Tax Test 2-chp 6, 7, 8 Quiz Review – Flashcards
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Sammy, a calendar year cash basis taxpayer who is age 6, has the following transactions: Salary from job $90,000 Alimony received from ex-wife 10,000 Medical expenses 8,000 Based on this information, Sammy has: a. AGI of $90,000 b. AGI of $95,000 c. AGI of $99,500 d. Deduction for medical expenses of $0 e. None of the above
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e. None of the above RATIONALE: Sammy's AGI is calculated as follows: Salary from job $ 90,000 Alimony received from ex-wife 10,000 AGI $100,000 Sammy's deduction for medical expenses, an itemized deduction, is $500 [$8,000 - 7.5%($100,000)].
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Trade and business expenses should be treated as: a. A deduction from AGI subject to the 2%-of-AGI floor. b. A deduction from AGI not subject to the 2%-of-AGI floor. c. Deductible for AGI. d. An itemized deduction if not reimbursed. e. None of the above.
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c. Deduction for AGI
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Which of the following can be claimed as a deduction for AGI? a. Personal casualty losses. b. Investment interest expenses. c. Medical expenses. d. Property taxes on personal use real estate. e. None of the above.
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e. None of the above RATIONALE: All of these expenses are classified as itemized deductions.
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Which of the following is not a "trade or business" expense? a. Interest on business indebtedness. b. Property taxes on business property. c. Parking ticket paid on business auto. d. Depreciation on business property. e. All of the above are "trade or business" expenses.
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c. Parking ticket paid on business auto
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Which of the following is a required test for the deduction of a business expense? a. Ordinary. b. Necessary. c. Reasonable. d. All of the above. e. None of the above.
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d. All of the above
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Benita incurred a business expense on December 10, 2014, which she charged on her bank credit card. She paid the credit card statement which included the charge on January 5, 2015. Which of the following is correct? a. If Benita is a cash method taxpayer, she cannot deduct the expense until 2015. b. If Benita is an accrual method taxpayer, she can deduct the expense in 2014. c. If Benita uses the accrual method, she can choose to deduct the expense in either 2014 or 2015. d. Only b. and c. are correct. e. a., b., and c. are correct.
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b. If Benita is an accrual method taxpayer, she can deduct the expense in 2014. RATIONALE: Choice a. is incorrect because charging the expense on a bank credit card is treated as a constructive payment. Thus, as a cash method taxpayer, she can deduct the expense in 2014. If Benita uses the accrual method, she deducts the expense in 2014. In any event, she does not merely choose the year in which to deduct the expense (choice c.).
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Payments by a cash basis taxpayer of capital expenditures: a. Must be expensed at the time of payment. b. Must be expensed by the end of the first year after the asset is acquired. c. Must be deducted over the actual or statutory life of the asset. d. Can be deducted in the year the taxpayer chooses. e. None of the above.
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c. Must be deducted over the actual or statutory life of the asset. RATIONALE: Both cash basis and accrual basis taxpayers are required to recover the cost of capital assets through amortization, depletion, or depreciation over the actual or statutory life of the asset.
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Which of the following legal expenses are deductible for AGI? a. Incurred in connection with a trade or business. b. Incurred in connection with rental or royalty property held for the production of income. c. Incurred for tax advice relative to the preparation of an individual's income tax return. d. Only a. and b. qualify. e. a., b., and c. qualify.
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d. Only a. and b. qualify. RATIONALE: Expenses incurred for tax advice relative to the preparation of an individual's income tax return are classified as itemized deductions.
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Terry and Jim are both involved in operating illegal businesses. Terry operates a gambling business and Jim operates a drug running business. Both businesses have gross revenues of $500,000. The businesses incur the following expenses. Terry Employee salaries $200,000 Bribes to police 25,000 Rent and utilities 50,000 Cost of goods sold -0- Jim Employee salaries $200,000 Bribes to police 25,000 Rent and utilities 50,000 Cost of goods sold 125,000 Which of the following statements is correct?
