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1

Premiums on Mr. Vick's personal life insurance policy.

Not deductible

2

Penalty on Mrs. Vick's early withdrawal of funds from a certificate of deposit.

Deductible on page 1 of Form 1040 to arrive at adjusted gross income

3

Mrs. Vick's substantiated cash donation to the American Red Cross.

Deductible in Schedule A—Itemized Deductions, subject to maximum of 50% of adjusted gross income

4

Payment of estimated state income taxes.

Deductible in full in Schedule A—Itemized Deductions

5

Cost in excess of the increase in value of residence, for the installation of a stairlift in January 2013, related directly to the medical care of Mr. Vick.

Deductible in Schedule A—Itemized Deductions, subject to threshold of 10% of adjusted gross income.

6

Mrs. Vick's union dues.

Deductible in Schedule A—Itemized Deductions, subject to threshold of 2% of adjusted gross income

7

In 2013, Green paid $2,000 interest on the $25,000 home equity mortgage on his vacation home, which he used exclusively for personal use. The mortgage is secured by Green's vacation home, and the loan proceeds were used to purchase an automobile.

B. Deductible in full on Schedule A—Itemized Deductions. Interest expense on home equity indebtedness is deductible on up to $100,000 of home equity loans secured by a first or second residence regardless of how the loan proceeds were used.

8

During 2013, Green had investment interest expense that did not exceed his net investment income.

B. Deductible in full on Schedule A—Itemized Deductions. Investment interest expense is deductible as an itemized deduction to the extent of net investment income. Since Green's investment interest expense did not exceed his net investment income, it is deductible in full.

9

In 2013, Green paid a $500 premium for a homeowner's insurance policy on his principal residence

Not deductible on Form 1040. A premium for a homeowner's insurance policy on a principal residence is a nondeductible personal expense.

10

For 2013, Green paid $2,000 to an unrelated babysitter to care for his child while he worked.

A credit is allowable. Payments to an unrelated babysitter to care for his child while Green worked would qualify for the child and dependent care credit. For 2013, the credit may vary from 20% to 35% of up to $3,000 ($6,000 for two or more qualifying individuals) of qualifying household and dependent care expenses incurred to enable the taxpayer to be gainfully employed or look for work.

11

In 2013, Green paid $4,000 interest on the $60,000 acquisition mortgage on his principal residence. The mortgage is secured by Green's home.

B. Deductible in full on Schedule A—Itemized Deductions. Interest expense on acquisition indebtedness is deductible on up to $1 million of loans secured by the residence if such loans were used to acquire, construct, or substantially improve a principal residence or a second residence.

12

During 2013, Green paid $3,600 real property taxes on residential rental property in which he actively participates. There was no personal use of the rental property.

F. Deductible on Schedule E—Supplemental Income and Loss. Expenses incurred in the production of rental income (e.g., interest, taxes, depreciation, insurance, utilities) are deductible on Schedule E and are included in the computation of net rental income or loss.

13

Fees received for jury duty. appropriate tax treatment?

Taxable as other income on page 1 of Form 1040. Fees received for jury duty represent compensation for services and must be included in gross income. Since there is no separate line for jury duty fees, they are taxable as other income on page 1 of Form 1040.

14

Interest income on mortgage loan receivable appropriate tax treatment?

Taxable as interest income in Schedule B - Interest and Dividend Income. Interest income on a mortgage loan receivable must be included in gross income and is taxable as interest income in Schedule B窶祢nterest and Dividend Income.

15

Penalty paid to bank on early withdrawal of savings appropriate tax treatment?

Deductible on page 1 of Form 1040 to arrive at adjusted gross income. An interest forfeiture penalty for making an early withdrawal from a certificate of deposit is deductible on page 1 of Form 1040 to arrive at adjusted gross income.

16

Write-offs of uncollectible accounts receivable from accounting practice. appropriate tax treatment?

Not deductible. The problem indicates that Cole is a CPA reporting on the cash basis. Accounts receivable resulting from services rendered by a cash-basis taxpayer have a zero tax basis, because the income has not yet been reported. Therefore, the write-offs of zero basis uncollectible accounts receivable from Cole's accounting practice are not deductible.

17

Cost of attending review course in preparation for the Uniform CPA Examination. appropriate tax treatment?

