surgent note Flashcards
(208 cards)
1
Q
rental real estate loss from active and portfolio income rule
A
Certain taxpayers may deduct real estate rental losses from active and portfolio income, provided that the taxpayers materially participate in the real property trade or business. Generally, up to $25,000 of losses from such activities may be deducted against active income and portfolio income, but the $25,000 deduction is reduced by 50% of the taxpayer’s adjusted gross income (AGI) in excess of $100,000.
2
Q
A has a basis of $6,000 for a 1/3rd interest in ABC partnership. A sells his interest for $14,000. What should A report as a gain on the sale?
A
Gain is recognized if cash distributed is in excess of the partner’s basis in the partnership interest. The sale for $14,000 results in a gain of $8,000 and a tax-free return of capital of $6,000. An investment in a partnership is a capital asset that gives rise to a capital gain.
3
Q
what r hot assets ?
A
The “hot assets” of a partnership include the unrealized receivables and inventory. These are the items that would generate ordinary income. Both Section 1231 assets and capital assets generate capital gains. Cash creates neither ordinary income nor capital gains.
4
Q
When a partner retires from a partnership, all debt relief and cash payments are first treated as
A
When a partner retires from a partnership, all debt relief and cash payments are first treated as a return of capital and then capital gains.
Since the debt relief and cash payments in Year 14 total $60,000 and Berk’s basis was $80,000, no gain is reported in Year 14.
5
Q
One of the accuracy-related penalties is for negligence or disregard of rules and regulations. The penalty is a percentage of the underpayment. What is that percentage?
A
The accuracy-related penalty combines several related penalties so that multiple penalties will not apply to a single understatement of tax.
Each of the accuracy-related penalties is 20% of the portion of the tax underpayment attributable to (1) negligence or disregard of rules and regulations; (2) substantial understatement of tax liability; (3) substantial valuation overstatement; or (4) substantial valuation understatement. The penalty will not apply if the taxpayer can show a reasonable basis for the position that was taken on the return.
6
Q
When are domestic wages subject to federal unemployment tax?
A
Over $1,000 total wages in a quarter
7
Q
A single taxpayer may enjoy the benefit of IRC Section 199A (qualified business reduction) without limitation if she does not have taxable income in excess of what amount?
A
single is 157500
joint filers is 315000
8
Q
Paul Pappas owns all of the stock of an S corporation which had previously been a C corporation. The S corporation had the following balances at the beginning of its tax year:
Accumulated adjustments account $ 8,000
Accumulated earnings and profits 10,000
Paul’s stock basis was $20,000 at the beginning of the tax year. The S corporation made a distribution of $19,000 to Paul during the year. What amount of the distribution is taxable to Paul?
A
10000
S corporation distributions are (1) tax-free to the extent of the accumulated adjustments account (previously taxed to Paul), (2) taxable to the extent of accumulated earnings and profits (C corporation earnings), (3) any remaining distributions are a return of capital.
9
Q
which deduction is allowed in computing undistributed personal holding company income from taxable income?
A
taxable income
deduct federal income tax
deduct net capital gain
10
Q
Which of the following corporate shareholder rights is enforceable by means of a derivative suit?
Compelling payment of properly declared dividends
Enforcing access to corporate records
Recovering damages from a third party
Protecting preemptive rights
A
If a corporation is harmed by someone, the directors of the corporation have the authority to bring an action on behalf of the corporation. When the corporation fails to bring such a suit, the shareholders have the right to sue on behalf of the corporation. This is called a derivative suit.
11
Q
when property is transferred to a corporaiton, the basis of any property received is ?
A
When property is transferred to a corporation, the basis of any property received is the fair market value (FMV) at the time of the transfer, unless the contribution qualifies for IRC Section 351 treatment, where the investor(s) receive control of the corporation under the 80% rule, as did Porter. In that case, the basis to the corporation is the same as the basis to the shareholder, or $50,000.
Corley only had a 10% interest after his contribution, so the basis of the property would be the FMV at the time of transfer of $500,000. The corporation’s total basis in property contributed would be $550,000.
12
Q
The estimated tax payment required in installments is the lesser of:
A
The estimated tax payment required in installments is the lesser of:
100% of the tax shown on the return for the preceding year or
100% of the tax shown for the current year.
13
Q
An individual taxpayer reported the following net long-term capital gains and losses:
Year Gain (Loss)
1 ($5,000)
2 1,000
3 4,000
The amount of capital gain that the individual taxpayer should report in year 3 is:
A
A capital gain or loss is that gain or loss arising from the sale or exchange of a capital asset. Capital gains and losses, once determined, must be classified as either short term or long term depending on the holding period of the asset given up. One year or less is considered short term; more than 12 months is long term. Long-term gains and losses are netted against each other, and short-term gains and losses are netted against each other. The results are then netted against each other. If the taxpayer has a net capital loss, up to $3,000 may be deducted in the current year as a deduction toward adjusted gross income; any remaining capital loss will be carried forward indefinitely and the carryover will be treated as STCL (short-term capital loss) or LTCL (long-term capital loss) depending on its origin.
Therefore, a net LTCL of $3,000 was deducted in year 1, with a net LTCL carried forward to year 2. Since the net amount for year 2 is an LTCG (long-term capital gain) of $1,000, the year 1 carryforward must have been completely used. The taxpayer should report a net LTCG of $4,000 for year 3.
14
Q
how to treat S corporation distribution ?
A
S corporation distributions are (1) tax-free to the extent of the accumulated adjustments account (previously taxed to Paul), (2) taxable to the extent of accumulated earnings and profits (C corporation earnings), (3) any remaining distributions are a return of capital.
Since Packer Corp. has been an S corporation since its inception, it has no accumulated E&P. Distributions by S corporations with no accumulated E&P are tax-free up to the adjusted basis of the stock with any excess taxable as capital gains. In this case, the $8,000 distribution did not exceed Starr’s basis and, therefore, was not taxable.
15
Q
name 3 facts of limited liability companies ?
A
The following three statements are all true for LLCs:
LLCs have complete pass-through of tax attributes generated by operations.
Every member is allowed to participate in an LLC.
Every member of an LLC has liability protection.
Therefore, the statement, “None of the members of an LLC have liability protection,” is incorrect as it directly contradicts the third item in the list.
16
Q
Magic Corp., a regular C corporation, elected S corporation status at the beginning of the current year. It had an asset with a basis of $40,000 and a fair market value (FMV) of $85,000 on January 1 of the current year. The asset was sold this year for $95,000. Magic’s corporate tax rate was 21%. What was Magic’s tax liability as a result of the sale?
A
Generally an S corporation is not subject to income tax. The company’s taxable income or loss flows through to the shareholders and is reported on their individual income tax returns. One exception to this is the built-in gains tax. When a regular C corporation converts to S corporation status, a tax may be imposed on the net appreciation of the assets owned at the time of conversion if they are sold within five years. The built-in gains tax is at the highest corporate tax rate.
Magic’s tax liability as a result of the sale is as follows:
Fair market value of asset at conversion $85,000
Basis (40,000)
Unrealized built-in gain $45,000
Sale price $95,000
Basis (40,000)
Realized gain $55,000
Built-in gains tax:
Lower of unrealized built-in gain or realized gain $45,000
x Tax rate x 0.21
Built-in gains tax $ 9,450
17
Q
What is the penalty if fraud is the reason for failure to timely file?
A
A penalty of 15% per month (with a maximum of 75%) of the deficiency on the tax return (when filed)
18
Q
Clip-Joint, an S corporation hair salon, distributes land with an adjusted basis of $10,000 and a fair market value of $50,000 to its sole shareholder, Louise. Louise’s basis in the corporate stock before distribution is $90,000. What is Louise’s basis in the land after the distribution?
A
Louise’s basis in the land is $50,000, its FMV at the time of distribution. A property distribution is treated as if the corporation sold the property to the shareholder at its fair market value. Clip-Joint will recognize a $40,000 gain on the distributions which it will pass to Louise.
19
Q
how to calculate simple trust ‘s taxable income ?
A
Simple trusts (1) distribute all trust income ($1,600 in this question), (2) do not deduct charitable contributions, and (3) do not distribute trust principal. In addition, a personal exemption is allowed of $300 for a trust that is required to distribute all of its income currently (i.e., simple trusts).
capital gain plus taxable interest minus trustee fee (allocated proportionately between taxable and nontaxable income) minus distribution (allocated proportionately between taxable and nontaxable income) minus exemption $300
20
Q
Packer Corp., an accrual-basis, calendar-year S corporation, has been an S corporation since its inception. Starr was a 50% shareholder in Packer throughout the current year and had a $10,000 tax basis in Packer stock on January 1. During the current year, Packer had a $1,000 net business loss and made an $8,000 cash distribution to each shareholder. What amount of the distribution was includible in Starr’s gross income?
A
Since Packer Corp. has been an S corporation since its inception, it has no accumulated E&P. Distributions by S corporations with no accumulated E&P are tax-free up to the adjusted basis of the stock with any excess taxable as capital gains. In this case, the $8,000 distribution did not exceed Starr’s basis and, therefore, was not taxable.
Basis on January 1 $10,000
Pro rata share of current loss
(50% x $1,000) (500)
Distribution (8,000)
--------
Basis on December 31 $1,500
21
Q
what increase the accumulated adjustment account and what decrease the accumulated adjustment account of S corp ?
A
Generally, income items such as interest and dividends will increase the AAA (accumulated adjustments account) of an S corporation. Capital contributions and distributions have no effect on the AAA account, and charitable contributions would decrease the AAA account.
22
Q
A taxable state tax refund
how to treat that when doing ATM ?
A
This adjustment will reduce AMT income
23
Q
at what level do domestic wages become subject to Social Security and Medicare tax?
A
Over $2,100 to one employee in a year
24
Q
For nonprofit organizations that are not private foundations or religious organizations, an annual information report to the IRS is not required until the group’s gross receipts exceed
A
50000 annually
25
Baker, an individual, owned 100% of Alpha, an S corporation. At the beginning of the year, Baker's basis in Alpha Corp. was $25,000. Alpha realized ordinary income during the year in the amount of $1,000 and a long-term capital loss in the amount of $3,000 for this year. Alpha distributed $30,000 in cash to Baker during the year. What amount of the $30,000 cash distribution is taxable to Baker?
$0
$5,000
$4,000
$7,000
Distributions to S corporation shareholders cannot reduce stock basis below zero. Distributions in excess of basis are taxable. (IRC Section 1368)
Items that increase S corporation shareholder basis include income of the corporation that is not separately computed. In this case, there is $1,000 of ordinary income. (IRC Section 1367(a)(1))
Items that decrease S corporation shareholder basis include distributions up to but not exceeding basis and loss and deduction items of the corporation that are separately stated. In this case, these are $3,000 long-term capital loss and $23,000 of the cash distribution. (IRC Section 1367(a)(2))
Stock basis is adjusted annually, as of the last day of the S corporation year, in the following order:
Increased for income items and excess depletion;
Decreased for distributions;
Decreased for non-deductible, non-capital expenses and depletion; and
Decreased for items of loss and deduction.
Therefore, $4,000 of the cash distribution is taxable to Baker. The long-term capital loss can’t be deducted in the current year as the cash distribution has already reduced the stock basis to zero.
26
does dividends received from unrelated domestic corporation considered personal holding company income .?
dividends received from an unrelated domestic corporation is considered personal holding company income.
27
In Year 8, Clyde formed an S corporation by contributing $5,000 in stock and $10,000 in loans. In Year 8, the corporation had a net loss of $5,000 leaving Clyde with no stock basis and $10,000 in debt basis. Clyde expects the S corporation to have a small loss in Year 9 also. Although Clyde knows he has a debt basis he still decides to take a $3,000 distribution in Year 9. Clyde will have to report:
$3,000 as a dividend.
$3,000 as a capital gain.
$5,000 as a capital loss.
$2,000 as a capital loss.
Although debt provides basis for the purpose of deducting losses, it is not considered basis for purposes of distributions. The $3,000 will be treated as a capital gain because Clyde had no stock basis. Had the $3,000 been treated as a debt repayment, instead of as a distribution, Clyde would have recognized no income
28
net operating loss carry rule for corporation ?
net operating losses (NOLs) may no longer be carried back. NOLs are now carried forward indefinitely subject to an annual limitation of 80% of taxable income.
29
For property contributed to a partnership after June 8, 1997, a partnership must hold contributed property how long before distributing it to avoid precontribution gain being taxed to the contributing partner?
7 years
30
what is corporation limit for charitable contribution ?
The corporate limit for charitable contributions is 10% of taxable income (TI) computed before the deductions for contributions, dividends-received deduction, NOL carryback, and capital loss carryback
31
Withholding federal income taxes for household employees is required only if requested by
Withholding federal income taxes for household employees is required only if requested by the employee and agreed to by the employer. Such withholding would be reported on Schedule H and filed with Form 1040.
32
A taxpayer reports a deduction for depreciation of business assets under the MACRS depreciation system on his tax return for the current tax year. Match the phrase that best describes the status for alternative minimum tax (AMT) computations of this tax item.
An AMT preference or adjustment which is a deferral item for the AMT
33
Wages paid for domestic services are subject to special rules for determining whether they are subject to payroll taxes. For 2018, at what level do domestic wages become subject to Social Security and Medicare tax?
Over $2,100 to one employee in a year
34
An accrual-basis corporation is allowed to take a charitable contribution deduction in the year prior to payment if the contribution was authorized by the board of directors in the prior year and paid within
An accrual-basis corporation is allowed to take a charitable contribution deduction in the year prior to payment if the contribution was authorized by the board of directors in the prior year and paid within 2-1/2 months of the prior year-end.
35
Job, Inc., had taxable income in year 15 of $8,000. Due to a downturn in its core business operations, Job isn't sure if he is expected to make estimated tax payments for year 16. Which of the following statements is correct concerning Job making estimated tax payments for year 16?
Job must make installment payments of estimated tax if the company expects estimated tax to be $500 or more for year 16.
Job must make installment payments of estimated tax because the company had taxable income in the prior year.
Job must make installment payments of estimated tax if the company expects income or taxable income to be $500 or more for year 16.
Job must make installment payments of estimated tax if the company expects income to be $500 or more for year 16.
Job must make installment payments of estimated tax if the company expects estimated tax to be $500 or more for year 16.
36
When should a corporation make estimated tax payments?
