Exam 2 FIT

Vincent pays $20,000 for equipment to use in his trade or business. He pays sales tax of $800 as a result of the purchase. Must the $800 sales tax be capitalized as part of the purchase price?

Yes, sales tax paid or accrued in connection with the acquisition of property is included as part of the property's purchase price

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 of property.

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.

True

The sale of inventory results in ordinary gain or loss

True

Self- employed individuals may claim, as a deduction for adjusted gross income, 50 percent of their

self - employment tax

All of the following are true with regard to the alternative depreciation system except

the ADS election is available to personal property on a property by property basis.

When depreciating 5 - year property, the final year of depreciation will be year

6

Paul bought a computer for $15,000 for business use on March 18, 2011. This was his only purchase for that year. Paul used the most accelerated depreciation method available, but did not elect sec. 179. Bonus depreciation was not available. Paul sells the machine in 2013. The depreciation on the computer for 2013 is

$1,440

On January 1 of the current year, the Purple corporation issues $200,00 of 11%, 10-year bonds for 190,000. Determine the amount of the original discount, if any

$10,000

Teri Pays the following interest expenses during the year: Home and mortgage interest on personal residence 8,500 credit cart interest on personal purchases 550 Interest on loans to purchase investments ( net investment income is $2,000) 2,400 Interest on loans used for a business conducted as sole proprietorship 3,800 Interest on a credit car used exclusively in the busness 470 What is the amount of interest expense that can be deducted as an itemized deduction?

$10,500

In 2001, Ella purchased a house for $90,000 to use as her personal residence. she paid $18,000 and borrowed 72,000 from the local savings and loan company. In 2005 she paid $20,000 to add a room to the house. In 2007 she paid $700 to have the house painted and $800 for built-in bookshelves. As of January 1 of the current year, she has reduced the $72,000 mortgage to $64,800. What is her basis for the house?

$110,800 (90,000+800+20,000)

Jimmy owns a trucking business. During the current year he incurred the following Gas and oil $100,000 Maintenance $15,000 Fines for speeding and illegal parking $ 8,000 Bribes to Governement inspection officials $21,000 What is the total amount of deductible expenses?

$115,000

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 $350,000 straight - line would have been $320,000. As a result of the sale, how much section 1231 gain will artima corporation report?

$406,000

Van pays the following medical expenses this year $1,500 for doctor bills for Van's son who is claimed as a dependent by van's former spouse $300 for Van's eyeglasses $900 for Van's dental work $3,800 for Van's facelift. Van a newscaster, is worried about the wrinkles around his eyes. How much can van included on his return as qualified medical expenses before limitation?

$2,700

Erin's records reflect the following information 1.) paid 200 dues to fraternal organization 2.) Donated stock to a qualified charitable organization. 3.) Paid $1,600 cash to qualified public charitable organizations Erin's adjusted gross income for this year was $50,000. what is the amount of charitable contribution deduction for the year?

$5,100

Charles is a single person, age 35, with no dependents. In 2013, 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 no itemized deductions. Charles's taxable income is

$7,000

Wang, a licensed architect employed by skye architects, incurred the following unreimbursed expenses this year: Subscription to architectural journal 800 Dues to professional architecture society 400 tax return preparation 600 investment advice 500 Wangs AGI is $75,000 what is his ned deduction for miscellaneous itemized deductions?

$800

In 2001, Ethel purchased a house for $70,000 to use as her personal residence. She paid $14,000 and borrowed $56,000 from the local savings and loan company. In 2005 she paid $15,000 to add a room to the house. In 2007 she paid $850 to have the house painted and $1,300 for built-in bookshelves. As of January 1 of the current year, she has reduced the $56,000 mortgage to $50,400. What is her basis for the house?

$86,300 (70,000+15,000+1,300)

What documentation is required in order for a travel or entertainment expense to be deductible?

All the above

Deductions for AGI may be located

All the above are true (on schedule C as a deduction, on schedule E as a deduction, on the front page of form 1040)

Which of the follwoing statements regarding sec. 179 is true

Amounts of the Sec. 179 election in excess of the taxable income limitation are carried forward.

What is the first day that an individual could sell a capital asset purchased on March 31 2013 and have a holding period of more than one year?

April 1, 2014

In a business combination, why does the buyer generally prefer to allocate as much of the purchase price to short-lived depreciable assets, ordinary assets such as inventory, and sec. 197 intangible assets?

Both A and B are correct (tax benefits obtained from the depreciation and amortization, and buyers generall perfer a liberal allocation of the purchase price)

Explain the difference between cost depletion and percentage depletion. Which of these two methods generally provides the largest deduction?

Cost depletion is similar to the units-of-production method of depreciation and is calculated by dividing the asset's adjusted basis by the estimated recoverable unites to arrive at a per unit depletion amount. This per-unit amount is then multiplied by the number of units sold to determine the cost depletion deduction. Percentage depletion is computed by multiplying the percentage depletion rate times the gross income from the property. percentage depletion will generally provide larger deductions than cost depletion, especially when measured over the life of the property.

Taxpayers may deduct legal fees incurred in the acquisition of property

False

For the years 2009 through 2013 (inclusive) Mary, best-selling author, has been involved in operating an antique store. In 2009, 2010, and 2011 her revenue exceeded the expenses from the activity. In 2012 and 2013, the antique store generated a loss. Which statement is correct?

The activity is presumed to be a business. However, the IRS may prove it is a hobby.

If Pam transfers an asset to Fred and the asset is subject to a liability that is assumed by Fred, How does Fred's assumption of the liability affect the amount realized by Pam? How does Fred's assumption of the laibility affect his basis for the property?

The amount realized by Pam is increased by the amount of the liability assumed by Fred, therefore, Fred's basis is increased by the amount of the assumed liability.

Four years ago, Susan loaned $7,000 to her friend Joe. During the current year, the $7,000 loan is considered worthless. Explain how Susan should treat the worthless debt for tax purposes.

The debt is a nonbusiness bad debt, therefore, the loss is treated as a short-term capital loss.

In 2013, Thomas, who has a marginal tax rate of 15%, 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 non-recaptured 1231 gain, the $4,000 will not be taxed.

True

Which of the following is not required for an accrual method taxpayer to currently deduct the cost of services received?

The liability must be paid.

For individuals, what is the overall deduction limitation on charitable contributions? What is the limitation for corporations?

The overall deduction limitation on charitable contributions for individuals is 50% of the taxpayer's AGI for the year. The limitation for corporations is 10% of taxable income computed without regard to the dividends received deduction, the charitable contribution deduction, or any NOL or capital loss carrybacks.

An expense is considered necessary if it is "appropriate and helpful" in the taxpayer's business.

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.

True

Fees paid to prepare a taxpayer's schedule C of the tax return (profit or loss from business) are for AGI deductions

True

For non corporate taxpayers, depreciation recapture is not required on real property placed in service after 1986

True

If a taxpayer has gains on sec. 1231 assets, sec. 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

True

A building used in a business for more than a year is sold. Sec. 1250 will not cause depreciation recapture if

all of the above

In accounting and research and experimental expenditures, all of the following alternatives are available with the exception of

expense R&E costs in the year in which a product of process becomes marketable

The following taxes are deductible as itemized deductions with the exception of

federal income taxes

In calculating depletion of natural resources each period

the greater of cost depletion or percentage depletion must be used.