Exam 4 Tax Practice Tests

Ronʹs building, which was used in his business, was destroyed in a fire. Ronʹs adjusted basis in the building was $210,000, and its FMV was $330,000. Ron filed an insurance claim and was reimbursed $300,000. In that same year, Ron invested $240,000 of the insurance proceeds in another business building. Ron will recognize gain of A. $0. B. $60,000. C. $30,000. D. $90,000.

$ 60,000 Insurance proceeds $300,000 Minus: Adjusted basis of old building ( 210,000) Equals: Gain realized $ 90,000 Insurance proceeds $300,000 Minus: Proceeds reinvested ( 240,000) Equals: Proceeds not reinvested $ 60,000 Gain recognized: Lesser of: 1. Gain realized 2. Proceeds not reinvested $ 90,000 60,000 Gain recognized $ 60,000

Jenna, who is single, sold her principal residence on December 1, 2014, and excluded the $150,000 gain because she met the ownership and usage requirements under Sec. 121. Jenna purchased another residence in Pensacola on January 1, 2015 that she occupied until July 1, 2015 when she receives a new job offer from an employer in Miami. She sells the Pensacola residence on October 1, 2015 and realizes a gain of $40,000. Jenna may exclude what amount of the gain from the sale on October 1, 2015? A. $40,000 B. $10,000 C. $0 D. $20,000

$0

Mara owns an activity with suspended passive losses from prior years of $13,000. In the current year, Mara becomes a material participant in the activity. This year the activity generates $6,000 of income. The net effect of this activity on Mara's current year AGI is a(n) A. decrease of $13,000. B. 0. C. decrease of $7,000. D. increase of $6,000.

$0

Tyler (age 50) and Connie (age 48) are a married couple. Tyler is covered under a qualified retirement plan at his job and earned $175,000 in 2015. Connie is employed as a lab technician and earned $30,000 but is not covered under a qualified retirement plan. They file a joint return; have interest and dividend income of $30,000. What is their maximum for AGI deduction for contributions to a traditional IRA? A. $5,500 B. $6,500 C. $12,000 D. $0

$0 Because their AGI exceeds $193,000, neither Tyler nor Connie may make tax deductible contributions to a traditional IRA.

Joseph has AGI of $170,000 before considering the $20,000 rental loss for property which he actively manages. How much of the rental loss can he deduct? A. $25,000 B. $10,000 C. $20,000 D. $0

$0 His AGI exceeds $150,000, so no portion of the rental loss is deductible

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

$0 None of the travel expenses are deductible because the expenses are related to income-producing activities under Section 212 and are not related to Gayle's trade or business.

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

$1,250. $3,000 + $2,000 = $5,000 total expenses × .50 reimbursed = $2,500 unreimbursed × .50 = $1,250.

Wesley completely demolished his personal automobile in a car accident. Damage to the auto was estimated at $35,000. Wesley had purchased the car a few years ago for $60,000. He received an insurance reimbursement of $28,000. His adjusted gross income this year was $55,000 and he incurred no other losses during the year. What amount can he deduct as a casualty loss on his income tax return after limitations? A. $6,900 B. $1,500 C. $7,000 D. $1,400

$1,400 ($35,000 - $28,000 - $100 - $5,500) = $1,400

Hope sustained a $3,600 casualty loss due to a severe storm. She also incurred a $800 loss from a theft in the same year. Both the casualty and theft involved personal use property. Hopeʹs AGI for the year is $25,000 and she does not have insurance coverage. Hopeʹs deductible casualty loss is a. $1,700 b. $1,800 c. $4,200 d. $4,300

$1,700 before limits $3,600 $ 800 $4,400 Minus: $100 floor ( 100) ( 100) ( 200) $3,500 $ 700 $4,200 Minus: 10% of AGI ( 2,500) Deductible loss $ 1,700

Nicole has a weekend home on Pecan Island that she purchased in 2013 for $250,000. Recently, the home was appraised at $260,000. After the appraisal, a hurricane hit Pecan Island, severely damaging Nicole's home. An appraisal placed the value of the home at $140,000 after the hurricane. Because of its prohibitive cost, Nicole had no hurricane insurance. Before any reductions or limitations, Nicole's casualty loss amount is A. $0. B. $10,000. C. $140,000. D. $120,000.