Not deductible. An educational expense that is part of a program of study that can qualify an individual for a new trade or business is not deductible. This is true even if the individual is not seeking a new job. In this case, the cost of attending a review course in preparation for the CPA examination is a nondeductible personal expense since it qualifies Cole for a new profession.

18

Fee for the biennial permit to practice as a CPA. appropriate tax treatment?

Deductible in Schedule C窶捻rofit or Loss from Business. Licensing and regulatory fees paid to state or local governments are an ordinary and necessary trade or business expense and are deductible by a sole proprietor on Schedule C窶捻rofit or Loss from Business. Since Cole is a cash method tax payor, he can deduct the fee for the biennial permit to practice when paid in 2013.

19

Costs of attending CPE courses in fulfillment of state board requirements. appropriate tax treatment?

Deductible in Schedule C窶捻rofit or Loss from Business. All trade or business expenses of a self-employed individual are deductible on Schedule C窶捻rofit or Loss from Business. Education must meet certain requirements before the related expenses can be deducted. Generally, deductible education expenses must not be a part of a program that will qualify the individual for a new trade or business and must (1) be required by an employer or by law to keep the individual's present position, or (2) maintain or improve skills required in the individual's present work. In this case, Cole already is a CPA and is fulfilling state CPE requirements, so his education costs of attending CPE courses are deductible in Schedule C窶捻rofit or Loss from Business.

20

Contribution to a qualified Keogh retirement plan. appropriate tax treatment?

Deductible on page 1 of Form 1040 to arrive at adjusted gross income. Contributions to a self-employed individual's qualified Keogh retirement plan are deductible on page 1 of Form 1040 to arrive at adjusted gross income. The maximum deduction for contributions to a defined contribution Keogh retirement plan is limited to the lesser of $51,000 (for 2013), or 25% of self-employment income.

21

Loss sustained from nonbusiness bad debt. appropriate tax treatment?

Deductible in Schedule D窶任apital Gains or Losses. A loss sustained from a nonbusiness bad debt is always classified as a short-term capital loss. Therefore, Cole's nonbusiness bad debt is deductible in Schedule D窶任apital Gains or Losses.

22

Loss sustained on sale of "Small Business Corporation" (Section 1244) stock. appropriate tax treatment?

Deductible in Form 4797窶粘ales of Business Property. A loss sustained on the sale of Sec. 1244 stock is generally deductible as an ordinary loss, with the amount of ordinary loss deduction limited to $50,000. On a joint return, the limit is increased to $100,000, even if the stock was owned by only one spouse. The ordinary loss resulting from the sale of Sec. 1244 stock is deductible in Form 4797窶粘ales of Business Property. To the extent that a loss on Sec. 1244 stock exceeds the applicable $50,000 or $100,000 limit, the loss is deductible as a capital loss in Schedule D窶任apital Gains or Losses. Similarly, if Sec. 1244 stock is sold at a gain, the gain would be reported as a capital gain in Schedule D if the stock is a capital asset.

23

Taxes paid on land owned by Cole and rented out as a parking lot. appropriate tax treatment?

Deductible in Schedule E窶粘upplemental Income and Loss. Rental income and expenses related to rental property are generally reported in Schedule E. Here, the taxes paid on land owned by Cole and rented out as a parking lot are deductible in Schedule E窶粘upplemental Income and Loss. Schedule E also is used to report the income or loss from royalties, partnerships, S corporations, estates, and trusts.

24

Interest paid on installment purchases of household furniture appropriate tax treatment?

Not deductible. The interest paid on installment purchases of household furniture is considered personal interest and is not deductible. Personal interest is any interest that is not qualified residence interest, investment interest, passive activity interest, or business interest. Personal interest generally includes interest on car loans, interest on income tax, underpayments, installment plan interest, credit card finance charges, and late payment charges by a utility.

25

Alimony paid to former spouse who reports the alimony as taxable income. appropriate tax treatment?

Deductible on page 1 of Form 1040 to arrive at adjusted gross income. Alimony paid to a former spouse who reports the alimony as taxable income is deductible on page 1 of Form 1040 to arrive at adjusted gross income.

26

Personal medical expenses charged on credit card in December 2013 but not paid until January 2014. appropriate tax treatment?