By the 15th day of the 4th, 6th, 9th, and 12th months of a corporation's tax year
37
Reid, Welsh, and May are equal partners in the RWM partnership. Reid's basis in the partnership interest is $60,000. Reid receives a liquidating distribution of $61,000 cash and land with a fair market value of $14,000 and an adjusted basis of $12,000. What gain must Reid recognize upon the liquidation of his partnership interest?
$0
$1,000
$13,000
$15,000
Although generally no gain or loss is recognized by a partner upon the liquidation of a partnership interest, there are exceptions:
Gain is recognized if cash distributed is in excess of the partner's basis in the partnership interest.
Loss is recognized if no property other than cash, unrealized receivables, and inventory is distributed and the cash and basis of the unrealized receivables and inventory received are less than the partner's basis in the partnership interest.
Reid's cash distribution exceeded his basis in his partnership interest, so he recognizes gain computed as follows:
Liquidating cash distribution $61,000
Basis in partnership interest (60,000)
Gain on liquidation $ 1,000
38
state tax refund
how to treat this item when calculating ATM income ?
tax refund is a negative adjustment
mean that it will decrease alternative minimum taxable income
39
state tax refund
how to treat this item when calculating ATM income ?
tax refund is a negative adjustment
mean that it will decrease alternative minimum taxable income
40
what increase distributation net income ?
what decrease distributable net income ?
items that increase distributable net income are personal exemption, net tax exempt interest , net capital loss deduction
items that decrease net capital gain are net capital gain
41
After a bankruptcy petition is filed, what will happen
After a bankruptcy petition is filed, a trustee will be appointed by the bankruptcy judge. The trustee will represent the creditors and will seek to seize and sell the debtor's assets so as to pay the listed creditors as much as possible out of the bankrupt's estate. The bankruptcy judge will order a stay preventing individual creditors from initiating their own collection proceedings; all such actions must be taken by the trustee.
42
transportation expense deductiable rule
between his or her residence and a temporary work location outside the metropolitan area where the taxpayer lives and normally works.
one or more regular work locations away from his or her residence, ; between the residence and a temporary work location in the same trade or business, regardless of the distance.
If a taxpayer's residence is his or her principal place of business for purposes of IRC Section 280A(c)(1)(A) (i.e., he or she is self-employed and qualifies for the home-office deduction), the taxpayer may deduct daily transportation expenses incurred in going between the residence and another work location in the same trade or business, regardless of whether the other work location is regular or temporary and regardless of the distance.
43
Sometimes the distribution to a shareholder in a C corporation is a dividend. When is such a distribution a dividend?
The distribution to the shareholder is a dividend to the shareholder to the extent of the earnings and profits of the corporation. The difference between fair market value and the basis in the corporation may be taxable to the shareholder, but not as a dividend.
44
can a S corp own a C corp ?
an S corporation may now own stock in a C corporation without any percentage limit.
45
Bobby Bell, married filing jointly, has adjusted gross income of $62,000 (including his salary and his wife's salary, interest, and dividends). In addition, Bobby and his wife had a capital loss of $8,000 and capital gains of $5,000 and $1,000. What is Bobby's adjusted gross income after considering the capital gains and losses?
Bobby Bell, married filing jointly, has adjusted gross income of $62,000 (including his salary and his wife's salary, interest, and dividends). In addition, Bobby and his wife had a capital loss of $8,000 and capital gains of $5,000 and $1,000. What is Bobby's adjusted gross income after considering the capital gains and losses?
46
Evan, an individual, has a 40% interest in EF, an S corporation. At the beginning of the year, Evan's basis in EF was $2,000. During the year, EF distributed $100,000 and reported operating income of $200,000. What amount should Evan include in gross income?
Shareholders of an S corporation include a pro rata share of the corporation's nonseparately and separately stated items of income or expense on their personal tax return. In this case, Evan includes 40% of EF's operating income or $80,000 ($200,000 × 0.40 = $80,000) on his personal tax return. None of Evan's $40,000 share of distributions ($100,000 × 0.40 = $40,000) would be taxable since his distributions did not exceed his new basis.
```
Beginning basis $ 2,000
Share of operating income 80,000
Share of distributions (40,000)
--------
Ending basis $42,000
In determining whether a distribution exceeds basis (and is taxable), the ordering rules allow basis to be increased by current-year income before reducing basis by distributions
```
47
Sandra received a nonqualified incentive stock option from her employer, County Bank. When would she recognize taxable income?
A nonqualified stock option plan requires employee recognition of the bargain element on the exercise date. The bargain element is the difference between the strike price and the fair market value on the exercise date
48
what is a fixture ?
A fixture is personal property that is attached to real property. The table is not a fixture because it is not attached to real property.
ex: ceiling lap, central air conditioning unit, built in bench in the patio
49
charitable contribution carry over rule?
carried forward 5 years.
50
order of adjustment of an S corp shareholder's stock
The basis of an S corporation shareholder's stock (generally, its cost) is adjusted as follows and, except as noted, in the order listed. In addition, basis may be adjusted under other provisions of the Internal Revenue Code:
Basis is increased by (a) all income (including tax-exempt income) reported on IRS Schedule K-1 and (b) the excess of the deduction for depletion (other than oil and gas depletion) over the basis of the property subject to depletion.
Basis is decreased by property distributions (including cash) made by the corporation (excluding dividend distributions reported on IRS Form 1099-DIV and distributions in excess of basis) reported on Schedule K-1, box 16, code D, minus the amount of such distributions in excess of the basis of the shareholder's stock.
Basis is decreased by (a) nondeductible expenses and (b) the depletion deduction for any oil and gas property held by the corporation, but only to the extent the shareholder's pro rata share of the property's adjusted basis exceeds that deduction.
Basis is decreased by all deductible losses and deductions reported on Schedule K-1.
Note that the taxpayer can make an election to deduct items in (4) in the list above before nondeductible items in (3).
In this case, Paige’s basis in the S corporation would be $30,000 at year-end, which is the $10,000 (her beginning-of-year basis) plus $50,000 (25% share of the S corporation’s $200,000 income) less the $30,000 cash distribution.
51
artisan liten and mechanic lien
An artisan's lien is a common law security device whereby a creditor can recover for work done on personal property of the debtor. If the debtor fails to pay for the work performed, the creditor can retain possession of the property and sell it in satisfaction of the lien.
An artisan's lien is a possessory lien. If the lien holder voluntarily returns possession of the property to the debtor, the lien no longer exists.
Finally, a mechanic's lien arises from the making of improvements to real property.
52
For the current year, the Herb Company had an increase in its liabilities. Does the increase in its liabilities affect the basis of the owners if the company is a partnership or is an S corporation?
An S corporation shareholder does not include a proportionate share of S corporation debt in his basis. A partner's basis is increased by his share of an increase in liabilities.
53
how many days for the rule of PMSI ? give example
| let say the good was purchased and delivered on June 15
Under Section 9-312 of the Uniform Commercial Code (U.C.C.), a purchase money security interest (PMSI) in noninventory (e.g., equipment) takes priority over all other competing security interests in the same collateral if the PMSI is perfected by filing a financing statement properly within a 10-day grace period, that is, within 10 days after June 15, 20X1. Since the PMSI was perfected June 24, it has priority over the non-PMSI security interest filed on June 20. A nonpurchase money security interest is subject to the date order; that is, first to file or perfect wins. The other existing security interests will have priority over any subsequent or inferior security interests.
54
For which of the following entities is the owner's basis increased by the owner's share of profits and decreased by the owner's share of losses but is not affected by the entity's bank loan increases or decreases?
S corporation
C corporation
Partnership
Limited liability company
The owner's adjusted basis in the stock of an S corporation is increased by the owner's share of profits and decreased by the owner's share of losses, and is not affected by the entity's bank loan increases and decreases.
The owner's adjusted basis in a partnership is increased by the owner's share of profits and decreased by the owner's share of losses, and is also increased for the partner's share of partnership debt.
The owner's adjusted basis in a C corporation's stock is not adjusted for income or loss of the C corporation.
The members of a limited liability company do not bear personal liability for its debts.
55
long term capital loss
how to treat that in a corporation ?
long term capital loss can not be used to offset corporate taxable income but must be carried forward and matched with future capital gain
56
On August 1, year 16, Graham purchased and placed into service an office building costing $264,000, including $30,000 for the land. What was Graham's MACRS deduction for the office building in year 16?
$9,600
$6,000
$3,600
$2,250
```
Total cost $264,000
Less: Cost of land - 30,000
Depreciable basis $234,000
of building ========
Commercial buildings placed in service after May 12, 1993, are depreciated over 39 years using straight-line depreciation and mid-month convention. While the depreciation is $6,000 per year, since it was placed in service in August, Graham can only take 4.5 months of depreciation in year 16. That is half the month of August (mid-month) and all of September, October, November, and December.
```
$234,000 / 39 years = $6,000 per year
4.5
$6,000 x ----- months = $2,250
12
57
Gary Berg, a farmer, exchanges land with a basis of $40,000 and a value of $50,000 for land with a value of $44,000 plus $6,000 cash. The basis of the land acquired by Gary is:
$40,000.
$44,000.
$46,000.
$50,000.
In a like-kind exchange, the basis of property received is the basis of the property given up plus any gain recognized, plus boot (cash or property not of a like kind) paid, less any loss recognized, less boot received. The basis of the land received is $40,000 ($40,000 + $6,000 gain − $6,000 boot received). The gain of $6,000 is the lesser of the realized gain of $10,000 or boot received of $6,000. Note that under the Tax Cuts and Jobs Act of 2017 (TCJA), like-kind exchanges are applicable only to business and investment real estate; like-kind exchanges of personal property are no longer eligible for deferment of gains.
58
A taxpayer reports a deduction for contributions to an Individual Retirement Account (IRA) for the current tax year. Which phrase best describes the status of this tax item for alternative minimum tax (AMT) computations?
Deductions for IRA contributions are not preferences or adjustments for AMT.
59
Which of the following items is not listed on Schedule K, Form 1120S, as a separately stated item?
Net income from rental real estate
Royalty income
Pension expense
Interest expense related to portfolio income
Expenses related to pensions, profit sharing, etc. are included in the computation of ordinary income and are not on Schedule K.
60
Tom Lewis, an individual taxpayer, sold his personal automobile (never used for business purposes) for $5,000 in the current year. He purchased the automobile five years earlier for $10,000. Which of the following is the correct treatment of this transaction on Tom's current-year tax return (assuming that Tom's only other source of income was from wages)?
Tom had a $5,000 net loss ($5,000 sales price minus $10,000 basis) on the sale of his automobile. The loss is considered a personal loss and is not deductible on his individual return.
61
Jim Nix gave a parcel of land to his niece, Jane. Jim had paid $15,000 for the land and the value on the date of the gift was $12,000. Jim paid a gift tax of $1,000 on the transfer to Jane. Subsequently, Jane sold the land for $10,000. Jane's basis for computing the loss is:
The basis of property acquired by gift when it is subsequently sold at a loss is the lesser of (i) the donor's basis or (ii) value at the time of the gift. Because the land had declined in value while held by Jim, no gift tax is added to the basis.
62
Freeman, a single individual, reported the following income in the current year:
Guaranteed payment from services rendered to a partnership: $50,000
Ordinary income from an S corporation: $20,000
What amount of Freeman’s income is subject to self-employment tax?
Only the $50,000 guaranteed payment paid to Freeman is subject to self-employment tax.
Guaranteed payments for services performed by a partner are subject to self-employment tax at the partner level.
A shareholder will report his share of the ordinary income from an S corporation whether it is distributed or not, and this income is not subject to self-employment tax at the shareholder level.
63
On May 1 of the prior year, Baker purchased equipment with a five-year useful life for a cost of $10,000. Baker adopted the MACRS depreciation system and did not utilize any special depreciation deductions. On March 1 of the current year, Baker sold the equipment. The MACRS depreciation schedule for five-year property is listed below:
First year: 20.00%
Second year: 32.00%
Third year: 19.20%
What amount of depreciation can Baker deduct in the current year?
In most cases, a half-year of cost recovery is allowed under MACRS in the year of disposition or retirement. Current-year depreciation would be $1,600 ($10,000 × 32% × 6/12).
64
Within how many months after the date of a decedent's death is the federal estate tax return (Form 706) due if no extension of time for filing is granted?
A federal estate tax return, if required, is due nine months after the date of the decedent's death.
An executor may request and obtain from the IRS an extension of time for filing Form 706 (Federal Estate Tax Return) up to an additional six months.
65
Gene and Olive Olson are married, under age 50, and file a joint return in 2018. The Olsons are both active participants in qualified retirement plans. The Olsons have adjusted gross income of $111,000 for 2018 and each contributed $5,500 to a traditional IRA. What is the deduction for IRA contributions for the Olsons in 2018?
In 2018, the phaseout of the IRA deduction for married taxpayers participating in another pension plan filing jointly exists for AGI between $101,000 and $121,000. Since their AGI is halfway between $101,000 and $121,000, only half of the combined contribution of $11,000 is deductible.
$5,500
66
Under the position taken by a majority of the courts, to which third parties will an accountant who negligently prepares a client's financial report be liable?
Only those third parties in privity of contract with the accountant
All third parties who relied on the report and sustained injury
Any foreseen or known third party who relied on the report
Any third party whose reliance on the report was reasonably foreseeable
If the financial reports are primarily for the benefit of a third party, the CPA may be held liable. The third party may be considered a party to the contract.
67
Ordinary and necessary administration expenses paid by the fiduciary of an estate are deductible:
Ordinary and necessary administration expenses are deductible on either the fiduciary income tax return (Form 1041) or the federal estate tax return (Form 706), but not both.
In order to deduct the expense on Form 1041, the estate must file a waiver of the death tax deduction on Form 706 and Form 1041.
While the expenses cannot be deducted twice, they can be allocated between the Form 1041 and Form 706.
68
Beckler & Associates, CPAs, audited and gave an unmodified opinion on the financial statements of Queen Co. The financial statements contained misstatements that resulted in a material overstatement of Queen's net worth. Queen provided the audited financial statements to Mac Bank in connection with a loan made by Mac to Queen. Beckler knew that the financial statements would be provided to Mac. Queen defaulted on the loan. Mac sued Beckler to recover for its losses associated with Queen's default. Which of the following must Mac prove in order to recover?