$120,000 Lesser of: Basis $250,000 or Reduction in FMV: FMV Before casualty $260,000 Minus: FMV After casualty ( 140,000) Reduction in FMV $120,000

Bobbie exchanges business equipment (adjusted basis $160,000) for other business equipment that has a FMV of $140,000. Bobbie also receives $30,000 cash. Bobbieʹs basis in the new equipment is A. $130,000. B. $160,000. C. $140,000. D. $170,000.

$140,000. This transaction qualifies as a likekind exchange with boot received. The gain realized is $170,000 (FMV of new equipment plus $30,000 cash) $160,000 adjusted basis of old equipment = $10,000. She must recognize gain to the extent of the lesser of the boot received or the realized gain so the full $10,000 realized gain is recognized. The basis of the new equipment is [$160,000 (old basis) 30,000 (boot received) + 10,000 (gain recognized)] = $140,000 or the FMV of property received less unrecognized gain of $0 = $140,000.

Justin has AGI of $110,000 before considering his $30,000 loss from rental property, which he actively manages. How much of the rental loss can Justin deduct this year? A. $25,000 B. $20,000 C. $10,000 D. $30,000

$20,000 Justin must reduce the $25,000 rental loss allowance by 50% of his AGI over $100,000, resulting in a deductible loss of $20,000 [$25,000 - .5($110,000 - $100,000)]

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

$22,000 Gross income $110,000 Minus: Salaries, etc. ( 88,000) Equals: limit on remaining expenses $22,000

Ron obtained a new job and moved from Houston to Washington. He incurred the following moving expenses: Transportation of household goods $3,200 Househunting trips 1,500 Temporary living expenses (20 days) 3,400 Commissions on new lease 500 Costs of settling old lease 250 Mileage for personal automobile 1,400 miles Assuming Ron is eligible to deduct his moving expenses, what is the amount of the deduction? A. $8,422 B. $6,600 C. $9,172 D. $3,522

$3,522 Transportation of goods $3,200 Mileage (1,400 × .23) 322 Deductible moving expenses $3,522

Juanʹs business delivery truck is destroyed in an accident. He paid $40,000 for the truck, and $30,000 of depreciation has been deducted during its period of use. The insurance company pays Juan $32,000 due to the accident. What is the minimum amount that Juan must spend on a new truck to avoid any gain recognition? A. $32,000 B. $22,000 C. $40,000 D. $10,000

$32, 000

William and Kate married in 2015 and purchased a new home together. Each had owned and lived in separate residences for the past 5 years. Williamʹs adjusted basis in his old residence was $200,000; Kateʹs adjusted basis in her old residence was $120,000. In late 2015, William sells his residence for $500,000 while Kate sells her residence for $190,000. What is the total gain to be excluded from these transactions in 2015? A. $250,000 B. $370,000 C. $0 D. $320,000

$320,000

Jorge owns activity X which produced a $20,000 passive loss last year. Jorge's only income last year was wages of $30,000. Jorge is a material participant in activity X this year when it produces a $14,000 loss. This year, Jorge's wages are $40,000. This year, Jorge also has passive activity income from activity Y of $16,000. What is the total passive activity loss carryover to next year? A. $4,000 B. $18,000 C. $3,000 D. $0

$4000 $20,000 carryover from prior year - $16,000 current passive income offset = $4,000 carryover to next year. This year's $14,000 active business loss from Activity X may offset Jorge's wages.

Hannah is a 52yearold an unmarried taxpayer who is not an active participant in an employersponsored qualified retirement plan. Before IRA contributions, her AGI is $64,000 in 2015. What is the maximum amount she may contribute to a tax deductible IRA? A. $6,500 B. $5,200 C. $4,400 D. $5,500

$6,500 Hannah is not an active participant in an employersponsored qualified retirement plan and therefore may deduct the full $5,500 limit plus $1,000 because she is over 50 years old.

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

$9,000 ($7,000 + $1,000 + $4,000) × 15,000/20,000 = $9,000.. Rajiv is selfemployed so the 2% of AGI floor does not apply.

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

Austin Tex $0 $1,800 The taxpayer (Tex Inc.) who ultimately pays the expenses is subject to the 50% cutoff. $3,600 × .50 = $1,800. Austin is fully reimbursed so he does not deduct anything.