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b. Terry should report profit from his business of $250,000. RATIONALE: Terry and Jim should report net profit from their businesses as follows: Jim Gross revenues $500,000 Less: Cost of goods sold (125,000) Gross income $375,000 Less: Expenses Employee salaries (-0-) Rent and utilities (-0-) Bribes to police (-0-) Net profit $375,000 Terry Gross revenues $500,000 Less: Cost of goods sold (-0-) Gross income $500,000 Less: Expenses Employee salaries (200,000) Rent and utilities (50,000) Bribes to police (-0-) Net profit $250,000 For Terry, the bribes to the police of $25,000 cannot be deducted. None of Jim's expenses can be deducted. However, the cost of goods sold is viewed as a negative item in calculating gross income (i.e., gross income = gross profit) rather than as a deduction.
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For a president of a publicly held corporation, which of the following are not subject to the $1 million limit on executive compensation? a. Contribution to medical insurance plan. b. Contribution to pension plan. c. Premiums on group term life insurance of $50,000. d. Only b. and c. are not subject to the limit. e. a., b., and c., are not subject to the limit.
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e. a., b., and c., are not subject to the limit.
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Iris, a calendar year cash basis taxpayer, owns and operates several TV rental outlets in Florida, and wants to expand to other states. During 2014, she spends $14,000 to investigate TV rental stores in South Carolina and $9,000 to investigate TV rental stores in Georgia. She acquires the South Carolina operations, but not the outlets in Georgia. As to these expenses, Iris should: a. Capitalize $14,000 and not deduct $9,000. b. Expense $23,000 for 2014. c. Expense $9,000 for 2014 and capitalize $14,000. d. Capitalize $23,000. e. None of the above.
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b. Expense $23,000 for 2014 RATIONALE: Since Iris owns and operates TV rental outlets, all of the investigation expenses can be deducted.
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. For an activity classified as a hobby, the expenses are categorized as follows: (1) Amounts that affect adjusted basis and would be deductible under other Code sections if the activity had been engaged in for profit (e.g., depreciation, amortization, and depletion). (2) Amounts deductible under other Code sections without regard to the nature of the activity, such as property taxes and home mortgage interest. (3) Amounts deductible under other Code sections if the activity had been engaged in for profit, but only if those amounts do not affect adjusted basis (e.g., maintenance, utilities, and supplies). If these expenses exceed the gross income from the activity and are thus limited, the sequence in which they are deductible is: a. (1), (2), (3). b. (1), (3), (2). c. (2), (3), (1). d. (2), (1), (3). e. (3), (2), (1).
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c. (2), (3), (1).
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Priscilla pursued a hobby of making bedspreads in her spare time. Her AGI before considering the hobby is $40,000. During the year she sold the bedspreads for $10,000. She incurred expenses as follows: Supplies $4,000 Interest on loan to get business started 500 Advertising 6,500 Assuming that the activity is deemed a hobby, how should she report these items on her tax return? a. Include $10,000 in income and deduct $11,000 for AGI. b. Ignore both income and expenses since hobby losses are disallowed. c. Include $10,000 in income, deduct nothing for AGI, and claim $11,000 of the expenses as itemized deductions, subject to the 2% of AGI limitation.. d. Include $10,000 in income and deduct interest of $500 for AGI. e. None of the above.
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c. Include $10,000 in income, deduct nothing for AGI, and claim $11,000 of the expenses as itemized deductions, subject to the 2% of AGI limitation..
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If a residence is used primarily for personal use (rented for fewer than 15 days per year), which of the following is correct? a. No income is included in AGI. b. No expenses are deductible. c. Expenses must be allocated between rental and personal use. d. Only a. and b. are correct. e. a., b., and c. are correct.
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a. No income is included in AGI. RATIONALE: Expenses that would otherwise be deductible (e.g., property taxes and interest on mortgage of personal residence) can be claimed (choice b.).
