Ch 6-7 – Flashcards

Flashcard maker : Lily Taylor
b
Which expenses incurred in a trade or business are deductible?
A. Fines and penalties.
B. Supplies expenses.
C. Political lobbying expenses.
D. Bribes.
d
If inventory is a material amount, what method of accounting is acceptable for a sole proprietorship to use?
A. The cash method.
B. Accrual method.
C. Hybrid method.
D. Both b and c
d
Patrica, a professional gambler, had the following income and expenses in her business:
Gambling winnings 275,000
Expenses
Fees paid for illegal info 18,000
Travel costs 8,000
Office expenses 5,000
Supplies 3,000
Business long dis phone charges 1,000
Tickets for illegal parking 900
How much net income must Patrica report from this business?
A. $0.
B. $239,100.
C. $240,000.
D. $258,000.
c
Which of the following is not a “trade or business” expense?
A. Mortgage interest on a warehouse.
B. Depreciation on business equipment.
C. Mortgage interest on a personal residence.
D. Cost of goods sold
d
Trade or business expenses are treated as:
A. Deductible only if the activity had substantial income.
B. An itemized deduction if not reimbursed.
C. Deductible as itemized deductions subject to the 2% AGI floor.
D. Deductible as a for AGI deduction.
b
On May 26, 2005, Jamal purchased machinery for $30,000 to be used in his business. He did not elect to
expense the equipment under §179 or the 50% bonus. On October 10, 2009, he sells the machinery to a
scrap metal dealer. What is his cost recovery deduction for 2009?
A. $0.
B. $1,340.
C. $2,679.
D. $4,287.
b
On July 15, 2007, Travis purchased some office furniture for $20,000 to be used in his business. He did
not elect to expense the equipment under §179 or the 50% bonus. On December 15, 2009, he sells the
equipment. What is his cost recovery deduction for 2009?
A. $0.
B. $1,749.
C. $2,858.
D. $3,498
a
Della purchased a warehouse on February 25, 2009, for $350,000. $45,000 of the price was for the land.
What is her cost recovery deduction for 2009?
A. $6,853.
B. $7,865.
C. $9,705.
D. $11,137
c
Paola purchased an office building on January 5, 2007, for $450,000. $30,000 of the price was for the land.
On September 25, 2009, he sold the office building. What is the cost recovery deduction for 2009?
A. $0.
B. $7,321.
C. $7,628.
D. $10,769
c
On November 30, 2009, Constance purchased an apartment building for $750,000. Determine her cost
recovery deduction for 2009.
A. $0.
B. $2,400.
C. $3,375.
D. $26,138
c
In June 2009, Kelly purchased new equipment for $26,000 to be used in her business. Assuming Kelly
has net income from her business of $75,000 prior to the deduction, what is the maximum amount of cost
recovery Kelly can deduct, assuming she does not elect §179 expense?
A. $1,858.
B. $13,000.
C. $14,858.
D. $26,000.
c
In July 2009, Cassie purchases equipment for $55,000 to be used in her business. Assuming Cassie has
a small net loss from her business prior to the deduction, what is the maximum amount of cost recovery
Cassie can deduct?
A. $3,930.
B. $27,500.
C. $31,430.
D. $55,000
c
§179 expense is available for all of the following business assets except:
A. Bulldozer.
B. Phone system.
C. Apartment complex.
D. Office furniture
d
If property is converted from personal-use property to business property, the depreciable cost basis is which
of the following?
A. Cost of the asset.
B. FMV of the asset.
C. The cost of a new similar asset at the date of conversion.
D. The lower of the cost or FMV at the date of conversion
a
The adjusted basis of an asset is:
A. The cost basis less any accumulated depreciation.
B. The cost of the asset.
C. The fair market value of the asset.
D. The trade-in value of the asset
c
Which of the following properties is not eligible for the §179 expense election when purchased?
A. A business automobile.
B. A business computer.
C. Rental property.
D. Manufacturing equipment
c
Under MACRS, 5-year property includes:
A. Warehouse.
B. Apartment complex.
C. Automobiles and light trucks used in a trade or business.
D. Fruit-bearing trees
b
The standard mileage rate encompasses all of the following auto costs except for:
A. Depreciation or lease payments.
B. Auto property taxes.
C. Maintenance and repairs.
D. Gasoline, oil, and insurance
d
Which of the following is incorrect regarding luxury automobile limitations?
