Tax Final Ch 1-3 – Flashcards

The IRS would most likely apply the arm's length transaction test to determine which of the following? a. whether an expenditure is related to a business activity b. whether an expenditure will be likely to produce income c. timeliness of an expenditure d. reasonableness of an expenditure e. All of these

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? a. Jim can defer the recognition of the income if he absolutely promises not to provide the services until next year. b. Jim must defer the recognition of the income until the income is earned. c. 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. d. Jim can elect to defer the recognition of the income if the income is not recognized for financial accounting purposes. e. Jim can never defer the recognition of the prepayments of income.

Riley operates a plumbing business and this year the 3-year old van he used in the business was destroyed in a traffic accident. The van was originally purchased for $20,000 and the adjusted basis was $5,800 at the time of the accident. Although the van was worth $6,000 at the time of accident, insurance only paid Riley $1,200 for the loss. What is the amount of Riley's casualty loss deduction? a. $6,000 b. $14,000 c. $5,800 d. $4,600 e. $5,300

After a business meeting with a prospective client Holly took the client to dinner and the theatre. Holly paid $290 for the meal and $250 for the theatre tickets, amounts that were reasonable under the circumstances. What amount of these expenditures can Holly deduct as a business expense? a. $540 b. $415 c. $270 d. None unless Holly discussed business with the client during the meal and the entertainment. e. None - the meals and entertainment are not deductible except during travel.

Which of the following is NOT considered a related party for the purpose of limitation on accruals to related parties? a. Spouse when the taxpayer is an individual. b. A partner when the taxpayer is a partnership. c. Brother when the taxpayer is an individual. d. A minority shareholder when the taxpayer is a corporation. e. All of these are related parties.

Which of the following types of transactions may not typically be accounted for using the cash method? a. sales of inventory b. services c. purchases of machinery d. payments of debt e. sales of securities by an investor

According to the Internal Revenue Code §162, deductible business expenses must be one of the following? a. incurred for the production of investment income b. ordinary and necessary c. minimized d. appropriate and measurable e. personal and justifiable

Which of the following expenses are completely deductible? a. $1,000 spent on compensating your brother for a personal expense. b. $50 spent on meals while traveling on business. c. $2,000 spent by the employer on reimbursing an employee for entertainment. d. All of these expenses are fully deductible. e. None of these expenses can be deducted in full.

Qualified production activities income is defined as follows for purposes of the domestic production activities deduction a. net income from selling or leasing property the taxpayer manufactured in the United States. b. revenue from selling or leasing property the taxpayer manufactured in the United States. c. revenue from selling or leasing property the taxpayer manufactured in the United States but the revenue was less that 50 percent of qualifying wages used in the production. d. 6 percent of revenue from selling or leasing property the taxpayer manufactured in the United States. e. None of these

Which of the following is likely to be a fully deductible business expense? a. Salaries in excess of the industry average paid to attract talented employees. b. The cost of employee uniforms that can be adapted to ordinary personal wear. c. A speeding fine paid by a trucker who was delivering a rush order. d. The cost of a three-year subscription to a business publication. e. None of these is likely to be deductible.

Which of the following business expense deductions is most likely to be unreasonable in amount? a. Compensation paid to the taxpayer's spouse in excess of salary payments to other employees. b. Amounts paid to a subsidiary corporation for services where the amount is in excess of the cost of comparable services by competing corporations. c. Cost of entertaining a former client when there is no possibility of any future benefits from a relation with that client. d. All of these are likely to be unreasonable in amount.

Which is not an allowable method under MACRS? a. 150 percent declining balance b. 200 percent declining balance c. Straight line d. Sum of the years digits e. All of these are allowable methods under MACRS

Which of the following is not depreciated? a. Automobile b. Building c. Patent d. Machinery e. All of these are depreciated

Tax cost recovery methods do not include: a. Amortization b. Capitalization c. Depletion d. Depreciation e. All of these are tax cost recovery methods

How is the recovery period of an asset determined? a. Estimated useful life b. Treasury regulation c. Revenue Procedure 87-56 d. Revenue Ruling 87-56 e. None of these

Which of the following is not usually included in an asset's tax basis? a. Purchase price b. Sales tax c. Shipping costs d. Installation costs e. None of these

Which of the following transactions results solely in §1245 gain? a. Sale of machinery held for less than one year. b. Sale of machinery held for more than one year and where the gain realized exceeds the accumulated deprecation. c. Sale of machinery held for more than one year and where the accumulated deprecation exceeds the gain realized. d. Sale of land held for more than one year and where the amount realized exceeds the adjusted basis. e. None of these

Brad sold a rental house that he owned for $250,000. Brad bought the rental house five years ago for $225,000 and has claimed $50,000 of depreciation expense. What is the amount and character of Brad's gain or loss? a. $25,000 ordinary and $50,000 unrecaptured §1250 gain. b.$25,000 §1231 gain and $50,000 unrecaptured §1250 gain. c. $75,000 ordinary gain. d. $75,000 capital gain. e. None of these.

Which of the following realized gains results in a recognized gain? a. Farm machinery traded for farm machinery. b. Sale to a related party. c. Involuntary conversion. d. Iowa cropland exchanged for a Minnesota warehouse.

The sale of machinery for more than the original cost basis (before depreciation), used in a trade or business, and held for more than one year results in the following types of gain or loss? a. Capital and Ordinary. b. Ordinary only. c. Capital and §1231. d. §1245 and §1231. e. None of these.

The sale of land held for investment results in the following type of gain or loss? a. Capital. b. Ordinary. c. §1231. d. §1245. e. None of these.

Which of the following is not used in the calculation of the amount realized: a. Cash. b. Adjusted basis. c. Fair market value of other property received. d. Buyer's assumption of liabilities. e. All of these.

Which of the following is not true regarding §1239? a. It only applies to related taxpayers. b. It only applies to gains on sales of depreciable property. c. It only applies to gains on sales of non-residential real property. d. It does not apply to losses. e. None of these.

Which of the following sections recaptures or recharacterizes only corporate taxpayer's gains? a. §291. b. §1239. c. §1245. d. Unrecaptured §1250 gains. e. None of these.

Which of the following may qualify as an installment sale? a. Sale of inventory at a gain. b. Sale of securities. c. Sale of asset used in a business at a gain. d. Land sold at a loss. e. All of these are true.