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Bob and April own a house at the beach. The house was rented to unrelated parties for 8 weeks during the year. April and the children used the house 12 days for their vacation during the year. After properly dividing the expenses between rental and personal use, it was determined that a loss was incurred as follows: Gross rental income $4,000 Less: Mortgage interest and property taxes $3,500 Other allocated expenses 2,000 (5,500) Net rental loss ($1,500) What is the correct treatment of the rental income and expenses on Bob and April's joint income tax return for the current year? a. A $1,500 loss should be reported. b. Only the mortgage interest and property taxes should be deducted. c. Since the house was used more than 10 days personally by Bob and April, the rental expenses (other than mortgage interest and property taxes) are limited to the gross rental income in excess of deductions for interest and taxes allocated to the rental use. d. Since the house was used less than 50% personally by Bob and April, all expenses allocated to personal use may be deducted. e. Bob and April should include none of the income or expenses related to the beach house in their current year income tax return.
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a. A $1,500 loss should be reported.
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Melba incurred the following expenses for her dependent daughter during the current year: Payment of principal on daughter's automobile loan $3,600 Payment of interest on above loan 2,900 Payment of daughter's property taxes 1,800 Payment of principal on daughter's personal residence loan 2,800 Payment of interest on daughter's personal residence loan 7,000 How much may Melba deduct in computing her itemized deductions? a. $0. b. $8,800. c. $11,700. d. $18,100. e. None of the above.
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a. $0. RATIONALE: None of the items are incurred for the taxpayer's (Melba) benefit or as a result of the taxpayer's obligation.
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. Which of the following must be capitalized by a business? a. Replacement of a windshield of a business truck which was broken in an accident. b. Repair of a roof of a building used in business. c. Amount paid for a covenant not to compete. d. Only b. and c. must be capitalized. e. a., b., and c. can be expensed rather than capitalized.
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c. Amount paid for a covenant not to compete. RATIONALE: All of these expenses, except for the covenant, can be deducted in the current tax year. The amortization period for the covenant is 15 years.
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In January, Lance sold stock with a cost basis of $26,000 to his brother, James, for $24,000, the fair market value of the stock on the date of sale. Five months later, James sold the same stock through his broker for $27,000. What is the tax effect of these transactions? a. Disallowed loss to James of $2,000; gain to Lance of $1,000. b. Disallowed loss to Lance of $2,000; gain to James of $3,000. c. Deductible loss to Lance of $2,000; gain to James of $3,000. d. Disallowed loss to Lance of $2,000; gain to James of $1,000. e. None of the above.
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d. Disallowed loss to Lance of $2,000; gain to James of $1,000. RATIONALE: Lance's realized loss of $2,000 ($24,000 - $26,000) is disallowed. James may reduce his realized gain of $3,000 ($27,000 - $24,000) by Lance's disallowed loss of $2,000. So James' recognized gain is $1,000.
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Jed is an electrician. Jed and his wife are accrual basis taxpayers and file a joint return. Jed wired a new house for Alison and billed her $15,000. Alison paid Jed $10,000 and refused to pay the remainder of the bill, claiming the fee to be exorbitant. Jed took Alison to Small Claims Court for the unpaid amount and was awarded a $2,000 judgment. Jed was able to collect the judgment but not the remainder of the bill from Alison. What amount of loss may Jed deduct in the current year? a. $0. b. $2,000. c. $3,000. d. $5,000. e. None of the above.
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c. $3,000. RATIONALE: Jed is an accrual basis taxpayer and therefore, has a basis in the $3,000 not collected.
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On June 2, 2013, Fred's TV Sales sold Mark a large HD TV, on account, for $12,000. Fred's TV Sales uses the accrual method. In 2014, when the balance on the account was $8,000, Mark filed for bankruptcy. Fred was notified that he could not expect to receive any of the amount owed to him. In 2015, final settlement was made and Fred received $1,000. How much bad debt loss can Fred deduct in 2015? a. $0. b. $7,000. c. $8,000. d. $12,000. e. None of the above.
