ACCT 3321 Income Tax Chapter 6 – Flashcards

56. Sammy, a calendar year cash basis taxpayer who is age 66, 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 these.

57. 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 these.

58. Al is single, age 60, and has gross income of $140,000. His deductible expenses are as follows: Alimony $20,000 Charitable contributions 4,000 Contribution to a traditional IRA 5,500 Expenses paid on rental property 7,500 Interest on home mortgage and property taxes on personal residence 7,200 State income tax 2,200 What is Al's AGI? a. $94,100. b. $103,000. c. $107,000. d. $127,000. e. None of these.

59. Marsha is single, had gross income of $50,000, and incurred the following expenses: Charitable contribution $2,000 Taxes and interest on home 7,000 Legal fees incurred in a tax dispute 1,000 Medical expenses 3,000 Penalty on early withdrawal of savings 250 Her AGI is: a. $39,750. b. $49,750. c. $40,000. d. $39,750. e. None of these.

60. 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 these.

61. Which of the following is a deduction for AGI (itemized deduction)? a. Contribution to a traditional IRA. b. Roof repairs to a personal use home. c. Safe deposit box rental fee in which stock certificates are stored. d. Property tax on personal residence.

62. Which of the following is correct? a. A personal casualty loss is classified as a deduction from AGI. b. Real estate taxes on a taxpayer's personal residence are classified as deductions from AGI. c. An expense associated with rental property is classified as a deduction for AGI. d. Only a. and b. are correct. e. a., b., and c., are correct.

63. Which of the following are deductions for AGI? a. Mortgage interest on a personal residence. b. Property taxes on a personal residence. c. Mortgage interest on a building used in a business. d. Fines and penalties incurred in a trade or business. e. None of these.

64. Which of the following is incorrect? a. Alimony is a deduction for AGI. b. The expenses associated with royalty property are a deduction from AGI. c. Contributions to a traditional IRA are a deduction for AGI. d. Property taxes on taxpayer's personal residence are a deduction from AGI e. All of these are correct.

65. 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 these are "trade or business" expenses.

66. 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 these

67. Paula is the sole shareholder of Violet, Inc. For 2014, she receives from Violet a salary of $300,000 and dividends of $100,000. Violet's taxable income for 2014 is $500,000. On audit, the IRS treats $100,000 of Paula's salary as unreasonable. Which of the following statements is correct? a. Paula's gross income will increase by $100,000 as a result of the IRS adjustment. b. Violet's taxable income will not be affected by the IRS adjustment. c. Paula's gross income will decrease by $100,000 as a result of the IRS adjustment. d. Violet's taxable income will decrease by $100,000 as a result of the IRS adjustment. e. None of these is correct.

68. During 2013, the first year of operations, Silver, Inc., pays salaries of $175,000. At the end of the year, employees have earned salaries of $20,000, which are not paid by Silver until early in 2014. What is the amount of the deduction for salary expense? a. If Silver uses the cash method, $175,000 in 2013 and $0 in 2014. b. If Silver uses the cash method, $0 in 2013 and $195,000 in 2014. c. If Silver uses the accrual method, $175,000 in 2013 and $20,000 in 2014. d. If Silver uses the accrual method, $195,000 in 2013 and $0 in 2014. e. None of these is correct.

69. 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.

70. 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 these.

71. Petal, Inc. is an accrual basis taxpayer. Petal uses the aging approach to calculate the reserve for bad debts. During 2014, the following occur associated with bad debts. Credit sales $400,000 Collections on credit sales 250,000 Amount added to the reserve 10,000 Beginning balance in the reserve -0- Identifiable bad debts during 2014 12,000 The amount of the deduction for bad debt expense for Petal for 2014 is: a. $10,000. b. $12,000. c. $22,000. d. $140,000. e. None of these.

72. 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.

73. Rex, a cash basis calendar year taxpayer, runs a bingo operation which is illegal under state law. During 2014, a bill designated H.R. 9 is introduced into the state legislature which, if enacted, would legitimize bingo games. In 2014, Rex had the following expenses: Operating expenses in conducting bingo games $247,000 Payoff money to state and local police 24,000 Newspaper ads supporting H.R. 9 3,000 Political contributions to legislators who support H.R. 9 8,000 Of these expenditures, Rex may deduct: a. $247,000. b. $250,000. c. $258,000. d. $282,000. e. None of these.

74. Andrew, who operates a laundry business, incurred the following expenses during the year. • Parking ticket of $250 for one of his delivery vans that parked illegally. • Parking ticket of $75 when he parked illegally while attending a rock concert in Tulsa. • DUI ticket of $500 while returning from the rock concert. • Attorney's fee of $600 associated with the DUI ticket. What amount can Andrew deduct for these expenses? a. $0. b. $250. c. $600. d. $1,425. e. None of these.

75. Which of the following may be deductible? a. Bribes that relate to a U.S. business. b. Fines paid for violations of the law. c. Interest on a loan used in a hobby. d. All of the above. e. None of these.

76. 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 Jim Employee salaries $200,000 $200,000 Bribes to police 25,000 25,000 Rent and utilities 50,000 50,000 Cost of goods sold -0- 125,000 Which of the following statements is correct? a. Neither Terry nor Jim can deduct any of the above items in calculating the business profit. b. Terry should report profit from his business of $250,000. c. Jim should report profit from his business of $500,000. d. Jim should report profit from his business of $250,000. e. None of these.

