Tax Exam 2
True
The tax benefit received from a tax credit is never affected by the tax rate of the taxpayer.
False
The tax benefits resulting from tax credits and tax deductions are affected by the tax rate bracket of the taxpayer.
True
The tax credit for rehabilitation expenditures for certified historic structures differs from that for qualifying structures that are not certified historic structures.
True
The tax law specifically provides that a taxpayer cannot be temporarily away from home for any period of employment that exceeds one year.
False
The work opportunity tax credit is available only for wages paid to qualifying individuals during their first year of employment.
False
The work-related expenses of an independent contractor will be subject to the 2%-of-AGI floor.
False
There is no cutback adjustment for meals and entertainment as to employees who are subject to regulation by the U.S. Department of Transportation.
True
Tickets to a theater performance or sporting event can be treated as either business entertainment or a business gift if the taxpayer does not accompany the client to the event.
False
Tired of renting, Dr. Smith buys the academic robes she will wear at her college's graduation procession. The cost of this attire does not qualify as a uniform expense.
Nonrefundable credits are those that reduce the taxpayer's tax liability but are not paid when the amount of the credit (or credits) exceeds the taxpayer's tax liability. (T/F)
True
Points paid by the owner of a personal residence to refinance an existing mortgage must be capitalized and amortized over the life of the new mortgage.
True
The earned income credit, a form of a negative income tax, is a refundable credit. (T/F)
True
Maria made significant charitable contributions of capital gain property in the current year. In fact, the amount of the contributions exceeds 30% of her AGI. The excess charitable contribution that is not deductible this year can be carried over for five years.
True A five year carryover period applies. In the carryover process, the carryover will continue to be classified as 30 percent property.
Fees for automobile inspections, automobile titles and registration, bridge and highway tolls, parking meter deposits, and postage are not deductible if incurred for personal reasons, but they are deductible as deductions for AGI if incurred as a business expense by a self-employed taxpayer.
True As noted in the text, certain taxes are deductible and certain are nondeductible. Specified taxes (such as state income taxes and real and personal property taxes) are deductible as itemized deductions, but personal fees are not. However, fees incurred in a trade or business are deductible, but not as itemized deductions.
Joe, a cash basis taxpayer, took out a 12-month business loan on December 1, 2016. He prepaid all $3,600 of the interest on the loan on December 1, 2016. Joe can deduct only $300 of the prepaid interest in 2016.
True Cash basis taxpayers are required to allocate prepaid interest to the tax years to which the interest relates. Therefore, Joe can deduct only $300 ($3,600 X 1/12) in 2016 and the other $3,300 in 2017.
Chad pays the medical expenses of his son, James. James would qualify as Chad's dependent except that he earns $7,500 during the year. Chad may claim James' medical expenses even if he is not a dependent.
True Chad may deduct the medical expenses. The gross income test is waived in determining dependency status for medical expense purposes.
In 2016, Dena traveled 600 miles for specialized medical treatment that was not available in her hometown. She paid $90 for meals during the trip, $145 for a hotel room for one night, and $15 in parking fees. She did not keep records of other out-of-pocket costs for transportation. Dena can include $179 in computing her medical expenses.
True Dena can deduct $114 (600 miles × 19 cents per mile) for transportation. The 19 cents per mile automatic mileage option for medical transportation does not include related parking fees and tolls, so she also can deduct the $15 paid for parking fees. She can deduct $50 for the hotel, but she cannot deduct the cost of meals. Therefore, Dena can deduct $179 ($114 + $50 + $15 = $179).
Herbert is the sole proprietor of a furniture store. He can deduct real property taxes on his store building as a business deduction but he cannot deduct state income taxes related to his net income from the furniture store as a business deduction.
True Herbert may deduct the real property taxes on the store building as a business expense. However, the position of the IRS is that state and local income taxes imposed upon an individual are deductible only as itemized deductions, even if the taxpayer's sole source of income is from a business, rents, or royalties
Capital assets donated to a public charity that would result in long-term capital gain if sold, are subject to the 30%-of-AGI ceiling limitation on charitable contributions for individuals.
True However, a limited exception applies if the long-term capital gain property is tangible personalty that is put to an unrelated use by the charity. In this situation, the deduction is subject to the 50%-of-AGI limitation.
Phyllis, a calendar year cash basis taxpayer who itemized deductions totaling $20,000, overpaid her 2015 state income tax and is entitled to a refund of $400 in 2016. Phyllis chooses to apply the $400 overpayment toward her state income taxes for 2016. She is required to recognize that amount as income in 2016.
True It does not matter for Federal income tax purposes whether the overpayment is refunded or applied toward the 2016 state income tax liability if the overpayment resulted in a tax benefit.
Jim's employer pays half of the premiums on a group medical insurance plan covering all employees, and employees pay the other half. Jim can exclude the half of the premium paid by his employer from his gross income and may include the half he pays in determining his medical expense deduction.
True Medical coverage provided by an employer is a nontaxable fringe benefit. Premiums paid by the taxpayer may be included in determining deductible medical expenses.
Letha incurred a $1,600 prepayment penalty to a lending institution because she paid off the mortgage on her home early. The $1,600 is deductible as interest expense.
True Prepayment penalties are considered to be deductible interest.
A taxpayer may not deduct the cost of new curbing (relative to a personal residence), even if the construction is required by the city and the curbing provides an incidental benefit to the public welfare.
True Such assessments are added to the basis of the taxpayer's property.
Sergio was required by the city to pay $2,000 for the cost of new curbing installed by the city in front of his personal residence. The new curbing was installed throughout Sergio's neighborhood as part of a street upgrade project. Sergio may not deduct $2,000 as a tax, but he may add the $2,000 to the basis of his property.
True Such assessments are added to the basis of the taxpayer's property.
Upon the recommendation of a physician, Ed has a swimming pool installed at his residence because of a heart condition. If he is allowed to deduct all or part of the cost of the pool, Ed's increase in utility bills due to the operation of the pool qualifies as a medical expense.
True Such expense does qualify as a medical expense.
In April 2016, Bertie, a calendar year cash basis taxpayer, had to pay the state of Michigan additional income tax for 2015. Even though it relates to 2015, for Federal income tax purposes the payment qualifies as a tax deduction for tax year 2016.
True The amount is deductible in 2016 because Bertie is a cash basis taxpayer.
On December 31, 2016, Lynette used her credit card to make a $500 contribution to the United Way, a qualified charitable organization. She will pay her credit card balance in January 2017. If Lynette itemizes, she can deduct the $500 in 2016.
True The date the charge is made on a credit card determines the year of deduction.
Bill paid $2,500 of medical expenses for his daughter, Marie. Marie is married to John and they file a joint return. Bill can include the $2,500 of expenses when calculating his medical expense deduction.
True The joint return test is waived in determining dependency status for medical expense deduction purposes. Bill may include the $2,500 in calculating his medical expenses.
Sadie mailed a check for $2,200 to a qualified charitable organization on December 31, 2016. The $2,200 contribution is deductible on Sadie's 2016 tax return.
True The mailing date is treated as the date of the charitable contribution.
Shirley pays FICA (employer's share) on the wages she pays her maid to clean and maintain Shirley's personal residence. The FICA payment is not deductible as an itemized deduction.
True The payment is a nondeductible personal expense.
Georgia contributed $2,000 to a qualifying Health Savings Account in the current year. The entire amount qualifies as an expense deductible for AGI.
True The payment to the HSA is a deduction for AGI, not an itemized medical expense deduction.
Al contributed a painting to the Metropolitan Art Museum of St. Louis, Missouri. The painting, purchased six years ago, was worth $40,000 when donated, and Al's basis was $25,000. If this painting is immediately sold by the museum and the proceeds are placed in the general fund, Al's charitable contribution deduction is $25,000 (subject to percentage limitations).
True The property was put to an "unrelated use" by the charitable organization. Al is allowed a deduction for the contribution based on the $25,000 basis, not the $40,000 FMV.
Trent sells his personal residence to Chester on July 1, 2016. He had paid $7,000 in real property taxes on March 1, 2016, the due date for property taxes for 2016. Trent may not deduct the portion of the taxes he paid for the period the property was owned by Chester.
True The real property taxes paid by the seller (Trent) but apportioned to the buyer (Chester) is treated as reducing the amount Trent realized from the sale of the residence. Trent may not deduct the portion of the taxes related to the period Chester owned the property.
In 2017, Rhonda received an insurance reimbursement for medical expenses incurred in 2016. She is not required to include the reimbursement in gross income in 2017 if she claimed the standard deduction in 2016.
True The reimbursement is included in gross income only to the extent the taxpayer derived a tax benefit from deducting the expense in the previous year. Because Rhonda did not itemize in 2016, she received no tax benefit.
Excess charitable contributions that come under the 30%-of-AGI ceiling are always subject to the 30%-of-AGI ceiling in the carryover year.
True They will continue to be subject to the 30% ceiling.
Employee business expenses for travel qualify as itemized deductions subject to the 2%-of-AGI floor if they are not reimbursed.
True Unreimbursed employee expenses qualify as itemized deductions subject to the 2%-of-AGI floor.
True
Under the regular (actual expense) method, the portion of the office in the home deduction that exceeds the income from the business can be carried over to future years.
True
Under the right circumstances, a taxpayer's meals and lodging expense can qualify as a deductible education expense.
False
Under the simplified method, the maximum office in the home deduction allowed is the greater of $1,500 or the office square feet × $5.
False
Unless a taxpayer is disabled, the tax credit for the elderly or disabled is available only if the taxpayer is at least 59 1/2 years old.
False
Unused foreign tax credits can be carried back three years and forward fifteen years.
True
When contributions are made to a traditional IRA, they are deductible by the participant. Later distributions from the IRA upon retirement are fully taxed.
34. Chris receives a gift of a passive activity from his father whose basis was $60,000. Suspended losses related to the activity are $18,000. Chris will be allowed to offset the $18,000 suspended losses against future passive income. a. True b. False
: False RATIONALE: A gift of a passive activity results in the suspended losses being added to the adjusted basis of the property.
6. Kelly, who earns a yearly salary of $120,000, sold an activity with a suspended passive loss of $44,000. The activity was sold at a loss and Kelly has no other passive activities. The suspended loss is not deductible. a. True b. False
: False RATIONALE: A suspended passive loss may be deducted when the activity is sold, even if the sale of the activity results in a loss. The suspended loss can offset Kelly's active income from her job.
19. Tom participates for 100 hours in Activity A and 450 hours in Activity B, both of which are nonrental businesses. Both activities are active. a. True b. False
: False RATIONALE: Activity A is not a significant participation activity because Tom has not devoted more than 100 hours to it. Therefore, Activity A is not counted in applying the more-than-500-hour test and it is treated as passive. Activity B is a significant participation activity; however, the total hours are not greater than 500 hours and it is considered passive.
11. Wolf Corporation has active income of $55,000 and a passive loss of $33,000 in the current year. Wolf cannot deduct the $33,000 loss if it is a closely held C corporation that is not a personal service corporation. a. True b. False
: False RATIONALE: Closely held C corporations that are not personal service corporations may offset passive losses against active income but not against portfolio income.
3. In the current year, Don has a $55,000 loss from a business he owns. His at-risk amount at the end of the year, prior to considering the current year loss, is $36,000. He will be allowed to deduct the $55,000 loss this year if he is a material participant in the business. a. True b. False
: False RATIONALE: Don's loss deduction will be limited to $36,000 by the at-risk rules.