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a. $0. RATIONALE: This debt is a business debt. Therefore, partial worthlessness can be recognized in 2014. The loss in 2014 would be $8,000. In 2015, the account has been written down to zero and hence, the collection of $1,000 would produce a $1,000 ($1,000 - $0) gain rather than a loss.
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Last year, Lucy purchased a $100,000 account receivable for $90,000. During the current year, Lucy collected $97,000 on the account. What are the tax consequences to Lucy associated with the collection of the account receivable? No subsequent collections are expected. a. $0. b. $2,000 gain. c. $3,000 loss. d. $13,000 loss. e. None of the above.
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e. None of the above. RATIONALE: The amount collected is $7,000 ($97,000 - $90,000) more than Lucy's basis in the receivable.
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Five years ago, Tom loaned his son John $20,000 to start a business. A note was executed with an interest rate of 8%, which is the Federal rate. The note required monthly payments of the interest with the $20,000 due at the end of ten years. John always made the interest payments until last year. During the current year, John notified his father that he was bankrupt and would not be able to repay the $20,000 or the accrued interest of $1,800. Tom is an accrual basis taxpayer whose only income is salary and interest income. The proper treatment for the nonpayment of the note is: a. No deduction. b. $3,000 deduction. c. $20,000 deduction. d. $21,800 deduction. e. None of the above.
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b. $3,000 deduction. RATIONALE: This is a bona fide loan to his son; therefore, Tom is entitled to a bad debt of $21,800 ($20,000 + $1,800; a deduction is allowed for the $1,800 of accrued interest receivable because Tom is an accrual basis taxpayer). The deduction for the current year is limited to $3,000, since the bad debt is classified as a short-term capital loss.
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John files a return as a single taxpayer. In 2014, he had the following items: · Salary of $40,000. · Loss of $65,000 on the sale of § 1244 stock acquired two years ago. · Interest income of $6,000. Determine John's AGI for 2014. a. ($5,000). b. $0. c. $45,000. d. $51,000. e. None of the above.
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b. $0. RATIONALE: Salary $ 40,000 Interest income 6,000 Ordinary loss (§ 1244 ordinary loss) (50,000) AGI $ -0- $15,000 ($65,000 - $50,000) is long-term capital loss. Of this amount, no loss can be used because there is no ordinary income. $15,000 will be carried forward.
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On July 20, 2013, Matt (who files a joint return) purchased 3,000 shares of Orange Corporation stock (the stock is § 1244 small business stock) for $24,000. On November 10, 2013, Matt purchased an additional 1,000 shares of Orange Corporation stock from a friend for $150,000. On September 15, 2014, Matt sold the 4,000 shares of stock for $120,000. How should Matt treat the sale of the stock on his 2014 return? a. $54,000 ordinary loss. b. $100,000 ordinary loss; $46,000 net capital gain. c. $100,000 ordinary loss; $20,000 STCL. d. $130,000 ordinary loss; $66,000 LTCG. e. None of the above.
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e. None of the above. RATIONALE: Amount realized (1,000 shares × $30 per share) $ 30,000 Less: basis (150,000) Recognized loss ($120,000) STCL ($120,000) The stock is not § 1244 stock because it was not purchased from the corporation. Amount realized (3,000 shares × $30 per share) $ 90,000 Less: basis (24,000) Recognized gain (LTCG) $ 66,000 Hence, Matt has a $54,000 STCL ($120,000 - $66,000).
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Which of the following events would produce a deductible loss? a. Erosion of personal use land due to rain or wind. b. Termite infestation of a personal residence over a several year period. c. Damages to personal automobile resulting from a taxpayer's willful negligence. d. A misplaced diamond ring. e. None of the above.
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e. None of the above. RATIONALE: A "theft" does not include misplaced or lost items.
