Tax Quizzes Flashcards
(129 cards)
1
Q
Unearned Income is…
A
Interest
Dividends
Capital gains
Royalties
Rents
Pension and annuity income
Unearned income from trusts
2
Q
Section 1231 specifically includes certain property, such as:
A
Timber
Coal
Iron Ore
Certain Livestock
Unharvested crops (under certain conditions)
3
Q
Tom bought 10,000 shares of stock at $10/share in a company. Now stock is worth $200,000 and paying $8,000 dividend/year. Tom feels stock will continue to appreciate at 12% each year, including dividend. Wants to establish college fund for two daughters age 19 (not in school yet) and age 9. Name two implications of gifting 2,500 shares of stock to each daughter.
A
Gives 2,500 shares to older daughter = All dividends will be taxed in her income bracket
Gives 2,500 shares to younger daughter = All dividend income that exceeds $2,300 will be taxed at parent’s rate.
4
Q
What credentials permit an individual to appear before the IRS on behalf of a client?
A
Enrolled Agent
CPA
Attorney
5
Q
Roger is a SE physician and uses CFP services. What schedules can Roger deduct the CFP’s fee on?
A
Tax planning for the business is deductible on Schedule C
CFP services to an individual are NOT deductible
6
Q
Basis in property transferred between spouses or former spouses incident to a divorce
A
Transfer will be treated as if it were acquired by gift and the transferor’s basis in the property will be carried over to the transferee.
7
Q
A cash-basis taxpayer includes income from a service business when the…
A
Client’s check is received
8
Q
Contractor purchased tractor for use in business for $25,000 plus $1,250 in sales tax. Local municipality also imposes annual property tax of $500. Expected useful life of 5 years. What is the basis in the tractor for depreciation?
A
Basis = Purchase Price + any addition to place the property into service.
$25,000 + $1,250 = $26,250
Personal property tax is an annual executory cost, not included in basis.
9
Q
Client sold apartment building for $100,000 paying sales commission of $5,000 plus $2,500 closing costs. Original cost was $80,000, total straight line depreciation of $40,000 had been taken. Had a mortgage of $60,000 assumed by buyer. What is the purchaser’s basis?
A
The buyer’s cost basis will be $100,000, the purchase price of the building.
10
Q
Client sold apartment building for $100,000 paying sales commission of $5,000 plus $2,500 closing costs. Original cost was $80,000, total straight line depreciation of $40,000 had been taken. Had a mortgage of $60,000 assumed by buyer. What is the seller’s adjusted cost basis?
A
Equal to the purchase price minus the depreciation, commissions and closing costs reduce the net sales price.
$80,000 - $40,000 = $40,000
11
Q
A minority non-employee shareholder in an S Corporation…
A
Received comp when corp declares dividend
Votes for board at annual meeting
Receives annual K-1
Reports on personal income tax return the pro-rata shore of corporate profit or loss
12
Q
What is the best source for obtaining information about the intent of a very recent change in the tax law?
A
Congressional Committee Reports
13
Q
What imposed the first constitutional federal income tax?
A
Revenue Act of 1913
14
Q
Revenue rulings are based on a set of facts…
A
common to many taxpayers.
15
Q
Determination letters are issued at the request of a taxpayer by the district director of the IRS when…
A
the taxpayer has already engaged in a transaction and would like to know how to report the transaction for tax purposes.
16
Q
In what venue is a jury trial available for tax controversies?
A
US District Court
17
Q
What is the best source for obtaining a plain language understanding about the current tax law?
A
Commerce Clearing House Federal Tax Guide.
18
Q
Sources of “substantial authority” available for tax research include:
A
Internal Revenue Code.
Congressional Committee Reports (Blue Book).
Treasury Regulations.
Private Letter Rulings.
19
Q
What generates the largest percentage of gross collections for the Internal Revenue Service?
A
Individual income taxes make up nearly 50% of the gross collections by the Internal Revenue Service.
