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Flashcards in REG 8 Deck (20):
1

In calculating the tax of a corporation for a short period, which of the following processes is correct?

Annualize income and calculate the tax on annualized income, then multiply the computed tax by the number of months in the short period divided by 12.

2

Ace Rentals Inc., an accrual-basis taxpayer, reported rent receivable of $35,000 and $25,000 in its 2015 and 2014 balance sheets, respectively. During 2015, Ace received $50,000 in rent payments and $5,000 in nonrefundable rent deposits.
In Ace's 2015 corporate income tax return, what amount should Ace include as rent revenue?

Ace Corp. would report rent revenue of $65,000. Of this amount, $55,000 (the sum of $50,000 in rental payments and $5,000 in nonrefundable rent deposits) would be cash receipts. Ace Corp. is an accrual based taxpayer. Therefore, for tax purposes, income is earned when 1) all the events have occurred to attach the taxpayer's right to receive the income and 2) the amount of income can be determined with reasonable accuracy. With respect to rent receivable, the income must have been earned to record it as a receivable.
Hence, in calculating rent revenue, the $10,000 increase in rent receivable from 2014 to 2015 would have to be added to the corporation's cash receipts.

3

Dart, a C corporation, distributes software over the Internet and has had average revenues in excess of $20 million dollars per year for the past three years. To purchase software, customers key-in their credit card number to a secure web site and receive a password that allows the customer to immediately download the software. As a result, Dart doesn't record accounts receivable or inventory on its books. Which of the following statements is correct?

C corporations cannot use the cash method of accounting unless their average annual gross receipts for the previous three years do not exceed $5,000,000. Once the $5,000,000 test is failed the accrual method must be used for all future tax years. Since Dart has had revenues of more than $20 million for the last three years it must use the accrual method of accounting.

4

Criteria for a Cafeteria Plan:

Cafeteria plans allow employees to select from a menu of fringe benefits and cash and not include the value of the nontaxable benefits in their gross income. The requirements of cafeteria plans are:
1) all participants must be employees;
2) participants may choose between two or more benefits composed of cash or qualified benefits;
3) participants are required to make elections among the benefits;
4) the plan must be in writing and have certain specified information;
5) the plan may not provide participants with deferred income, except for under 401(k) plans.

5

A 33-year-old taxpayer withdrew $30,000 (pretax) from a traditional IRA. The taxpayer has a 33% effective tax rate and a 35% marginal tax rate. What is the total tax liability associated with the withdrawal?

The $30,000 distribution from the traditional IRA is taxable at the taxpayer's marginal tax rate for federal income tax purposes. In addition, since this is an early distribution (before age 59 and 1/2) and none of the exceptions for early distributions are met, the distribution is also subject to a 10% penalty tax. Therefore, the $30,000 distribution will be taxed at a 45% rate (35% marginal tax rate + 10% penalty tax). Total tax liability is $13,500 ($30,000 x 45%).

6

Davis, a sole proprietor with no employees, has a Keogh profit-sharing plan to which he may contribute 100% of his annual earned income.
For this purpose, "earned income" is defined as net self-employment earnings reduced by the

For determining the amount of income that a self-employed individual may contribute to a Keogh profit-sharing plan, earned income is defined as net self-employed earnings less the deductible Keogh contribution and one-half of the self-employment tax.

7

Mr. Kitten purchased an annuity contract for $50,000 from the XYZ Company on March 31, 2015. He is to receive $1,000 per month starting April 1, 2015 and continuing for life. He has a life expectancy of 10 years as of March 31, 2015. Mr. Kitten's reportable annuity income for 2015 is:

Mr. Kitten's expected return is 120 months × $1,000, or $120,000. His basis in the annuity is $50,000, so his exclusion ratio is 41.67% ($50,000/$120,000). He received nine payments totaling $9,000 in 2015, and $3,750 is excluded from income. Therefore, $5,250 is included in income ($9,000 − $3,750).