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In 2014, Grant's personal residence was completely destroyed by fire. Grant was insured for 100% of his actual loss, and he received the insurance settlement. Grant had adjusted gross income, before considering the casualty item, of $30,000. Pertinent data with respect to the residence follows: Cost basis $280,000 Value before casualty 250,000 Value after casualty -0- What is Grant's allowable casualty loss deduction? a. $0. b. $6,500. c. $6,900. d. $10,000. e. $80,000.
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a. $0. RATIONALE: The proceeds received are $250,000. Therefore, Grant has no casualty gain or a casualty loss.
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John had adjusted gross income of $60,000. During the year his personal use summer home was damaged by a fire. Pertinent data with respect to the home follows: Cost basis $260,000 Value before the fire 400,000 Value after the fire 100,000 Insurance recovery 270,000 John had an accident with his personal use car. As a result of the accident, John was cited with reckless driving and willful negligence. Pertinent data with respect to the car follows:Chapter 7 Deductions and Losses: Certain Business Expenses and Losses © 2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Cost basis $80,000 Value before the accident 56,000 Value after the accident 20,000 Insurance recovery 18,000 What is John's itemized casualty loss deduction? a. $0. b. $2,000. c. $17,000. d. $18,000. e. None of the above.
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a. $0 RATIONALE: Gain on home ($260,000 - $250,000) = $10,000. John has no itemized casualty loss deduction because casualty gains exceed casualty losses. There is no casualty loss on the car because the accident was the result of willful negligence.
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0. In 2013, Sarah (who files as single) had silverware worth $10,000 (basis $6,000) stolen from her home. Sarah's insurance company told her that her policy did not cover the theft. Sarah's other itemized deductions last year were $2,000. She had AGI of $30,000 last year. In August of 2014, Sarah's insurance company decided that Sarah's policy did cover the theft of the silverware and they paid Sarah $5,000. Determine the tax treatment of the $5,000 received by Sarah during 2014. a. None of the $5,000 should be included in gross income. b. $2,900 should be included in gross income. c. $5,000 should be included in gross income. d. Last year's return should be amended to include the $5,000. e. None of the above.
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a. None of the $5,000 should be included in gross income. RATIONALE: Sarah would have taken a casualty loss of $2,900 ($6,000 - $100 - $3,000) in 2013. Therefore, the total itemized deductions would be $4,900 ($2,900 + $2,000). Because this is less than the 2013 standard deduction of $6,100 for single taxpayers, Sarah would have taken the standard deduction. Hence, none of the $5,000 would be included in gross income under the tax benefit rule.
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Alma is in the business of dairy farming. During the year, one of her barns was completely destroyed by fire. The adjusted basis of the barn was $90,000. The fair market value of the barn before the fire was $75,000. The barn was insured for 95% of its fair market value, and Alma recovered this amount under the insurance policy. Alma has adjusted gross income for the year of $40,000 (before considering the casualty). Determine the amount of loss she can deduct on her tax return for the current year. a. $3,750. b. $14,650. c. $14,750. d. $18,750. e. None of the above.
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d. $18,750. RATIONALE: Amount of loss (adjusted basis for business property that is completely destroyed) $90,000 Less: Insurance proceeds received ($75,000 95%) (71,250) Business loss $18,750 A business casualty loss is classified as an ordinary loss.
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Blue Corporation incurred the following expenses in connection with the development of a new product: Salaries $100,000 Utilities 18,000 Materials 25,000 Advertising 5,000 Market survey 3,000 Depreciation on machine 9,000 Blue expects to begin selling the product next year. If Blue elects to amortize research and experimental expenditures over 60 months, determine the amount of the deduction for research and experimental expenditures for the current year. a. $0. b. $118,000. c. $143,000. d. $152,000. e. $160,000.
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A. $0 RATIONALE: The qualified research expenditures are $152,000 ($100,000 + $18,000 + $25,000 + $9,000). Under the election to amortize, the monthly amortization is $2,533 ($152,000 ÷ 60 months). However, since sales will not start until next year, there is no deduction for the current year.