A. Passenger autos with a gross weight of less than 6,000 pounds are subject to the limits.
B. Light trucks or vans that are less than 6,000 pounds are subject to the limits.
C. The limits are reduced further if the business use is less than 100%.
D. The luxury limitations do not apply to the Section 179 expense deduction
c
Marcus has two jobs. He works as a night auditor at the Midnight Motel. When his shift at the motel is over, he works as a short order cook at the Break-An-Egg Restaurant. On a typical day, he drives the following distances:
Home to motel 4 miles
motel to restaurant 12 miles
restaurant to home 8 miles
How many miles per day would qualify as transportation expenses for tax purposes?
A. 0.
B. 4.
C. 12.
D. 24.
c
Marion drives 20 miles a day from his first job to his second job. He worked 125 days during 2009 on both jobs. What is Marion’s mileage deduction assuming he uses the standard mileage rate and mileage is
incurred ratably throughout the year?
A. $11.
B. $1263.
C. $1,375.
D. $1,463
b
Which of the following statements is false with respect to the standard mileage rate?
A. The standard mileage rate encompasses depreciation.
B. The taxpayer can have an unlimited number of autos and use the mileage rate.
C. Section 179 cannot be used on a standard mileage rate auto.
D. The standard mileage rate cannot be used on a taxi
c
Cole purchased a car for business and personal use. In 2009, he used the car 60% for business (13,000 total use miles) and used the standard mileage rate to calculate his vehicle expenses. He also paid $1,500 in interest and $360 in county property tax on the car. What is the total business deduction related to business use of the car?
A. $1,860.
B. $4,290.
C. $5,406.
D. $6,150.
a
Byron took a business trip from Philadelphia to Rome. He was away 16 days of which he spent 9 days on business (including two travel days) and 7 days vacationing. His expenses are as follows:
airfare 1,100
lodging (16 days x 140) 2,240
Meals (16 days x 115) 1,840
Byron’s total travel (including meals and lodging) expense deduction is:
A. $2,397.
B. $2,878.
C. $3,395.
D. $5,180.
a
Chris runs a business out of her home. She uses 500 square feet of her home exclusively for the business. Her home is 2500 square feet in total. Chris had $36,000 of business revenue and $32,000 of business expenses from her home business. The following expenses relate to her home:
Mort int 12,400
Real est tax 1,800
repairs 3.200
utilit 2,600
Ins 650
Dep on business use 1,750
What is Chris’ net income from her business and the amount of expenses carried over to the following year, if any?
Net Income Carryover
a. 0, 1880
b. 0,0
c. 4000, 4130
d 36000, 0
A. Option a
B. Option b
C. Option c
D. Option d
d
In order for an employee to deduct home office expenses, which of the following must occur:
A. The business use of the home must be specifically for trade or business purposes.
B. There must be no other fixed business location.
C. The taxpayer’s most important activities must occur in the home.
D. The home office must be for the convenience of his or her employer
c
If an activity is considered a hobby, which of the following is true?
A. None of the expenses connected with the activity are deductible.
B. None of the income connected with the activity is included in income.
C. The deductible expenses connected with the activity are limited to the income from the activity.
D. The IRS has the burden to prove an activity is a hobby.
c
Which of the following individuals can deduct his or her education expenses?
A. An accountant who attends law school to get a law degree.
B. A medical doctor who attends a review course to obtain a financial consultant license.
C. A lawyer who goes to law school to get a specialized tax degree.
D. An accounting bookkeeper who takes a CPA review course to pass the CPA exam and become a CPA
d
Deductible education expenses include all of the following except:
A. Tuition.
B. Books.
C. Travel.
D. Room and board
c
Shante is employed by a local pharmaceutical company where she earned $48,000 in 2009. During the
year, she also had self-employment income of $18,000. Her self-employment tax is:
A. $0.
B. $2,061.
C. $2,543.
D. $2,754
b
What form is filed to report the self-employment tax?
A. Form 1040.
B. Schedule SE.
C. Schedule C.
D. Schedule D.
b
Katherine earned $100,000 from her job at a local business in 2009. She also had $42,000 in self-employed consulting income. What is the amount of her self-employment tax?
A. $0.
B. $1,968.
C. $5,934.
D. $6,426
d
For 2009, what is the social security tax rate and income limit for a self-employed individual?
Rate Income Limit
a. 2.9% Unl
b. 12.4% Unl
c. 15.3% 106,800
d. 12.4% 106,800
A. Option a
B. Option b
C. Option c
D. Option d
d
Before the tax implications of asset sales can be determined, which of the following must be determined?