Beckler was negligent in conducting the audit.
Mac relied on the financial statements.
This question deals with the concept of professional liability of the CPA to a foreseeable third-party beneficiary. Under this concept, the CPA can be held liable to a third party who can be foreseen as a user of the financial statements under ordinary common law negligence and lack of due professional care in the performance of the audit.
In order to recover from Beckler, Mac Bank must prove that the financial statements contained a material misrepresentation (given), that the user suffered damage (the default—given), and both:
Beckler was negligent in conducting the audit and
Mac relied on the financial statements.
69
what is section 197 intangible ?
Section 197 intangible costs include goodwill, going concern value, patents, copyrights, franchises, trademarks, trade names, and various other intangibles. Generally, these intangibles must have been obtained in a business acquisition.
The taxpayer must amortize these costs if the intangibles are held in connection with a trade or business, or in an activity engaged in for the production of income.
Geological and geophysical costs have an amortization period of 2–7 years, depending on the size of the entity. Pollution control facilities may be amortized over 5 years (60 months). Research and experimental costs have an optional write-off period of 5 to 10 years.
70
A party involuntarily petitioned into bankruptcy under Chapter 7 of the Federal Bankruptcy Code who succeeds in having the petition dismissed could recover:
A party involuntarily petitioned into bankruptcy under Chapter 7 of the Federal Bankruptcy Code who succeeds in having the petition dismissed could recover:
court costs and attorneys' fees,
compensatory damages, and
punitive damages.
71
What tax year must the S corporation generally adopt?
Because most, if not all, of the shareholders will be on a calendar year, the S corporation must also adopt a calendar year to avoid income shifting. (Remember, this is a pass-through entity.) There is a limited exception for tax deferral which would be not in excess of three months.
72
Taxpayers using a flexible spending account are allowed:
a $500 carryover balance to the following year or a grace period for the unused balance through March 15 of the following year.
73
A self-employed taxpayer had gross income of $57,000. The taxpayer paid self-employment tax of $8,000, health insurance of $6,000, and $5,000 of alimony related to a divorce decree executed in January 2019. The taxpayer also contributed $2,000 to a traditional IRA. What is the taxpayer's adjusted gross income?
The self-employed taxpayer can deduct one-half of the self-employment tax ($4,000) for AGI, 100% of the health insurance cost ($6,000), and none of the alimony (see note below). The taxpayer is also able to deduct the $2,000 for the IRA contribution. The taxpayer's AGI is $45,000 ($57,000 − $4,000 − $6,000 − $2,000).
Note: For any divorce or separation agreement executed prior to January 1, 2019, alimony and separate maintenance payments are deductible by the payor spouse and includible in income of the payee spouse. For agreements executed after December 31, 2018, alimony and separate maintenance payments are not deductible by the payor spouse nor includible in income of the payee spouse.
74
During the current year, Mann, an unmarried U.S. citizen, made a $5,000 cash gift to an only child and also paid $25,000 in tuition expenses directly to a grandchild's university on the grandchild's behalf. Mann made no other lifetime transfers. Assume that the gift tax annual exclusion is $15,000. For gift tax purposes, what was Mann's taxable gift?
0
Each individual taxpayer can make gifts to any individual in any year up to $15,000 and the entire amount is excluded from gift tax. Tuition payments made to an educational organization on another's behalf are not subject to the federal gift tax. Therefore, the two gifts made by Mann are not subject to federal gift tax.
75
Dowd, Elgar, Frost, and Grant formed a general partnership. Their written partnership agreement provided that the profits would be divided so that Dowd would receive 40%; Elgar, 30%; Frost, 20%; and Grant, 10%. There was no provision for allocating losses. At the end of its first year, the partnership had losses of $200,000. Before allocating losses, the partners' capital account balances were: Dowd, $120,000; Elgar, $100,000; Frost, $75,000; and Grant, $11,000. Grant refuses to make any further contributions to the partnership. Ignore the effects of federal partnership tax law.
After losses were allocated to the partners' capital accounts and all liabilities were paid, the partnership's sole asset was $106,000 in cash. How much would Elgar receive on dissolution of the partnership?
If after losses are allocated to partners' capital accounts the partnership has $106,000 in cash, Elgar would receive $37,000. The computation is as follows:
Elgar's share of loss .30 x $200,000 = $60,000
Grant's share of loss .10 x $200,000 = $20,000
$20,000 - $11,000 (his contribution) = $9,000
Since Grant will not contribute, the additional $9,000 must be made up by the other three partners. Therefore, Elgar's contribution of $100,000 is reduced by his loss ($100,000 - $60,000 = $40,000) and then reduced by the $3,000 share of Grant's loss ($40,000 - $3,000 = $37,000).
76
Which of the following statements describes the same characteristic for both an S corporation and a C corporation?
Both corporations can have more than 100 shareholders.
Both corporations have the disadvantage of double taxation.
Shareholders can contribute property into a corporation without being taxed.
Shareholders can be citizens of either the United States or foreign countries.
Shareholders can contribute property into both an S corporation and a C corporation without being taxed.
Only a C corporation can have more than 100 shareholders or have a nonresident alien as a shareholder. Only a C corporation has the disadvantage of double taxation when it pays dividends to its shareholders.
77
Green is self-employed as a human resources consultant and reports on the cash basis for income tax purposes. Select the appropriate tax treatment on Form 1040 (U.S. Individual Income Tax Return) for personal life insurance premiums paid by Green.
Fully deductible on Form 1040 to arrive at adjusted gross income
Reported in Schedule A, Itemized Deductions (deductibility subject to threshold of 7.5% of adjusted gross income)
Reported in Schedule A, Itemized Deductions (deductibility subject to threshold of 2% of adjusted gross income)
Not deductible
No deduction is allowed for premiums paid by an insured for personal life insurance.
Regulation Section 1.262-1(b)(1)
78
The Jacksons, who file a joint return, actively participate in a solely-owned rental real estate activity that produces a $30,000 loss during the current year. Their adjusted gross income was $120,000 before considering the rental activity. How much of the rental loss, if any, are the Jacksons entitled to deduct?
Certain taxpayers may deduct real estate rental losses from active and portfolio income. This treatment applies to taxpayers who materially participate in a real property trade or business. Both individuals and closely held C corporations may qualify.
Other taxpayers who qualify as active participants in a rental real estate activity may also deduct losses from such activities against active and portfolio income.
Generally, up to $25,000 of losses from such activities may be deducted against active income and portfolio income ($12,500 for married taxpayers filing separately).
This $25,000 deduction limit is reduced by 50% of the taxpayer’s AGI in excess of $100,000.
Step 1: Calculate the amount in excess of $100,000:
$120,000 (AGI) − $100,000 = $20,000
Step 2: multiply the amount in excess of step 1 by 50%:
$20,000 × 50% = $10,000
Step 3: Subtract the maximum by the excess calculated in step 2:
$25,000 − $10,000 = $15,000
79
A trust has distributable net income of $14,000 and distributes $20,000 to the sole beneficiary. What amounts are taxable to the trust and to the beneficiary?
Distributable net income (DNI) determines the amount and character of the income to be reported by the beneficiaries. In this case, all the DNI was distributed plus an additional $6,000. The DNI is the taxable amount ($14,000). For trusts, whoever gets the money is taxed on it. In this case, the trust kept no money and the beneficiaries received all of the taxable income from the trust.
80
As part of a complete liquidation, a C corporation distributed the following assets to unrelated individual shareholders:
Basis FMV
Investment land $500,000 $540,000
Inventory 130,000 150,000
Marketable securities 70,000 20,000
What is the amount of capital gain or loss, if any, recognized by the corporation as a result of the liquidation?
Inventory is not a capital asset, so it is not part of the computation here. A corporation recognizes gain or loss on the liquidating distribution as if the property were sold at its fair market value. The land would have a capital gain of $40,000 and the securities would have a loss of $50,000, for a net capital loss of $10,000.
81
Clark and Hunt organized Jet Corp. with authorized voting common stock of $400,000. Clark contributed $60,000 cash. Both Clark and Hunt transferred other property in exchange for Jet stock as follows:
Other Property:
Fair Percentage
Adjusted Market of Jet Stock
Basis Value Acquired
Clark $ 50,000 $100,000 40%
Hunt 120,000 240,000 60%
What was Clark's basis on Jet stock?
Clark's Basis in Jet Stock:
```
Cash $ 60,000
Adjusted basis-property 50,000
Clark's basis in Jet Stock $110,000
========
No gain or loss is recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in such corporation and immediately after the exchange the persons are in control of the corporation. Control means 80% or more of the corporation. Since Clark and Hunt own 100% of the corporation, no gain is to be recognized. The basis of Clark's stock has to be the carryover basis, which is cash $60,000 + adjusted basis of the other property ($50,000) = $110,000.
```
82
A Trust had rental income of $20,000 and taxable interest income of $10,000. The rents constituted 60% of DNI and taxable interest 40% of DNI. The trust distributed $6,000 of DNI to its sole beneficiary, Carl. What amount should Carl report as rental and interest income from the trust?
Carl is deemed to have received partly rental income and partly interest income. The allocation of the $6,000 is based on the percentage of DNI (distributable net income) from rentals and interest. Beneficiaries are taxed on their share of the trusts income distributed to them, but not more than their share of DNI of the trust.
83
A first-time homebuyer, for purposes of favorable IRA distribution treatment, is one who has not had a present ownership interest in another principal residence for what minimum period before a new principal residence is purchased?
Two years
84
For a cash-basis taxpayer, gain or loss on a year-end sale of listed stock arises on the:
trade date
85
On July 8, Ace, a refrigerator wholesaler, purchased 50 refrigerators. This comprised Ace’s entire inventory and was financed under an agreement with Rome Bank that gave Rome a security interest in all refrigerators on Ace’s premises, all future-acquired refrigerators, and the proceeds of sales. On July 12, Rome filed a financing statement that adequately identified the collateral. On August 15, Ace sold one refrigerator to Cray for personal use and four refrigerators to Zone Co. for its business. Which of the following statements is correct?
The refrigerators sold to Zone will be subject to Rome’s security interest.
The refrigerator sold to Cray will not be subject to Rome’s security interest.
The security interest does not include the proceeds from the sale of the refrigerators to Zone.
The security interest may not cover after-acquired property even if the parties agree
The refrigerator sold to Cray will not be subject to Rome’s security interest.
A buyer in the ordinary course of business from a merchant seller takes the property free of any security interest. Consequently, the refrigerators sold to both Zone and Cray will not be subject to the security interest
86
In the current year, Tatum exchanged farmland for an office building. The farmland had a basis of $250,000, a fair market value (FMV) of $400,000, and was encumbered by a $120,000 mortgage. The office building had an FMV of $350,000 and was encumbered by a $70,000 mortgage. Each party assumed the other's mortgage. What is the amount of Tatum's recognized gain?
Gain is recognized to the extent of boot (cash, other assets, or mortgages given up) received, but not to exceed the gain realized.
Fair value of assets received--Building $350,000
Mortgage given up 120,000
Mortgage assumed (70,000)
Net value received $400,000
Adjusted basis of farmland 250,000
Realized gain $150,000
Boot given: Mortgage assumed $(70,000)
Boot received: Mortgage given up 120,000
Net boot $ 50,000
Net boot is less than realized gain, therefore $50,000 is the recognized gain.
87
On December 1, Year 4, Jim Miller placed in service office furniture (7-year life), which cost $28,000. Jim did not elect Section 179 expensing or bonus depreciation. The office furniture was the only asset purchased during the year. What amount can Jim claim as depreciation under MACRS for Year 4?
First-year depreciation under MACRS is based on double declining balance. A 7-year life would yield depreciation of 2/7 the first year. Because the purchase was made in December, the mid-quarter convention is used and 1-1/2 months of depreciation is recorded. Depreciation is $1,000 ($28,000 × 2/7 × 1.5/12).
88
Alice Lewis received $3,000 in unemployment benefits in the current year. In addition, her employer made a $200 contribution to the unemployment insurance fund on her behalf during the year. How much should Alice include in gross income in the current year as a result of the unemployment benefit payments?
All unemployment compensation received by a taxpayer is taxable in the year received by a taxpayer. Contributions to the unemployment insurance fund on the behalf of an employee by an employer do not affect the taxable compensation amount of the employee.
89
An S corporation has two shareholders who are also employees of the corporation. Shareholder A owns 20 shares and shareholder B owns 90 shares. The total number of shares issued and outstanding is 2,000. The corporation pays the health insurance premiums for all its employees and families. The cost of family coverage is $5,300. The corporation pays for family coverage for both shareholders. Because the company paid for health insurance, which of the following amounts would be reported to shareholder A as his income?
If the shareholder owns less than 2% of the company, none of the premiums would be taxable. If they own more than 2%, then insurance premiums paid by the S corporation are fully taxable. Shareholder A owns 1% (20 ÷ 2,000) and therefore has zero income. Note that shareholder B owns 4.5% (90 ÷ 2,000) and would have to declare the premium as income if the question had asked about shareholder B.
90
Max sold his 10% interest in the Ajax partnership for $60,000. Ajax had $150,000 of unrealized receivables. Max had an adjusted basis in the partnership of $40,000. As the result of the sale, Max should report:
Max must recognize $15,000 ordinary income under IRC Section 751 because Ajax had “hot assets” (unrealized receivables and inventory). Any gain in excess of that attributed to hot assets is a capital gain.
91
A taxpayer owns 50% of the stock of an S corporation and materially participated in the corporation's activities. At the beginning of the year, the taxpayer had an adjusted basis in the stock of $25,000 and made a loan to the corporation of $13,000. During the year, $3,000 of the loan was repaid, and the taxpayer's share of the corporation's loss for the year was $40,000. What is the amount of the loss that may be deducted on the taxpayer's tax return?
Loans to an S corporation increase a shareholder’s basis, and repayments of that loan reduce basis. The taxpayer had a basis of $35,000 ($25,000 + $13,000 − $3,000) at year-end; therefore, the maximum amount of the loss that can be deducted is $35,000, since the taxpayer’s basis cannot go below $0. In other words, the deductibility of losses is limited to the shareholder’s basis in stock plus loans to the company.
92
Sands purchased 100 shares of Eastern Corp. stock for $18,000 on April 1 of the prior year. On February 1 of the current year, Sands sold 50 shares of Eastern for $7,000. Fifteen days later, Sands purchased 25 shares of Eastern for $3,750. What is the amount of Sand's recognized gain or loss?
