fed Tax 01

Flashcard maker : Lily Taylor
Which of the following is a true statement?
Business activities never require a relatively high level of involvement or effort from the taxpayer.
All business expenses are deducted for AGI.
Congress allows self-employed taxpayers to deduct the employer portion of their self-employment tax.
All of these are true.
To deduct expenses associated with any profit motivated activity taxpayers must maintain a high level of involvement or effort in the activity throughout the year.
See discussion of the self-employment deduction in the text.
Congress allows self-employed taxpayers to deduct the employer portion of their self-employment tax.

See discussion of the self-employment deduction in the text.

According to the Internal Revenue Code §162, deductible trade or business expenses must be one of the following?
incurred for the production of investment income
appropriate and measurable
personal and justifiable
ordinary and necessary
minimized
ordinary and necessary

Language from the IRC.

Individual proprietors report their business income and deductions on:
Schedule C
Kevin bought 200 shares of Intel stock on January 1, 2014 for $50 per share with a brokerage fee of $100. Then, Kevin sells all 200 shares for $75 per share on December 12, 2014. The brokerage fee on the sale was $150. What is the amount of the gain/loss Kevin must report on his 2014 tax return?
$4,750

Amount Realized = (200 shares × $75) – $150 = $14,850; Adjusted Basis = (200 shares × $50) + $100 = $10,100; Gain = $14,850 – $10,100 = $4,750.

Which of the following is a true statement?
The regulations do not provide any guidance for determining whether an activity is profit motivated.
All of these are true.
The deductibility of an activity’s expenses in excess of revenues depends upon whether the activity is primarily profit-motivated or a hobby as determined by facts and circumstances.
Expenses associated with a “hobby” are never deductible.
Taxpayers engaged in a “hobby” are always presumed to be motivated by profit.
The deductibility of an activity’s expenses in excess of revenues depends upon whether the activity is primarily profit-motivated or a hobby as determined by facts and circumstances.

The regulations provide a list of factors for determining whether an activity is profit motivated. The presumption that a hobby is profit motivated depends upon whether the activity generates a profit in three of five consecutive years.

Which taxpayer would not be considered a material participant of an activity?
taxpayer materially participated in the activity for any five of the preceding ten years
taxpayer participated 95 hours last year and participation is not less than any other participants for the year
None of these
taxpayer participated on a regular, continuous, and substantial basis last year
taxpayer participated in the activity for 995 hours last year
taxpayer participated 95 hours last year and participation is not less than any other participants for the year
Which of the following expenses are completely deductible?
All of these expenses are fully deductible.
None of these expenses can be deducted in full.
$50 spent on meals while traveling on business.
$2,000 spent by the employer on reimbursing an employee for entertainment.
$1,000 spent on compensating your brother for a personal expense.
None of these expenses can be deducted in full.

Meals and entertainment are only 50% deductible.

Happy, Sleepy, Grumpy, and Doc all did not make adequate estimated payments. Which of them will not owe underpayment penalties for 2014 given the following information?

PICTURE
Doc
Sleepy
None of these
Happy
Two of these
Grumpy

two of these

Happy will not have underpayment penalties because he did not owe taxes last year. Doc will not have underpayment penalties because his tax liability is less than $1,000.

Which of the following is a true statement?
To satisfy the distance test, the distance from the taxpayer’s old residence to the new place of work must be at least 50 miles more than the distance from the old residence to the old place of work.
The moving expense deduction is restricted to expenses associated with moving personal possessions to the new residence.
Individuals qualify for the moving expense deduction only if they change employers.
All of these are true.
To satisfy the business test, the taxpayer must be employed full-time for 45 of the first 52 weeks after the move.
To satisfy the distance test, the distance from the taxpayer’s old residence to the new place of work must be at least 50 miles more than the distance from the old residence to the old place of work.

Reasonable moving expenses include travel to the new residence.