8

On December 1, 2014, Michaels, a self-employed cash basis taxpayer, borrowed $100,000 to use in her business. The loan was to be repaid on November 30, 2015. Michaels paid the entire interest of $12,000 on December 31, 2014.
What amount of interest was deductible on Michaels' 2015 income tax return?

Cash basis taxpayers report income when cash or property is actually or constructively received. There is no constructive receipt for deductions. Deductions for cash basis taxpayers generally are taken when actually paid. However, for expenses covering 12 months or more, the deduction must be spread over the period for which the expenses apply. Thus, since the loan was to be repaid in 12 months, the deduction for the interest must be spread over the 12 month period.
Thus, to account for the period of December 1, 2014 to December 31, 2014, Michaels would have deducted $1,000 of the interest on her 2014 income tax return and $11,000 on her 2015 income tax return to account for the period January 1, 2015 to November 30, 2015.

This response is correct.

9

What are the criteria for deducting expenses related to moving due to a new job?

If an employee or a self-employed individual moves his/her residence due to a change of his/her principal place of work, reasonable expenses resulting from moving household goods and personal effects from the old residence to the new residence and from traveling from the old residence to the new residence may be deducted. To qualify for the deduction, the new job site must be at least 50 miles further away from the old residence than was the old principal job.

If the taxpayer was unemployed before the move, the job site must be at least 50 miles away from his/her old residence. In addition, the taxpayer must be employed full-time in the area of the new principal place of work for at least 39 weeks during the 12 month period following the move, or if self-employed, for at least 78 weeks in the 24 month period following the move with at least 39 of the 78 weeks in the 12 month period following the move.

Neither the $500 fee for breaking the lease on the prior apartment residence nor the $900 for the security deposit placed on the apartment at the new location may be deducted as moving expenses. They are not qualified expenses nor was the move work related or more than 50 miles.

Also note that the question asks to determine the moving expenses that are deducted on Schedule A. Moving expenses are deducted on Form 1040 - they are not itemized deductions.

10

Dale received $1,000 in 2015 for jury duty. In exchange for regular compensation from her employer during the period of jury service, Dale was required to remit the entire $1,000 to her employer in 2015.
In Dale's 2015 income tax return, the $1,000 jury duty fee should be

If an employer requires jury pay to be remitted in exchange for regular compensation for the period the employee was performing jury duty, the employee may deduct the jury duty pay from her gross income as an adjustment arriving at adjusted gross income.
As Dale was required by her employer to remit the $1,000 in jury duty pay in exchange for regular compensation for the period the employee was performing jury duty, Dale should deduct the jury duty pay from her gross income in arriving at adjusted gross income.

11

The 2015 deduction by an individual taxpayer for interest on investment indebtedness is

A noncorporate taxpayer's deduction for interest on investment indebtedness is limited to the taxpayer's net investment income. Interest on investment indebtedness is interest paid or accrued that is allocable to property held for investment.

12

The $910 sewer system assessment imposed by the city in 2015 is

Not deductible in 2015.

Assessments for public improvements, that tend to increase the value of the taxpayer's property (whether or not the value actually increases), generally, are not deductible. However, assessments may be deducted to the extent that the taxpayer can prove the assessment is allocable to maintenance.
Since Hall cannot prove that any of the assessment for the sewer system is allocable to maintenance, the assessment is not deductible.

13

What is the medical expense deduction threshhold?

10%

14

Doyle has gambling losses totaling $7,000 during the current year. Doyle's adjusted gross income is $60,000, including $3,000 in gambling winnings. Doyle can itemize the deductions. What amount of gambling losses is deductible?

Gambling losses are deductible as a miscellaneous itemized deduction, but are limited to the gambling winnings of $3,000.

15

Stein, an unmarried taxpayer, had adjusted gross income of $80,000 for the year, and qualified to itemize deductions. Stein had no charitable contribution carryovers and only made one contribution during the year.
Stein donated stock, purchased seven years earlier for $17,000, to a tax-exempt educational organization. The stock was valued at $25,000 when it was contributed.

What is the amount of charitable contributions deductible on Stein's current year income tax return?

$24,000 is correct. Although Stein can deduct the fair market value (FMV) of $25,000 for the stock contributed, the deduction is limited to 30% of his AGI, $80,000.