A. Assets must be classified as either personal, trade or business, or investment assets.
B. The length of time the taxpayer owned the property.
C. Whether the assets are subject to depreciation.
D. All of the above.
d
Patrice sells a parcel of land for $50,000 cash and the buyer assumes Patrice’s liability of $7,000 on the land. Patrice’s basis in the land is $40,000. What is the gain or loss she will recognize on the sale?
A. $3,000 gain.
B. $10,000 gain.
C. $17,000 loss.
D. $17,000 gain
a
A taxpayer purchased land in 2004 for $85,000 and sold it in 2009 for $65,000 cash. The buyer also assumed the mortgage of $30,000. What is the amount of gain on the sale of the land?
A. $10,000.
B. $20,000.
C. $95,000.
D. $115,000.
b
The gain or loss on land sold within one year of purchase is recorded on which one of the following forms or schedules?
A. Form 4797 if the sale was an asset held for investment purposes by a taxpayer who is a sole proprietor.
B. Form 4797 if the sale was an asset used in a trade or business by a sole proprietor.
C. Schedule D if the sale was an asset used in a trade or business by a sole proprietor who also files a Schedule C.
D. Schedule C if the sale was an asset used in a trade or business of a sole proprietorship
d
Which one of the following is Section 1231 property?
A. Accounts receivable.
B. Copyright owned by an author.
C. Inventory.
D. A building used in a trade or business
a
Which one of the following is a capital asset?
A. Household furnishings.
B. Business inventory.
C. A non-musical copyright created by the taxpayer.
D. Rental property
a
What is the basis of artistic works that have been gifted to another by the creator?
A. Artistic works are not capital assets for the creator or the recipient of the artistic works if given as a gift.
B
.
Artistic works are not capital assets for the creator but are capital assets in the hands of the recipient if the
creator gave the artistic works as a gift.
C. Artistic works are capital assets to the creator if they are sold to an unrelated person.
D. Artistic works are capital assets if they were available for sale in an art gallery
d
Section 1231 property is:
A. Property used in a trade or business that is subject to depreciation and is held for more than one year.
B. Property used in a trade or business that may or may not be subject to depreciation and held for less than one year.
C. All property used in a trade or business regardless of how long the asset is held.
D.Property used in a trade or business that may or may not be subject to depreciation and is held for more than one year.
d
Juanita is a sole proprietor who has some outstanding receivables she wishes to sell. The receivables have a $16,000 FMV and a basis of $10,000. Juanita sells the receivables for $12,500. What gain or loss does
Juanita recognize on the sale?
A. $3,500 capital loss.
B. $3,500 ordinary loss.
C. $2,500 capital gain.
D. $2,500 ordinary gain
c
Marquez purchased some equipment for $48,750 on August 15, 2008. He decided he did not need the equipment so he sold it on June 13, 2009 for $46,500. The equipment was subject to depreciation of $6,964 for 2008 and 2009. What gain or loss will Marquez recognize on the sale of the equipment?
A. $2,250 ordinary loss.
B. $2,250 capital loss.
C. $4,714 ordinary gain.
D. $4,714 capital gain
a
Lourdes, a sole proprietor, collected $8,650 on November 21, 2009 on some of her outstanding receivables. Her basis in these receivables was $0. What is the gain or loss Lourdes recognizes for 2009?
A. No gain or loss as the payments are within the normal course of business.
B. A short-term gain as the payments are from receivables that are always considered short-term.
C. A short-term loss as the FMV is greater than the payments received on the receivables.
D. An ordinary gain because the receivables had a FMV greater than the basis of the receivables
b
Which of the following statements is correct regarding the sale of ordinary assets?
A. The sale of inventory for a profit is considered to be a sale of an ordinary asset.
B. The sale of an asset outside the normal course of a trade or business is a sale of an ordinary asset.
C. The sale of business property held for more than a year is a sale of an ordinary asset.
D. The sale of any business property regardless of holding period is a sale of an ordinary asset
c
On which form or schedule is the selling of inventory related to the course of business recorded for a sole
proprietor?