A wash sale takes place when securities are sold at a loss and replaced with substantially identical securities within 30 days before and after the sale.
Sands established a short-term loss of $2,000 by selling 50 shares for $7,000 ($7,000 - $9,000 = $2,000 loss). Fifteen days later, Sands washed out half of the loss by purchasing 25 shares for $3,750. Since he repurchased shares equal to half of the number he had sold previously, the recognition of half of the loss was delayed
93
qualified student loan interest
how to treat that in individual ?
Individual taxpayers may deduct up to $2,500 of qualified student loan interest as an above-the-line deduction to arrive at AGI. This amount is phased out for higher-income taxpayers. The deduction is not available for taxpayers who are dependents of others or for taxpayers using the married filing separately filing status. The phaseout does not apply to this taxpayer.
94
Chris, age 5, has $3,000 of interest income and no earned income this year. How much of Chris’s income will be taxed at Chris’s parents’ maximum tax rate?
$900
$1,000
$0
$1,050
The "kiddie tax" was greatly modified by the Tax Cuts and Jobs Act of 2017 (TCJA). No amount is taxed at the parents' rate. The tax is now at the trust and estate tax rates, which tax at 37% in amounts in excess of $12,500.
95
What law governs the sale of real estate?
common law
96
The charitable contribution deduction on an estate’s fiduciary income tax return is allowable:
An unlimited charitable contribution deduction is allowed for an estate if the contribution is provided for in the will of the decedent, the charity is a qualified charity, and if the contribution is paid in the year of deduction or the year following the deduction.
There are no other limits on the charitable contribution deduction of an estate.
97
what is garnishment
Garnishment is a statutory remedy of the creditor that is directed at a third party, rather than the debtor. The third party (garnishee) must either owe a debt to the debtor or be holding property that belongs to the debtor. As a result of the garnishment, the third party is ordered to turn over the payment of the debt or the property of the debtor to satisfy the creditor’s judgment. The most common garnishments are served on the debtor’s employer to garnish the debtor’s wages or upon a bank to garnish the funds in the debtor’s accounts. Both federal and state laws limit the amount that can be garnished from the debtor’s weekly wages; the limitation allows the garnishee sufficient funds to continue to work.
98
On their joint tax return, Sam and Joann had adjusted gross income (AGI) of $150,000 and claimed the following itemized deductions:
Interest of $15,000 on a $100,000 home equity loan to purchase a motor home
Real estate tax and state income taxes of $18,000
Based on these deductions, what would be the amount of AMT add-back adjustment in computing alternative minimum taxable income?
The interest and taxes are not deductible for AMT (alternative minimum tax). Under the Tax Cuts and Jobs Act of 2017 (TCJA), itemized deductions subject to the 2% floor are no longer deductible at all.
Add back:
Interest ($15,000) + Taxes ($18,000) = $33,000
99
Andi Corp. issued $1,000,000 face amount of bonds in Year 1 and established a sinking fund to pay the debt at maturity. The bondholders appointed an independent trustee to invest the sinking fund contributions and to administer the trust. In Year 6, the sinking fund earned $60,000 in interest on bank deposits and $8,000 in net long-term capital gains. All of the trust income is accumulated with Andi’s periodic contributions so that the aggregate amount will be sufficient to pay the bonds when they mature. What amount of trust income was taxable to Andi in Year 6?
The $60,000 in interest on bank deposits and $8,000 in net long-term capital gains are considered trust income to Andi in Year 6. Funds included in a sinking fund or trust are considered assets of the entity.
100
Benson exchanged a van, used exclusively for business and with an adjusted basis of $100,000, for a new van with a fair market value of $120,000 and received $5,000 in cash. What amount of gain did Benson recognize from the transaction?
Under the Tax Cuts and Jobs Act of 2017 (TCJA), like-kind exchanges are limited to real property; gains related to like-kind exchanges of personal property can no longer be deferred. Benson must recognize a $25,000 gain:
FMV of new van received $120,000
Boot/cash received 5,000
Total value received $125,000
Less adjusted basis given up (100,000)
Gain realized and recognized $ 25,000
101
On March 1, Green went to Easy Car Sales to buy a car. Green spoke to a salesperson and agreed to buy a car that Easy had in its showroom. On March 5, Green made a $500 down payment and signed a security agreement to secure the payment of the balance of the purchase price. On March 10, Green picked up the car. On March 15, Easy filed the security agreement. On what date did Easy’s security interest attach?
March 1
March 5
March 10
March 15
Before a security interest attaches, there must be a security agreement (oral or written) between the debtor and the secured party, the secured party must give value, and the debtor must have rights in the collateral. Green gave value ($500) and signed a security agreement on March 5.
102
Forrest Corp. owned 100% of both the voting stock and total value of Diamond Corp. Both corporations were C corporations. Forrest's basis in the Diamond stock was $200,000 when it received a lump-sum liquidating distribution of property as a result of the redemption of all of Diamond stock. The property had an adjusted basis of $270,000 and a fair market value of $500,000. What amount of gain did Forrest recognize on the distribution?
$0
$70,000
$270,000
$500,000
When a subsidiary distributes property to its parent corporation (80% ownership or more), no gain is recognized by the parent. Generally, the property received by the parent has the same basis that it had in the hands of the subsidiary.
103
Which of the following transactions would qualify for tax-deferred exchanges?
An exchange of real property for personal property
Swap of livestock of different sexes
Transfer of property to a controlled corporation
Exchange of interests in a partnership
Transfer of property to a controlled corporation
When property that is owned by the taxpayer is transferred to his controlled corporation (80% owned immediately following the transfer of property to the corporation), no gain or loss is recognized if the exchange is solely for stock. Generally speaking, real property must be exchanged for real property. Under the Tax Cuts and Jobs Act of 2017 (TCJA), like-kind exchanges of personal property were eliminated from favorable tax treatment (this includes livestock).
104
O'Day, an S corporation, had net income per books of $200,000 after deducting $100,000 for compensation to officers. O'Day also had a $10,000 capital loss and a $10,000 charitable contribution on its books for the current year. Depreciation per books was $20,000. MACRS depreciation is used for tax purposes and was $25,000. What is O'Day's ordinary income for tax purposes?
O'Day's ordinary income for tax purposes (Form 1120S) is as follows:
```
Book income $200,000
Capital loss 10,000
Charitable contribution 10,000
Additional depreciation (5,000)
Ordinary income $215,000
=========
```
105
Eller, Fort, and Owens do business as Venture Associates, a general partnership. Trent Corp. brought a breach of contract suit against Venture and Eller individually. Trent won the suit and filed a judgment against both Venture and Eller. Trent will generally be able to collect the judgment from:
partnership assets only.
the personal assets of Eller, Fort, and Owens only.
Eller’s personal assets only after partnership assets are exhausted.
Eller’s personal assets only.
General partners have unlimited liability. When the assets of the partnership are not sufficient, the assets of the partners may be used to satisfyDove and Eagle formed a business entity in which they are equal owners. Dove contributed cash of $100,000, and Eagle contributed land with a basis of $40,000 and fair market value of $100,000. For its first year of operations, the entity had taxable income of $60,000 and made no distributions. At year-end it had outstanding recourse liabilities to third parties of $10,000. Eagle had a basis of $70,000 in the entity at the end of the first year of operations. What type of entity was formed?
C corporation
S corporation
General partnership
Limited liability company (LLC) the liability.
106
Dove and Eagle formed a business entity in which they are equal owners. Dove contributed cash of $100,000, and Eagle contributed land with a basis of $40,000 and fair market value of $100,000. For its first year of operations, the entity had taxable income of $60,000 and made no distributions. At year-end it had outstanding recourse liabilities to third parties of $10,000. Eagle had a basis of $70,000 in the entity at the end of the first year of operations. What type of entity was formed?
C corporation
S corporation
General partnership
Limited liability company (LLC)
The basis of an S corporation shareholder's stock (generally, its cost) is adjusted as follows and, except as noted, in the order listed. In addition, basis may be adjusted under other provisions of the Internal Revenue Code:
Basis is increased by (a) all income (including tax-exempt income) reported on Schedule K-1 and (b) the excess of the deduction for depletion (other than oil and gas depletion) over the basis of the property subject to depletion.
Basis is decreased by property distributions (including cash) made by the corporation (excluding dividend distributions reported on IRS Form 1099-DIV and distributions in excess of basis) reported on IRS Schedule K-1, box 16, code D, minus the amount of such distributions in excess of the basis of the shareholder's stock.
Basis is decreased by (a) nondeductible expenses and (b) the depletion deduction for any oil and gas property held by the corporation, but only to the extent the shareholder's pro rata share of the property's adjusted basis exceeds that deduction.
Basis is decreased by all deductible losses and deductions reported on Schedule K-1.
Note that the taxpayer can make an election to deduct items in (4) in the list above before nondeductible items in (3).
In this case, Eagle’s basis at the end of the year in the S corporation is $70,000, which is the $40,000 for his basis of the contributed land plus his share of the taxable income for the first year of operations of $30,000 (50% share of the S corporation’s $60,000 income).
If the entity was a C corporation, its taxable income of $60,000 would not increase Eagle’s basis in his stock, so it cannot be a C corporation.
If the entity was a general partnership, $5,000 (50% share of the general partnership’s $10,000 of recourse liabilities) would have been added to Eagle’s basis. The partner's contributions to the partnership and the increased share of, or assumption of, partnership liabilities increase a partner’s basis. Thus, it cannot be a general partnership.
The entity choice of a limited liability company (LLC) does not provide enough information. There is uncertainty as to its tax treatment as a corporation or a partnership since there are two equal owners, Dove and Eagle, and they could choose to be either a partnership or corporation.
Thus, as first described above, the only entity that could result in an end-of-year basis for Eagle would be the S corporation.
107
Which of the following taxes can be withheld from a domestic service employee's wages (i.e., paid by the employee)?
A portion of total federal unemployment tax owed
A portion of total Medicare tax owed
A portion of total Social Security tax owed
The employer's required payment for federal unemployment (FUTA) tax cannot be withheld from the employee's wages. This must be paid from the employer's own funds.
The employee's share of the Medicare tax can be withheld from the domestic service employee's wages.
The employee's share of the Social Security tax can be withheld from the domestic service employee's wages.
108
An individual reports the following capital transactions in the current year:
```
Short-term capital gain $ 1,000
Short-term capital loss 11,000
Long-term capital gain 10,000
Long-term capital loss 6,000
What amount is deducted in arriving at adjusted gross income?
```
3000
If capital losses exceed capital gains, for an individual, the amount of the capital loss that can be claimed to lower income is limited to $3,000. Any amount not used carries forward indefinitely. All short-term capital gains and losses are netted together and then all long-term capital gains and losses are netted together. Then the short term is netted with the long term.
In this example, the short-term items net to a short-term capital loss of $10,000. The long-term capital items net to a long-term capital gain of $4,000. The $4,000 long-term capital gain is eliminated by the $10,000 short-term capital loss resulting in a net $6,000 short-term capital loss. The taxpayer may use $3,000 of the short-term loss to reduce taxable income. The balance unused, $3,000, is a carryover to the next year.
109
George sold stock on July 31, 2018, creating a $5,000 capital gain. He had owned the stock for three years. George is in the 32% tax bracket and has income of $180,000. At what rate would this capital gain be taxed?
Under the Tax Cuts and Jobs Act of 2017 (TCJA), there are three tax brackets that apply to net capital gains and qualified dividends for individuals and other noncorporate taxpayers. These brackets are not tied to ordinary-income tax brackets; rather, these rates have their own brackets which are applied to maximum taxable income levels: 0% for net capital gain up to $38,600 for single taxpayers; 15% for gain between $38,601 and $425,800, and 20% for gain over $425,800. George’s taxable income of $180,000 would result in a capital gains tax rate of 15%.
110
Certain issuances are exempt from the provisions of the Securities Act of 1933, including:
s
Certain issuances are exempt from the provisions of the Securities Act of 1933, including:
securities issued by not-for-profit, charitable organizations,
securities issued by domestic governmental organizations, and
securities issued by savings and loans and similar financial institutions.
Securities issued by insurance companies are not exempt from provisions of the act.
111
payments for college books, supplies, and dormitory fees on behalf of an individual unrelated to the donor
is what
The federal gift tax does not apply to the following:
Medical care payments on another's behalf paid directly to medical care provider
Tuition payments made to an educational organization (for example, a university)
Transfers to political organizations
All other transfers over $15,000 per donee, per year are subject to gift tax (the unified transfer tax).
Therefore, payments for college books, supplies, and dormitory fees on behalf of an individual unrelated to the donor could be subject to gift tax.
112
Nare, an accrual-basis taxpayer, owns a building which was rented to Mott under a 10-year lease expiring August 31, Year 7. On January 2, Year 5, Mott paid $30,000 as consideration for cancelling the lease. On November 1, Year 5, Nare leased the building to Pine under a 5-year lease. Pine paid Nare $10,000 rent for the two months of November and December and an additional $5,000 for the last month's rent. What amount of rental income should Nare report in its Year 5 income tax return?
01/02/Yr. 5 payment from Mott for lease cancellation $30,000
11/01/Yr. 5 November and December rent payment from Pine 10,000
11/01/Yr. 5 additional payment from Pine 5,000
-------
Total rental income for Year 5 $45,000
=======
Any amount received as rent must be included in income in the year of receipt whether the taxpayer is accrual or cash basis. In general, any payment to or made on the behalf of a landlord of any kind is additional rent income.
Any amounts received by a landlord in consideration for cancellation of a lease are additional rent revenue (and not capitalized).
113
An individual taxpayer (whose adjusted gross income is above $150,000 in the previous year) may avoid the penalty for failure to pay estimated tax by:
paying at least ________ of the tax shown on the current year's return, or
________ of the tax shown on the prior year's return (assuming that the prior year's return was for a full 12-month period).
90%; 100%
110%; 110%
90%; 110%
110%; 90%
Individuals may generally avoid the penalty for failure to pay estimated tax by:
paying at least 90% of the tax shown on the current year's return or
paying 110% of the tax shown on the prior year's return (for individuals with AGIs of more than $150,000 in the previous year).
114
Sanderson has made deductible contributions to his traditional IRA for many years. Sanderson recently retired at age 60 and received a distribution of $150,000. In which way, if any, will the distribution be taxed?
