital gains b. Interest income c. Dividend income d. Operating income

D

Which of the following statements are true when considering the deductibility of a suspended passive loss? (Check all that apply.) a. The suspended loss can only be deducted against passive income from the same passive activity that generated the loss. b. The taxpayer will lose the tax benefit of the suspended loss if he sells or divests of the passive activity. c. The suspended loss can reduce short and long-term capital gains, but NOT ordinary income. d. The suspended loss may be deducted against active or portfolio income when the taxpayer sells or divests of the passive activity. e. The suspended loss may be deducted when a taxpayer generates passive income from that activity or another passive activity.

D, E

T/F: Income from passive investments may be taxed at ordinary rates, preferential rates, or may be exempt from taxation while income from portfolio investments will be taxed at ordinary rates.

False

T/F: A suspended loss on a passive activity can be used to offset active and portfolio income in the year the taxpayer sells or divests of the activity.

True

T/F: Capital losses retain their character as short-term or long-term when they are carried forward to subsequent years

True

T/F: Net passive income is included with net investment income and, therefore, may be subject to the 3.8% additional tax on net investment income.

True

Assets that are held for investment or personal use assets are referred to as _______ assets.

capital

Taxpayers can completely offset _________ _______ with capital losses. If there remains an excess capital loss, taxpayers can deduct up to $_______ per year against ordinary income. The loss exceeding that amount is carried forward indefinitely.

capital, gain, 3000

Assets such as works of art, antiques, stamps and coins held for more than one year are referred to as ___________. The maximum capital gains tax rate applied to the gain on the sale of these assets is ____________ percent.

collectibles, 28

Unincorporated business and rental activities do NOT pay taxes at the organization level; rather these types of activities are ________- ________ entities whose operating income and losses are allocated to the owners of the entities.

flow-through

Taxpayers must __________ (include/exclude) gains but __________ (include/exclude) losses on the disposal of personal use assets from gross income.

include, exclude

When taxpayers borrow money to acquire investments, the interest expense they pay on the loan is _______ _______ expense and the deduction is limited to the taxpayer's ______ ______ income for the year.

investment interest, net interest

The net investment income tax is imposed on the ________ of (a) net investment income or (b) the excess of ________ AGI over a specific level depending on filing status.

lesser, modified

When a taxpayer does NOT materially participate in the business activities of a trade or business (including rental activities) in which he is a partial owner, any loss that flows through to the taxpayer is subject to the _____ ______ loss rule.

passive activity

A taxpayer's income or loss for the year is classified into one of three categories: __________ income/loss, __________ income/loss, and __________ income/loss.

passive activity, portfolio, active business

Passive activity losses may only offset _______ income, but NOT active ________ or income.

passive, portfolio

Regarding portfolio investments, _________ dividends generally are taxed at capital gains rates and _________ dividends are taxed at ordinary rates

qualified, nonqualified