20
Q
The statute of limitations for the collection of a deficiency by the IRS is…
The statute of limitations of fraud for the IRS is…
The general statute of limitations under Section 6501 is…
The statute of limitations for a substantial understatement of income greater than 25% is…
A
10 Years
There is no statute of limitations for fraud
3 Years
6 Years
21
Q
Our tax laws encourage taxpayers to…
A
Sell investment assets that have declined in value, but keep those investment assets that have appreciated.
22
Q
Characteristics of Section 179 Deduction
A
Upfront business deduction, now at $1,080,000 (2022) that can be used by businesses to reduce tax liabilities.
Any asset value placed into service over $2,700,000 reduces the deductible maximum of $1,080,000 dollar for dollar.
Section 179 is one year deduction.
Section 179 does not apply to personal assets.
23
Q
Claiming Section 179 expense immediately…
A
reduces the basis of the property by whatever the amount claimed (not to exceed original cost).
24
Q
During the current year, JoAnne’s business made net income before any Section 179 deduction of $15,000. She added an allowable Section 179 asset to her business valued at $150,000 as of the first of the current year. What can she deduct under Section 179 in the current year?
A
$15,000
Section 179 deduction cannot exceed net business income in a given year. The rest of the Section 179 deduction can be carried over, but a 179 deduction cannot be used to create a business loss. Therefore, they would only be allowed to deduct $15,000 for the current year and carry forward $135,000.
25
When do the recapture rules for Section 179 apply?
When the asset is sold before it would have been fully depreciated.
When the business use drops below 50%.
26
Chelsea had to put more money into her rental property this year. She had the exterior of the rental home painted and the roof replaced at a cost of $12,500 and $18,000, respectively. How much is depreciable?
$18,000
Painting, inside or out, is considered a repair, which is immediately expensed. The roof replacement is an improvement that substantially prolongs the asset’s life, which is capitalized and depreciated over the useful life.
27
Qualified private-activity municipal bond interest and the excess of percentage depletion over the property's adjusted basis are...
Preference items or adjustments for purposes of AMT
28
Add-back items for purposes of AMT
Depreciation of property placed in service after 1986.
Passive activity losses.
The standard deduction, if taken in lieu of itemized deductions.
29
Giselle became an AMT taxpayer last year. She had to add several items to her regular taxable income in arriving at alternative minimum taxable income. Which of the following items will result in an AMT credit that can be used to offset future regular tax liability?
A $75,000 difference between the fair market value of stock and the strike price in the incentive stock option used to purchase the stock.
The inclusion of the difference between the fair market value and exercise price of the stock options will result in a credit that Giselle can use against future regular income tax liability
30
State income taxes deducted as an itemized deduction will be...
added back into regular income to calculate Alternative Minimum Taxable Income.
31
Flow Through Entities (6)
GP
LP
LLP
FLP
LLC
S Corp
32
If the business is deemed to be a PHC by the IRS...
penalty tax of 20% can be imposed on the undistributed personal holding company income.
33
Brady is starting a new business where he will be the sole owner. He would like to have limited liability, but he would prefer flow-through taxation because he expects to have losses in the first few years. He is not concerned about incurring self-employment taxes. What entity would best suit Brady's needs?
A Single-member LLC.
34
Lowest cost entity...
Medium cost entities...
Proprietorship
GP and LP
35
Entities with no personal liability of investors for enterprise debt...
LP (if limited partner)
LLC
S Corp
C Corp
36
Entities with no annual state filing requirement
Proprietorships
GP
37
Entities with restricted number of owners
Proprietorship (One)
S Corp (100)
38
Entities with K-1s
GP
LP
LLC
LLP
FLP
S Corp
39
If interested in taking the company public in the future an LLC...
Is an inappropriate entity,
40
Entities without SE income
S Corps and C Corps (W-2)
41
Characteristics of a C corporation
The number of shareholders is unlimited.
The bankruptcy of a major shareholder has NO effect on the business form.
Shareholder liability is limited.
42
The primary purpose of a FLP is to...
Upon creation of a FLP...
transfer assets to younger generations of a family using annual exclusion gifts and valuation discounts.
there are neither income nor gift tax consequences because the entity created is owned by the same person, or persons, who owned it before the transfer.