Deductible in Schedule A窶祢temized Deductions, subject to threshold of 10% of adjusted gross income. Personal medical expenses are generally deductible as an itemized deduction subject to a 10% (7.5% prior to 2013) of AGI threshold for the year in which they are paid. Additionally, an individual can deduct medical expenses charged to a credit card in the year the charge is made. It makes no difference when the amount charged is actually paid. Here, Cole's personal medical expenses charged on a credit card in December 2013 but not paid until January 2014 are deductible for 2013 in Schedule A窶祢temized Deductions, subject to a threshold of 10% of adjusted gross income.

27

Personal casualty loss sustained. appropriate tax treatment?

Deductible in Schedule A窶祢temized Deductions, subject to threshold of 10% of adjusted gross income and additional threshold of $100. If an individual sustains a personal casualty loss, it is deductible in Schedule A窶祢temized Deductions subject to a threshold of $100 and an additional threshold of 10% of adjusted gross income.

28

State inheritance tax paid on bequest received. appropriate tax treatment?

Not deductible. State inheritance taxes paid on a bequest that was received are not deductible. Other taxes not deductible in computing an individual's federal income tax include federal estate and gift taxes, federal income taxes, and social security and other employment taxes paid by an employee.

29

Foreign income tax withheld at source on dividend received appropriate tax treatment?

Claimed in Form 1116窶認oreign Tax Credit, or in Schedule A窶祢temized Deductions, at taxpayer's option. An individual can deduct foreign income taxes as an itemized deduction or can deduct foreign income taxes as a tax credit. Cole's foreign income tax withheld at source on foreign dividends received can be claimed in Form 1116窶認oreign Tax Credit, or in Schedule A - Itemized Deductions, at Cole's option.

30

Computation of self-employment tax. appropriate tax treatment?

Based on net earnings from self-employment. A self-employed individual is subject to a self-employment tax if the individual's net earnings from self-employment are at least $400.

31

One-half of self-employment tax paid with 2013 return filed in April 2014. appropriate tax treatment?

Deductible on page 1 of Form 1040 to arrive at adjusted gross income. An individual's self-employment tax is computed in Schedule SE and is added as an additional tax in arriving at the individual's total tax. A portion of the computed self-employment tax is allowed as a deduction in arriving at adjusted gross income. Here, one-half of Cole's self-employment tax for 2013 is deductible for 2013 on page 1 of Form 1040 to arrive at adjusted gross income, even though the tax was not paid until the return was filed in April 2014.

32

Insurance premiums paid on Cole's life. appropriate tax treatment?

Not deductible. Insurance premiums paid on Cole's life are classified as a personal expense and are not deductible.

33

Loss on the sale of the family car.

Not deductible

34

2012 federal income tax paid with the Vicks' tax return on April 15, 2013

Not deductible

35

One-half the self-employment tax paid by Mrs. Vick.

Deductible on page 1 of Form 1040 to arrive at adjusted gross income

36

Payment of real estate taxes on the Vick home.

Deductible in full in Schedule A—Itemized

37

Amortization over the life of the loan of points paid to refinance the mortgage at a lower rate on the Vick home.

Deductible in full in Schedule A—Itemized

38

Mrs. Vick's $100 in gambling losses. She had $450 of gambling winnings.

Deductible in full in Schedule A—Itemized

39

The Vicks' health insurance premiums for hospitalization coverage.

Deductible in Schedule A—Itemized Deductions, subject to threshold of 10% of adjusted gross income.

40

CPA fees to prepare the 2012 tax return

Deductible in Schedule A—Itemized Deductions, subject to threshold of 2% of adjusted gross income

41

On January 2 of this year, BIG, an accrual basis, calendar-year C corporation, purchased all of the assets of a sole proprietorship, including $300,000 of goodwill. Current-year federal income tax expense of $110,100 and $7,500 for goodwill amortization (based upon 40 year amortization period) were deducted to arrive at Big's book income of $239,200. What is Big's current-year taxable income (as reconciled on Schedule M-1)?