Jim operates his business on the accrual method and this year he received $4,000 for services that he intends to provide to his clients next year. Under what circumstances can Jim defer the recognition of the $4,000 of income until next year?
Jim must defer the recognition of the income until the income is earned.
Jim can defer the recognition of the income if he absolutely promises not to provide the services until next year.
Jim can defer the recognition of the income if he has requested that the client not pay for the services until the services are provided.
Jim can elect to defer the recognition of the income if the income is not recognized for financial accounting purposes.
Jim can never defer the recognition of the prepayments of income.
Jim can elect to defer the recognition of the income if the income is not recognized for financial accounting purposes.

The deferral method can be elected for advance payments of unearned service income if the income is also unearned for financial reporting.

In 2014, Jessica retired at the age of 65. The current balance in her traditional IRA was $200,000. Over the years, Jessica had made $20,000 of nondeductible contributions and $60,000 of deductible contributions to the account. If Jessica receives a $50,000 distribution from the IRA, what amount of the distribution is taxable?
$45,000
$5,000
$0
$50,000
$37,500
$45,000

10% of the distribution is not taxable ($20,000 nondeductible contributions divided by balance in account of $200,000). Taxable portion is 90% so taxable amount is $45,000 ($50,000 × 90%).

In the current year, Norris, an individual, has $50,000 of ordinary income, a Net Short Term Capital Loss (NSTCL) of $10,000 and a Net Long Term Capital Gain (NLTCG) of $2,800. From his capital gains and losses, Norris reports:
an offset against ordinary income of $3,000 and a NSTCL carryforward of $7,200
an offset against ordinary income of $10,000
an offset against ordinary income of $3,000 and a NSTCL carryforward of $7,000
an offset against ordinary income of $3,000 and a NSTCL carryforward of $4,200
an offset against ordinary income of $2,800 and a NSTCL carryforward of $7,200
an offset against ordinary income of $3,000 and a NSTCL carryforward of $4,200

$2,800 NLTCG – $10,000 NSTCL = $7,200 NSTCL; Use $3,000 NSTCL to reduce ordinary income leaving $4,200 as a NSTCL carryforward.

Which of the following statements regarding traditional IRAs is true?
Taxpayers who participate in an employer-sponsored retirement plan are allowed to deduct contributions to a traditional IRA regardless of their AGI.
Once a taxpayer reaches age 55 years of age she is allowed to contribute an additional $1,000 a year.
A single taxpayer with no earned income is not allowed to deduct contributions to traditional IRAs.
Taxpayers with high income are not allowed to contribute to traditional IRAs.
A single taxpayer with no earned income is not allowed to deduct contributions to traditional IRAs.

The limit for deductible contributions to traditional IRAs is the lesser of $5,500 or earned income. A taxpayer with no earned income would not be allowed to make a deductible contribution to an IRA.

Ajax Computer Company is an accrual method calendar year taxpayer. Ajax has never advertised in the national media prior to this year. In November of this year, however, Ajax paid $1 million for television advertising time during a “super” sporting event scheduled to take place in early February of next year. In addition, in November of this year the company paid $500,000 for advertising time during a professional golf tournament in April of next year. What amount of these payments, if any, can Ajax deduct this year?
$1.5 million
$1.5 million only if the professional golf tournament is played before April 15.
No deduction can be claimed this year.
$1 million
$500,000
$1 million

Deduct $1 million because under the 3½ month rule payment for a service qualifies as economic performance when actual performance (the service) is expected within 3½ months of the date of payment. Note that the $500,000 might also be deductible if it qualified as a recurring expense.

Which of the following is a true statement?
A married couple is only entitled to one addition to their standard deduction even if both spouses are both over age 65.
The standard deduction is increased for taxpayers who are blind or deaf at year end.
Before any applicable phase-out, the deduction for personal and dependency exemptions is $3,950 times the number of exemptions.
Bunching itemized deductions is an illegal method of tax avoidance.
All of these are true.
Before any applicable phase-out, the deduction for personal and dependency exemptions is $3,950 times the number of exemptions.

For 2014, each exemption is worth $3,950.

In order to deduct a portion of the cost of a business meal which of the following conditions must be met?
All of these are conditions for a deduction.
The meal must occur on the taxpayer’s business premises.
A client (not a supplier or vendor) must be present at the meal.
The taxpayer or an employee must be present at the meal.
None of these is a condition for a deduction.
The taxpayer or an employee must be present at the meal.