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Last year, Green Corporation incurred the following expenditures in the development of a new plant process: Salaries $250,000 Materials 90,000 Utilities 20,000 Quality control testing costs 40,000 Management study costs 5,000 Depreciation of equipment 15,000 During the current year, benefits from the project began being realized in May. If Green Corporation elects a 60 month deferral and amortization period, determine the amount of the deduction for the current year. a. $48,000. b. $50,400. c. $54,667. d. $57,067. e. None of the above
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b. $50,400. RATIONALE: Salary $250,000 Materials 90,000 Utilities 20,000 Depreciation 18,000 Research and experimental costs $378,000 Current deduction $50,400 [($378,000 ÷ 60) × 8 months] Neither the quality control testing costs nor the management study costs are research and experimental expenditures
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Ivory, Inc., has taxable income of $600,000 and qualified production activities income (QPAI) of $700,000 in 2014. Ivory's domestic production activities deduction is: a. $36,000. b. $42,000. c. $54,000. d. $63,000. e. None of the above.
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c. $54,000. RATIONALE: DPAD is calculated for Ivory for 2014 as the lesser of the following: ? $700,000 × 9% = $63,000 ? $600,000 × 9% = $54,000 So the DPAD is $54,000.
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Grape Corporation purchased a machine in December of the current year. This was the only asset purchased during the current year. The machine was placed in service in January of the following year. No assets were purchased in the following year. Grape Corporation's cost recovery would begin: a. In the current year using a mid-quarter convention. b. In the current year using a half-year convention. c. In the following year using a mid-quarter convention. d. In the following year using a half-year convention. e. None of the above.
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d. In the following year using a half-year convention.
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On June 1 of the current year, Tab converted a machine from personal use to rental property. At the time of the conversion, the machine was worth $90,000. Five years ago Tab purchased the machine for $120,000. The machine is still encumbered by a $50,000 mortgage. What is the basis of the machine for cost recovery? a. $70,000. b. $90,000. c. $120,000. d. $140,000. e. None of the above.
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b. $90,000. RATIONALE: The basis is $90,000, the lower of the adjusted basis ($120,000) or fair market value ($90,000) at the date of conversion. The mortgage of $50,000 does not affect adjusted basis.
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Tara purchased a machine for $40,000 to be used in her business. The cost recovery allowed and allowable for the three years the machine was used are as follows: Cost Recovery Allowed Year 1 $16,000 Year 2 9,600 Year 3 5,760 Cost Recovery Allowable Year 1 $ 8,000 Year 2 12,800 Year 3 7,680 If Tara sells the machine after three years for $15,000, how much gain should she recognize? a. $3,480. b. $6,360. c. $9,240. d. $11,480. e. None of the above.
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d. $11,480. RATIONALE: Cost $40,000 Less the greater of cost recovery allowed or allowable ($16,000 + $12,800 + $7,680) (36,480) Adjusted basis $ 3,520 The recognized gain is $11,480 ($15,000 - $3,520).
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Hazel purchased a new business asset (five-year asset) on September 30, 2014, at a cost of $100,000. On October 4, 2014, Hazel placed the asset in service. This was the only asset Hazel placed in service in 2014. Hazel did not elect § 179 or additional first-year depreciation if available. On August 20, 2015, Hazel sold the asset. Determine the cost recovery for 2015 for the asset. a. $14,250. b. $19,000. c. $23,750. d. $38,000. e. None of the above.
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c. $23,750. RATIONALE: The asset was placed in service in October 2014; hence, the mid-quarter convention is used. 2015 is the second year of cost recovery. ($100,000) × .38 × (2.5/4) = $23,750.
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Tan Company acquires a new machine (ten-year property) on January 15, 2014, at a cost of $200,000. Tan also acquires another new machine (seven-year property) on November 5, 2014, at a cost of $40,000. No election is made to use the straight-line method. The company does not make the § 179 election and elects to not take additional first-year depreciation if available. Determine the total deductions in calculating taxable income related to the machines for 2014. a. $24,000. b. $25,716. c. $102,000. d. $132,858. e. None of the above.