The following individuals maintained offices in their home: (1) Dr. Austin is a self-employed surgeon who performs surgery at four hospitals. He uses his home for administrative duties as he does not have an office in any of the hospitals. (2) June, who is a self-employed plumber, earns her living in her customer's homes. She maintains an office at home where she bills clients and does other paperwork related to her plumbing business. (3) Cassie, who is an employee of Montgomery Electrical, is provided an office at the work but does significant administrative work at home. Her employer does not require her to do extra work but she feels it is necessary in order to properly do her job. A. Dr. Austin and June B. Dr Austin D. Cassie and June D. All of the taxpayers are entitled to a deduction.

Dr. Austin and June Only Dr. Austin and June get deductions. In order for an employee, Cassie, to take the deduction, the office in home must be for the convenience of her employer in addition to the other requirements.

All of the following statements regarding tax treatment of education expenses except A. Sophie is a partner in a CPA firm. She pays out of her own funds to attend an update course on estate and gift tax planning. Sophie can deduct the cost of the course for AGI. B. Iris is an associate in a law firm. She attends an update course on contract drafting, and she is reimbursed by the law firm. There is no effect on Irisʹ tax return. C. Javier is an associate in a CPA firm. He pays out of his own funds to attend an update course on new FASB standards. Javier can deduct his cost for the course as a miscellaneous itemized deduction (subject to the 2% nondeductible floor). D. Fred, who recently graduated law school, is working in a law firm. The firm requires that he pass the bar exam by a certain date, or he will lose his job. Fred can deduct his cost for the bar exam review course as a miscellaneous itemized deduction (subject to the 2% nondeductible floor)

Fred, who recently graduated law school, is working in a law firm. The firm requires that he pass the bar exam by a certain date, or he will lose his job. Fred can deduct his cost for the bar exam review course as a miscellaneous itemized deduction (subject to the 2% nondeductible floor). None of Fredʹs expenses are deductible because they are incurred to meet the minimum educational standards for qualification in his profession.

In 2014 Grace loaned her friend Paula $12,000 to invest in various stocks. Paula signed a note to repay the principal with interest. Unfortunately the market for that industry sector plunged, and Paula incurred large losses. In 2015 Paula declared personal bankruptcy and Grace was unable to collect any of her loan. Grace had no other gains or losses last year or this year. The result is A. Grace deducts a business bad debt of $3,000 in 2015 and carries $9,000 over to subsequent years. B. Grace deducts a $12,000 nonbusiness bad debt as a short-term capital loss in 2015. C. Grace deducts a $3,000 nonbusiness bad debt as a short-term capital loss in 2015 and carries $9,000 over to subsequent years. D. Grace deducts a business bad debt of $12,000 in 2015.

Grace deducts a $3,000 nonbusiness bad debt as a short-term capital loss in 2015 and carries $9,000 over to subsequent years The debt is a nonbusiness bad debt since it is not related to Grace's trade or business. Therefore, the $12,000 loss is treated as a short-term capital loss, $3,000 of which is deductible this year and $9,000 of which may be carried over to next year.

Which of the following statements with respect to a likekind exchange is false? A. An exchange of inventory does not qualify as a likekind exchange. B. Sale of property and subsequent purchase of likekind property will always qualify as a likekind exchange. C. Personal property must be exchanged for personal property. D. Property of one class must be exchanged for property of the same class.

Sale of property and subsequent purchase of likekind property will always qualify as a likekind exchang

All of the following may deduct education expenses except: A. Marvin is a high school teacher who incurs expenses for education courses to meet new course requirements to maintain his job. B. Paige is an accountant who incurs expenses to take a CPA exam review course. C. Hope is a business executive who incurs expenses to pursue an MBA degree. D. Richard is a self-employed dentist who incurs expenses to attend a convention on new techniques in oral surgery

Paige is an accountant who incurs expenses to take a CPA exam review course.

Which of the following statements regarding involuntary conversions is incorrect? A. With some exceptions, the replacement property must be similar or related in service or use to the property converted. B. The taxpayeruse test applies to the involuntary conversion of rental property owned by an investor. C. Real property used in a trade or business that is condemned must be replaced with property which has the same functional use as the converted property. D. The functionaluse test is more restrictive than the likekind test.