24. A qualified real estate professional is allowed to treat income or loss from any real estate venture as active except for income or loss from a rental activity. a. True b. False
: False RATIONALE: Income and losses from real estate rental activities are treated as active (i.e., not passive) for qualified real estate professionals. NAT: BUSPROG - Analytic STA: 25. Bruce owns a small apartment building that produces a $25,000 loss during the year. His AGI before considering the rental loss is $85,000. Bruce must be a material participant with respect to the rental activity in order to deduct the $25,000 loss under the real estate rental exception. a. True b. False ANSWER: False RATIONALE: Bruce must actively participate in the rental activity in order to deduct the $25,000 loss.
37. Investment income can include gross income from interest, dividends, annuities, and royalties not derived in the ordinary course of a trade or business; income from a passive activity; and income from a real estate activity in which the taxpayer actively participates. a. True b. False
: False RATIONALE: Investment income can include gross income from interest, dividends, annuities, and royalties not derived in the ordinary course of a trade or business. However, income from a passive activity and income from a real estate activity in which the taxpayer actively participates are not considered investment income for this purpose.
31. Roger owns and actively participates in the operations of an apartment building which produces a $40,000 loss during the year. He has AGI of $150,000 from an active business. He may deduct $25,000 of the loss. a. True b. False
: False RATIONALE: It is possible for individuals to deduct up to $25,000 of losses on real estate rental activities against active and portfolio income. However, the potential deduction of $25,000 is reduced by 50% of modified AGI in excess of $100,000. Therefore, Roger's potential loss deduction is fully phased out [$25,000 - 50%($150,000 - $100,000)].
4. Judy owns a 20% interest in a partnership (not real estate) in which her at-risk amount was $35,000 at the beginning of the year. The partnership borrowed $50,000 on a recourse note and made a $40,000 profit during the year. Her at-risk amount at the end of the year is $43,000. a. True b. False
: False RATIONALE: Judy is considered at-risk for amounts borrowed on a recourse note because she is personally liable for repayment of the debt. Therefore, her at-risk amount is increased by her share of the recourse debt incurred by the partnership. Judy's at-risk amount at the end of the year is $53,000 [$35,000 + (20% × $50,000 recourse note) + (20% × $40,000 profit)].
9. Oriole Corporation has active income of $45,000 and a passive loss of $23,000 in the current year. Under an exception, Oriole can deduct the $23,000 loss if it is a personal service corporation. a. True b. False
: False RATIONALE: Personal service corporations may not offset passive losses against active income.
7. All of a taxpayer's tax credits relating to a passive activity can be utilized when the activity is sold at a loss. a. True b. False
: False RATIONALE: Tax credits associated with a passive investment are lost if the investment is disposed of at a loss.
32. Lucy owns and actively participates in the operations of an apartment complex that produces a $50,000 loss during the year. Her modified AGI is $125,000 from an active business. Disregarding any at-risk amount limitation, she may deduct $25,000 of the loss, and the remaining $25,000 is a suspended passive loss. a. True b. False
: False RATIONALE: The $25,000 deduction is reduced by 50% of modified AGI in excess of $100,000. Therefore, only $12,500 of Lucy's rental loss can be deducted this year [$25,000 - 50%($125,000 - $100,000)]. The remaining $37,500 ($50,000 - $12,500) is a suspended passive loss.
1. Jack owns a 10% interest in a partnership (not real estate) in which his at-risk amount is $42,000 at the beginning of the year. During the year, the partnership borrows $80,000 on a nonrecourse note and incurs a loss of $60,000 from operations. Jack's at-risk amount at the end of the year is $44,000. a. True b. False
: False RATIONALE: The amount a taxpayer has at risk is increased by the taxpayer's share of additional recourse debt and decreased by the share of losses from the activity. The at-risk amount is not affected by nonrecourse debt. Jack's year-end at-risk amount is $36,000 [$42,000 - (10% × $60,000 loss)].
2. Sherri owns an interest in a business that is not a passive activity and in which she has $20,000 at risk. If the business incurs a loss from operations during the year and her share of the loss is $32,000, this loss will be fully deductible. a. True b. False
: False RATIONALE: The at-risk provisions limit the deductibility of losses from business and income-producing activities for individuals and closely held corporations. The loss reduces Sherri's at-risk amount to $0 and results in a suspended loss of $12,000 under the at-risk rules.
26. Wayne owns a small apartment building that produces a $45,000 loss during the year. His AGI before considering the rental loss is $85,000. Because Wayne is an active participant with respect to the rental activity, he may deduct the $45,000 loss. a. True b. False
: False RATIONALE: The ceiling on the deductibility of such losses is $25,000, not $45,000.
36. David earned investment income of $20,000, incurred investment interest expense of $12,000, and other investment expenses of $9,000 during the current year. David can deduct $12,000 of investment interest for this year. a. True b. False
: False RATIONALE: The deduction for investment interest expense may not exceed net investment income for the year. As David's net investment income is $11,000 ($20,000 - $9,000), only this amount of investment interest can be deducted. The excess $1,000 is carried forward to future years.
8. Jackson Company incurs a $50,000 loss on a passive activity during the year. The company has active income of $34,000 and portfolio income of $24,000. If Jackson is a personal service corporation, it may deduct $34,000 of the passive loss. a. True b. False
: False RATIONALE: The passive loss rules apply to individuals, estates, trusts, closely held C corporations, and personal service corporations. Therefore, Jackson, a personal service corporation, is not allowed to offset passive losses against active or portfolio income.
16. Mary Jane participates for 100 hours during the year in an activity she owns. She has no employees and is the only participant in the activity. The activity is a significant participation activity. a. True b. False
: False RATIONALE: To be considered a significant participation activity, the owner's participation in the activity must be for more than 100 hours per year.
17. A taxpayer is considered to be a material participant in a significant participation activity if he or she spends at least 400 hours in the activity. a. True b. False
: False RATIONALE: Under the 500-hour test, a taxpayer must devote more than 500 hours to an activity to meet the material participation standard. Further, the significant participation activity test does not apply because the aggregate participation does not exceed 500 hours.
33. Kim dies owning a passive activity with a basis of $75,000, a fair market value of $140,000, and suspended losses of $80,000. All of the $80,000 passive loss can be deducted on Kim's final income tax return. a. True b. False
: False RATIONALE: Upon death, it is possible that a taxpayer can lose all or part of his/her suspended losses. Suspended passive losses are deductible only to the extent they exceed the step-up in basis for the decedent's property. The step-up in basis is $65,000 ($140,000 fair market value - $75,000 basis). Kim can deduct $15,000 ($80,000 suspended passive loss - $65,000 step-up in basis).
20. From January through November, Vern participated for 420 hours as a salesman in a partnership in which he owns a 50% interest. The partnership has four full-time employees. During December, Vern spends 110 hours cleaning the store and painting the walls in order to meet the material participation standards. Vern qualifies as a material participant. a. True b. False
: False RATIONALE: Work performed in an individual's capacity as an investor or in performance of duties not normally performed by owners does not count toward material participation if such work is performed primarily to meet the material participation requirements.
14. A taxpayer is considered to be a material participant if he or she spends more than 500 hours in the activity. a. True b. False
: True
22. When determining whether an individual is a material participant, participation by an owner's spouse generally counts. a. True b. False
: True
29. Individuals can deduct from active or portfolio income losses of up to $25,000 from real estate rental activities in which they actively participate. a. True b. False
: True
5. Tonya owns an interest in an activity (not real estate) that converted recourse financing to nonrecourse financing. Recapture of previously allowed losses is required if Tonya's at-risk amount is reduced below zero as a result of the debt restructuring. a. True b. False
: True
21. Joyce owns an activity (not real estate) in which she participates for 100 hours a year; her husband participates for 450 hours. Joyce qualifies as a material participant. a. True b. False
: True RATIONALE: A spouse's participation is counted in applying the material participation tests. Joyce and her husband together participated more than 500 hours, thus making Joyce a material participant.
35. Eric makes an installment sale of a passive activity having suspended losses of $40,000. He collects 25% of the sales price in the current year, and will collect 25% in each of the next three years. Eric can deduct $10,000 of the passive loss this year. a. True b. False
: True RATIONALE: An installment sale of a taxpayer's entire interest in a passive activity entitles the taxpayer to deduct suspended losses on the installment basis. Therefore, Eric can deduct 25% of the $40,000 suspended passive loss each year as installments are collected.
38. Bob realized a long-term capital gain of $8,000. In calculating his net investment income, Bob may elect to include the gain in investment income. a. True b. False
: True RATIONALE: Bob may elect to include the gain in investment income if he agrees to reduce the amount qualifying for the preferential capital gains rate by the same amount.
15. Dick participates in an activity for 90 hours during the year. He has no employees and there are no other participants. Dick is a material participant. a. True b. False
: True RATIONALE: Dick's participation constitutes substantially all of the participation in the activity (Test 2).
39. Harry earned investment income of $18,500, incurred investment interest expense of $15,500, and other investment expenses of $9,000 during the current year. He does not itemize his personal deductions. Harry may deduct $9,500 of investment interest expense this year and carry forward $6,000 to future years. a. True b. False
: True RATIONALE: Harry's investment interest deduction is $9,500 ($18,500 investment income - $9,000 other investment expenses) this year. The portion of investment interest not deducted ($6,000) is carried forward to future years.
12. Linda owns investments that produce portfolio income and Activity A that produces losses. From a tax perspective, Linda will be better off if Activity A is not passive. a. True b. False
: True RATIONALE: Linda benefits from Activity A's losses only if the activity is not a passive activity. If it is a passive activity, Linda needs to generate passive income to absorb the passive losses.
27. Services performed by an employee are treated as being related to a real estate trade or business if the employee performing the services has more than a 5% ownership interest in the employer. a. True b. False
: True RATIONALE: Services performed by an employee are treated as being related to a real estate trade or business only if the employee performing the services has more than a 5% ownership interest in the employer.
28. In the current year, Kelly had a $35,000 loss from a real estate rental activity in which she is a 10% owner. If she is an active participant and if her modified AGI is $100,000, she can deduct $25,000 of the loss. a. True b. False
: True RATIONALE: She meets both the active participation test and the ownership test. Further, Kelly's modified AGI has not reached the level (beyond $100,000) where any of the $25,000 loss is phased out.
13. Nathan owns Activity A, which produces income, and Activity B, which produces passive losses. From a tax planning perspective, Nathan will be better off if Activity A is passive. a. True b. False
: True RATIONALE: Taxpayers who have passive losses generally benefit by having profitable activities classified as passive so that the passive losses can offset the passive income.
30. Individuals with modified AGI of $100,000 can deduct against active or portfolio income losses of up to $25,000 from real estate rental activities in which they actively participate. a. True b. False
: True RATIONALE: The $25,000 offset generally phases out at the rate of $0.50 for each dollar by which a taxpayer's modified AGI exceeds $100,000. Therefore, once modified AGI reaches $150,000, the deduction is phased-out completely. In this case, the phase out does not apply.
23. If an owner participates for more than 500 hours in a bicycle rental activity located at a beach resort, any loss from that activity is treated as an active loss that can offset active income. a. True b. False
: True RATIONALE: The bicycle rental activity is subject to the material participation rules because it is not treated as a rental activity. As the owner participated more than 500 hours, this is not a passive activity.