A. $239,200
B. $329,300
C. $336,800

The purpose of Schedule M-1 of Form 1120, U.S. Corporation Income Tax Return is to reconcile book income (loss) with income per the return. Federal income tax is not deductible for tax purposes so it must be added back to book income, giving $349,300 ($239,200 + $110,100). The goodwill is amortized over 15 years for tax purposes, or $20,000 per year ($300,000/15 years). Thus, the book goodwill amortization is added back and the tax good will is deducted. This results in taxable income of $336,800 ($349,300 + $7,500 - $20,000).

42

Robin, a C corporation, had revenues of $200,000 and operating expenses of $75,000. Robin also received a $20,000 dividend from a domestic corporation and is entitled to a $14,000 dividend-received deduction. Robin donated $15,000 to a qualified charitable organization in the current year. What is Robin's contribution deduction?


A. $15,000
B. $14,500

Taxable income before dividends and contributions is $125,000 ($200,000 - $75,000). The 10% of taxable income limitation for C corporations uses taxable income BEFORE the dividends received deduction, which is $145,000. Thus, the charitable contribution limitation is $14,500 ($145,000 x 10%).

Taxable income before dividends $125,000
Dividends 20,000
Taxable income before special deductions $145,000
Charitable contributions (14,500)
Taxable income after charitable deduction $130.500
Dividends-received deduction (14,000)
Taxable income $116,500

43

Lace Computer Sales Corp. orally contracted with Banks, an independent consultant, for Banks to work part time as Lace's agent to perform Lace's customers' service calls. Banks, a computer programmer and software designer, was authorized to customize Lace's software to the customers' needs, on a commission basis, but was specifically told not to sell Lace's computers.
On March 15, Banks made a service call on Clear Co. to repair Clear's computer. Banks had previously called on Clear, customized Lace's software for Clear, and collected cash payments for the work performed. During the call, Banks convinced Clear to buy an upgraded Lace computer for a price much lower than Lace would normally charge. Clear had previously purchased computers from other Lace agents and had made substantial cash down payments to the agents. Clear had no knowledge that the price was lower than normal. Banks received a $1,000 cash down payment and promised to deliver the computer the next week. Banks never turned in the down payment and left town. When Clear called the following week to have the computer delivered, Lace refused to honor Clear's order.
I. Lace's agreement with Banks had to be in writing for it to be a valid agency agreement.
II. Lace's agreement with Banks empowered Banks to act as Lace's agent.

Statement I is incorrect because normally an agency agreement need not be in writing unless the agency contract cannot be completed in one year. Statement II is correct because Lace authorized Banks to be Lace's agent.

44

Lace Computer Sales Corp. orally contracted with Banks, an independent consultant, for Banks to work part time as Lace's agent to perform Lace's customers' service calls. Banks, a computer programmer and software designer, was authorized to customize Lace's software to the customers' needs, on a commission basis, but was specifically told not to sell Lace's computers.
On March 15, Banks made a service call on Clear Co. to repair Clear's computer. Banks had previously called on Clear, customized Lace's software for Clear, and collected cash payments for the work performed. During the call, Banks convinced Clear to buy an upgraded Lace computer for a price much lower than Lace would normally charge. Clear had previously purchased computers from other Lace agents and had made substantial cash down payments to the agents. Clear had no knowledge that the price was lower than normal. Banks received a $1,000 cash down payment and promised to deliver the computer the next week. Banks never turned in the down payment and left town. When Clear called the following week to have the computer delivered, Lace refused to honor Clear's order.
I. Clear was entitled to rely on Banks' implied authority to customize Lace's software.
II. Clear was entitled to rely on Banks' express authority when buying the computer.

Statement I is correct because Banks was given actual, express authority by Lace to perform Lace's customers' service calls and to customize Lace's software to the customer's needs. As an extension to this actual, express authority, Clear can also rely on what is customary and ordinary for such an agent to be able to do under implied authority. Statement II is incorrect because Banks did not have express authority to sell the computer. In fact, Banks was told not to sell Lace's computers.