77. Tom operates an illegal drug-running operation and incurred the following expenses: Salaries $ 75,000 Illegal kickbacks 20,000 Bribes to border guards 25,000 Cost of goods sold 160,000 Rent 8,000 Interest 10,000 Insurance on furniture and fixtures 6,000 Utilities and telephone 20,000 Which of the above amounts reduces his taxable income? a. $0. b. $160,000. c. $279,000. d. $324,000. e. None of these.

78. 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.

79. Tommy, an automobile mechanic employed by an auto dealership, is considering opening a fast food franchise. If Tommy decides not to acquire the fast food franchise, any investigation expenses are: a. A deduction for AGI. b. A deduction from AGI, subject to the 2 percent floor. c. A deduction from AGI, not subject to the 2 percent floor. d. Deductible up to $5,000 in the current year with the balance being amortized over a 180-month period. e. Not deductible.

80. 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 these.

81. Which of the following statements is correct in connection with the investigation of a business? a. If the taxpayer is not already engaged in the trade or business, the expenses incurred are deductible if the project is abandoned. b. If the business is acquired, the expenses may be deducted immediately by a taxpayer engaged in a similar trade or business regardless of whether the business being investigated is acquired. c. That business must be related to the taxpayer's present business for any expense ever to be deductible. d. Regardless of whether the taxpayer is already engaged in the trade or business, the expenses must be capitalized and amortized. e. None of these.

82. Which of the following is not relevant in determining whether an activity is profit-seeking or a hobby? a. Whether the activity is enjoyed by the taxpayer. b. The expertise of the taxpayers or their advisers. c. The time and effort expended. d. The relationship of profits earned and losses incurred. e. All of these are relevant factors.

83. 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).

84. Priscella 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. d. Include $10,000 in income and deduct interest of $500 for AGI. e. None of these.

85. Cory incurred and paid the following expenses: Tax return preparation fee $ 600 Moving expenses 2,000 Investment expenses 500 Expenses associated with rental property 1,500 Interest expense associated with loan to finance tax-exempt bonds 400 Calculate the amount that Cory can deduct (before any percentage limitations). a. $5,000. b. $4,600. c. $3,000. d. $1,500. e. None of these.

86. Which of the following is not deductible? a. Moving expenses in excess of reimbursement. b. Tax return preparation fees of an individual. c. Expenses incurred associated with investments in stocks and bonds. d. Allowable hobby expenses in excess of hobby income. e. None of these.

87. 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.

88. Robyn rents her beach house for 60 days and uses it for personal use for 30 days during the year. The rental income is $6,000 and the expenses are as follows: Mortgage interest $9,000 Real estate taxes 3,000 Utilities 2,000 Maintenance 1,000 Insurance 500 Depreciation (rental part) 4,000 Using the IRS approach, total expenses that Robyn can deduct on her tax return associated with the beach house are: a. $0. b. $6,000. c. $8,000. d. $12,000. e. None of these.

89. If a vacation home is determined to be a personal/rental use residence, which of the following statements is correct? a. All rental income is included in gross income. b. All rental related expenses that are deductible are classified as deductions from AGI. c. Expenses must be allocated between rental and personal use. d. Only a. and c. are correct. e. a., b., and c. are correct.

90. 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 assuming the IRS approach is used if applicable? 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.

91. Because Scott is three months delinquent on the mortgage payments for his personal residence, Jeanette (his sister) is going to cover the arrearage. Based on past experience, she does not expect to be repaid by Scott. Which of the following statements is correct? a. If Scott receives the money from Jeanette and pays the mortgage company, Jeanette can deduct the interest part. b. If Jeanette pays the mortgage company directly, neither Scott nor Jeanette can deduct the interest part. c. If Jeanette pays the mortgage company directly, she cannot deduct the interest part. d. Only b. and c. are correct. e. a., b., and c. are correct.

92. 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 these.

93. Velma and Bud divorced. Velma's attorney fee of $5,000 is allocated as follows: General representation in obtaining the divorce $1,500 Services in obtaining custody of the child 900 Services in settlement of martial property 600 Determining the tax consequences of: Dependency deduction for child 700 Property settlement 1,300 Of the $5,000 Velma pays to her attorney, the amount she may deduct as an itemized deduction is: a. $0. b. $700. c. $2,000. d. $5,000. e. None of these.

94. 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.

95. On January 2, 2014, Fran acquires a business from Chuck. Among the assets purchased are the following intangibles: patent with a 7-year remaining life, a covenant not to compete for 10 years, and goodwill. Of the purchase price, $140,000 was paid for the patent and $60,000 for the covenant. The amount of the excess of the purchase price over the identifiable assets was $100,000. What is the amount of the amortization deduction for 2014? a. $10,667. b. $16,000. c. $20,000. d. $32,667. e. None of these.

96. 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 these.

97. Nikeya sells land (adjusted basis of $120,000) to her adult son, Shamed, for its appraised value of $95,000. Which of the following statements is correct? a. Nikeya's recognized loss is $25,000 ($95,000 amount realized - $120,000 adjusted basis). b. Shamed's adjusted basis for the land is $120,000 ($95,000 cost + $25,000 disallowed loss for Nikeya). c. If Shamed subsequently sells the land for $112,000, he has no recognized gain or loss. d. Only a. and b. are correct. e. a., b., and c. are correct.

98. Which of the following is not a related party for constructive ownership purposes under § 267? a. The taxpayer's aunt. b. The taxpayer's brother. c. The taxpayer's grandmother. d. A corporation owned more than 50% by the taxpayer. e. None of these.