10. Gray Company, a closely held C corporation, incurs a $50,000 loss on a passive activity during the year. The company has active income of $34,000 and portfolio income of $24,000. If Gray is not a personal service corporation, it may deduct $34,000 of the passive loss. a. True b. False
: True RATIONALE: The passive loss rules apply to individuals, estates, trusts, personal service corporations, and closely held C corporations. Only closely held C corporations that are not personal service corporations are allowed to offset passive losses against active income.
18. Tom participates for 300 hours in Activity A and 250 hours in Activity B, both of which are nonrental businesses. Both activities are active. a. True b. False
: True RATIONALE: Tom has participated for more than 500 hours in the two activities, both of which are significant participation activities.
66. Rita earns a salary of $150,000, and invests $40,000 for a 20% interest in a passive activity. Operations of the activity result in a loss of $250,000, of which Rita's share is $50,000. How is her loss characterized? a. $40,000 is suspended under the passive loss rules and $10,000 is suspended under the at-risk rules. b. $40,000 is suspended under the at-risk rules and $10,000 is suspended under the passive loss rules. c. $50,000 is suspended under the passive loss rules. d. $50,000 is suspended under the at-risk rules. e. None of the above.
: a RATIONALE: $10,000 of Rita's loss is suspended under the at-risk rules, leaving a potential deduction of $40,000. However, the $40,000 loss is suspended under the passive loss rules.
63. Jenny spends 32 hours a week, 50 weeks a year, operating a bicycle rental store that she owns at a resort community. She also owns a music store in another city that is operated by a full-time employee. Jenny spends 140 hours per year working at the music store. She elects not to group them together as a single activity under the "appropriate economic unit" standard. a. Neither store is a passive activity. b. Both stores are passive activities. c. Only the bicycle rental store is a passive activity. d. Only the music store is a passive activity. e. None of the above.
: a RATIONALE: A bicycle rental store is not treated as a rental activity because the average period of customer use is 7 days or less. Because Jenny participates for more than 500 hours during the year, the bicycle rental store is treated as an active business. Jenny participates for more than 100 hours in the music store, which makes it a significant participation activity. Her total participation in the two significant participation activities is more than 500 hours, so neither business is treated as passive.
51. Tara owns a shoe store and a bookstore. Both businesses are operated in a mall. She also owns a restaurant across the street and a jewelry store several blocks away. a. All four businesses can be treated as a single activity if Tara elects to do so. b. Only the shoe store and bookstore can be treated as a single activity, the restaurant must be treated as a separate activity, and the jewelry store must be treated as a separate activity. c. The shoe store, bookstore, and restaurant can be treated as a single activity, and the jewelry store must be treated as a separate activity. d. All four businesses must be treated as separate activities. e. None of the above.
: a RATIONALE: All four businesses may be treated as a single activity because of common ownership.
68. Vic's at-risk amount in a passive activity is $200,000 at the beginning of the current year. His current loss from the activity is $80,000. Vic had no passive activity income during the year. At the end of the current year: a. Vic has an at-risk amount in the activity of $120,000 and a suspended passive loss of $80,000. b. Vic has an at-risk amount in the activity of $200,000 and a suspended passive loss of $80,000. c. Vic has an at-risk amount in the activity of $120,000 and no suspended passive loss. d. Vic has an at-risk amount in the activity of $200,000 and no suspended passive loss. e. None of the above.
: a RATIONALE: The $80,000 passive loss reduces the at-risk amount to $120,000. The passive loss is suspended because Vic has no passive income.
74. Kate dies owning a passive activity with an adjusted basis of $100,000. Its fair market value at that date is $130,000. Suspended losses relating to the property were $45,000. a. The heir's adjusted basis is $130,000, and Kate's final deduction is $15,000. b. The heir's adjusted basis is $130,000, and Kate's final deduction is $45,000. c. The heir's adjusted basis is $100,000, and Kate's final deduction is $45,000. d. The heir's adjusted basis is $175,000, and Kate has no final deduction. e. None of the above.
: a RATIONALE: The heir receives a $30,000 step-up in basis ($130,000 FMV - $100,000 decedent's basis). A $15,000 passive loss deduction is allowed on the decedent's final return ($45,000 suspended loss - $30,000 step-up in basis).
49. White Corporation, a closely held personal service corporation, has $150,000 of passive losses, $120,000 of active business income, and $30,000 of portfolio income. How much of the passive loss can White Corporation deduct? a. $0 b. $30,000 c. $120,000 d. $150,000 e. None of the above
: a RATIONALE: White Corporation, a personal service corporation, cannot offset the passive loss against the active or portfolio income.
65. Sandra acquired a passive activity three years ago. Until last year, the activity was profitable and her at-risk amount was $300,000. Last year, the activity produced a loss of $100,000, and in the current year, the loss is $50,000. Assuming Sandra has received no passive income in the current or prior years, her suspended passive loss from the activity is: a. $90,000 from last year and $50,000 from the current year. b. $100,000 from last year and $50,000 from the current year. c. $0 from last year and $0 from the current year. d. $50,000 from the current year. e. None of the above.
: b RATIONALE: $100,000 from last year and $50,000 from the current year is suspended.
73. Josie, an unmarried taxpayer, has $155,000 in salary, $10,000 in income from a limited partnership, and a $26,000 passive loss from a real estate rental activity in which she actively participates. If her modified adjusted gross income is $155,000, how much of the $26,000 loss is deductible? a. $0 b. $10,000 c. $25,000 d. $26,000 e. None of the above
: b RATIONALE: A rental loss of $10,000 is deducted against the passive income from the limited partnership interest. None of the remaining $16,000 rental loss is deducted against Josie's salary, even though she actively participates in the activity. The special $25,000 offset for real estate rental activities is reduced to $0 [$25,000 - 50%($155,000 - $100,000)]. Therefore, of the remaining $16,000 loss, none can be deducted in the current year.
61. Leigh, who owns a 50% interest in a sporting goods store, was a material participant in the activity for the last fifteen years. She retired from the sporting goods store at the end of last year and will not participate in the activity in the future. However, she continues to be a material participant in an office supply store in which she is a 50% partner. The operations of the sporting goods store resulted in a loss for the current year and Leigh's share of the loss is $40,000. Leigh's share of the income from the office supply store is $75,000. She does not own interests in any other activities. a. Leigh cannot deduct the $40,000 loss from the sporting goods store because she is not a material participant. b. Leigh can offset the $40,000 loss from the sporting goods store against the $75,000 of income from the office supply store. c. Leigh will not be able to deduct any losses from the sporting goods store until future years. d. Leigh will not be able to deduct any losses from the sporting goods store until she has been retired for at least four years. e. None of the above.
: b RATIONALE: Because Leigh materially participated in the sporting goods activity for at least five of the last ten taxable years before the current year (Test 5), she is still considered an active participant in that activity. Therefore, her loss is an active loss that can be offset against her active income from the office supply store.
60. Maria, who owns a 50% interest in a restaurant, has been a material participant in the restaurant activity for the last 20 years. She retired from the restaurant at the end of last year and will not participate in the restaurant activity in the future. However, she continues to be a material participant in a retail store in which she is a 50% partner. The restaurant operations produce a loss for the current year, and Maria's share of the loss is $80,000. Her share of the income from the retail store is $150,000. She does not own interests in any other activities. a. Maria cannot deduct the $80,000 loss from the restaurant because she is not a material participant. b. Maria can offset the $80,000 loss against the $150,000 of income from the retail store. c. Maria will not be able to deduct any losses from the restaurant until she has been retired for at least three years. d. Assuming Maria continues to hold the interest in the restaurant, she will always treat the losses as active. e. None of the above.
: b RATIONALE: Because Maria materially participated in the restaurant activity for at least five of the last ten taxable years before the current year (Test 5), she is still considered an active participant in the activity. Therefore, her loss is an active loss that can be offset against her active income from the retail store. However, in the future after no longer meeting the five-year test, the classification of the losses will depend on Maria's level of involvement in the restaurant activity.
42. In 2015, Joanne invested $90,000 for a 20% interest in a limited liability company (LLC) in which she is a material participant. The LLC reported losses of $340,000 in 2015 and $180,000 in 2016. Joanne's share of the LLC's losses was $68,000 in 2015 and $36,000 in 2016. How much of these losses can Joanne deduct? a. $68,000 in 2015; $36,000 in 2016. b. $68,000 in 2015; $22,000 in 2016. c. $0 in 2015; $0 in 2016. d. $68,000 in 2015; $0 in 2016. e. None of the above.
: b RATIONALE: Joanne's losses are not subject to the passive loss rules in either year because she is a material participant in the activity. However, the at-risk rules limit her total losses to $90,000 ($68,000 in 2015 and $22,000 in 2016).
55. Rick, a computer consultant, owns a separate business (not real estate) in which he participates. He has one employee who works part-time in the business. a. If Rick participates for 500 hours and the employee participates for 620 hours during the year, Rick qualifies as a material participant. b. If Rick participates for 550 hours and the employee participates for 2,000 hours during the year, Rick qualifies as a material participant. c. If Rick participates for 120 hours and the employee participates for 120 hours during the year, Rick does not qualify as a material participant. d. If Rick participates for 95 hours and the employee participates for 5 hours during the year, Rick probably does not qualify as a material participant. e. None of the above.
: b RATIONALE: Option a. is incorrect; Rick would have to participate for more than 500 hours for statement a. to be correct (Test 1). Option b. is correct; an individual who participates for more than 500 hours is a material participant regardless of how much others participate (Test 1). Option c. is incorrect; Rick participates for more than 100 hours and this is not less than the participation of any other individual (Test 3). Option d. is incorrect; Rick's participation constitutes substantially all of the participation, even though Rick's participation is less than 100 hours (Test 2).
57. Ahmad owns four activities. He participated for 120 hours in Activity A, 150 hours in Activity B, 140 hours in Activity C, and 100 hours in Activity D. Which of the following statements is correct? a. Activities A, B, C, and D are all significant participation activities. b. Activities A, B, and C are significant participation activities. c. Ahmad is a material participant with respect to Activities A, B, and C. d. Ahmad is a material participant with respect to Activities A, B, C, and D. e. None of the above.
: b RATIONALE: Statement b. is correct. Activities A, B, and C are all significant participation activities. A significant participation activity is one in which the individual's participation exceeds 100 hours during the year. However, the material participation standard is not met because total participation in significant participation activities (120 + 150 + 140) does not exceed 500 hours.
47. Matt has three passive activities and has at-risk amounts in excess of $100,000 for each. During the year, the activities produced the following income (losses). Activity A ($60,000) Activity B (40,000) Activity C 75,000 Net passive loss ($25,000) Matt's suspended losses are as follows: a. $25,000 is allocated to C; $0 to A and B. b. $12,500 is allocated to A; $12,500 to B. c. $15,000 is allocated to A; $10,000 to B. d. $8,333 is allocated to A, B, and C. e. None of the above.
: c RATIONALE: $60,000/$100,000 × $25,000 = $15,000 allocated to Activity A $40,000/$100,000 × $25,000 = $10,000 allocated to Activity B
48. Green Corporation earns active income of $50,000 and receives $40,000 in dividends during the year. In addition, Green incurs a loss of $70,000 from an investment in a passive activity acquired several years ago. Consider the following two statements: (1) Green's current deduction for passive losses is $50,000 if it is a closely held C corporation that is not a personal service corporation. (2) Green's current deduction for passive losses is $0 if it is a personal service corporation. Which of the following answers is correct? a. Only statement 1. b. Only statement 2. c. Both statements 1 and 2. d. Neither statement 1 or 2. e. None of the above.
