Ch12 Pretest/Posttest

question

Several years ago, Elaine purchased a structure for $300,000 that was originally placed in service in 1929. In the current year, she incurred qualifying rehabilitation expenditures of $400,000. 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. $40,000 credit, $360,000 basis. b. $80,000 credit, $320,000 basis. c. $40,000 credit, $400,000 basis. d. $40,000 credit, $700,000 basis. e. None of these choices are correct.
answer

A Credit: $40,000 = $400,000 × 10%; basis increase: $360,000 = $400,000 (cost) – $40,000 (credit).
question

Self-employed individuals and employees may be required to make estimated tax payments. a. True b. False
answer

True
question

Any unused general business credit must be carried back 1 year and then forward for 10 years. a. True b. False
answer

False Unused general business credits are carried back one year. Any remaining credits are then carried forward for 20 years.
question

Nonrefundable credits are those that reduce the taxpayer’s tax liability and are paid when the amount of the credit (or credits) exceeds the taxpayer’s tax liability. a. True b. False
answer

False Most credits are not refundable.
question

Frank is considering making a $3,000 investment in a venture that its promoter promises will generate immediate tax benefits for him. Frank, 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 Frank’s tax liability decline because of the investment? a. $0 b. $1,200 c. $900 d. $1,100 e. None of these choices are correct.
answer

B The tax credit reduces Frank’s tax liability by $1,200 ($3,000 × 40%).
question

Gerome and Alice 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. Gerome and Alice each earns a salary of $18,000. What is the amount of the credit for child and dependent care expenses? a. $720 b. $1,488 c. $1,035 d. $1,380 e. None of these choices are correct.
answer

A $720 = 24% × $3,000. Gerome and Alice have only one qualifying dependent (i.e., the 8 year-old); therefore, only up to $3,000 of expenditures qualify for the credit. The $3,000 statutory ceiling is less than the earned income ceiling of $18,000.
question

During 2015, Sophia earns $146,000 in wages as an employee of an accounting firm. She also earns $26,000 in gross income from an outside consulting service she operates. Deductible expenses paid in connection with the consulting service amount to $6,000. Sophia also has a recognized long-term capital gain of $1,000 from the sale of a stock investment. She must pay a self- a. $0 b. $27,000 c. $20,000 d. $26,000 e. None of these choices are correct.
answer

C Sophia is subject to the Medicare portion of the self-employment tax to the extent of the $20,000 ($26,000 – $6,000) of net earnings from self-employment.
question

Bluejay 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 $15,000 during the year. As a result of this event, Bluejay Corporation may claim a work opportunity credit of: a. $2,400 b. $12,000 c. $4,800 d. $8,000 e. None of these choices are correct.
answer

C $4,800 = ($6,000 × 40% × 2).
question

During the year, Cardinal Corporation (a U.S. corporation) has U.S.-source income of $1,500,000 and foreign income of $1,000,000. The foreign-source income generates foreign income taxes of $480,000. The U.S. income tax before the foreign tax credit is $850,000. Cardinal Corporation’s foreign tax credit is: a. $340,000 b. $1,000,000 c. $480,000 d. $850,000 e. None of these choices are correct.
answer

A The overall limitation is [($1,000,000/$2,500,000) × $850,000], or $340,000.
question

The tax benefit received from a tax credit is not affected by the tax rate of the taxpayer. a. True b. False
answer

True
question

Income tax withheld on wages is an example of a nonrefundable credit. a. True b. False
answer

False Income tax withheld on wages is an example of a refundable credit.
question

Vince and Laura are married, file a joint tax return, have AGI of $82,500, and have two children. Cheyenne is beginning her freshman year at State University during Fall 2015, and Cody is beginning her senior year at Northeast University during Fall 2015 after having completed her junior year during the spring of that year. Both Cheyenne and Cody are claimed as dependents on their parents’ tax return. Cheyenne’s qualifying tuition expenses and fees total $4,000 for the fall semester, while Cody’s qualifying tuition expenses and fees total $6,200 for each semester during 2015. Full payment is made for the tuition and related expenses for both children during each semester. The American Opportunity credit available to Vince and Laura for 2015 is: a. $5,000 b. $6,000 c. $2,500 d. $3,000 e. None of these choices are correct.
answer

A The American Opportunity credit is available to both Cheyenne and Cody. Cheyenne’s American Opportunity credit is $2,500 [100% of the first $2,000 of qualifying expenses plus 25% of the next $2,000 of qualifying expenses; $2,000 + ($2,000 × 25%)]. Cody’s American Opportunity credit is also $2,500 [100% of the first $2,000 of qualifying expenses plus 25% of the next $2,000 of qualifying expenses; $2,000 + ($2,000 × 25%)]. As Vince and Laura’s AGI is not more than $160,000, no phaseout is required. Therefore, the total American Opportunity credit is $5,000.
question