45

Lace Computer Sales Corp. orally contracted with Banks, an independent consultant, for Banks to work part time as Lace's agent to perform Lace's customers' service calls. Banks, a computer programmer and software designer, was authorized to customize Lace's software to the customers' needs, on a commission basis, but was specifically told not to sell Lace's computers.
On March 15, Banks made a service call on Clear Co. to repair Clear's computer. Banks had previously called on Clear, customized Lace's software for Clear, and collected cash payments for the work performed. During the call, Banks convinced Clear to buy an upgraded Lace computer for a price much lower than Lace would normally charge. Clear had previously purchased computers from other Lace agents and had made substantial cash down payments to the agents. Clear had no knowledge that the price was lower than normal. Banks received a $1,000 cash down payment and promised to deliver the computer the next week. Banks never turned in the down payment and left town. When Clear called the following week to have the computer delivered, Lace refused to honor Clear's order.
I. Lace's agreement with Banks was automatically terminated by Banks' sale of the computer.
II. Lace must notify Clear before Banks' apparent authority to bind Lace will cease.

Banks breached his/her fiduciary duty to Lace and breached his/her duty to follow instructions when s/he sold the computer. This, however, does not automatically terminate their agreement. Statement II is correct because Banks had dealt with Clear before as Lace's agent. Therefore, Clear must receive actual notice to terminate the apparent authority.

46

Lace Computer Sales Corp. orally contracted with Banks, an independent consultant, for Banks to work part time as Lace's agent to perform Lace's customers' service calls. Banks, a computer programmer and software designer, was authorized to customize Lace's software to the customers' needs, on a commission basis, but was specifically told not to sell Lace's computers.
On March 15, Banks made a service call on Clear Co. to repair Clear's computer. Banks had previously called on Clear, customized Lace's software for Clear, and collected cash payments for the work performed. During the call, Banks convinced Clear to buy an upgraded Lace computer for a price much lower than Lace would normally charge. Clear had previously purchased computers from other Lace agents and had made substantial cash down payments to the agents. Clear had no knowledge that the price was lower than normal. Banks received a $1,000 cash down payment and promised to deliver the computer the next week. Banks never turned in the down payment and left town. When Clear called the following week to have the computer delivered, Lace refused to honor Clear's order.
I. Lace is not bound by the agreement made by Banks with Clear.
II. Lace may unilaterally amend the agreement made by Banks to prevent a loss on the sale of the computer to Clear.

Statement I is incorrect because Banks had apparent authority to sell the computer even though Banks did not have actual authority to do so. Statement II is incorrect because Lace is bound by the contract with Clear. Any modification of the contract must be made by both parties to the contract, not just one.

47

Lace Computer Sales Corp. orally contracted with Banks, an independent consultant, for Banks to work part time as Lace's agent to perform Lace's customers' service calls. Banks, a computer programmer and software designer, was authorized to customize Lace's software to the customers' needs, on a commission basis, but was specifically told not to sell Lace's computers.
On March 15, Banks made a service call on Clear Co. to repair Clear's computer. Banks had previously called on Clear, customized Lace's software for Clear, and collected cash payments for the work performed. During the call, Banks convinced Clear to buy an upgraded Lace computer for a price much lower than Lace would normally charge. Clear had previously purchased computers from other Lace agents and had made substantial cash down payments to the agents. Clear had no knowledge that the price was lower than normal. Banks received a $1,000 cash down payment and promised to deliver the computer the next week. Banks never turned in the down payment and left town. When Clear called the following week to have the computer delivered, Lace refused to honor Clear's order.
I. Lace, as a disclosed principal, is solely contractually liable to Clear.
II. Both Lace and Banks are contractually liable to Clear.

Statement I is correct because since Lace was a disclosed principal, only Lace, the principal, is liable under the contract to Clear, the third party. Banks, the agent, is not. For the same reason, statement II is incorrect.

48

Smith paid the medical expenses of his mother-in-law. Although Smith provided more than half of her support, she does not qualify as Smith's dependent because she had gross income of $5,000.

From AGI (No 2%)

49

Smith paid the real estate taxes on his rental apartment building.

For AGI

50

Smith paid state sales taxes of $1,500 on a used automobile that he purchased for personal use.

From AGI (No 2%)

51

Smith paid the real estate taxes on his mother-in-law's home. She is the owner of the home.

Not ded.

52

Smith paid $1,500 of interest on credit card charges. The charges were for items purchased for personal use.

Not ded

53

Smith paid an attorney $500 to prepare Smith's will.

Not ded

54

Smith incurred $750 of expenses for business meals and entertainment in his position as an employee of Patton Corporation. Smith's expenses were not reimbursed.