: c RATIONALE: A closely held C corporation that is not a personal service corporation can offset passive losses against active income, but a personal service corporation cannot. Both statements are correct.
77. Raul is married and files a joint tax return. His current investment interest expense of $95,000 is related to a loan used to purchase a parcel of unimproved land. Income from investments [dividends (not qualified) and interest] total $18,000. Raul paid $5,000 of real estate taxes on the unimproved land. He also has a $4,500 net long-term capital gain from the sale of another parcel of unimproved land. Raul's maximum investment interest deduction for the year is: a. $95,000. b. $18,000. c. $17,500. d. $13,000. e. None of the above.
: c RATIONALE: Raul's net investment income is computed as follows: Income from investments: Interest and dividends $18,000 Long-term capital gain* 4,500 Less: Investment expenses (real estate taxes) (5,000) Net investment income $17,500 *Net capital gain generally is not included in investment income. In order to maximize his investment interest deduction, Raul may elect to treat capital gain as investment income. If this election is made, however, the beneficial tax rate on capital gains will not apply. Raul's current investment interest expense deduction is limited to $17,500, the amount of net investment income, and $77,500 would be disallowed: Total investment interest expense $95,000 Less: Net investment interest income (17,500) Investment interest disallowed in the current year $77,500 The amount of investment interest disallowed carries over and becomes investment interest expense in the subsequent year (subject to the net investment income limitation).
44. Josh has investments in two passive activities. Activity A (acquired three years ago) produces income of $30,000 this year, while Activity B (acquired two years ago) produces a loss of $50,000. What is the amount of Josh's suspended loss for the year? a. $0 b. $18,000 c. $20,000 d. $50,000 e. None of the above
: c RATIONALE: The $30,000 of passive income is offset by $30,000 of the $50,000 passive loss, leaving a net passive loss of $20,000. None of the $20,000 net passive loss is deductible in the current year and it is all suspended.
64. Josh has investments in two passive activities. Activity A, acquired three years ago, produces income in the current year of $60,000. Activity B, acquired last year, produces a loss of $100,000 in the current year. At the beginning of this year, Josh's at-risk amounts in Activities A and B are $10,000 and $100,000, respectively. What is the amount of Josh's suspended passive loss with respect to these activities at the end of the current year? a. $0 b. $36,000 c. $40,000 d. $100,000 e. None of the above
: c RATIONALE: The $60,000 of passive income from Activity A is offset by $60,000 of the passive loss from Activity B, leaving a net passive loss of $40,000. None of the $40,000 net passive loss is deductible in the current year. The $40,000 net passive loss is suspended.
46. Nell sells a passive activity with an adjusted basis of $45,000 for $105,000. Suspended losses attributable to this property total $45,000. The total gain and the taxable gain are: a. $60,000 total gain; $105,000 taxable gain. b. $10,000 total gain; $15,000 taxable gain. c. $60,000 total gain; $0 taxable gain. d. $60,000 total gain; $15,000 taxable gain. e. None of the above.
: d RATIONALE: $105,000 amount realized - $45,000 adjusted basis = $60,000 total gain - $45,000 suspended loss = $15,000 taxable gain.
59. Dena owns interests in five businesses and has full-time employees in each business. She participates for 100 hours in Activity A, 120 hours in Activity B, 130 hours in Activity C, 140 hours in Activity D, and 125 hours in Activity E. a. All five of Dena's activities are significant participation activities. b. Dena is a material participant with respect to all five activities. c. Dena is not a material participant in any of the activities. d. Dena is a material participant with respect to Activities B, C, D, and E. e. None of the above.
: d RATIONALE: Activity A is not a significant participation activity because Dena does not participate for more than 100 hours. She is not a material participant with respect to Activity A because this activity is not a significant participation activity. She is a material participant in Activities B, C, D, and E under the significant participation test (Test 4).
45. Carl, a physician, earns $200,000 from his medical practice in the current year. He receives $45,000 in dividends and interest during the year as well as $5,000 of income from a passive activity. In addition, he incurs a loss of $50,000 from an investment in a passive activity. What is Carl's AGI for the current year after considering the passive investment? a. $195,000 b. $200,000 c. $240,000 d. $245,000 e. None of the above
: d RATIONALE: Carl's net income after considering the passive investments is $245,000 ($200,000 active income + $45,000 portfolio income). He is not allowed to offset the net passive loss against active or portfolio income.
50. Charles owns a business with two separate departments. Department A produces $100,000 of income and Department B incurs a $60,000 loss. Charles participates for 550 hours in Department A and 100 hours in Department B. He has full-time employees in both departments. a. If Charles elects to treat both departments as a single activity, he cannot offset the $60,000 loss against the $100,000 income. b. Charles may not treat Department A and Department B as separate activities because they are parts of one business. c. If Charles elects to treat the two departments as separate activities, he can offset the $60,000 loss against the $100,000 income. d. If Charles elects to treat both departments as a single activity, he can offset the $60,000 loss against the $100,000 income. e. None of the above.
: d RATIONALE: Charles may choose to treat the two departments as either a single activity or as separate activities. If the two departments are treated as a single activity, Charles is a material participant and the loss can be offset against the income. If the two departments are treated as separate activities, Charles is a material participant with respect to Department A (the more-than-500-hour test is met) and the income from Department A is active. However, the loss from Department B would be passive because none of the material participation tests would be met. Passive losses cannot be offset against active income.
71. During the current year, Ethan performs personal services as follows: 800 hours in his information technology consulting practice, 625 hours in a real estate development business, and 510 hours in a condominium leasing operation. He expects that losses will be realized from the two real estate ventures while his consulting practice will show a profit. Ethan files a joint return with his wife whose salary is $125,000. The income and losses from the following ventures is considered active and not subject to the passive loss limitations: a. Only the information technology consulting practice. b. Only the information technology consulting practice and the real estate development business. c. Only the information technology consulting practice and the condominium leasing operation. d. All three of the ventures are considered active and not subject to the passive loss limitations. e. None of the above.
: d RATIONALE: Ethan is considered a material participant in all three ventures, so the income and loss from these operations is treated as active and will be fully reflected on his income tax return. The losses from the real estate activities will not be subject to the passive loss rules because more than 50% of his personal services were devoted to real property trades or businesses in which he is a material participant, and this participation exceeded 750 hours. Thus, the losses from these activities can offset the income from his information technology consulting practice and his wife's salary. NAT: BUSPROG - Analytic STA: AICPA - FN- Measurement
67. Art's at-risk amount in a passive activity was $60,000 at the beginning of 2014. His loss from the activity in 2014 is $80,000, and he had no passive activity income during the year. Art had $20,000 of passive income from the activity in 2015. Under the passive loss rules, Art's suspended loss at the end of 2015 is: a. $15,000. b. $20,000. c. $45,000. d. $60,000. e. None of the above.
: d RATIONALE: In 2014, Art had an $80,000 loss, $20,000 of which was suspended under the at-risk rules; $60,000 was suspended under the passive loss rules. The $20,000 of passive income in 2015 increases Art's at-risk amount and allows for reclassification as a passive loss $20,000 of the 2014 loss suspended under the at-risk rules. Therefore, Art has a total loss of $60,000 suspended under the passive loss rules ($60,000 in 2014 + $20,000 reclassified in 2015 - $20,000 of passive losses offset against passive income).
70. Jon owns an apartment building in which he is a material participant and a computer consulting business. Of the 2,000 hours he spends on these activities during the year, 55% of the time is spent operating the apartment building and 45% of the time is spent in the computer consulting business. a. The computer consulting business is a passive activity but the apartment building is not. b. The apartment building is a passive activity but the computer consulting business is not. c. Both the apartment building and the computer consulting business are passive activities. d. Neither the apartment building nor the computer consulting business is a passive activity. e. None of the above.
: d RATIONALE: More than half of Jon's personal services are spent in a real property trade or business in which he materially participates, and the time spent exceeds 750 hours. Thus, the apartment building is not a passive activity. Because Jon participates for more than 500 hours in the computer consulting business, it also is not a passive activity.
56. Ned, a college professor, owns a separate business (not real estate) in which he participates in the current year. He has one employee who works part-time in the business. a. If Ned participates for 120 hours and the employee participates for 120 hours during the year, Ned does not qualify as a material participant. b. If Ned participates for 95 hours and the employee participates for 5 hours during the year, Ned probably does not qualify as material participant. c. If Ned participates for 500 hours and the employee participates for 520 hours during the year, Ned qualifies as material participant. d. If Ned participates for 600 hours and the employee participates for 2,000 hours during the year, Ned qualifies as a material participant. e. None of the above.
: d RATIONALE: Option a. is incorrect; Ned participates for more than 100 hours and this is not less than the participation of any other individual (Test 3). Option b. is incorrect; Ned's participation constitutes substantially all of the participation, even though Ned's participation is less than 100 hours (Test 2). Option c. is incorrect; Ned would have to participate for more than 500 hours for statement c. to be correct (Test 1). Option d. is correct; an individual who participates for more than 500 hours is a material participant regardless of how much others participate (Test 1).
54. Tess owns a building in which she rents apartments to tenants and operates a restaurant. Which of the following statements is incorrect? a. If 60% of Tess's gross income is from apartment rentals and 40% is from the restaurant, the rental operation and the restaurant business must be treated as separate activities. b. If 95% of Tess's gross income is from apartment rentals and 5% is from the restaurant, she may treat the rental operation and the restaurant business as a single activity that is a rental activity. c. If 5% of Tess's gross income is from apartment rentals and 95% is from the restaurant, she may treat the rental operation and the restaurant business as a single activity that is not a rental activity. d. If 98% of Tess's gross income is from apartment rentals and 2% is from the restaurant, the rental operation and the restaurant business must be treated as a single activity that is not a rental activity. e. None of the above.
: d RATIONALE: Rental and nonrental operations are generally treated as separate activities. However, when an insubstantial portion of the gross income is attributable to either rental or nonrental operations, both activities may be treated as a single activity. The single activity is treated as rental or nonrental, depending on which made the predominant contribution to gross income. Since the Regulations do not require a grouping of rental and nonrental activities, the statement that they must be treated as a single activity is incorrect.
41. Last year, Ted invested $100,000 for a 50% interest in a partnership in which he was a material participant. The partnership incurred a loss, and Ted's share was $150,000. Which of the following statements is incorrect? a. Ted's nondeductible loss of $50,000 can be carried over and used in the future (subject to the at-risk provisions). b. If Ted has taxable income of $50,000 from the partnership in the current year and no other transactions that affect his at-risk amount, he can use all of the $50,000 loss carried over. c. Since Ted has only $100,000 of capital at risk, he cannot deduct more than $100,000 against his other income. d. None of the above is incorrect.
: d RATIONALE: Statements a., b., and c. are all correct.
69. Wes's at-risk amount in a passive activity is $25,000 at the beginning of the current year. His current loss from the activity is $35,000 and he has no passive activity income. At the end of the current year, which of the following statements is incorrect? a. Wes has a loss of $25,000 suspended under the passive loss rules. b. Wes has an at-risk amount in the activity of $0. c. Wes has a loss of $10,000 suspended under the at-risk rules. d. Wes has a loss of $35,000 suspended under the passive loss rules. e. None of the above is incorrect.
: d RATIONALE: The at-risk amount of $25,000 is reduced to zero by $25,000 of the passive loss. As a result, the $10,000 unused loss is suspended under the at-risk rules. The $25,000 of passive loss is suspended under the passive loss rules because Wes has no passive income.