A. Form 4797.
B. Schedule SE.
C. Schedule C.
D. Schedule D.
d
In 2001, Susan purchased 200 shares of Hi-Style stock as an investment. The stock cost $11,000. In 2009 when the fair market value was $13,000, Susan gave the stock to her daughter, Daniele. If no gift tax is paid and Daniele sells the stock for $14,000, she will recognize:
A. no gain or loss.
B. a $1,000 gain.
C. a $2,000 gain.
D. a $3,000 gain.
a
Brenda gave her son, Christopher 700 shares of Creative Marketing, Inc. common stock on May 26, 2008. Brenda originally paid $9,000 for the stock on April 15, 2008. At the date of the gift, the fair market value of the stock was $8,500. If no gift tax is paid and Christopher sells the stock for $5,500 on May 26, 2009, he will recognize:
A. a short-term capital loss.
B. a long-term capital loss.
C. an ordinary loss.
D. no loss because Brenda already recognized the loss when she gave the stock to Christophe
c
Hiroko, a single taxpayer, has wage income of $50,000. In addition, she has $6,000 in long-term capital losses, $5,000 in long-term capital gains, and $3,000 in short-term capital gains. What is Hiroko’s AGI for 2009?
A. $38,000.
B. $48,000.
C. $52,000.
D. $55,000
a
Diane gifted 100 shares of Runners Link common stock with a FMV of $8,000 to her brother, Sean. The stock originally cost Diane $11,000. Sean later sells the stock on the open market for $9,000. Sean recognizes:
A. no gain or loss.
B. a $1,000 gain.
C. a $2,000 loss.
D. a $2,000 gain
a
For capital assets sold after December 31, 2007, the applicable rates for calculating the tax due on a gain are:
A. 0%, 15%, 25% and 28%.
B. 5%, 15%, 25% and 28%.
C. 5%, 25%, 28% and 35%.
D. 15%, 25%, 28% and 35%.
b
Maysoon, a single taxpayer, has wage income of $50,000. She also has a short-term capital loss of $5,000, a short-term capital gain of $2,000, and a long-term capital gain of $3,000. What is Maysoon’s AGI for 2009?
A. $47,000.
B. $50,000.
C. $52,000.
D. $53,000.
c
Gilberto invested in a mid-size local company with gross assets of $16,000,000. Gilberto purchased 1,000 shares for $48,000 in 1997. In 2009, Gilberto sold the stock for $78,000. How is the gain treated for tax purposes?
A. $30,000 capital gain, taxed at preferential rates.
B.$15,000 excluded from gross income under Section 1202 with the remaining gain recognized and taxed at regular tax rates.
C. $15,000 excluded from gross income under Section 1202 and $15,000 taxed at 28%.
D. $15,000 excluded from gross income under Section 1202 and $15,000 taxed at preferential rates
c
The top tax rates for an individual with long-term capital gains on the sale of stock and on the sales of collectibles, sold after May 5, 2003 are:
A. 0%, 15%.
B. 15%, 25%.
C. 15%, 28%.
D. 25%, 28%.
a
Glenn sells a piece of equipment used in his business for $31,500. The equipment was purchased on July 1, 2007, at a cost of $22,000. Glenn has taken $6,600 of depreciation on the equipment. What are the amount and classification of the gain on the sale by Glenn?
A. $6,600 ordinary income under Section 1245 and $9,500 Section 1231 gain.
B. $9,500 Section 1231 gain.
C. $16,100 ordinary income under Section 1245.
D. $16,100 Section 1231 gain
b
Matthew bought a 4-unit apartment building in July 2000 for $360,000 and sold it for $480,000 in 2009. There was $116,712 of accumulated straight-line depreciation on the apartment building. Assuming that Matthew is in the 33% tax bracket, how much of his gain is taxed at 25%?
A. $0.
B. $116,712.
C. $120,000.
D. $236,712
c
Patel buys a piece of sculpture from a collector for resale in his gallery. He purchased the sculpture for $5,000 and sold it 18 months later for $9,000. What is the nature and amount of the gain on the sale?
A. $4,000 Section 1245 gain.
B. $4,000 gain subject to a 28% tax rate.
C. $4,000 ordinary income.
D. $5,000 ordinary gain and $4,000 Section 1231 gain
d
Jake purchased a $300,000 earthmover for his business. He sold the earthmover for $245,000 after taking $210,000 of depreciation. What is the nature and amount of the gain or loss on the sale?
A. $55,000 Section 1245 ordinary income and $100,000 Section 1231 gain.
B. $90,000 Section 1245 ordinary income and $65,000 Section 1231 gain.
C. $155,000 Section 1231 gain.
D. $155,000 Section 1245 ordinary income
b
In 2003, Indira purchased land for $87,000 for use in her landscape business. She sold it in 2009 for $93,000. If Indira has no other sales of business or trade property, how will this gain be taxed?