The taxpayer or employee must be present for a portion of the cost of the meal to be deductible.

Which of the following is a true statement?
A taxpayer can only deduct a meal for a client if business is discussed during the meal.
None of these is true.
The cost of business meals must be reasonable.
Meals are never deductible as a business expense.
An employer can only deduct half of any meals provided to employees.
The cost of business meals must be reasonable.

Employee meals can be fully deductible as compensation and meals merely need to be associated with the conduct of business.

Grace is employed as the manager of a sandwich shop. This year she earned a salary of $45,000 and incurred the following expenses associated with her employment:

Subscriptions to food publications
Cooking class( ” How to make better subs”)
Transportation between Grace’s home and the shop

What amount of miscellaneous itemized deductions can Grace include with her other allowable itemized deductions?
$1,050
None of these.
$150
$550
$200 if Grace was reimbursed $50 for her cooking class

None of These

The subscriptions and cooking class ($550) are deductible but this sum is reduced to zero by the 2 percent of AGI limitation ($900).

Asteria earned a $25,500 salary as an employee in 2014. How much should her employer have withheld from her paycheck for FICA taxes (rounded to the nearest whole dollar amount)?
$1,951
$3,902
$370
$1,581
$1,951

$25,500 × (.062 + .0145).

This year Norma paid $1,200 of real estate taxes on her personal residence. Norma’s other itemized deductions (state income taxes) only amount to $3,100. Which of the following is a true statement if Norma files single with one personal exemption?
Norma can deduct $1,200 even if her standard deduction is $6,200.
Norma can deduct $3,100 even if her standard deduction is $6,200.
Norma should deduct $4,300 even if her standard deduction is $6,200.
Norma can deduct 4,300 for AGI.
Norma should claim the standard deduction.
Norma should claim the standard deduction.

Taxpayers should generally claim the standard deduction if it exceeds their total itemized deductions.

Which of the following statements regarding Roth IRAs distributions is true?
A Roth IRA does not have minimum distribution requirements.
The full amount of all nonqualifying distributions is subject to tax at the taxpayer’s marginal tax rate.
A distribution is not a qualifying distribution unless the distribution is at least two years after the taxpayer has opened the Roth IRA.
A taxpayer receiving a distribution from a Roth IRA before reaching the age of 55 is generally not subject to an early distribution penalty.
A Roth IRA does not have minimum distribution requirements.

A Roth IRA does not have minimum distribution requirements. A nonqualifying distribution is not subject to tax to the extent it is from the taxpayer’s contributions to the account.

Which of the following best describes the manner in which self-employed taxpayers may deduct self-employment taxes?
Deduct employer portion for AGI.
Deduct entire amount for AGI.
Deduct employer portion from AGI.
No deduction
Deduct entire amount from AGI.
Deduct employer portion for AGI

This is a for AGI deduction as it is considered a cost of doing business. The employer portion is deductible.

Alain Mire files a single tax return and has adjusted gross income of $304,000. His net investment income is $53,000. What is the additional tax that Alain will pay on his net investment income for the year?
$1,938
$2,014
Zero
None of these
$3,952
$2,014

Alain’s net investment income tax is the lesser of 1) his net investment income ($53,000) or 2) his modified adjusted gross income less the threshold of $200,000 ($304,000 – $200,000 = $104,000) multiplied by 3.8% ($53,000 × 3.8% = $2,014).

Carly donated inventory (ordinary income property) to a church. She purchased the inventory last month for $100,000, and on the date of the gift, it had a fair market value of $92,000. What is her maximum charitable contribution deduction for the year if her AGI is $200,000?
$60,000
$92,000
None of these
$46,000 if the church sells the inventory
$92,000

The charitable deduction for ordinary income property is the lesser of FMV or basis limited to 50% of AGI.

Unused investment interest expense:
is carried back two years
is carried forward indefinitely
None of these
expires after the current year
is carried forward twenty years
is carried forward indefinitely

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