62. Jed spends 32 hours a week, 50 weeks a year, operating a bicycle rental store that he owns at a resort community. He also owns a music store in another city that is operated by a full-time employee. He elects not to group them together as a single activity under the "appropriate economic unit" standard. Jed spends 40 hours per year working at the music store. a. Neither store is a passive activity. b. Both stores are passive activities. c. Only the bicycle rental store is a passive activity. d. Only the music store is a passive activity. e. None of the above.
: d RATIONALE: The bicycle rental store is not treated as a rental activity because the average period of customer use is 7 days or less. Jed participates for more than 500 hours during the year; therefore, the bicycle rental store is treated as an active business. However, because Jed does not materially participate in the operations of the music store, it is a passive activity.
78. Judy incurred $58,500 of interest expense this year related to her investments. Her investment income includes $15,000 of interest, $9,000 of qualified dividends, and a $22,500 net capital gain on the sale of securities. The maximum amount of Judy's investment interest expense deduction for the year is: a. $15,000. b. $24,000. c. $37,500. d. $46,500. e. None of the above.
: d RATIONALE: The deduction for investment interest is limited to the amount of net investment income reported. If Judy elects to treat the capital gain and qualified dividends as investment income, the deduction is $46,500 ($15,000 interest + $9,000 qualified dividends + $22,500 net capital gain). However, if she so elects, her capital gain and qualified dividends will not be eligible for beneficial capital gains tax rate treatment.
72. Pablo, who is single, has $95,000 of salary, $10,000 of income from a limited partnership, and a $27,000 passive loss from a real estate rental activity in which he actively participates. His modified adjusted gross income is $95,000. Of the $27,000 loss, how much is deductible? a. $0 b. $10,000 c. $25,000 d. $27,000 e. None of the above
: d RATIONALE: The entire loss may be deducted: $10,000 of the loss is deducted against the passive income from the limited partnership and the remaining $17,000 rental real estate loss is deducted against Pablo's salary because he actively participates in the activity.
40. In 2015, Arnold invests $80,000 for a 20% interest in a partnership in which he is a material participant. The partnership incurs a loss with $100,000 being Arnold's share. Which of the following statements is incorrect? a. Since Arnold has only $80,000 of capital at risk, he cannot deduct any more than this amount against his other income. b. Arnold's nondeductible loss of $20,000 can be carried over and used in future years (subject to the at-risk provisions). c. If Arnold has taxable income of $40,000 from the partnership in 2016 and there are no other transactions that affect his at-risk amount, he can use all of the $20,000 loss carried over from 2015. d. Arnold's $100,000 loss is nondeductible in 2015 and 2016 under the passive loss provisions. e. All of the statements are correct.
: d RATIONALE: Statements a., b., and c. are correct. The passive loss provisions do not apply because Arnold is a material participant.
52. Which of the following factors should be considered in determining whether an activity is treated as an appropriate economic unit? a. The similarities and differences in types of business. b. The extent of common control. c. The extent of common ownership. d. The geographic location. e. All of the above.
: e
53. Which of the following is not a factor that should be considered in determining whether an activity is treated as an appropriate economic unit? a. The interdependencies between the activities. b. The extent of common control. c. The extent of common ownership. d. The geographical location. e. All of the above are relevant factors.
: e
76. Identify from the list below the type of disposition of a passive activity where the taxpayer keeps the suspended losses of the disposed activity and utilizes them on a subsequent taxable disposition. a. Disposition of a passive activity by gift. b. Disposition of a passive activity at death. c. Installment sale of a passive activity. d. All of the above. e. None of the above.
: e
58. Paula owns four separate activities. She elects not to group them together as a single activity under the "appropriate economic unit" standard. Paula participates for 130 hours in Activity A, 115 hours in Activity B, 260 hours in Activity C, and 100 hours in Activity D. She has one employee, who works 125 hours in Activity D. Which of the following statements is correct? a. Activities A, B, C, and D are all significant participation activities. b. Paula is a material participant with respect to Activities A, B, C, and D. c. Paula is not a material participant with respect to Activities A, B, C, and D. d. Losses from all of the activities can be used to offset Paula's active income. e. None of the above.
: e RATIONALE: Activities A, B, and C are all significant participation activities, but Activity D is not. A significant participation activity is one in which the individual's participation exceeds 100 hours during the year. The material participation standards are met with respect to Activities A, B, and C because total participation in significant participation activities (130 + 115 + 260) exceeds 500 hours.
43. In 2015, Kipp invested $65,000 for a 30% interest in a partnership conducting a passive activity. The partnership reported losses of $200,000 in 2015 and $100,000 in 2016, Kipp's share being $60,000 in 2015 and $30,000 in 2016. How much of the losses from the partnership can Kipp deduct assuming he owns no other investments and does not participate in the partnership's operations? a. $0 in 2015; $30,000 in 2016. b. $60,000 in 2015; $30,000 in 2016. c. $60,000 in 2015; $5,000 in 2016. d. $60,000 in 2015; $0 in 2016. e. None of the above.
: e RATIONALE: No losses are deductible in either year because the activity is passive and he owns no passive income-producing investments. Had the passive loss rules not applied, the at-risk rules would have limited the deduction to $65,000 over the two-year period.
75. Caroyl made a gift to Tim of a passive activity (adjusted basis of $50,000, suspended losses of $20,000, and a fair market value of $80,000). No gift tax resulted from the transfer. a. Tim's adjusted basis is $80,000, and Tim can deduct the $20,000 of suspended losses in the future. b. Tim's adjusted basis is $80,000. c. Tim's adjusted basis is $50,000, and the suspended losses are lost. d. Tim's adjusted basis is $50,000, and Tim can deduct the $20,000 of suspended losses in the future. e. None of the above.
: e RATIONALE: Since the $20,000 suspended loss is included in basis, Tim's basis in the property is $70,000 ($50,000 + $20,000).
During the year, Green Corporation (a U.S. corporation) has U.S.-source income of $750,000 and foreign income of $500,000. The foreign-source income generates foreign income taxes of $240,000. The U.S. income tax before the foreign tax credit is $425,000. Green Corporation's foreign tax credit is: a. $170,000. b. $240,000. c. $425,000. d. $500,000.
A
Identify the statement below that is false: a. If an employer is not required to withhold income taxes from an employee's wages, the wages are not taxable to the employee. b. In certain situations, income tax withholding by an employer is voluntary. c. An employer must deposit with the government an amount of FICA tax that is twice the amount withheld from the employee's salary (i.e., the employee's and employer's shares). d. If an excess amount of FICA has been withheld for an employee because the employee has multiple jobs, the employee may claim a credit for the excess amount withheld on his or her income tax return. e. None of the above statements are false.
A
Kevin and Sue have two children, ages 8 and 14. They spend $6,200 per year on eligible employment related expenses for the care of their children after school. Kevin earned a salary of $20,000 and Sue earned a salary of $18,000. What is the amount of the credit for child and dependent care expenses: a. $690 b. $713 c. $1,380 d. $1,426
A
Realizing that providing for a comfortable retirement is up to them, Jim and Julie commit to making regular contributions to their IRAs, beginning this year. Consequently, they each make a $2,000 contribution to their traditional IRA. If their AGI is $35,000 on their joint return, what is the amount of their credit for certain retirement plan contributions: a. $2,000 b. $1,000 c. $400 d. $200 e. None of the above.
A
Several years ago, Sarah purchased a structure for $150,000 that was placed in service in 1929. In the current year, she incurred qualifying rehabilitation expenditures of $200,000. The amount of the tax credit for rehabilitation expenditures, and the amount by which the building's basis for cost recovery would increase as a result of the rehabilitation expenditures are the following amounts: a. $20,000 credit, $180,000 basis. b. $20,000 credit, $200,000 basis. c. $20,000 credit, $350,000 basis. d. $40,000 credit, $160,000 basis.
A
The ceiling amounts and percentages for 2016 for the two portions of the self-employment tax are: S. Security Portion Medicare Portion a. $118,500, 12.4% Unlimited, 2.9% b. $118,500, 15.3% Unlimited, 2.9% c. $117,000, 12.4% Unlimited, 2.9% d. $117,000, 2.9% Unlimited, 13.3%
A
False
A LIFO method is applied to general business credit carryovers, carrybacks, and utilization of credits earned during a particular year.
False
A deduction for parking and other traffic violations incurred during business use of the automobile is allowed under the actual cost method but not the automatic mileage method.
True
A moving expense deduction is allowed even if at the time of the move the taxpayer did not have a job at the new location.
False
A small employer incurs $1,500 for consulting fees related to establishing a qualified retirement plan for its 75 employees. As a result, the employer may claim the credit for small employer pension plan startup costs for $750.
True
A statutory employee is not a common law employee but is subject to Social Security tax.
False
A taxpayer may qualify for the credit for child and dependent care expenses if the taxpayer's dependent is under age 17.
True
A taxpayer takes six clients to an NBA playoff game. If all of the tickets (list price of $120 each) are purchased on the Internet for $1,800 ($300 each), only $60 ($120 × 50% cutback adjustment) per ticket is deductible.
False
A taxpayer who claims the standard deduction will not avoid the 2% floor on unreimbursed employee expenses.
False
A taxpayer who claims the standard deduction will not be able to claim an office in the home deduction.
False
A taxpayer who lives and works in Kansas City is sent to Chicago on an eight-day business trip. While in Chicago, taxpayer uses the hotel valet service to have some laundry done. The valet charge is a nondeductible personal travel expense.
False
A taxpayer who lives and works in Tulsa travels to Buffalo for five days. If three days are spent on business and two days are spent on visiting relatives, only 60% of the airfare is deductible.
True
A taxpayer who maintains an office in the home to conduct his only business will not have nondeductible commuting expense.
False
A taxpayer who meets the age requirement and receives no Social Security benefits will be entitled to the full tax credit for the elderly.
False
A taxpayer who qualifies for the low-income housing credit claims the credit over a 20-year period.
True
A taxpayer who uses the automatic mileage method for the business use of an automobile can change to the actual cost method in a later year.
True
A taxpayer who uses the automatic mileage method to compute auto expenses can also deduct the business portion of tolls and parking.
True
A taxpayer's earned income credit is dependent on the number of his or her qualifying children.
George and Martha are married and file a joint tax return claiming their two children, ages 10 and 8 as dependents. Assuming their AGI is $119,650, George and Martha's child tax credit is: a. $1,500. b. $1,000. c. $0. d. $2,000.
A)$1,500
True
After completing an overseas assignment in Oslo (Norway), Daniel retires from Pelican Corporation and moves to a retirement community in Key West (Florida). Daniel's moving expenses from Oslo to Key West are deductible as they are exempt from the time test.
False
After graduating from college with a degree in chemistry, Alberto obtains a job as a chemist with DuPont. Alberto's job search expenses qualify as deductions.
True
After she finishes working at her main job, Ann returns home, has dinner, then drives to her second job. Ann may deduct the mileage between her first and second job.
False
After the automatic mileage rate has been set by the IRS for a year, it cannot later be changed by the IRS.
False
Alexis (a CPA) sold her public accounting practice in Des Moines and accepted a job with the Seattle office of a national accounting firm. Her moving expenses are not deductible because she has changed employment status (i.e., went from self-employed to employee).
False
All foreign taxes qualify for the foreign tax credit.
False
All taxpayers are eligible to take the basic research credit.