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b. $25,716. RATIONALE: The total cost recovery is computed as follows: 10-year property MACRS cost recovery ($200,000 × .10) $20,000 7-year property MACRS cost recovery ($40,000 × .1429) 5,716 Total cost recovery $25,716
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Barry purchased a used business asset (seven-year property) on September 30, 2014, at a cost of $200,000. This is the only asset he purchased during the year. Barry did not elect to expense any of the asset under § 179, did not take additional first-year depreciation (if available), and did not elect straight-line cost recovery. Barry sold the asset on July 17, 2015. Determine the cost recovery deduction for 2015. a. $19,133. b. $24,490. c. $34,438. d. $55,100. e. None of the above.
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b. $24,490. RATIONALE: The half-year convention applies in this case [$200,000 × .2449 × 1/2 = $24,490].
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Cora purchased a hotel building on May 17, 2014, for $3,000,000. Determine the cost recovery deduction for 2015. a. $48,150. b. $59,520. c. $69,000. d. $76,920. e. None of the above.
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d. $76,920. RATIONALE: The hotel building is nonresidential realty. .02564 × $3,000,000 = $76,920.
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Carlos purchased an apartment building on November 16, 2014, for $3,000,000. Determine the cost recovery for 2014. a. $9,630. b. $11,910. c. $13,650. d. $22,740. e. None of the above.
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c. $13,650. RATIONALE: The apartment building is residential realty. $3,000,000 × .00455 = $13,650.
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Diane purchased a factory building on April 15, 1992, for $5,000,000. She sells the factory building on February 2, 2014. Determine the cost recovery deduction for the year of the sale. a. $16,025. b. $19,838. c. $26,458. d. $158,750. e. None of the above.
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b. $19,838. RATIONALE: .03174 × $5,000,000 × 1.5/12 = $19,838
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0. Howard's business is raising and harvesting peaches. On March 10, 2014, Howard purchased 10,000 new peach trees at a cost of $60,000. Howard does not make an election to expense assets under § 179 and does not take additional first-year depreciation (if available). Determine the cost recovery deduction for 2014. a. $1,532. b. $3,000. c. $12,000. d. $31,500. e. None of the above.
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b. $3,000. RATIONALE: MACRS cost recovery ($60,000 × .05) = $3,000
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On May 30, 2014, Jane signed a 20-year lease on a factory building to use for her business. The lease begins on June 1, 2014. In August 2014, Jane paid $300,000 for leasehold improvements which were completed that month to the building. Determine Jane's total deduction with respect to the leasehold improvements for 2014. a. $2,889. b. $4,173. c. $4,815. d. $25,000. e. None of the above
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a. $2,889. RATIONALE: MACRS cost recovery ($300,000 × .00963); 39-year real property; month 8 $2,889
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White Company acquires a new machine (seven-year property) on January 10, 2013, at a cost of $600,000. White makes the election to expense the maximum amount under § 179. No election is made to use the straight-line method. White does take additional first-year depreciation. Determine the total deductions in calculating taxable income related to the machine for 2013 assuming White has taxable income of $800,000. a. $71,593. b. $128,610. c. $385,296. d. $390,868. e. None of the above.