During the year, Flamingo, Inc., incurs the following research expenditures: In-house wages, supplies, computer time $120,000 Paid to Raven Foundation for research $60,000 Flamingo’s qualifying research expenditures for the year are: a. $159,000 b. $180,000 c. $120,000 d. $150,000 e. None of these choices are correct.
answer

A $159,000 = $120,000 + ($60,000 × 65%).
question

Bertha has generated general business credits over the years that have not been utilized. The amounts generated and not utilized follow: 2011 $5,000 2012 $15,000 2013 $10,000 2014 $8,000 In the current year, 2015, her business generates an additional $30,000 general business credit. In 2015, based on her tax liability before credits, she can utilize a general business credit of up to $40,000. After utilizing the carryforwards and the current year credits, how much of the general business credit generated in 2015 is available for future years? a. $23,000 b. $28,000 c. $0 d. $2,000 e. None of these choices are correct.
answer

B Total credit allowed in 2015 (based on tax liability) =$40,000 Utilization of carryovers: ~2011- $5,000 ~2012- $15,000 ~2013- $10,000 ~2014- $8,000 = (38,000) Remaining credit allowed: Utilization current year credit =$2,000 Carryover of unused current year general business credit ~General business credit generated in 2015 =$30,000 ~Applied against 2015 general business credit =(2,000) ~Unused 2015 amount available for carryforward to 2016 =$28,000
question

In March 2015, Freebird Corporation hired two individuals, both of whom were certified as long-term recipients of family assistance benefits. Each employee was paid $11,000 during 2015. Only one of the individuals continued to work for Banjo Corporation in 2016, earning $9,000 during the year. No additional workers were hired in 2016. Banjo Corporation’s work opportunity tax credit amounts for 2015 and 2016 are: a. $8,000 in 2015, $5,000 in 2016. b. $8,000 in 2015, $9,000 in 2016. c. $4,000 in 2015, $4,000 in 2016. d. $8,000 in 2015, $4,500 in 2016. e. None of these choices are correct
answer

D The maximum work opportunity tax credit in this case is 40% of the first $10,000 of qualified wages per employee paid in the first year of employment, plus 50% of the first $10,000 of qualified wages per employee paid in the second year of employment. Therefore, the 2015 credit amount is $8,000 (40% × $10,000 wages × 2 employees), while the 2016 credit amount is $4,500 (50% × $9,000 wages × 1 employee).
question

For the current year, the base amount for the Social Security portion (old age, survivors, and disability insurance) is the same as that for the Medicare portion of FICA. a. True b. False
answer

False For Social Security for 2015, the base amount is limited to $118,500. For Medicare, there is no ceiling.
question

During the year, Ostrich Corporation (a U.S. Corporation) has U.S.-source income of $900,000 and foreign income of $300,000. The foreign-source income generates foreign income taxes of $75,000. The U.S. income tax before the foreign tax credit is $408,000. Ostrich Corporation’s foreign tax credit is: a. $102,000 b. $408,000 c. $56,250 d. $75,000 e. None of these choices are correct.
answer

D The overall limitation is [($300,000/$1,200,000) × $408,000], or $102,000. However, the foreign tax credit cannot exceed the amount of foreign taxes paid ($75,000).
question

During 2015, Daisy earns $120,000 in wages as an employee of an accounting firm. She also earns $26,000 in gross income from an outside consulting service she operates. Deductible expenses paid in connection with the consulting service amount to $6,000. Daisy also has 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. $26,000 b. $27,000 c. $0 d. $20,000 e. None of these choices are correct.
answer

D Daisy is subject to the Medicare portion of the self-employment tax to the extent of the $20,000 ($26,000 – $6,000) of net earnings from self-employment.
question

Rufus owns and operates a real estate agency as a sole proprietor. On a full-time basis, he employs his 17-year old daughter as a receptionist and his 22-year old son as a bookkeeper. Both the son and daughter are subject to FICA withholding. a. True b. False
answer

False Because the daughter is under age 18, FICA withholding is not required.
question

Ringo is considering making a $10,000 investment in a venture which its promoter promises will generate immediate tax benefits for him. Ringo, 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 Ringo and by how much will Ringo’s tax liability decline because of the investment? a. $2,800, take the itemized deduction. b. Both options produce the same benefit. c. $0, take neither the itemized deduction nor the tax credit. d. $2,500, take the tax credit. e. None of these choices are correct.
answer

A The tax deduction will produce a benefit of $2,800 ($10,000 × 28%), which is greater than the amount resulting from claiming a tax credit, $2,500 ($10,000 × 25%). Therefore, Ringo should claim the itemized deduction because it produces the greater benefit.
question

The tax benefits resulting from tax credits are affected by the tax rate bracket of the taxpayer. a. True b. False
answer

False The tax benefit of a tax credit is not affected by the tax rate bracket of the taxpayer.

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