False
Amy lives and works in St. Louis. In the morning she flies to Boston, has a three-hour business meeting, and returns to St. Louis that evening. For tax purposes, Amy was away from home.
True
An education expense deduction may be allowed even if the education results in a promotion or pay raise for the employee.
True
An employer's tax deduction for wages is affected by the work opportunity tax credit.
False
An expatriate who works in a country with an income tax rate higher than the U.S. rate probably will find the foreign earned income exclusion preferable to the foreign tax credit.
False
An individual generally may claim a credit for adoption expenses in the year in which the expenses are paid.
False
Any unused general business credit must be carried back 3 years and then forward for 20 years.
False
At age 65, Camilla retires from her job in Boston and moves to Florida. As a retiree, she is not subject to the time test in deducting her moving expenses.
Amber is in the process this year of renovating the office building (placed in service in 1976) used by her business. Because of current Federal Regulations that require the structure to be accessible to handicapped individuals, she incurs an additional $11,000 for various features, such as ramps and widened doorways, to make her office building more accessible. The $11,000 incurred will produce a disabled access credit of what amount: a. $0 b. $5,000 c. $5,125 d. $5,500
B
Black Company paid wages of $180,000, of which $40,000 was qualified wages for the work opportunity tax credit under the general rules. Black Company's deduction for wages for the year is: a. $140,000. b. $164,000. c. $166,000. d. $180,000. e. None of the above.
B
During 2016, Barry (who is single and has no children) earned a salary of $13,000. He is age 30. His earned income credit for the year is: a. $0. b. $144. c. $362. d. $506.
B
During the current year, Eleanor earns $120,000 in wages as an employee of an accounting firm. She also earns $13,000 in gross income from an outside consulting service she operates. Deductible expenses paid in connection with the consulting service amount to $3,000. Eleanor also incurs a recognized long-term capital gain of $1,000 from the sale of a stock investment. She must pay a self-employment tax on: a. $0. b. $10,000. c. $13,000. d. $14,000.
B
During the year, Purple Corporation (a U.S. Corporation) has U.S.-source income of $1,800,000 and foreign income of $600,000. The foreign-source income generates foreign income taxes of $150,000. The U.S. income tax before the foreign tax credit is $816,000. Purple Corporation's foreign tax credit is: a. $112,500. b. $150,000. c. $204,000. d. $816,000.
B
In 2015, Juan and Juanita incur $9,800 in legal and adoption fees directly related to the adoption of an infant son born in a nearby state. Over the next year, they incur another $4,500 of adoption expenses. The adoption becomes final in 2016. Which of the following choices properly reflects the amounts and years in which the adoption expenses credit is available: 2015 2016 a. $9,800 $ 4,500 b. None $13,460 c. None $14,300 d. $9,800 $ 3,660
B
In March 2016, Gray Corporation hired two individuals, both of whom were certified as long-term recipients of family assistance benefits. Each employee was paid $11,000 during 2016. Only one of the individuals continued to work for Gray Corporation in 2017, earning $9,000 during the year. No additional workers were hired in 2017. Gray Corporation's work opportunity tax credit amounts for 2016 and 2017 are: a. $4,000 in 2016, $4,000 in 2017. b. $8,000 in 2016, $4,500 in 2017. c. $8,000 in 2016, $5,000 in 2017. d. $8,000 in 2016, $9,000 in 2017.
B
In describing FICA taxes, which (if any) of the following statements is incorrect: a. The base amounts for 2017 probably will increase from the 2016 amounts. b. The base amounts for the Social Security and Medicare portions are the same. c. If both spouses work, excess FICA taxes need not result. d. Excess FICA taxes can be claimed as an income tax credit.
B
Several years ago, Tom purchased a structure for $300,000 that was placed in service in 1929. Three and one-half years ago he incurred qualifying rehabilitation expenditures of $600,000. In the current year, Tom sold the property in a taxable transaction. Calculate the amount of the recapture of the tax credit for rehabilitation expenditures: a. $0 b. $24,000 c. $36,000 d. $48,000 e. None of the above.
B
Which of the following best describes the treatment applicable to unused business credits: a. Unused amounts are carried forward indefinitely. b. Unused amounts are first carried back one year and then forward for 20 years. c. Unused amounts are first carried back one year and then forward for 10 years. d. Unused amounts are first carried back three years and then carried forward for 15 years. e. None of the above.
B
The ceiling amounts and percentages for 2017 for the two portions of the self-employment tax are: Social Security portion Medicare portion a. $118,500; 2.9%Unlimited; 13.3% b. $127,200; 12.4%Unlimited; 2.9% c. $118,500; 12.4%Unlimited; 2.9% d. $127,200; 15.3%Unlimited; 2.9%
B)$127,200;12.4. unlimited;2.9%
Which of the following correctly reflects current rules regarding estimated tax payments for individuals? a. Married taxpayers may not make joint estimated tax payments unless they file a joint income tax return. b. No quarterly payments are required if the taxpayer's estimated tax is under $1,000. c. Employees are not subject to the estimated tax payment provisions. d. Any penalty imposed for underpayment is deductible for income tax purposes.
B)No quarterly payments are required if the taxpayer's estimated tax is under $1,000
True
Because current U.S. corporate income tax rates are higher than many foreign corporate income tax rates, the overall limitation does not yield a lower foreign tax credit than the amount of foreign taxes actually paid.
False
BlueCo incurs $900,000 during the year to construct a facility that will be used exclusively for the care of its employees' pre-school age children during normal working hours. The credit for employer-provided child care available to BlueCo this year is $225,000.
True
Bob lives and works in Newark, NJ. He travels to London for a three-day business meeting, after which he spends three days touring Scotland. All of his air fare is deductible.
False
Both education tax credits are available for qualified tuition expenses, and in certain instances, also may be available for room and board.
True
Both traditional and Roth IRAs possess the advantage of tax-free accumulation of income within the plan.
True
By itself, credit card receipts will not constitute adequate substantiation for travel expenses.
75. Green Company, in the renovation of its building, incurs $9,000 of expenditures that qualify for the disabled access credit. The disabled access credit is: a. $8,750. b. $4,500. c. $4,375. d. $4,250. e. None of the above.
C
Ahmad is considering making a $10,000 investment in a venture which its promoter promises will generate immediate tax benefits for him. Ahmad, who normally itemizes his deductions, is in the 28% marginal tax bracket. If the investment is of a type where the taxpayer may claim either a tax credit of 25% of the amount of the expenditure or an itemized deduction for the amount of the investment, what treatment normally would be most beneficial to Ahmad and by how much will Ahmad's tax liability decline because of the investment: a. $0, take neither the itemized deduction nor the tax credit. b. $2,500, take the tax credit. c. $2,800, take the itemized deduction. d. Both options produce the same benefit. e. None of the above.
C
An employer calculates the amount of income tax withheld from salary or wages based on the information an employee provides on the following form: a. Form W-2. b. Form W-3. c. Form W-4. d. Form 941.
C
Bob and Sally are married, file a joint tax return, report AGI of $115,000, and have two children. Del is beginning her freshman year at State College during Fall 2016, and Owen is beginning his senior year at Southwest University during Fall 2016. Owen completed his junior year during the Spring semester of 2015 (i.e., he took a "leave of absence" during the 2015-2016 school year). Both Del and Owen are claimed as dependents on their parents' tax return. Del's qualifying tuition expenses and fees total $5,000 for the Fall semester, while Owen's qualifying tuition expenses were $6,100 for the Fall 2016 semester. Del's room and board costs were $3,200 for the Fall semester. Owen did not incur room and board costs, as he lived with his aunt and uncle during the year. Full payment is made for the tuition and related expenses for both children at the beginning of each semester. In addition to the children's college expenses, Bob also spent $3,000 on professional education seminars during the year in order to maintain his license as a practicing dentist. Bob attended the seminars during July and August 2016. Compute the available education tax credits for Bob and Sally for 2016: a. $3,100 b. $5,000 c. $5,480 d. $5,600
C
Cardinal Corporation hires two persons certified to be eligible employees for the work opportunity tax credit under the general rules (e.g., food stamp recipients), each of whom is paid $9,000 during the year. As a result of this event, Cardinal Corporation may claim a work opportunity credit of: a. $1,440. b. $2,880. c. $4,800. d. $7,200. e. None of the above.
C
Cheryl is single, has one child (age 6), and files as head of household during 2016. Her salary for the year is $19,500. She qualifies for an earned income credit of the following amount: a. $0. b. $3,064. c. $3,164. d. $3,373.
C
During the year, Green, Inc., incurs the following research expenditures: In-house wages, supplies, computer time $60,000 Paid to Blue Foundation for research 30,000 Green's qualifying research expenditures for the year are: a. $60,000. b. $75,000. c. $79,500. d. $90,000. e. None of the above.
C
George and Jill are husband and wife, ages 67 and 65 respectively. During the year, they receive Social Security benefits of $4,000 and have adjusted gross income of $11,000. Assuming they file a joint return, their tax credit for the elderly, before considering any possible limitation due to their tax liability, is: a. $1,125. b. $750. c. $450. d. $375.
C
George and Martha are married and file a joint tax return claiming their two children, ages 10 and 8 as dependents. Assuming their AGI is $119,650, George and Martha's child tax credit is: a. $0. b. $1,000. c. $1,500. d. $2,000.
C
Harry and Wilma are married and file a joint income tax return. On their tax return, they report $44,000 of adjusted gross income ($20,000 salary earned by Harry and $24,000 salary earned by Wilma) and claim two exemptions for their dependent children. During the year, they pay the following amounts to care for their 4-year old son and 6-year old daughter while they work. ABC Day Care Center $3,200 Blue Ridge Housekeeping Services 2,000 Mrs. Mason (Harry's mother) 1,000 Harry and Wilma may claim a credit for child and dependent care expenses of: a. $840. b. $1,040. c. $1,200. d. $1,240. e. None of the above.
C
Jermaine and Kesha are married, file a joint tax return, have AGI of $82,500, and have two children. Devona is beginning her freshman year at State University during Fall 2016, and Arethia is beginning her senior year at Northeast University during Fall 2016 after having completed her junior year during the spring of that year. Both Devona and Arethia are claimed as dependents on their parents' tax return. Devona's qualifying tuition expenses and fees total $4,000 for the fall semester, while Arethia's qualifying tuition expenses and fees total $6,200 for each semester during 2016. Full payment is made for the tuition and related expenses for both children during each semester. The American Opportunity credit available to Jermaine and Kesha for 2016 is: a. $2,500. b. $3,000. c. $5,000. d. $6,000. e. None of the above.
C
Molly has generated general business credits over the years that have not been utilized. The amounts generated and not utilized follow: 2012 $2,500 2013 7,500 2014 5,000 2015 4,000 In the current year, 2016, her business generates an additional $15,000 general business credit. In 2016, based on her tax liability before credits, she can utilize a general business credit of up to $20,000. After utilizing the carryforwards and the current year credits, how much of the general business credit generated in 2016 is available for future years: a. $0. b. $1,000. c. $14,000. d. $15,000. e. None of the above.
C
Pat generated self-employment income in 2016 of $76,000. The self-employment tax is: a. $0. b. $5,369.23. c. $10,738.46. d. $11,628.00.
C
Rex and Dena are married and have two children, Michelle (age 7) and Nancy (age 5). During 2016, Rex earned a salary of $24,500, received interest income of $300, and filed a joint income tax return with Dena. Dena had $0 gross income. Their earned income credit for the year is: a. $0. b. $5,222. c. $5,412. d. $5,572.