Real property used in a trade or business that is condemned must be replaced with property which has the same functional use as the converted property. Condemned real property may be replaced with likekind property.

Jamie sells investment real estate for $80,000, resulting in a $15,000 loss. Jamieʹs loss isa A. Sec. 1244 loss. B. a capital loss. C. an ordinary loss. D. a Sec. 1231 loss.

a capital loss Real estate held for investment is considered a capital asset, therefore the loss on the sale or exchange is a capital loss.

Lucia owns 100 shares of Cronco Inc. which she purchased on December 1 of last year for $10,000. The stock is not Sec. 1244 stock. On July 1 of the current year, Lucia receives notice from the bankruptcy court that Conco Inc. has been liquidated, and there are no assets remaining for shareholders. As a result, Lucia will have A. a long-term capital loss of $10,000. B. no loss allowed. C. a short-term capital loss of $10,000. D. an ordinary loss of $10,000.

a long-term capital loss of $10,000.

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

an advanced age of the taxpayer younger taxpayers are more likely to benefit because of the years available to accumulated earnings tax-free.

All of the following qualify as a likekind exchange except A. improved real estate held for investment for unimproved real estate held for investment. B. an apartment building held for investment for farmland used in a trade or business. C. a printer used in trade or business for a computer used in trade or business. D. an airplane used in trade or business for a general purpose truck used in trade or business.

an airplane used in trade or business for a general purpose truck used in trade or business.

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

deductible from AGI, subject to the 2% of AGI floor. Ron has accepted a temporary assignment of one year or less so the living expenses are deductible. He is an employee so the deductible expenses will be subject to the 2% of AGI floor

Constance, who is single, is in an automobile accident in 2015, and her car sustains $6,200 in damages. Because both drivers received tickets in the accident, Constance does not expect to recover any of the loss from her insurance company. Constance's 2015 AGI is $31,000. Her casualty loss is $3,000; she has other itemized deductions of $1,200. In 2016, Constance's insurance company reimburses her $2,800. Constance's 2016 AGI is $28,000. As a result, Constance must A. do nothing to the 2015 return but report $2,800 of income on her 2016 return. B. amend the 2016 return to show the $200 loss. C. amend the 2015 return to show $0 loss and file her 2016 return to show $200 loss. D. do nothing and simply keep the $2,800.

do nothing and simply keep the $2,800.

Danielʹs cabin was destroyed in a massive tornado in 2015. After consideration of insurance, he has a loss of $15,000. The President of the United States has declared the area a disaster area. Daniel can deduct this loss in A. 2014. B. 2015. C. 2016. D. either 2014 or 2015

either 2014 or 2015

During the year, Mark reports $90,000 of active business income from his law practice. He also owns two passive activities. From Activity A, he earns $20,000 of income, and from Activity B, he incurs a $30,000 loss. As a result, Mark A. reports AGI of $80,000. B. reports AGI of $110,000 with a $30,000 passive loss carryover. C. reports AGI of $90,000 with a $30,000 passive loss carryover. D. reports AGI of $90,000 with a $10,000 passive loss carryover

reports AGI of $90,000 with a $10,000 passive loss carryover. Mark offsets $20,000 of Bʹs loss against Aʹs income and carries forward the $10,000 loss. His AGI is $90,000 from the active business income.

Last year, Abby loaned Pat $10,000 as a gesture of their friendship. Although Pat had signed a note payable that contained interest payments and a maturity date, the loan had not been repaid this year when Pat died insolvent. For this year, assuming that the loan was bona fide, Abby should account for nonpayment of the loan as a(n) A. itemized deduction. B. short-term capital loss. C. long-term capital loss. D. ordinary loss.

short-term capital loss Because the debt is not related to Abby's trade or business, it is a nonbusiness bad debt. All nonbusiness bad debts are deductible as short-term capital losses.

An individual is considered to materially participate in an activity if any of the following tests are met with the exception of A. the individual participates in the activity for 75 hours during the year, and that participation is more than any other individualʹs participation for the year. B. the individual participates in the activity for more than 500 hours during the year. C. the individual has materially participated in the activity in any five years during the immediate preceding 10 taxable years. D. the individualʹs participation in the activity for the year constitutes substantially all of the participation in the activity by all individuals

the individual participates in the activity for 75 hours during the year, and that participation is more than any other individualʹs participation for the year.