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e. None of the above. RATIONALE: § 179 expense $500,000 Additional first-year depreciation [($600,000 - $500,000) × .50] 50,000 MACRS cost recovery ($50,000 × .1429) 7,145 Total $557,145
question
Augie purchased one new asset during the year (five-year property) on November 10, 2014, at a cost of $650,000. She would like to use the § 179 election if available. The income from the business before the cost recovery deduction and the § 179 deduction was $600,000. Determine the total cost recovery deduction with respect to the asset for 2014. a. $32,500. b. $56,250. c. $130,000. d. $150,000. e. None of the above.
answer
a. $32,500 RATIONALE: The mid-quarter convention applies to the MACRS calculation and § 179 is not available as the asset cost exceeds $125,000. MACRS cost recovery ($650,000 × .05) $ 32,500
question
The only asset Bill purchased during 2014 was a new seven-year class asset. The asset, which was listed property, was acquired on June 17 at a cost of $50,000. The asset was used 40% for business, 30% for the production of income, and the rest of the time for personal use. Bill always elects to expense the maximum amount under § 179 whenever it is applicable. The net income from the business before the § 179 deduction is $100,000. Determine Bill's maximum deduction with respect to the property for 2014. a. $1,428. b. $2,499. c. $26,749. d. $33,375. e. None of the above.
answer
b. $2,499. RATIONALE: The listed property does not pass the predominantly business usage test. Therefore, neither § 179 expensing nor additional first-year depreciation (if available) can be taken. In addition, only straight- line cost recovery can be used. Maximum deduction ($50,000 × .0714 × 70%) $2,499
question
. On June 1, 2014, James places in service a new automobile that cost $40,000. The car is used 60% for business and 40% for personal use. (Assume this percentage is maintained for the life of the car.) James does not take additional first-year depreciation (if available). Determine the cost recovery deduction for 2014. a. $1,776. b. $1,896. c. $4,800. d. $8,000. e. None of the above.
answer
b. $1,896. RATIONALE: MACRS cost recovery ($40,000 × .20) x .60 $ 4,800 Limited to ($3,160 × .60) $ 1,896
question
On July 10, 2014, Ariff places in service a new sports utility vehicle that cost $70,000 and weighed 6,300 pounds. The SUV is used 100% for business. Determine Ariff's maximum deduction for 2014, assuming Ariff's § 179 business income is $110,000. Ariff does not take additional first-year depreciation (if available). a. $2,960. b. $25,000. c. $34,000. d. $70,000. e. None of the above.
answer
c. $34,000. RATIONALE: Since the SUV weighs over 6,000 pounds, it is not subject to the statutory dollar limits on luxury automobiles. § 179 expensing (limited to $25,000 for such SUVs) $25,000 Regular MACRS [($70,000 - $25,000) × .20] 9,000 Total $34,000
question
On March 1, 2014, Lana leases and places in service a passenger automobile. The lease will run for five years and the payments are $500 per month. During 2014, she uses her car 60% for business and 40% for personal activities. Assuming the dollar amount from the IRS table is $20, determine Lana's inclusion as a result of the lease. a. $0. b. $10. c. $17. d. $20. e. None of the above.
answer
b. $10 RATIONALE: $20 × 306/365 × 60% = $10.
question
Bhaskar purchased a new factory building on September 10, 2014, for $3,700,000. Five hundred thousand of the purchase price was allocated to the land. He elected the alternative depreciation system (ADS). Determine the cost recovery deduction for 2015. a. $23,328. b. $80,000. c. $82,048. d. $92,500. e. None of the above.
answer
b. $80,000. RATIONALE: .025 × $3,200,000 = $80,000
question
9. George purchases used seven-year class property at a cost of $200,000 on April 20, 2014. Determine George's cost recovery deduction for 2014 for alternative minimum tax purposes, assuming George does not elect § 179. a. $2,500. b. $10,000. c. $14,280. d. $21,420. e. None of the above.
answer
d. $21,420. RATIONALE: .1071 × $200,000 = $21,420.
question
On June 1, 2014, Red Corporation purchased an existing business. With respect to the acquired assets of the business, Red allocated $300,000 of the purchase price to a patent. The patent will expire in 20 years. Determine the total amount that Red may amortize for 2014 for the patent. a. $0. b. $1,667. c. $11,667. d. $35,000. e. None of the above
answer
c. $11,667. RATIONALE: $300,000 × (7 months/180 months) = $11,667. The statutory amortization period for § 197 intangibles is 15 years.