C
The components of the general business credit include all of the following except: a. Credit for employer-provided child care. b. Disabled access credit. c. Research activities credit. d. Tax credit for rehabilitation expenditures. e. All of the above are components of the general business credit.
C
Which, if any, of the following correctly describes the research activities credit: a. The research activities credit is the greater of the incremental research credit, the basic research credit, or the energy research credit. b. If the research activities credit is claimed, no deduction is allowed for research and experimentation expenditures. c. The credit is not available for research conducted outside the United States. d. All corporations qualify for the basic research credit. e. None of the above.
C
Refundable tax credits include the: a. Tax credit for rehabilitation expenses. b. Foreign tax credit. c. Earned income credit. d. Credit for certain retirement plan contributions. e. None of these choices are correct.
C)Earned Income Credit
False
Cardinal Company incurs $800,000 during the year to construct a facility that will be used exclusively for the care of its employees' pre-school age children during normal working hours. Assuming Cardinal claims the credit for employer-provided child care this year, its basis in the newly constructed facility is $640,000.
False
Certain high-income individuals are subject to three additional Medicare taxes beginning in 2013—on wages, unearned income, and tax credits claimed.
True
Child and dependent care expenses include amounts paid for general household services.
True
Child care payments to a relative are not eligible for the credit for child and dependent care expenses if the relative is a child (under age 19) of the taxpayer.
In terms of the withholding procedures, which statement does not reflect current rules: a. Penalties can be imposed for filing false information with respect to wage withholding. b. An employer need not verify the number of exemptions claimed by an employee on Form W-4 (Employee's Withholding Allowance Certificate). c. An employee may claim fewer than the number of withholding allowances allowed, but not more. d. In preparing the income tax return for the year, the employee is bound by the number of exemptions claimed for withholding purposes.
D
Refundable tax credits include the: a. Foreign tax credit. b. Tax credit for rehabilitation expenses. c. Credit for certain retirement plan contributions. d. Earned income credit. e. None of the above.
D
Roger is considering making a $6,000 investment in a venture that its promoter promises will generate immediate tax benefits for him. Roger, who does not anticipate itemizing his deductions, is in the 30% marginal income tax bracket. If the investment is of a type that produces a tax credit of 40% of the amount of the expenditure, by how much will Roger's tax liability decline because of the investment: a. $0 b. $1,800 c. $2,200 d. $2,400 e. None of the above
D
Which of the following correctly describes the tax credit for rehabilitation expenditures: a. The cost of enlarging any existing business building is a qualifying expenditure. b. The cost of facilities related to the building (e.g., a parking lot) is a qualifying expenditure. c. No recapture provisions apply. d. No credit is allowed for the rehabilitation of personal use property. e. None of the above.
D
Which of the following correctly reflects current rules regarding estimated tax payments for individuals: a. Employees are not subject to the estimated tax payment provisions. b. Any penalty imposed for underpayment is deductible for income tax purposes. c. Married taxpayers may not make joint estimated tax payments unless they file a joint income tax return. d. No quarterly payments are required if the taxpayer's estimated tax is under $1,000.
D
Which of the following issues does not need resolution in an employer's effort to comply with employment tax payment requirements: a. Ascertaining which employees and wages are covered by employment taxes and are subject to withholding for income taxes. b. Arriving at the amount to be paid and/or withheld. c. Reporting and paying employment taxes and income taxes withheld to the IRS on a timely basis through the use of proper forms. d. Each of the above issues needs to be resolved. e. None of the above is relevant to the employer.
D
Which of the following statements concerning the credit for child and dependent care expenses is not correct: a. A taxpayer is not allowed both an exclusion from income and the credit for child and dependent care expenses on the same amount. b. A taxpayer is not allowed both a deduction as a medical expense and the credit for child and dependent care expenses on the same amount. c. If a taxpayer's adjusted gross income exceeds $43,000, the rate for the credit for child and dependent care expenses is 20%. d. If a taxpayer's adjusted gross income exceeds $15,000 but is not over $17,000, the rate for the credit for child and dependent care expenses is 35%. e. All of the above statements are correct.
D
Which of the following statements regarding the adoption expenses credit is not true: a. The adoption expenses credit is a nonrefundable credit. b. The adoption expenses credit starts to be phased out in 2016 beginning when a taxpayer's modified AGI exceeds $201,920. c. No adoption expenses credit is a available in 2016 if a taxpayer's modified AGI exceeds $241,920. d. The adoption expenses credit is limited to no more than $14,000 per eligible child in 2016. e. All of the above statements are true.
D
Which, if any, of the following correctly describes the earned income credit: a. Would be available regardless of the amount of the taxpayer's adjusted gross income. b. Not available to a surviving spouse. c. A taxpayer must have a qualifying child to take advantage of the credit. d. Is a refundable credit.
D
Which of the following statements is true regarding the education tax credits: a. The lifetime learning credit is available for qualifying tuition and related expenses incurred by students pursuing only graduate degrees. b. The American Opportunity credit permits a maximum credit of 20% of qualified expenses up to $10,000 per year. c. The American Opportunity credit is calculated per taxpayer, while the lifetime learning credit is available per eligible student. d. Continuing education expenses do not qualify for either education credit. e. None of the above statements is true.
E
Which of the following statements is true regarding the education tax credits? a. The lifetime learning credit is available for qualifying tuition and related expenses incurred by students pursuing only graduate degrees. b. The American Opportunity credit permits a maximum credit of 20% of qualified expenses up to $10,000 per year. c. Continuing education expenses do not qualify for either education credit. d. The American Opportunity credit is calculated per taxpayer, while the lifetime learning credit is available per eligible student. e. None of these statements are true
E)None of these statements are true
True
Eileen lives and works in Mobile. She travels to Rome for an eight-day business meeting, after which she spends two days touring Italy. All of Eileen's airfare is deductible.
True
Employees who render an adequate accounting to the employer and are fully reimbursed will shift the 50% cutback adjustment to their employer.
True
Employers are encouraged by the work opportunity tax credit to hire individuals who have been long-term recipients of family assistance welfare benefits.
False
Ethan, a bachelor with no immediate family, uses the Pine Shadows Country Club exclusively for his business entertaining. All of Ethan's annual dues for his club membership are deductible.
False
Expenses that are reimbursed by a taxpayer's employer under a dependent care assistance program can also qualify for the credit for child and dependent care expenses.
A taxpayer may qualify for the credit for child and dependent care expenses if the taxpayer's dependent is under age 17. (T/F)
False
An individual generally may claim a credit for adoption expenses in the year in which the expenses are paid. (T/F)
False
Unused foreign tax credits can be carried back three years and forward fifteen years. (T/F)
False
Interest paid or accrued during the tax year on aggregate acquisition indebtedness of $2 million or less ($1 million or less for married persons filing separate returns) is deductible as qualified residence interest.
False A $1 million limit for qualified residence interest applies to acquisition indebtedness ($500,000 or less for married persons filing separately).
Maria traveled to Rochester, Minnesota, with her son, who had surgery at the Mayo Clinic. Her son stayed at the clinic for the duration of his treatment. She paid airfare of $300 and $50 per night for lodging. The cost of Maria's airfare and lodging cannot be included in determining her medical expense deduction.
False A deduction is allowed for transportation and lodging expenses. In addition, Maria's deduction for lodging is allowed, since it falls within the limit of $50 per night.
Charitable contributions that exceed the percentage limitations for the current year can be carried over for up to three years.
False A five year carryover period applies to individual taxpayers.
For purposes of computing the deduction for qualified residence interest, a qualified residence includes the taxpayer's principal residence and two other residences of the taxpayer or spouse.
False A qualified residence includes a principal residence and one other residence.
For purposes of computing the deduction for qualified residence interest, a qualified residence includes only the taxpayer's principal residence.
False A qualified residence includes the taxpayer's principal residence and one other residence of the taxpayer or spouse.
A physician recommends a private school for Ellen's dependent child. Because of the physician's recommendation, the cost of the private school will qualify as a medical expense deduction (subject to percentage limitations).
False A recommendation of a physician, although helpful, does not make the expenditure automatically deductible as a medical expense.
Personal expenditures that are deductible as itemized deductions include medical expenses, Federal income taxes, state income taxes, property taxes on a personal residence, mortgage interest, and charitable contributions.
False All of the listed personal expenditures except Federal income taxes are deductible as itemized deductions.
In January 2017, Pam, a calendar year cash basis taxpayer, made an estimated state income tax payment for 2016. The payment is deductible in 2016.
False Cash basis taxpayers can deduct amounts paid or withheld for state income taxes in the year paid, no matter which year the payments pertain to. The January 2017 payment is a deduction for 2017.
During the year, Victor spent $300 on bingo games sponsored by his church. If all profits went to the church, Victor has a charitable contribution deduction of $300.
False Costs of raffles, bingo, or lottery tickets do not qualify for the charitable deduction regardless of who receives the profits.
Dan contributed stock worth $16,000 to his college alma mater, a qualified charity. He acquired the stock 11 months ago for $4,000. He may deduct $16,000 as a charitable contribution deduction (subject to percentage limitations).
False Dan's deduction is $4,000, the basis of the property. Contributions of short-term capital gain property are treated the same as contributions of ordinary income property and the amount of the deduction is measured by its basis.
Gambling losses may be deducted to the extent of the taxpayer's gambling winnings. Such losses are subject to the 2%-of-AGI floor for miscellaneous itemized deductions.
False Gambling losses may be deducted to the extent of the taxpayer's gambling winnings. However, such losses are not subject to the 2%-of-AGI floor for miscellaneous itemized deductions.
Noah gave $750 to a good friend whose house was destroyed by an earthquake. In addition, Noah contributed his time, valued at $250, in the cleanup effort. Noah may claim a charitable deduction of $1,000 on his tax return for the current year.
False Gifts of property made to needy individuals are not tax deductible. Deductible gifts need to be made to a qualifying charity. Furthermore, contributions of one's services, even if provided to a qualifying charity, are not deductible.
Leona borrows $100,000 from First National Bank and uses the proceeds to purchase City of Houston bonds. The interest Leona pays on this loan is deductible as investment interest subject to the investment interest limits.
False Interest incurred to purchase or carry tax-exempt bonds is not deductible.
Jack sold a personal residence to Steven and paid points of $3,500 on the loan to help Steven finance the purchase. Jack can deduct the points as interest.
False Points paid by the seller of a personal residence are deductible as interest by the buyer (i.e., Steven). Such amounts reduce the seller's (Jack's) amount realized.
Ronaldo contributed stock worth $12,000 to the Children's Protective Agency, a qualified charity. He acquired the stock 20 months ago for $7,000. He may deduct $7,000 as a charitable contribution deduction (subject to percentage limitations).
False Ronaldo's deduction is $12,000, the FMV of the property. Capital gain property contributions usually are measured by FMV, not basis.
Grace's sole source of income is from a restaurant that she owns and operates as a proprietorship. Any state income tax Grace pays on the business net income must be deducted as a business expense rather than as an itemized deduction.
False State and local income taxes imposed on an individual are deductible only as an itemized deduction even if the taxpayer's sole source of income is from a business.
Mindy paid an appraiser to determine how much a capital improvement made for medical reasons increased the value of her personal residence. The appraisal fee qualifies as a deductible medical expense.
False The appraisal fee does not qualify as a medical expense, but it qualifies as a deduction under § 212 (related to the determination of tax liability) as a miscellaneous itemized deduction.