Distributions from a traditional IRA are not tax-free; distributions are taxable as ordinary income, not as capital gains. Only taxpayers receiving distributions before age 59-1/2 are subject to the additional 10% penalty on the taxable portion of the distribution; this penalty may be waived under certain circumstances.
115
Parent company X and subsidiary company Y file a calendar-year consolidated federal income tax return. Company X reported a $120,000 tax loss, which included a $10,000 dividend from Y. Company Y reported $140,000 of taxable income, which included $30,000 of dividends received from less than 20%-owned stock investments. Neither company took into account any applicable dividends-received deduction. What is the group's consolidated tax loss for the year?
the consolidated taxable income before the dividends-received deduction (DRD) would be the sum of company X’s taxable loss of $120,000 plus company Y’s taxable income of $140,000 with the $10,000 dividend income eliminated in the consolidation (the dividend that company’s X subsidiary, company Y, paid to company X, and note that there is only income elimination in this case because company Y did not recognize a deduction for the payment of dividend), which equals $10,000. The DRD of $15,000 (50% × $30,000 dividends received from less than 20%-owned stock investments) is then subtracted from the $10,000 consolidated taxable income before the DRD for a taxable loss of $(5,000).
116
The sole shareholder of an S corporation had a basis for her stock of $30,000 and a basis for a loan to the S corporation of $15,000. In Year 6, the S corporation operated at a loss of $39,000. What is the shareholder's basis in the stock and loan on December 31, Year 6?
The loss reduces the shareholder's stock basis first. The remaining loss ($39,000 − $30,000) of $9,000 is deducted from the loan basis.
Stock Loan Total
Beg. Basis $30,000 $15,000 $45,000
Less: Loss ( 30,000) ( 9,000) ( 39,000)
Ending Basis: $ 0 $ 6,000 $ 6,000
117
The loss reduces the shareholder's stock basis first. The remaining loss ($39,000 − $30,000) of $9,000 is deducted from the loan basis.
Stock Loan Total
Beg. Basis $30,000 $15,000 $45,000
Less: Loss ( 30,000) ( 9,000) ( 39,000)
Ending Basis: $ 0 $ 6,000 $ 6,000
Chapter 11 of the U.S. Bankruptcy Code is available to every business, whether organized as a corporation, partnership, or sole proprietorship, and to individuals. This saves businesses from being liquidated.
However, a stockbroker or a commodity broker is prohibited from filing under Chapter 11 and is restricted to Chapter 7 bankruptcy.
118
Davis, a sole proprietor with no employees, has a Keogh profit-sharing plan to which he may contribute 20% of his annual earned income. For this purpose, “earned income” is defined as net self-employment earnings reduced by the:
deductible Keogh contribution and a portion of the self-employment tax.
119
a purchase money security interest, has priority over nonpurchase money securities when
Item III, a purchase money security interest, has priority over nonpurchase money securities when perfected within 20 days of attachment. Item I has priority over item II because it was perfected. Item II was not perfected.
120
The filing of an involuntary bankruptcy petition under the Federal Bankruptcy Code:
stops the enforcement of judgment liens against property, except IRS, in the bankruptcy estate.
121
Only three entities are permitted to freely select a fiscal year:
Only three entities are permitted to freely select a fiscal year: C corporations, estates, and tax-exempt entities.
122
vKlein, a master's degree candidate at Briar University, was awarded a $12,000 scholarship from Briar. The scholarship was used to pay Klein's current-year university tuition and fees. Also in the current year, Klein received $5,000 for teaching two courses at a nearby college. What amount is includible in Klein's current-year gross income?
Scholarship grants received by a degree candidate which are used to pay for tuition and fees are excludible from income. If the scholarship grant is awarded for past, present, or future services, it is not excludible. Thus the $5,000 Klein received for teaching is taxable and the $12,000 scholarship is not.
123
Lind and Post organized Ace Corp., which issued voting common stock with a fair market value of $120,000. They each transferred property in exchange for stock as follows:
Adjusted Fair Market Percentage of
Property Basis Value Ace Stock Acquired
Lind Building $40,000 $82,000 60%
Post Land 5,000 48,000 40%
The building was subject to a $10,000 mortgage that was assumed by Ace.
What was Ace’s basis in the building?
This transaction qualifies as a Section 351 tax-free transaction. No gain or loss is recognized if property is transferred to a corporation by one or more persons solely in exchange for stock in such corporation and immediately after the exchange the persons are in control of the corporation. Control means 80% or more of the corporation. Since Lind and Post own 100% of the corporation, no gain is to be recognized.
IRC Section 362(a) determines the rule for determining the corporation’s basis in the assets contributed by the shareholders. The basis will be a “substituted” or “carryover” basis. Ace’s basis in the building will be the same as the basis was for the shareholder of $40,000.
124
Azure, a C corporation, reports the following:
Pretax book income is $543,000.
Depreciation on the tax return is $20,000 greater than depreciation on the financial statements.
Rent income reportable on the tax return is $36,000 greater than rent income per the financial statements.
Fines for pollution appear as a $10,000 expense in the financial statements.
Interest earned on municipal bonds is $25,000.
What is Azure's taxable income?
Azure's taxable income is $544,000, calculated as follows:
Pretax book income $543,000
Less: Additional tax depreciation (20,000)
Add: Additional rent income 36,000
Add: Nondeductible fines 10,000
Less: Nontaxable municipal bond interest (25,000)
---------
Taxable income $544,000
=========
Assets are generally expensed over a longer period of time for the financial statements and deducted over a shorter period of time for the tax return due to differences in book depreciation methods versus tax depreciation methods.
Prepaid rent is generally included in financial income when earned according to accrual basis accounting, and taxable when received according to the wherewithal concept.
Fines and penalties are included as expenses on the financial statements and are not deductible on the tax return.
Municipal bond interest is included as income on the financial statements but is not taxable on the tax return.
125
Aqua Corp. had an operating income of $500,000 and operating expenses of $350,000 in the current year. Aqua had a long-term capital gain of $30,000 and a $50,000 short-term capital loss. What is Aqua's taxable income for the current year?
Aqua has a net short-term capital loss of $20,000 ($50,000 – $30,000). Capital losses can only be used to offset capital gains and can then be carried back three years and carried forward for five years. Aqua’s taxable income is $150,000 ($500,000 – $350,000); none of the $30,000 capital gain is included as it is fully offset by the capital loss.
126
Payments made to political organizations
is this considered gift ?
Gift tax is levied against the donor on the fair market value of all taxable gifts made in each calendar year. The gift tax is an excise tax levied on the transfer of property when less than adequate and full consideration was received. Payments made to political organizations are not considered gifts. Therefore, Beck’s total gifts before considering the annual gift tax exclusion are for all items except the donation to the political party, or $9,200 ($5,000 + $3,000 + $1,200).
127
Stone Corp. has been an S corporation since inception. In each of Year 1, Year 2, and Year 3, Stone made distributions in excess of each shareholder's basis. Which of the following statements is correct concerning these three years?
When there is no C corporation accumulated E&P, all cash distributions are considered a return of capital until adjusted basis is reduced to zero, and then any excess is capital gain to the shareholder.
128
Mike and Jane Lewis, a married couple, file a joint federal income tax return. They have one child, age 15, whom they support 100%. Both are under age 65. They have the following income and expenses for the year:
Mike's wages $65,000
Jane's wages 60,000
Total allowable itemized deductions 13,000
Mike's contribution to an IRA 4,000
Jane's contribution to an IRA 4,000
Mike is not covered by a pension plan at work, while Jane is covered by a plan at her employer.
Assume that the standard deduction amount for married filing jointly is $24,000, and the IRA contribution limit is $120,000.
What is the Lewises' taxable income amount?
Correct
The Lewises' taxable income amount is calculated as follows:
```
Mike's wages $ 65,000
Jane's wages 60,000
Adjusted gross income $125,000
Less: Standard deduction (24,000)
Taxable income $101,000
=========
```
Taxpayers can elect each year to itemize deductions or take the standard deduction. If itemized deductions are $13,000, the Lewises will take the standard deduction of $24,000 for married, filing jointly.
Mike may not take an IRA deduction because they are over the threshold in AGI. Jane's IRA contribution is not deductible since they are above the threshold of $120,000 in AGI and she is covered by a pension plan at work.
129
Alt Partnership, a cash-basis calendar-year entity, began business on March 1 of the current year. Alt incurred and paid the following this year, prior to March 1:
Legal fees to prepare the partnership
agreement $14,000
Accounting fees to prepare the
representations in offering materials 15,000
Alt elected to amortize costs. What was the maximum amount that Alt could deduct on the current-year partnership return?
Alt Partnership can deduct $5,500 of organization costs, which consist of the legal fees to prepare the partnership agreement. The accounting fees of $15,000 are syndication fees, not organizational costs, and therefore not deductible.
Taxpayers may deduct up to $5,000 in the taxable year in which the business begins. The $5,000 amount is reduced by the amount by which the cumulative cost of organizational expenditures exceeds $50,000. Any remaining organizational expenditures not deducted are amortized over a 15-year period (180 months) beginning with the month the active trade or business begins.
Total organization costs are less than $50,000, so the first $5,000 of costs is deductible. The remaining $9,000 is amortized over 180 months beginning with the month the business begins.
$5,000 + ($9,000 × (10 months ÷ 180 months)) = $5,500
130
insurance premium
insurance reimbursement
how to treat these items when calculating medical expense deduction ?
add da premium
less da insurance reimbursement
131
interest expense on a home-equity line of credit for an amount borrowed to finance Green's business
how to treat this expense ? is it deductible ?
Interest expense on a home equity line of credit for an amount borrowed to finance Green's business is not deductible under the Tax Cuts and Jobs Act of 2017 (TCJA) unless the home equity line is used to buy, build, or substantially improve the home. If it qualifies as a deduction, taxpayers can only deduct interest on a maximum of $750,000 in home loans.
132
For Year 2, Quest Corp., an accrual-basis calendar-year C corporation, had an $8,000 unexpired charitable contribution carryover from Year 1. Quest's Year 2 taxable income before the deduction for charitable contributions was $200,000. On December 12, Year 2, Quest's board of directors authorized a $15,000 cash contribution to a qualified charity, which was made on January 6, Year 3. What is the maximum allowable deduction that Quest may take as a charitable contribution on its Year 2 income tax return?
For an accrual-basis corporation, any charitable contribution authorized by the board of directors prior to year-end and paid within 2-1/2 months from year-end may be deducted on the prior-year tax return.
The maximum allowable deduction that Quest Corp. may take as a charitable contribution is 10% of $200,000 (its taxable income), which is $20,000.
The current-year charitable contribution is used first before any carryover. In Year 2, Quest will use all of the current-year contribution of $15,000 plus $5,000 of the carryover contribution from Year 1. The remaining carryover of $3,000 from Year 1’s contribution will be carried over to Year 4.
133
Thomas filed a voluntary petition for bankruptcy on July 1, 20X1. As part of the petition, Thomas listed his assets, which include his permanent residence. The residence, which was recently appraised for $125,000, is subject to a mortgage in favor of Security Finance in the amount of $100,000. Assuming that Thomas properly claims a homestead exemption under the federal exemptions, he will be entitled to an exemption in the amount of:
$7,500.
$23,675.
$25,000.
$125,000.
Each state has its own set of exemption laws (California has two sets). A handful of states allow bankruptcy filers to use the federal bankruptcy exemptions instead of their state bankruptcy exemptions. The amounts allowed under the federal bankruptcy exemptions are adjusted every three years ending on April 1 to reflect changes in the Consumer Price Index and were last adjusted in 2016; the federal homestead exemption is $23,675. If you are married and filing jointly, you may double all of the federal bankruptcy exemptions. This exemption is not effective against a secured creditor, but in this case, the value of the property is sufficient to pay the $100,000 due Security Finance as well as to pay Thomas the amount of the exemption ($23,675)
134
give example of da oral contracts for da sale of good valued at more than 500 that are enforcable
a contract to sell a work of art
a contract to sell fuil oil, where the contract is admitted to in court
a contract to sell furniture where half of the value of the shipment has been received and accepted
135
what is type b reorganization
A type B reorganization effectively results in a parent-sub relationship. The requirements for a B reorganization (which is tax free) is the acquisition by one corporation of stock in a second (target) corporation in exchange solely for the acquiring corporation's voting stock (or voting stock of its parent) if the acquiring corporation has control of the target immediately after the exchange. (IRC Section 368(a)(1)(B))
Note: "Control" means at least 80% of the combined voting power of all voting stock and at least 80% of the total number of shares of each class of nonvoting stock. (IRC Section 368(c))
136
In terms of depreciation, what generally occurs for the first year of use of personal property?
Depreciation is on a pro-rated daily basis.
Depreciation begins on the first day of the month placed in service.
Half-year recovery method is used.
Depreciation begins on the last day of the month placed in service.
Generally, a half-year’s recovery deduction is taken in the first year of use of personal property regardless of the month the property was placed in service (half-year convention).
137
when u have garantee payment when calculating nonseprated item for partnership
how to treat this ?
just deduct it like a normal expense
138
How is the net gain from short-term sales or exchanges treated?
Taxed at ordinary income rates, in a taxpayer’s given bracket
139
What is the civil penalty if a taxpayer claims withholding allowances that are based upon false information?
A civil penalty of $500 applies if a taxpayer claims withholding allowances that are based on false information. Note that a criminal penalty can also apply to a willful failure to supply information or for willfully supplying false or fraudulent information regarding withholding, which is an additional fine of up to $1,000 and/or up to one year in prison.
140
To receive a refund for an overpayment of tax, a taxpayer must file a claim for refund within
To receive a refund for an overpayment of tax, a taxpayer must file a claim for refund within three years from the date on which the tax return that relates to the refund was filed, or within two years of actual payment of the tax if that date is later.
141
How are a C corporation's net capital losses used?
Capital losses can only be offset by capital gains. Net capital losses for a corporation can be carried back for three years and forward for five years. Individuals can deduct up to $3,000 per year of capital losses from ordinary income, but corporations cannot.
142
The uniform capitalization rules require manufacturers to capitalize:
The UNICAP rules require the capitalization of all direct materials and direct labor. Some indirect costs such as indirect labor and handling costs may be capitalized. Some indirect costs are not capitalized such as selling and distribution costs.