A. $6,000 short-term capital gain.
B. $6,000 long-term capital gain.
C. $6,000 ordinary income.
D. $6,000 Section 1231 gain
c
On May 1, 2008, Kelalani purchased land for $93,000 for use in her business. She sold it on May 2, 2009, for $87,000. If there are no other sales of business or trade property, how is this loss treated for tax purposes on Kelalani’s return?
A. $6,000 short-term capital loss.
B. $6,000 long-term capital loss.
C. $6,000 ordinary loss.
D. $6,000 Section 1231 loss
b
Sylvio purchased an apartment building as an investment in 2003 for $383,500 and sold it for $475,000 in 2009. He reported $40,436 of allowed accumulated straight-line depreciation. If Sylvio is in the highest tax bracket for ordinary income, how much of his gain is taxed at 25%?
A. $0.
B. $40,436.
C. $91,500.
D. $131,936.
b
Keisha sold 200 shares of Chico’s stock in 2009 for $22,500 and received a 1099-B to record the sale of theshares. Keisha’s investment portfolio includes the following purchases of Chico’s stock:
2000 100 shares at $100 per share
2001 50 shares at $110 per share
2002 125 shares at $130 per share
2005 75 shares at $125 per share
Assuming Keisha does not identify which shares she sold, she will recognize
A. no gain or loss.
B. $500 gain.
C. $1,000 loss.
D. $3,125 loss
c
Kwon-Lee sold 200 shares held in FNP Mutual Fund in 2009 for $22,500 and received a 1099-B to record the sale of the shares. Kwon-Lee’s investment portfolio includes the following purchases of FNP Mutual Fund stock:
1999 100 shares at $100 per share
2002 50 shares at $110 per share
2004 125 shares at $130 per share
2005 75 shares at $125 per share
Assuming Kwon-Lee uses the single category average cost method, he will recognize
A. no gain or loss.
B. $500 gain.
C. $1,000 loss.
D. $3,125 loss
d
Anike received property as part of an inheritance from her father who passed away on March 10, 2009. The property was purchased by her father on July 3, 2008, for $156,000. Anike sold the property on June 30, 2009, for $168,000. At the date of his death the property had a FMV of $154,000. What gain, if any, will Anike pick up on her return for 2009?
A. no gain is recognized on the sale of property sold within 1 year of inheritance.
B. $3,000 long-term gain.
C. $12,000 long-term gain.
D. $14,000 long-term gain
c
Renita purchased 500 shares in Prompt Messenger Services for $12,000 on November 21, 2008. The company went bankrupt on June 13, 2009, with no hope of recovery for the shareholders. On what date is the stock deemed to be worthless and what is the nature of the loss?
A. December 31, 2008, short- term loss in 2008.
B. December 31, 2009, short- term loss in 2009.
C. December 31, 2009, long- term loss in 2009.
D. June 13, 2009, short- term loss in 2009
d
Dan sold 200 shares (assume 100 are long-term) of Elite Mutual Fund on July 26, 2009 for $22,500 and received a 1099-B to record the sale of the shares. Dan’s investment portfolio includes the following purchases of Elite Mutual Fund:
May 20, 2007 50 shares at $100 per share
March 29, 2008 50 shares at $110 per share
October 21, 2008 50 shares at $130 per share
February 22, 2009 100 shares at $125 per share
Assuming Dan uses the double-category average cost method, and the shares purchased in 2008 are longterm,
Dan will recognize:
A. no short- term gain or loss but a $667 long- term loss.
B. no short- term gain or loss but a $667 long- term gain.
C. no long- term gain or loss but a $667 short- term gain.
D. no long- term gain or loss but a $667 short- term loss.
c
Which of the following statements is incorrect regarding the gain or loss from the sale of property received as a gift?
A.If the FMV is less than the donor’s adjusted basis at the time of the gift, the basis for figuring the gain is the donor’s basis.
B.If the FMV is less than the donor’s adjusted basis at the time of the gift, the basis for figuring the loss is the FMV of the asset.
C.If the FMV is equal to or more than the donor’s adjusted basis, the basis for any gain or loss on a sale is the FMV of the asset.
D.If the FMV is equal to or more than the donor’s adjusted basis, the basis for any gain or loss on a sale is the donor’s adjusted basis.
b
Joe received a parcel of land as a gift from his sister, Lisa, in 2004. At the time of the gift, the land had a FMV of $10,000. Lisa purchased the land in 2000 for $13,000. If Joe sells the land in 2009 for $22,450, he will report a
A. $9,450 ordinary gain.
B. $9,450 capital gain.
C. $12,450 capital gain.
D. $19,540 capital gain

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