16

Banks Corp., a calendar year corporation, reimburses employees for properly substantiated qualifying business meal expenses.
The employees are present at the meals, which are neither lavish nor extravagant, and the reimbursement is not treated as wages subject to withholdings.
For 2015, what percentage of the meal expense may Banks deduct?

Meals and entertainment expenses are limited to 50 percent of their total amount. For meals and entertainment expenses that an employee is reimbursed by his/her employer, the percentage limit applies to the employer. However, if the reimbursement is included in the employee's income, the percentage limits apply to the employee and not the employer. Food and beverage expenses are only deductible, if:
1) the expenses are not lavish or extravagant;
2) the taxpayer (or one of his employees) is present when the food or beverages were provided; and
3) the expense relates directly to the conducting of business.
Assuming that a Banks Corp.'s employee was present when the meals were provided and that the expenses were for a bona fide business purpose, the meals expense can be deducted because they were not lavish or extravagant. Since the corporation reimbursed its employees, Banks Corp. may deduct 50 percent of the meals expense.

17

Baker, a sole proprietor CPA, has several clients that do business in Spain. While on a four-week vacation in Spain, Baker took a five-day seminar on Spanish business practices that cost $700. Baker's round-trip airfare to Spain was $600. While in Spain, Baker spent an average of $100 per day on accommodations, local travel, and other incidental expenses, for total expenses of $2,800.
What amount of educational expense can Baker deduct on Form 1040 Schedule C, "Profit or Loss From Business"?

When traveling outside the U.S. primarily for vacation (4 weeks total versus 1 week seminar), the cost of the trip is a nondeductible personal expense. Baker can deduct the registration fees for the business seminar and deduct the out of pocket expenses for the time that was directly related to the business seminar (1 week). 5 days x $100 per day plus $700 registration = $1200 of deductible education expense.

18

Destry, a single taxpayer, reported the following on his 2015 U.S. Individual Income Tax Return Form 1040:
Income:
Wages $ 5,000
Interest on savings account 1,000
Net rental income 4,000
Deductions:
Personal exemption $ 4,000
Standard deduction 6,300
Net business loss 16,000
Net short-term capital loss 2,000
What is Destry's net operating loss that is available for carry back or carry forward?

$7,000 is correct.
Wages $ 5,000
Interest on savings account 1,000
Net rental income 4,000
Net business loss (16,000)
Net short-term capital loss ( 2,000)
AGI ( 8,000)
Deductions:
Personal exemption $ 4,000
Standard deduction 6,300
Taxable Loss (18,300)
Adjustments to arrive at NOL carry back or carry forward (Use Form 1045, Schedule A for calculation purposes.)

$18,300 TAXABLE LOSS
Plus $ 4,000 Personal exemption, Destry cannot deduct his personal exemption.
Plus $5,300 Adjustment for deductions that are not connected to a trade or business or employment, such as the standard deduction of $6,300 reduced by the non-business income of $1,000 interests from savings.
Plus $ 2,000 Short term capital loss as adjusted by business capital gains and losses (-0-).
($ 7,000) Correct carry back or forward

19

A review of Bearing's year 2 records disclosed the following tax information:
Wages $ 18,000
Taxable interest and qualifying dividends 4,000
Schedule C trucking business net income 32,000
Rental (loss) from residential property (35,000)
Limited partnership (loss) (5,000)
Bearing actively participated in the rental property and was a limited partner in the partnership. Bearing had sufficient amounts at risk for the rental property and the partnership. What is Bearing's year 2 adjusted gross income?

Wages, interest, dividends, and Schedule C income are all taxable for a total of $54,000. $25,000 of the rental loss is allowed since Bearing actively participates in the rental real estate activity and his modified AGI does not exceed $100,000. However, the $5,000 passive loss from the partnership cannot reduce other income. Therefore, AGI is $29,000.

20

Which of the following statements regarding an individual's suspended passive activity losses is correct?

Suspended passive losses can be carried forward indefinitely, but they cannot be carried back.