143
A party who filed a security interest in inventory on April 1, 20X1, would have a superior interest to which of the following parties?
A holder of a mechanic's lien whose lien was filed on March 15, 20X1
A holder of a purchase money security interest in after-acquired property filed on March 20, 20X1
A purchaser in the ordinary course of business who purchased on April 10, 20X1
A judgment lien creditor who filed its judgment on April 15, 20X1
A party who filed a security interest in inventory on April 1, 20X1, would have a superior interest to a judgment lien creditor who filed its judgment on April 15, 20X1.
The general rule on priorities is first to file or perfect wins. The mechanic's lien was filed first or prior to filing the security interest.
The PMSI (purchase money security interest) was filed on March 20 and therefore prior to April 1.
The other applicable rule is that buyers in the ordinary course of business prevail over security interest holders. Even though the buyer purchased the product on April 10, which is after the security interest was filed on April 1, the buyer in the ordinary course of business has priority over the creditor
144
As part of the corporate tax return, corporations must reconcile the difference between taxable income and accounting income on Schedule M-1. As a general rule, corporations are not required to file Schedules L, M-1, and M-2 if their total assets at the end of the taxable year and the corporation's total receipts for the tax year are less than
As part of the corporate tax return, corporations must reconcile the difference between taxable income and accounting income on Schedule M-1. As a general rule, corporations are not required to file Schedules L, M-1, and M-2 if their total assets at the end of the taxable year and the corporation's total receipts for the tax year are less than 250000
145
Dan owes debts to four different creditors. To satisfy these debts, Dan transfers his property to a trustee. The trustee converts the property to cash and pays it to all of the creditors on a pro rata basis. If all of the creditors only receive partial payments of the amounts they are due:
the debtor will be released from liability for the balance due unless the creditors expressly reserve the right to collect the full amount.
the debtor will be released from liability for the balance due since this is a composition agreement.
the debtor will not be released from liability for the balance due because an assignment for the benefit of creditors does not require the consent of the creditors.
the debtor will not be released from liability for the balance due unless the trustee agrees to the release.
the debtor will not be released from liability for the balance due because an assignment for the benefit of creditors does not require the consent of the creditors.
In an assignment for the benefit of creditors, the debtor transfers property to a trustee who sells the property and uses the funds to make payments to the creditors. Since this arrangement does not involve the consent of the creditors, the debtors will not be released from liability for any balance.
Any agreement under which partial payments will release the debtor from further liability must be made between the debtor and the creditors. The trustee has no such power.
Finally, a composition agreement involves a direct agreement between the debtor and its creditors and does not generally involve transfer of the debtor's property to a trustee. However, in the above instance, a composition agreement for a lesser payment of individuals claims would, in fact, discharge the balance if it were so agreed.
146
Proceeds of a lawsuit for physical injuries
how to treat this in individual AGI ?
ignore it , DO NOT add this amount to find income
147
A taxpayer died in year 1 with a gross estate valued at $100,000,000. In the taxpayer's will, he gave $40,000,000 of his gross estate to his surviving spouse, with no restrictions. His surviving spouse also receives $20,000,000 in assets not included in the taxpayer's gross estate. What is the amount of the marital deduction for the taxpayer's estate?
$0
$20,000,000
$40,000,000
$60,000,000
The marital deduction is an unlimited deduction available for all property given to a spouse. Although all $60,000,000 would be covered under the marital deduction, the question specifically asks for the amount related to the taxpayer’s estate, which would be the $40,000,000.
148
Premium on disability insurance policy to pay him if he is
injured and unable to work
how to treat this item when doing deductible medical expense
ignore this premium on disability insurance policy
149
Green is self-employed as a human resources consultant and reports on the cash basis for income tax purposes. Select the appropriate tax treatment on Form 1040 (U.S. Individual Income Tax Return) for interest income received on U.S. Treasury bonds.
Taxable as other income on Form 1040
Reported in Schedule B—Interest and Dividend Income
Reported in Schedule E—Supplemental Income and Loss
Not taxable
Interest income on U.S. Treasury bonds is reported in Schedule B—Interest and Dividend Income.
150
Property contributions to qualified organizations are deductible at cost basis or at the fair market value if
if at the fair market value when da fair value is below basis
151
Tap, a calendar-year S corporation, reported the following items of income and expense in the current year:
```
Revenue $44,000
Operating expenses 20,000
Long-term capital loss 6,000
Charitable contributions 1,000
Interest expense 4,000
What is the amount of Tap's ordinary income?
```
Tap's ordinary income is $20,000, calculated as follows:
```
Revenue $44,000
Less: Operating expenses (20,000)
Less: Interest expense (4,000)
--------
Ordinary income $20,000
========
Any income, losses, deductions, or credits that might affect the tax liability of a shareholder in a different manner depending on any other factors in their particular tax situation must be separately stated on the tax return. In this problem, the separately stated items include long-term capital loss and charitable contributions.
```
152
Two unrelated individuals, John and Tom, own all the stock of Regal Corporation, which has earnings and profits of $400,000. Because of the inactivity of the business for the last several years, Tom has decided to retire from the business and move to Alaska. Accordingly, Regal Corporation will redeem all the stock owned by Tom and, in return, Tom will receive a distribution of $500,000. Tom's adjusted basis in the stock is $250,000. What will be the tax effect to Tom?
The distribution qualifies as a capital gain since the distribution is disproportionate related to the other shareholders. A shareholder disposing of his or her shares will generally experience capital gain treatment when sold outside the corporation.
A distribution in redemption of stock will be treated as an exchange eligible for capital gains treatment rather than as a dividend if the shareholder's interest in the corporation is terminated or if the redemption is substantially disproportionate and after the redemption the shareholder owns less than 50% of the stock.
The requirement is to determine the tax effect of Tom's stock redemption. Since the redemption is a complete redemption of all of Tom's stock ownership, the redemption proceeds of $500,000 qualify for exchange treatment. Thus, Tom will report a capital gain of $250,000.
Redemption proceeds $500,000
Less: Tom's adjusted basis in the stock (250,000)
Capital gain $250,000
=========
153
a gift of a future interest is ?
The gift of a future interest is just that: a gift that will vest in the future. Gifts of future interest are not available for the annual gift tax exclusion and must be included in gross gifts in their entirety.
154
qualifying widower
The Form 1040 uses the term “qualifying widow(er)” in place of “surviving spouse.” The term “surviving spouse” means a taxpayer whose spouse died during either of the two taxable years immediately preceding the current taxable year, and who maintains his or her home where a dependent resides. Dependent in this case means a son, stepson, daughter, or stepdaughter of the taxpayer, and the taxpayer is entitled to a dependent deduction for the taxable year. The choices given in this question were not correct because the home and residence of the dependent must be maintained for the full year. Exceptions to the full-year rule are if the dependent is born or dies during the year.
155
In April, A and B formed X Corp. A contributed $50,000 cash and B contributed land worth $70,000 (with an adjusted basis of $40,000). B also received $20,000 cash from the corporation. A and B each received 50% of the corporation's stock. What is the tax basis of the land to X Corp.?
X Corp. received land with an adjusted basis of $40,000 from shareholder B. X Corp. paid B an additional $20,000 in cash. The tax basis of the land for X Corp. is $60,000, made up of the $40,000 in basis from B and the $20,000 paid to B.
156
On December 1, Year 2, Jeff Weber placed in service office furniture (7-year life), which cost $25,000. Jeff did not elect Section 179 expensing. The office furniture was the only asset purchased during the year. What amount can Jeff claim as depreciation under MACRS for Year 2?
First-year depreciation under MACRS is based on double-declining balance. A seven-year life under double declining would yield depreciation of 2/7 for the first year. Because the purchase was made in December, the mid-quarter convention is used and 1-1/2 months of depreciation is recorded. Depreciation is $893 ($25,000 × 2/7 × 1.5/12).
157
a fraudulent transfer is
A “fraudulent transfer” is a transfer made by a debtor within two years prior to the date of bankruptcy in which the debtor did not receive fair value in exchange for the asset. There is no requirement that the transferee be aware of the insolvency of the transferor.
158
Creditors of Walters filed an involuntary petition of bankruptcy on May 15, 20XX. After all nonexempt property was sold and secured creditors paid, there remained $6,000 to pay other creditors. Walters' other creditors consisted of the following: trustee ($4,000), attorney for the petitioner ($4,000), accountant for the estate ($2,000), and other general creditors ($10,000).
Under the federal system of priorities, what is the amount that will be received by the accountant for the estate?
The accountant for the estate is a priority one creditor, along with the trustee and the attorney for the petitioner. Priority creditors are entitled to be paid in full before lower level priority creditors and general creditors are paid. If there are insufficient funds to pay a level of priority creditors, they are paid pro-rata. In this case, the trustee, attorney, and accountant are all level one priority creditors and will share the $6,000 pro-rata. This means that the accountant will be paid $1,200 ($2,000 ÷ $10,000 × $6,000). Further, no payment is possible to the unsecured (general) creditors.
159
Key-person life insurance is
Premiums paid on life insurance are not deductible by any person that is directly or indirectly a beneficiary under the policy. Key-person life insurance is life insurance purchased by a business payable to the business in the event of the death of the covered key employees to enable the business to survive the death of such key employees. Since the business, or in this case the corporation, is the beneficiary, it would not be deductible for income tax purposes and would be a reconciling item for Schedule M-1 (or Schedule M-3 required for corporations with assets over $10 million).
Corporate bond interest is part of corporate taxable income and so is not part of the Schedule M-1 reconciliation of taxable income to book income.
Cash distributions to shareholders and ending balance of retained earnings do not affect taxable income or book income and are part of Schedule M-2, reconciliation of retained earnings.
160
Which of the following is not an example of how general partnership earnings might be shared?
All partners share equally in profits and losses.
If the agreement states how profits are shared but not losses, losses will be shared the same as profits.
If the agreement states how losses are shared but not profits, profits will be shared the same as losses.
Partnership profits are to be shared in the same ratio as the partner’s capital contribution.
Unless the partners agree otherwise, each partner has the right to an equal share in the partnership’s profits and losses. If the partnership agreement states how profits are to be shared among the partners but is silent as to how losses are shared, then losses are allocated in the same manner as the profits. If the partnership agreement states how losses are allocated but is silent as to how profits are shared, profits are shared equally. In many cases, a partnership agreement will specify that partnership profits are to be shared in the same ratio as the partner’s capital contribution.
161
Which of the following actions may be taken by a corporation's board of directors without stockholder approval?
Purchasing substantially all of the assets of another corporation
Selling substantially all of the corporation's assets
Dissolving the corporation
Amending the articles of incorporation
Shareholders are entitled to approve fundamental corporate changes to the entity they own. Selling substantially all of the corporation's assets, dissolving the corporation, and amending the articles of incorporation represent an example of a fundamental corporate change that must be approved by (usually) a 2/3rds majority of the voting shareholders. While normally the board of directors is authorized to obtain the assets of another corporation, it would be good form to have stockholder ratification of this acquisition as well. Usually due to the necessity for speed in the acquisition of the assets, such approval may not be available on a timely basis, assuming that it had been required.
162
Which of the following costs may be amortized over 60 months or expensed at the election of the taxpayer?
Patents
Goodwill
Trademarks
Research and experimental
Research and experimental expenses may be amortized over 60 months or longer. Patents are amortized on a straight-line basis over their estimated life. Businesses can only amortize intangible assets with definite lives. Because a trademark can be renewed every 10 years with the U.S. Patent and Trademark Office indefinitely, a business typically does not amortize a trademark in its accounting records. Goodwill amortization is computed on a straight-line basis over a 10-year period (or over a smaller number of years if a different useful life is more appropriate). Note that a business must also conduct impairment testing.
163
A married individual invested in IRC Section 1244 small business stock in year 1. In year 7, the individual sold the stock at a loss of $157,000. There were no other stock transactions during year 7. If the taxpayer files a joint return, how much loss can the taxpayer deduct in year 7?
For year 7, the taxpayer can deduct a $103,000 loss on a joint return. IRC Section 1244 addresses small business (as defined in the Internal Revenue Code) stock transactions. A taxpayer, other than a corporation, can usually exclude an applicable percentage of any gain realized on the sale of Section 1244 stock under certain conditions. In order for a taxpayer to deduct a loss, the stock must have been acquired directly from the corporation; an ordinary loss deduction up to $50,000 ($100,000 on a joint return) is allowed per year. Losses in excess of the maximum amount (i.e., $100,000) are then reported on Schedule D of IRS Form 1040; only $3,000 of capital loss can be deducted against earnings in a given year. Therefore, the total amount of loss that the taxpayer can deduct in year 7 is $103,000 ($100,000 + $3,000).
164
Generally, which of the following parties would have the first priority to receive the estate of a person who dies without a will?
The state
A child of the deceased
A parent of the deceased
A sibling of the deceased
Intestate succession is the law of the decedent's state providing for the inheritance of property from a person who dies without leaving a will. Most states begin with the decedent's spouse, and then move to his or her children and their descendants.
165
Tom Lewis, a single taxpayer, had the following income and expense items for the current year:
Wages $ 55,000
Long-term capital loss 4,000
Deductible IRA contribution (Tom is not
covered by a retirement plan at work) 2,000
Mortgage interest on personal residence 6,000
Medical expenses not covered by insurance 4,000
Tom's standard deduction amount 12,000
What is the maximum amount that Tom can contribute to his local church and the full amount be deductible in this year?
A contribution to a church or conventions or associations of churches is considered to be a contribution to a “60% organization.” This means that the charitable deduction is limited to 60% of an individual's adjusted gross income. Tom’s AGI is $50,000 (wages of $55,000 less $3,000 capital loss, less $2,000 IRA contributions). Remember that only $3,000 of capital loss can be deducted; the remaining $1,000 is carried forward.
In this question, the maximum amount that can be deducted is:
$50,000 (AGI amount) × 0.60 = $30,000
166
The at-risk limitation provisions of the Internal Revenue Code (IRC) may limit:
a partner's deduction for his or her distributive share of partnership losses.
a partnership's net operating loss carryover.
I only
II only
Both I and II
Neither I nor II
The at-risk rules apply to all taxpayers (including partners) and encompass all business and investment activities, with a limited exception for certain types of real estate financing. The at-risk restrictions on deducting partnership losses provide that a partner may deduct his share of a loss from a partnership activity only to the extent to which he is at risk.