Judy paid $40 for Girl Scout cookies and $40 for Boy Scout popcorn. Judy may claim an $80 charitable contribution deduction.
False The deduction is limited to the excess of the amount paid over the value of the benefit received (i.e., the cookies and popcorn).
The election to itemize is appropriate when total itemized deductions are less than the standard deduction based on the taxpayer's filing status.
False The election to itemize is appropriate when total itemized deductions exceed the standard deduction based on the taxpayer's filing status.
Mason, a physically handicapped individual, pays $10,000 this year for the installation of wheelchair ramps, support bars, and railings in his personal residence. These improvements increase the value of his personal residence by $2,000. Only $8,000 of the expenditure qualifies as a medical expense for tax purposes.
False The full $10,000 is included as a medical expense under a special rule applicable to physically handicapped persons.
In order to dissuade his pastor from resigning and taking a position with a larger church, Michael, an ardent leader of the congregation, gives the pastor a new car. The cost of the car is deductible by Michael as a charitable contribution.
False The pastor is not a qualified charitable organization. Therefore, the gift is not deductible as a charitable contribution.
A phaseout of certain itemized deductions applies for all taxpayers who choose to itemize their deductions.
False The phaseout of certain itemized deductions applies to only certain high-income taxpayers.
For all of the current year, Randy (a calendar year taxpayer) allowed the Salvation Army to use a building he owns rent-free. The building normally rents for $24,000 a year. Randy will be allowed a charitable contribution deduction this year of $24,000.
False The rent-free use of building space is not deductible as a charitable contribution.
A taxpayer pays points to obtain financing to purchase a second residence. At the election of the taxpayer, the points can be deducted as interest expense for the year paid.
False The special rule for the expensing of points applies when a personal residence is involved (i.e., the taxpayer's principal residence).
Contributions to public charities in excess of 50% of AGI may be carried back 3 years or forward for up to 5 years.
False They may be carried forward for up to 5 years, but they may not be carried back.
In 2016, Allison drove 800 miles to volunteer in a project sponsored by a qualified charitable organization in Utah. In addition, she spent $250 for meals while away from home. In total, Allison may take a charitable contribution deduction of $112 (800 miles × $.14) relating to her transportation.
False Transportation for charitable purposes is deductible at 14 cents per mile. The cost of meals is deductible because they were incurred while the taxpayer was away from home. Therefore, Allison's charitable contribution deduction is $362 [$250 + (800 miles × $.14 per mile)].
During the year, Eve (a resident of Billings, Montana) spends three consecutive weeks in Louisville, Kentucky. One week is spent representing the Billings First Christian Church at the national convention, and two weeks are spent vacationing with relatives. One third of Eve's travel expenses will qualify as a charitable deduction.
False Two weeks out of three weeks would be considered "a significant element" for vacation time. Therefore, none of Eve's travel expenses will qualify.
Matt, a calendar year taxpayer, pays $11,000 in medical expenses in 2016. He expects $5,000 of these expenses to be reimbursed by an insurance company in 2017. In determining his medical expense deduction for 2016, Matt must reduce his 2016 medical expenses by the amount of the reimbursement he expects in 2017.
False Unlike the casualty loss deduction, the medical expense deduction does not have to be reduced by anticipated recoveries. Matt can include all $11,000 as a medical expense in 2016.
Adrienne sustained serious facial injuries in a motorcycle accident. To restore her physical appearance, Adrienne had cosmetic surgery. She cannot deduct the cost of this procedure as a medical expense.
False Unnecessary cosmetic surgery is not deductible. However, Adrienne's surgery restored her appearance and corrected a problem caused by the accident.
True
Flamingo Corporation furnishes meals at cost to its employees by means of a cafeteria it maintains. The cost of operating the cafeteria is not subject to the cutback adjustment.
True
For purposes of computing the credit for child and dependent care expenses, the qualifying employmentrelated expenses are limited to an individual's actual or deemed earned income.
True
For self-employed taxpayers, travel expenses are not subject to the 2%-of-AGI floor.
True
For tax purposes, "travel" is a broader classification than "transportation."
False
For tax purposes, a statutory employee is treated the same as a common law employee.
False
For tax year 2013, Taylor used the simplified method of determining her office in the home deduction. For 2014, Taylor must continue to use the simplified method and cannot switch to the regular (actual expense) method.
True
For the current year, the base amount for the Social Security portion (old age, survivors, and disability insurance) is different from that for the Medicare portion of FICA.
True
Frank, a recently retired FBI agent, pays job search expenses to obtain a position with a city police department. Frank's job search expenses do qualify as deductions.
False
If a taxpayer chooses to claim a foreign tax credit, part of the foreign income taxes paid can also be claimed as a deduction.
False
If a taxpayer does not own a home but rents an apartment, the office in the home deduction is not available.
False
If a taxpayer is required to recapture any tax credit for rehabilitation expenditures, the recapture amount need not be added to the adjusted basis of the rehabilitation expenditures.
False
If an employee holds two jobs during the year, an overwithholding of FICA tax will result.
True
If an individual is subject to the direction or control of another only to the extent of the end result but not as to the means of accomplishment, an employer-employee relationship does not exist.
False
If the cost of a building constructed and placed into service by an eligible small business in the current year includes the cost of a wheelchair ramp, the cost of the ramp qualifies for the disabled access credit.
True
If the cost of uniforms is deductible, their maintenance cost (e.g., laundry, dry cleaning, alterations) also is deductible.
False
In May 2014, after 11 months on a new job, Ken is fired after he assaults a customer. Ken must include in his gross income for 2014 any deduction for moving expenses he may have claimed on his 2013 tax return.
False
In November 2014, Katie incurs unreimbursed moving expenses to accept a new job. Katie cannot deduct any of these expenses when she timely files her 2014 income tax return since she has not yet satisfied the 39-week time test.
True
In choosing between the actual expense method and the automatic mileage method, a taxpayer should consider the cost of insurance on the automobile.
False
In computing the foreign tax credit, the greater of the foreign income taxes paid or the overall limitation is allowed.
True
In some cases it may be appropriate for a taxpayer to report work-related expenses by using both Form 2106 and Schedule C.
True
In the case of an office in the home deduction, the exclusive business use test does not apply when the home is used as a daycare center.
False
Jackson gives his supervisor and her husband each a $30 box of chocolates at Christmas. Jackson may claim only $25 as a deduction.
False
Jake performs services for Maude. If Maude provides the helper and tools, this is indicative of independent contractor (rather than employee) status.
True
Janet, who lives and works in Newark, travels to Atlanta for a Thursday-Friday business conference. She stays over after the conference and visits relatives and friends on Saturday. Under certain circumstances, the meals and lodging expenses for Saturday can be considered as business related.
False
John owns and operates a real estate agency as a sole proprietor. On a full-time basis, he employs his 17year old daughter as a receptionist and his 22-year old son as a bookkeeper. Both children are subject to FICA withholding.
False
Kelly, an unemployed architect, moves from Boston to Phoenix to accept a job as a chef at a restaurant. Kelly's moving expenses are not deductible because her new job is in a different trade or business.
False
Liam just graduated from college. Because it is his first job, the cost of moving his personal belongings from his parents' home to the job site does not qualify for the moving expense deduction.
False
Lloyd, a practicing CPA, pays tuition to attend law school. Since a law degree involves education leading to a new trade or business, the tuition is not deductible.
False
Madison is an instructor of fine arts at a local community college. If she spends $600 (not reimbursed) on art supplies for her classes, $250 of this amount can be claimed as a deduction for AGI.
False
Mallard Corporation pays for a trip to Aruba for its two top salespersons. This expense is subject to the cutback adjustment.
False
Marvin lives with his family in Alabama. He has two jobs: one in Alabama and one in North Carolina. Marvin's tax home is where he lives (Alabama).
True
Nonrefundable credits are those that reduce the taxpayer's tax liability but are not paid when the amount of the credit (or credits) exceeds the taxpayer's tax liability.
True
On their birthdays, Lily sends gift certificates (each valued at $25) to Caden (a key client) and to each of Caden's two minor children. Lily can deduct only $25 as to these gifts.
False
Once the actual cost method is used, a taxpayer cannot change to the automatic mileage method in a later year.
False
One indicator of independent contractor (rather than employee) status is when the individual performing the services is paid based on time spent (rather than on tasks performed).
False
Only married taxpayers with children are qualified to receive the earned income credit.
False
Only self-employed individuals are required to make estimated tax payments.
True
Qualified moving expenses include the cost of lodging but not meals during the move.
True
Qualified moving expenses of an employee that are not reimbursed are a deduction for AGI.
False
Qualified rehabilitation expenditures include the cost of acquiring the building, but not the cost of acquiring the land.
True
Qualified research and experimentation expenditures are not only eligible for the 20% tax credit, but also can be expensed in the year incurred.
True
Qualifying job search expenses are deductible even if the taxpayer does not change jobs.
True
Qualifying tuition expenses paid from the proceeds of a tax-exempt scholarship do not give rise to an education tax credit.
True
Sick of her 65 mile daily commute, Edna purchases a condo that is only four miles from her job. Edna's moving expenses to her new condo are not allowed and cannot be claimed by her as a deduction.
True
Some (or all) of the tax credit for rehabilitation expenditures will have to be recaptured if the rehabilitated property is disposed of prematurely or if it ceases to be qualifying property.
In 2016, Brandon, age 72, paid $3,000 for long-term care insurance premiums. He may include the $3,000 in computing his medical expense deduction for the year.
Taxpayers over age 70 may include up to $4,870 of long-term care insurance premiums in computing medical expenses.
True
The American Opportunity credit is available per eligible student, while the lifetime learning credit is calculated per taxpayer.
False
The Federal per diem rates that can be used for "deemed substantiated" purposes are the same for all locations in the country.
True
The IRS will issue advanced rulings as to whether a worker's status is that of an employee or an independent contractor.
True
The additional Medicare taxes assessed on high-income individuals carry differing tax rates depending on the tax base.
False
The calculation of FICA and the self-employment tax both involve two components: the Social Security portion and the Medicare portion, each portion of which is imposed on the same base amounts.
True
The child tax credit is based on the number of the taxpayer's qualifying children under age 17.
False
The credit for child and dependent care expenses is an example of a refundable credit.
False
The disabled access credit is computed at the rate of 50% of all access expenditures incurred by the taxpayer during the year.
True
The disabled access credit was enacted to encourage small businesses to make their businesses more accessible to disabled individuals.
False
The earned income credit is available only if the taxpayer has at least one qualifying child in the household.
True
The earned income credit, a form of a negative income tax, is a refundable credit.
False
The education tax credits (i.e., the American Opportunity credit and the lifetime learning credit) are available to help defray the cost of higher education regardless of the income level of the taxpayer.
True
The incremental research activities credit is 20% of the qualified research expenses that exceed the base amount.
False
The low-income housing credit is available to low-income tenants who reside in qualifying low-income housing.
False
The maximum child tax credit under current law is $1,500 per qualifying child.
True
The maximum credit for child and dependent care expenses is $2,100 if only one spouse is employed and the other spouse is a full-time student.
False
The purpose of the tax credit for rehabilitation expenditures is to encourage the relocation of businesses from older, economically distressed areas (i.e., inner city) to newer locations.
True
The purpose of the work opportunity tax credit is to encourage employers to hire individuals from specified target groups traditionally subject to high rates of unemployment.