From AGI (2% Floor)

55

Smith paid self-employment taxes of $3,000 as a result of earnings from the consulting business that he conducts as a sole proprietor

For AGI

56

Smith made a contribution to his self-employed retirement plan (Keogh Plan).

For AGI

57

Smith had gambling losses totaling $2,500 for the year. He is including a lottery prize of $5,000 in his gross income this year

From AGI (No 2%)

58

Partnership made a proportionate cash distribution

Partners do not include the cash as income, but must reduce their basis in the partnership.
Gain is recognized on a partnership distribution only if the cash distributed exceeds the basis in the partnership interest. However, the facts indicate that there is enough basis to cover all distributions, so no gain is recognized. The basis of the interest is reduced by the cash distributed.

59

Partnership sold depreciable property at a gain in excess of the depreciation allowed on the property

Treated partly as a separately stated section 1231 gain and partly as partnership ordinary business income.
Since depreciable property was sold the gain is subject to being recaptured as ordinary income under the depreciation recapture rules. Section 1245 requires more recapture than Section 1250 because Section 1245 requires that all depreciation taken is subject to recapture. Since the gain in this problem exceeds the depreciation taken, the gain is ordinary income to the extent of depreciation claimed, and the remaining gain is Section 1231 gain.

60

Partnership claimed a section 179 deduction for depreciable property purchased during the year

Treated as a separately stated item by the partnership and potentially deductible by the partners.
Section 179 expense is a separately stated item because the partner must combine the Section 179 expense passed through from the partnership with Section 179 expense from other businesses, and the total cannot exceed the annual Section 179 limit. It is "potentially deductible" because its deductibility depends on whether the taxpayer has already meet the annual Section 179 limit from other businesses.

61

4. Partnership made cash contributions to qualifying charities

Treated as a separately stated item by the partnership and potentially deductible by the partners.
Charitable contributions are separately stated because their deductibility is subject to the limitations on deductions applicable to individuals (50% of AGI, etc.) and corporations (10% of taxable income).

62

5. Partnership sold an investment held for less than one year at a gain

Treated as separately stated item by the partnership, taxable to the partner.
This would be a short-term capital gain that is separately stated so it can be netted with other capital gains and losses on the partner's return.

63

6. Partnership paid rental of office space

Deductible by the partnership in arriving at partnership ordinary business income.
Rental expense is deductible on page 1 of Form 1065 in computing ordinary business income

64

7. Partnership paid an outside consultant for services rendered

Deductible by the partnership in arriving at partnership ordinary business income.
Consulting fees are deductible on page 1 of Form 1065 in computing ordinary business income.

65

8. Partnership made a cash contribution to a foreign charity

Partners are not entitled to a deduction and decrease their basis in the partnership
A charitable contribution deduction is not allowed for the contribution to a foreign charity, but all deductions (both deductible and non-deductible) reduce basis

66

Quest Corp., an accrual-basis calendar-year C corporation, timely filed its 2013 federal income tax return on March 15, 2014. Determine if the following items are fully deductible, partially deductible, or nondeductible for regular income tax purposes on Quest's 2013 federal income tax return. An answer may be selected once, more than once, or not at all.
Quest's 2013 taxable income before charitable contributions and dividends received deduction was $200,000. Quest's Board of Directors authorized a $38,000 contribution to a qualified charity on December 1, 2013. The payment was made on February 1, 2014. All charitable contributions were properly substantiated.

Partially. Since Quest is an accrual method corporation, it can elect to deduct contributions authorized by its board of directors during 2013, so long as the contribution is actually paid no later than 2 1/2 months after the end of the tax year. Thus, to maximize its deduction for 2013, Quest can elect to treat the $38,000 contribution as a deduction for 2013 subject to the 10% of taxable income limitation that applies for 2013. Since Quest had 2013 taxable income of $200,000 before the charitable contributions and dividends received deductions, Quest's 2013 deduction for the $38,000 charitable contribution is limited to $200,000 x 10% = $20,000

67

During 2013 Quest was assessed and paid a $300 uncontested penalty for failure to pay its 2012 federal income taxes on time.

Nondeductible for regular income tax purposes on Quest's 2013 federal income tax return.