A partnership is not allowed a deduction for net operating losses (NOLs). A net operating loss (and any related carryforward) is determined at the partner level, taking into account all of the partner's applicable items of income and expense.
167
In general, a corporation is not required to file Schedule M-1 (Reconciliation of Income (Loss) per Books with Income per Return) along with their Form 1120 if:
As a general rule, corporations are not required to file schedules L, M-1, and M-2 if their total assets at the end of the taxable year and the corporation's total receipts for the tax year are less than $250,000.
Corporations with assets of $10 million or more must use Schedule M-3 instead of M-1.
168
How does a noncorporate shareholder treat the gain on the redemption of stock that qualifies as a partial liquidation of the distributing corporation?
Entirely as capital gain
Entirely as a dividend
Partly as capital gain and partly as a dividend
As a tax-free transaction
A partial liquidation of a corporation is not equivalent to a dividend and therefore is treated as an exchange of stock for cash. The exchange should be considered a capital gain and should be treated as a capital gain for tax purposes.
169
Dunn received 100 shares of stock as a gift from Dunn's grandparent. The stock cost Dunn's grandparent $32,000 and it was worth $27,000 at the time of the transfer to Dunn. Dunn sold the stock for $29,000. What amount of gain or loss should Dunn report from the sale of the stock?
Because of the special situation in this gift, neither a gain nor a loss can be computed on the sale of this stock received as a gift. In this situation, the selling price is less than the basis for gain and more than the basis for loss.
170
In the current year, a taxpayer reports the following items:
Salary $50,000
Income from Partnership A, in which the
taxpayer materially participates 20,000
Passive activity loss from Partnership B (40,000)
During the year, the taxpayer disposed of the interest in Partnership B, which had a suspended loss carryover of $10,000 from prior years. What is the taxpayer's adjusted gross income for the current year?
Adjusted gross income is calculated by subtracting business expenses and other deductions from gross income. The adjusted gross income is $20,000, calculated as follows:
Salary $50,000
Income from partnership 20,000
Passive loss from Partnership B (40,000)
Suspended loss carryover (10,000)
--------
Adjusted gross income $20,000
Because the taxpayer disposed of ownership in Partnership B during the year, he may take all of the loss up to the amount of his basis in the partnership.
171
Mutt and Jeff each have a 50% interest in Keni Partnership. The partnership and the individuals file on a calendar-year basis. For its Year 4 tax year, Keni had a $30,000 loss. Mutt's adjusted basis in the partnership interest on January 1, Year 4, was $8,000. In Year 5, Keni partnership had a profit of $28,000. Assuming that there were no other adjustments to Mutt's basis in the partnership in Year 4 and Year 5, what amount of partnership income (loss) would Mutt show on his Year 4 and Year 5 individual income tax returns?
Year 4: $(8,000); Year 5: $0
Year 4: $(8,000); Year 5: $7,000
Year 4: $(15,000); Year 5: $7,000
Year 4: $(15,000); Year 5: $14,000
A partner's distributive share of partnership loss is allowed only to the extent of the adjusted basis of the partner's partnership interest:
Computation:
Year 4 Year 5
Mutt's share of profit(loss) at 50% ($15,000) $14,000
Basis 8,000 0
Unallowed loss (carryover) ($ 7,000) ($ 7,000)
Taxable income(loss) allowed ($ 8,000) $ 7,000
172
A corporation had $10,000 of earnings and profits (E&P) for the current year and accumulated negative E&P of $100,000. It paid a cash distribution of $30,000. What amount represents the taxable dividend to the shareholder for that year?
$100,000
$30,000
$10,000
$0
Shareholders have a taxable dividend of $10,000 for the year. To the extent of earnings and profits, a corporate distribution is considered to be a taxable dividend (i.e., $10,000) even if there is a deficit in accumulated E&P. Any distributions in excess of current E&P come from accumulated E&P. Distributions in excess of both current E&P and accumulated E&P are considered to be a return of capital.
173
What is the basis of property for gain purposes converted from personal to business use?
The basis of property for gain purposes converted from personal to business is the adjusted basis at conversion, then less depreciation (assuming no capital improvement to property). The basis for calculating depreciation is the lower of (a) the adjusted basis of the asset at conversion or (b) fair market value at conversion.
174
what is holding period rule for dividend
Dividends qualify for the dividends-received deduction only if the 46-day (or 91-day) holding period is met for each dividend received. The holding period must be met within the 91-day period beginning 45 days before the ex-dividend date of the stock. If the stock is cumulative preferred stock with an arrearage of dividends, it must be held at least 91 days during the 181-day period beginning 90 days before the ex-dividend date.
Days when the corporation is protected from loss on the stock by put options do not count toward the holding period requirement. The holding period requirement must be met for each dividend viewed over time.
175
Under the Securities Act of 1933, which of the following statements is (are) correct regarding the purpose of registration?
The purpose of registration is to allow for the detection of management fraud and prevent a public offering of securities when management fraud is suspected.
The purpose of registration is to adequately and accurately disclose financial and other information upon which investors may determine the merits of securities.
I only
II only
Both I and II
Neither I nor II
The purpose of registration is to adequately and accurately disclose financial and other information upon which investors may determine the merits of securities.
176
Downs, Frey, and Vick formed the DFV general partnership to act as manufacturers' representatives. The partners agreed Downs would receive 40% of any partnership profits and Frey and Vick would each receive 30% of such profits. It was also agreed that the partnership would not terminate for five years. After the fourth year, the partners agreed to terminate the partnership. At that time, the partners' capital accounts were as follows: Downs, $20,000; Frey, $15,000; and Vick, $10,000. There also were undistributed losses of $30,000. If Frey died before the partnership terminated:
Downs and Vick, as a majority of the partners, would have been able to continue the partnership.
the partnership would have continued until the 5-year term expired.
the partnership would automatically dissolve.
Downs and Vick would have Frey's interest in the partnership
If Frey died before the partnership terminated, the partnership would automatically dissolve. Under the typical state partnership laws, death automatically dissolves a partnership. If the partners wanted to continue the partnership after the death of a partner, they can agree to form a new partnership
177
Terrell has a 60% interest in the capital and profits of Bronco Partnership. He also owns a 65% interest in the capital and profits of STI Partnership. In the current year, Bronco Partnership sold land to STI for $35,000. At the time of the sale, the land had an adjusted basis to Bronco of $40,000. What is the amount of loss that Bronco can recognize this year?
$6,500
$5,000
$3,250
$0
Losses are not allowed from a sale or exchange of property (other than an interest in the partnership) directly or indirectly between a partnership and a person whose direct or indirect interest in the capital or profits of the partnership is more than 50%. Terrell owns more than 50% interest in both partnerships. His basis in the partnership will be reduced by the amount of loss. When the property is sold, any gain will not be recognized up to the amount of the loss not allowed. In other words, the subsequent gain is reduced by the previously disallowed loss. The basis in the partnership will be increased by any gain not recognized.
178
A corporation transferred fully depreciated machinery to an individual shareholder in a liquidating distribution. The original cost of the machinery was $6,000, and the fair market value at the date of the transfer was $5,000. If the shareholder's basis in the corporation's stock was $2,000, then the shareholder reports:
$3,000 capital gain.
$3,000 ordinary income.
$5,000 ordinary income and $2,000 capital loss.
no gain and no loss.
A corporation transferred fully depreciated machinery to an individual shareholder in a liquidating distribution. The original cost of the machinery was $6,000, and the fair market value at the date of the transfer was $5,000. If the shareholder's basis in the corporation's stock was $2,000, then the shareholder reports:
$3,000 capital gain.
$3,000 ordinary income.
$5,000 ordinary income and $2,000 capital loss.
no gain and no loss.
179
In general, the distribution of stock rights does not constitute income. Which of the following is an exception?
The shareholder holds fewer than 100 shares of stock.
There is an immediate capital gain.
The stock rights distribution is made on preferred stock.
The shareholder holds more than 100 shares of stock.
As stated in the question, the distribution of stock rights is generally not a taxable event. There are two exceptions: when a distribution of stock rights is made on preferred stock, and when the option is made to receive cash or other property in lieu of money.
180
Tom Lewis, an individual taxpayer who is a CPA, performs volunteer accounting work for the local Red Cross throughout the year. Tom's adjusted gross income for the year is $80,000. He incurs the following expenses for the year:
Transportation expenses to and from the Red Cross $ 200
Estimated value of accounting services performed 3,000
How much of these expenses may Tom deduct as a charitable donation on his Schedule A (itemized deduction) form (assuming that he can fully itemize and deduct all such expenses)?
$0
$200
$3,000
$3,200
Transportation expenses to and from an event in which an individual performs charitable services is deductible as a charitable contribution. The fair market value of services performed for a charitable organization is not deductible as a charitable contribution.
181
A discharge is the end of a contractual obligation. Which of the following is not a discharge of a contractual obligation?
Complete performance
Partial performance
Condition precedent not happening
Condition subsequent happening
A condition precedent must occur before a contractual obligation comes into existence; if the condition precedent does not occur, there can be no contract or obligation to discharge. A condition subsequent ends an existing contractual obligation. Provided the performance is complete and exactly as agreed to, it will discharge the contract. Partial performance is less than substantial (or complete) and does not discharge the obligation.
182
Zack Zell, single, had adjusted gross income of $50,000 before considering capital gains and losses. Zack had incurred a $4,000 long-term capital loss and also a $5,000 short-term capital loss during the year. What is Zach's adjusted gross income after considering the capital losses?
Net capital losses are deductible to arrive at adjusted gross income, but the deduction is limited to $3,000 per year for individuals with the remaining $6,000 carried over to future years
183
Which of the following parties generally has the most management rights?
Minority shareholder in a corporation listed on a national stock exchange
Limited partner in a general partnership
Member of a limited liability company
Limited partner in a limited partnership
Out of the choices provided, a member of a limited liability company generally has the most management rights.
A limited partner, in order to maintain limited liability, can have no management rights. Shareholders in a corporation elect the board of directors, who then make management decisions. Shareholders have no management rights.
184
a fiduciary must file a tax return for an estate if ?
A fiduciary must file a tax return for an estate if there is gross income of $600 or more.
A fiduciary must file a tax return for a trust if there is any taxable income, or gross income of $600 or more.
185
Which of the following actions will result in the discharge of a party to a contract?
Prevention of performance
Accord and satisfaction
Both prevention of performance and accord and satisfaction
Neither prevention of performance nor accord and satisfaction
There are numerous ways in which a person's contractual obligations might be discharged. A person is discharged from a contractual obligation if the other party has taken action to prevent a performance under the contract. There is also a discharge in the case of “accord and satisfaction.” In this context, the “accord” is the agreement of the parties to modify a contract so as to require a different kind of performance from one of the parties than was originally expected. The “satisfaction” component is the completion of the modified performance, thus discharging the new obligation.
186
Blake transferred a corporate bond with a face amount and fair market value of $20,000 to a trust for the benefit of his 16-year-old child. Annual interest on this bond is $2,000, which is to be accumulated in the trust and distributed to the child on reaching the age of 21. The bond is then to be distributed to the donor or her successor-in-interest in liquidation of the trust. Present value of the total interest to be received by the child is $8,710. What is the amount of the gift that is excludable from taxable gifts?
$20,000
$10,000
$8,710
$0
The annual exclusion only applies to a “gift of a present interest.” A present interest gift is an unrestricted right to the immediate use, possession, or enjoyment of the property or of the related income.
There is an exception to the present interest rule. A transfer for the benefit of a person who has not attained age 21 is considered a gift of a present interest if all of the following conditions are satisfied:
Both the property and its income may be spent by or for the benefit of the minor before she or he reaches 21 years old.
Any portion of the property or its income not expended for the minor before reaching 21 years of age must go to the minor at 21 years of age.
If the minor dies before reaching 21 years of age, the property and its income must be payable to the minor's estate or as the minor directs (under a “general power of appointment”). (IRC Section 2503(c))
Since this question states that only the interest income is to go to the minor (not the corporate bond itself), it does not qualify for the annual exclusions. None of the gift ($8,170) is excludable from taxable gifts.
187
The Browns borrowed $20,000, secured by their home, to pay their son’s college tuition. At the time of the loan, the fair market value of their home was $400,000, and it was unencumbered by other debt. The interest on the loan qualifies as:
The Tax Cuts and Jobs Act of 2017 (TCJA) suspended the deduction for home equity interest from 2018 to 2026—unless the loan is used to buy, build, or substantially improve the home that secures the loan. Therefore, the interest on the Browns' loan is not deductible.
188
Filler-Up is an accrual-basis calendar-year C corporation. Filler-Up uses an allowance method for accounting for bad debts. The allowance for bad debts was $20,000 at the beginning of the year and $30,000 at the end of the year. During the year, Filler-Up wrote off $5,000 of uncollectible receivables and accrued an additional $15,000 of expenses for accounts estimated to be uncollectible. What is the Schedule M-1 adjustment on Filler-Up's federal income tax return?
$10,000 decrease in taxable income
$10,000 increase in taxable income
$5,000 decrease in taxable income
$5,000 increase in taxable income
The Schedule M-1 adjustment on Filler-Up's federal income tax return is a $10,000 increase to taxable income. For tax purposes, bad debts can only amount to $5,000, the actual write-offs for the year. Bad debt expense for book purposes was given as $15,000. Therefore, the excess expense recognition for book purposes results in a $10,000 increase in taxable income.
189
In January Year 3, Brown sold land he had owned for many years on the installment basis. Installments are to be made semi-annually on the first day of March and September. $30,000 of each installment represents Brown's profit. Brown is in the 33% bracket for Year 15. How much capital gains tax must Brown pay on the two installments he receives in Year 15?
Since the property sold was held more than 12 months, both installments are taxed at the 15% capital gains rate; thus, the capital gains tax is $9,000 ($60,000 × 0.15).
The current capital gains rates apply to installment sale proceeds collected after the effective date of the current rates even if the installment sale occurred before the effective date of the current rates.
190
Tom Lewis, a single taxpayer, had the following income and expense items for the current year:
Wages $55,000
Long-term capital loss 4,000
Deductible IRA contribution (Tom is not
covered by a retirement plan at work) 2,000
Mortgage interest on personal residence 5,000
Medical expenses not covered by insurance 6,000
Tom's standard deduction amount 12,000
Assuming that the medical expense deduction threshold is 10%, what is his lowest possible taxable income for the year?
Tom's taxable income is calculated as follows:
```
Wages $55,000
Less Capital loss (3,000)
Less IRA contribution (2,000)
Adjusted gross income $50,000
Minus: Standard deduction 12,000
Taxable income $38,000
```
If Tom itemizes, his taxable income would be $44,000 ($50,000 – $5,000 mortgage interest – $1,000 medical expenses [$6,000 – ($50,000 × 10%)], so Tom should not itemize but rather use the standard deduction of $12,000 for the lowest taxable income of $38,000. Remember, only $3,000 capital loss can be deducted; the remaining $1,000 is carried forward.
Under the Tax Cuts and Jobs Act of 2017 (TCJA), for tax years beginning January 1, 2019, medical and dental care expenses in excess of 10% of AGI are deductible if the taxpayer itemizes. For 2018, the rate was 7.5%. If this question related to 2018, the excess amount over AGI would have been $2,250 [$6,000 – ($50,000 × 7.5%)]. If Tom itemizes, his taxable income would be $42,750 ($50,000 – $5,000 mortgage interest – $2,250 medical expenses), so Tom would still have chosen to use the standard deduction of $12,000, resulting in taxable income of $38,000.
191
Which of the following would be considered a tax-deferred transaction?
A tract of U.S. real property for a piece of foreign real property
An airplane for a Hummer
A statutory merger or consolidation (Type A)
An automobile for a light truck
A Type A statutory merger is usually completed as a stock-for-stock swap without a payment of cash, qualifying as a like-kind exchange.
The like-kind exchange rules (IRC Section 1031) do not allow an exchange of foreign property for U.S. property. No tax-deferred exchange is allowed for autos and trucks, or airplanes and Hummers (or any other personal property).
192
The two equal shareholders of a C corporation are thinking of filing an election to have the company treated as an S corporation. Which of the following consequences is an advantage of this election?
The corporation's net operating loss carryovers from prior years are immediately deductible by the shareholders.
The corporation's tax-free fringe benefits for the shareholders will be deductible by the corporation.
The shareholders of the S corporation will be taxed only on distributions from the corporation.
The corporation's capital losses can be claimed on the tax returns of the shareholders.
Pursuant to IRC Section 1371, no carryforward arising for a taxable year for which a corporation is a C corporation may be carried to a taxable year for which such corporation is an S corporation. Since there is no mention in the question of a built-in gain, any net operating loss carryover deduction does not appear to be immediate and does not appear to be an advantage for an S election.
The S corporation may deduct fringe benefits provided to shareholders to compute ordinary business income; however, fringe benefit expenditures made on behalf of officers and employees owning more than 2% of the S corporation's stock are included as wages in their IRS Form W-2. There are two equal shareholders, and each member will own 50% of the S corporation stock, which is far more than the 2% required for the fringe benefits to be taxable as wage income, so this does not appear to be an advantage for an S election.
The income and deductions of an S corporation are passed through to shareholders on a per-share, per-day basis regardless of when or if distributions are made. However, as a former C corporation, distributions may be taxed in addition to the taxable income of the S corporation depending on the C corporation’s accumulated earnings and profits. Thus, the S corporation shareholders may not only be taxed on their distributions as a former C corporation; the S corporation shareholders will also be taxed on their share of the taxable income of the S corporation. Therefore, this does not appear to be an advantage for an S election.
A corporation may not carry a capital loss from, or to, a year for which it is an S corporation. However, a careful reading of the consequence that a corporation’s capital losses can be claimed on the tax returns of the shareholders suggests that these capital losses are not carryovers but current capital losses while an S corporation. This would be an advantage going forward once the corporation is an S corporation since the capital losses would flow to the shareholder for their income tax return. A C corporation can only deduct capital losses up to its amount of capital gains; the loss is carried to future tax years. Thus, this does appear to be an advantage for an S election and, compared to the other answer choices, is the only choice that is advantageous.
193
Joel and Harriett are married retirees who choose to file their returns jointly. They receive Social Security benefits of $12,000 and a pension of $10,000 per year. How much of their Social Security benefits is taxable?
$12,000
$6,000
$0
$22,000
Payments received from the Social Security Administration are, in general, excluded from gross income. A portion may be taxable depending on other income received by the taxpayer(s). The amount includible is the lesser of half of the benefits received or one-half of the excess of AGI plus one-half of the benefits received over the base amount. For married filing jointly taxpayers, the base amount is $32,000.
194
Able and Baker are equal members in Apple, an LLC. Apple has elected not to be treated as a corporation. Able contributes $7,000 cash and Baker contributes a machine with a basis of $5,000 and a fair market value of $10,000, subject to a liability of $3,000. What is Apple's basis for the machine?
The basis of contributed property is the same in the hands of the partnership as it was in the hands of the partner who contributed it.
The liability Apple assumes will decrease Baker's adjusted basis in his interest in Apple and will increase Able's adjusted basis in his interest in Apple.
195
what is VAT ?
A value-added tax is a tax passed on to the consumer and an estimated market value added onto a product or material at each stage of the manufacturing process. Unlike the sales tax, which is collected at the cash register, the VAT is imposed at each stage of the production process.
196
The adjusted basis of Ted's partnership interest is $30,000. In complete liquidation of his interest, he receives $10,000 in cash, his share of the inventory items having a basis to the partnership of $12,000, and two parcels of land having both fair market values and adjusted bases to the partnership of $12,000 and $4,000. What is Ted's basis in the two parcels of land?
Basis in partnership $30,000
Less: Cash received (10,000)
Remaining basis $20,000
Less: Basis allocated to inventory items (12,000)
Basis left to be allocated to land $ 8,000
$12,000 / $16,000 = 0.75;
0.75 x $8,000 = $6,000 for Parcel 1 (6,000)
Basis in Parcel 2 $ 2,000
Since the fair market value is equal to the basis of the land parcels, the decrease is simply allocated based on the properties' adjusted bases.
197
Graphite Corp. has been a calendar-year S corporation since its inception on January 2, Year 1. On January 1, Year 9, Smith and Tyler each owned 50% of the Graphite stock, in which their respective bases were $12,000 and $9,000. For the year ended December 31, Year 9, Graphite has $80,000 in ordinary business income and $6,000 in tax-exempt income. Graphite made a $53,000 cash distribution to each shareholder on December 31, Year 9. What total amount of income from Graphite is includible in Smith's Year 9 adjusted gross income?
In an S corporation, income is taxed when earned, not when distributed, unless distributions exceed owners' share of earnings + basis. In this case, Smith gets 50% of ($80,000 taxable income + $6,000 nontaxable income). This yields a new basis of $55,000 ($12,000 beginning basis + $43,000 increase in basis = $55,000), which is greater than distributions. Thus, taxable income is limited to Smith's share of Graphite's taxable income, or 50% of $80,000. After the distribution, Smith's basis is $2,000 (basis of $55,000 reduced by a distribution of $53,000 = $2,000).
```
Basis at 01/01/Yr. 9 $12,000
Share of ordinary income 40,000
Share of tax-exempt income 3,000
New basis 55,000
Distribution (53,000)
Basis at 12/31/Yr. 9 $ 2,000
========
```
198
A family farmer with regular annual income may file a voluntary petition for bankruptcy under any of the following Chapters of the Federal Bankruptcy Code except:
7.
9.
11.
13.
Chapter 9 of the Bankruptcy Code deals with the debts of a municipality.
Chapter 7 deals with individual liquidation, Chapter 11 deals with reorganization of debts, and Chapter 13 deals with adjustment of debts (repayment) and all are applicable to an individual or a farmer.
199
Which of the following entities has an unrestricted option in selecting the tax year to be used when filing the first tax return?
Sole proprietor
Limited liability company
S corporation
C corporation
Sole proprietors, partnerships, and limited liability entities are restricted to the tax year of the owner. S corporations are restricted to a calendar year unless IRS approval is obtained.
Only a C corporation can select any month for the close of the tax year.
200
For which of the following contracts will a court generally grant the remedy of specific performance?
A contract for the sale of a patent
A contract of employment
A contract for the sale of fungible goods
A contract for the sale of stock that is traded on a national stock exchange
Specific performance forces performance of the contract when the goods are unique. Patents are unique, so the court would grant the remedy for a contract for the sale of a patent.
201
Matthews was a cash-basis taxpayer whose records showed the following:
Year 5 state and local income taxes withheld $1,500
Year 5 state estimated income taxes paid
December 30, Year 5 400
Year 5 federal income taxes withheld 2,500
Year 5 state and local income taxes paid
April 15, Year 6 300
What total amount was Matthews entitled to claim for taxes on her Year 5 Schedule A of Form 1040?
Schedule A of Form 1040 is the “itemized deductions” schedule for an individual. Since Matthews is a cash-basis taxpayer, she is allowed to deduct all state income taxes paid in Year 5. These are:
Year 5 state and local income taxes withheld $1,500
Year 5 state estimated income taxes paid
December 30, Year 5 400
Total $1,900
======
No deduction is allowed for federal income tax. The Year 5 state and local income taxes paid on April 15, Year 6, of $300 can be deducted in Year 6.
202
Thompson's basis in Starlight Partnership was $60,000 at the beginning of the year. Thompson materially participates in the partnership's business. Thompson received $20,000 in cash distributions during the year. Thompson's share of Starlight's current operations was a $65,000 ordinary loss and a $15,000 net long-term capital gain. What is the amount of Thompson's deductible loss for the period?
Partnership losses are deductible by a partner up to the amount of the partner's basis in the partnership interest. To compute a partner's basis to determine deductible losses, the basis is reduced by distributions first.
Beginning of year $ 60,000
Less Distributions - 20,000
$ 40,000
Long-term capital gain 15,000
Basis for allowing deductible loss $ 55,000
Thus Thompson can deduct $55,000 of Starlight Partnership's ordinary loss and will have a $10,000 loss to carryforward.
203
Tom, a roofer, repairs a leaky roof on George's home. They had agreed that the cost of the materials and labor involved in the repair would be $200. If George fails to pay the $200 owed for the roof repair:
Tom could create a mortgage lien on the home by filing written notice of the lien.
Tom could create an artisan's lien on the home by filing written notice of the lien.
Tom could create a mechanic's lien on the home by filing written notice of the lien.
Tom could not obtain any special type of lien against the home.
Tom could create a mechanic's lien on the home by filing written notice of the lien.
When labor, services, or materials are provided for the purpose of making improvements or repairs to real property, the creditor can place a mechanic's lien on the property if payment is not made. This is a statutory lien controlled by state law, and generally the lien holder is required to file a written notice of the lien within a specific time period.
An artisan's lien is a lien arising from work done on personal property. A mortgage lien is a security interest in real property given by the owner as security for a debt owed to the creditor. No specific agreement to transfer a security interest exists between George and Tom.
204
Which of the following entities may not deduct fringe benefits for the owner/employee?
Sole proprietorship
Partnership
S corporation
C corporation
Sole proprietors may not deduct the cost of fringe benefits. The entity does not exist separately from the person for taxation purposes. Partnerships may deduct the benefits but the partners must include the amount in income. A more than 2% shareholder of an S corporation must include the benefits in income.
205
Under the Secured Transactions Article of the U.C.C., which of the following statements is correct regarding a security interest that has not attached?
It is effective against the debtor, but not against third parties.
It is effective against both the debtor and third parties.
It is effective against third parties with unsecured claims.
It is not effective against either the debtor or third parties.
A security interest is an interest in personal property or fixtures that secures payment or performance of an obligation. Attachment is the creation and coming into existence of a security interest. Attachment requires a security agreement between the debtor and the secured party; the secured party must give value and have rights in the collateral. If these things do not occur, then no attachment has been completed and it is not effective against either the debtor or third parties.
206
You are a partner in HiJack Partnership. The adjusted basis of your partnership interest at the end of the current year is zero. Your share of potential ordinary income from partnership depreciable property is $5,000. The partnership has no other unrealized receivables or substantially appreciated inventory items. You sell your interest in the partnership for $11,000 in cash. Which of the following statements is accurate?
You report the entire amount as a capital gain since your adjusted basis in the partnership is zero.
You report $5,000 as ordinary income from the sale of the partnership's depreciable property.
You report the remaining $6,000 gain as capital gain.
Two (2) and 3 are correct, but 1 is incorrect.
All of the statements are incorrect.
All of the statements are correct.
One (1) is correct, but 2 and 3 are incorrect.
The $5,000 is reported under the ordinary income rules for depreciation recapture. The additional payment of $6,000 is a capital gain and reportable in the current year.
207
Acorn Marina, Inc., sells and services boat motors. On April 1, 20X1, Acorn financed the purchase of its entire inventory with GAC Finance Company. GAC required Acorn to execute a security agreement and financing statement covering the inventory and proceeds of sale. On April 14, 20X1, GAC properly filed the financing statement pursuant to the U.C.C. Secured Transactions Article. On April 27, 20X1, Acorn sold one of the motors to Wilks, who had once worked for Acorn, and knew that Acorn regularly financed its inventory with GAC. Acorn has defaulted on its obligations to GAC. The motor purchased by Wilks is:
subject to the GAC security interest because Wilks should have known that GAC finances the inventory purchase by Acorn.
subject to the GAC security interest because Wilks purchased the motor for a commercial use.
not subject to the GAC security interest because Wilks is regarded as a buyer in the ordinary course of Acorn's business.
not subject to the GAC security interest because GAC failed to file the financing statement until more than 10 days after April 1, 20X1.
the motor purchased by Wilks is not subject to the GAC security interest because Wilks is regarded as a buyer in the ordinary course of Acorn's business. Acorn Marina is in the business of selling outboard motors. Although Wilks was once an employee of Acorn, his purchase is entirely within Acorn's normal business.
Under U.C.C. 9-307, “A buyer in ordinary course of business (see also Section 9 of U.C.C. 1-201)…takes free of a security interest created by his seller even though the security interest is perfected and even though the buyer knows of its existence.”
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A corporation may reduce its regular income tax by taking a tax credit for:
dividends-received deduction.
foreign income taxes.
state income taxes.
accelerated depreciation.
A corporation may reduce its regular income tax by taking a tax credit for foreign income taxes paid.
Note: The following items reduce taxable income:
Dividends-received deduction
State income taxes
Accelerated depreciation