43
A shareholder in an S corporation...
restricted to individuals who are either US citizens OR US residents, estates, certain trusts, and charitable organizations
Votes for the Board of Directors at the annual shareholders' meeting.
Receives a K-1 annually in order to prepare a personal income tax return.
Reports on a personal income tax return a pro-rata share of corporate profit or loss.
44
In the current year Harold had a Section 1231 gain of $13,000. In the prior years, Harold had the following Section 1231 transactions:
Year Net Section 1231 Transaction
2021 $4, 000 Loss
2020 $2,000 Loss
2019 None
2018 None
2017 None
2016 $8,000 Gain
2015 $2,000 Gain
2014 $2,000 Gain
How will Harold's Section 1231 gain be taxed in the current year?
5-Year Look-Back Rule:
Harold would have to recognize $6,000 of his 2022 gain as ordinary income since in 2021 and 2020 he had Section 1231 losses. The remaining $7,000 of Harold's Section 1231 gain ($13,000 - $6,000) would be treated as a Section 1231 capital gain.
45
The basis of depreciable property begins with...
the acquisition costs plus any additional expense necessary to acquire or making such property ready for use.
46
Section 1245 recapture is applied to...
the sale of depreciated assets
47
Section 1245 recapture does not apply to business equipment held for 17 months or longer if...
The property was abandoned as worthless.
48
Section 1250 gain applies to...
the realized gain on real property where the accelerated method was used. The gain is the excess of accelerated over straight line (ACRS). Section 1250 gain is taxed as ordinary income. Under current law (MACRS), only straight line depreciation of real property is used.
49
Kate owns a downtown office building. Kate originally purchased the building for $900,000 and took depreciation deductions of $400,000. Kate is in the 37% tax bracket. Straight-line depreciation would have been $400,000. What are the tax consequences if Kate sells the building for $2,100,000?
Sale Price $2,100,000
Less Adjusted Basis $500,000 ($900,000 - $400,000)
Equals Gain $1,600,000
Breakdown of Gain
$400,000 Straightline Depreciation Recapture (25%)
$0 Excess Depreciation (Ordinary Income)
$1,200,000 Gain (Capital Gain)
The capital rate in this case will be 20% because she is in the 37% tax bracket.
50
Depreciable property or real property used in a trade or business is a ____ asset
1231
51
Section 1245 recapture applies when...
All or a portion of gain on tangible personal business property resulted from depreciation taken.
52
A client sold an apartment building last year for $100,000, paying a sales commission of $5,000 plus $2,500 closing costs. The building originally cost $80,000 20 years ago. Total straight line depreciation of $40,000 had been taken. The building had a mortgage of $60,000 which was assumed by the buyer. What is the seller's adjusted cost basis prior to the sale?
The adjusted cost basis is determined by subtracting from the acquisition costs any depreciation or unrecovered casualty losses. The adjusted cost basis was as follows: $80,000 (acquisition cost) minus $40,000 (depreciation) = $40,000 adjusted cost basis.
NOTE: Only acquisition costs add to basis. The seller is covering the cost of disposition here, it does not add to their original basis.
53
A client sold an apartment building last year for $100,000, paying a sales commission of $5,000 plus $2,500 closing costs. The building originally cost $80,000 20 years ago. Total straight line depreciation of $40,000 had been taken. The building had a mortgage of $60,000 which was assumed by the buyer. What is the purchaser's cost basis?
The cost basis to a purchaser is the acquisition cost plus any other costs associated with purchasing the property or making it useful for service. The buyer paid $100,000, and no acquisition costs.
The question indicates that it was the seller, and not the buyer, who paid the sales commission and the closing costs. Therefore, the buyer's basis is only the acquisition costs of $100,000. Cash $40,000 plus mortgage $60,000.
54
Upon the death of either spouse in a community property state, what is the basis in the community property for surviving spouse?
both halves of community property are stepped to the fair market value regardless of who inherits the decendant's half - becomes FMV at time of death
55
Abigail was an original investor in, and owns a 25% interest in, Decorate Your Dream LLC, a home decorating company. Abigail paid $50,000 for her interest. This year, Decorate Your Dream did very well and had a profit of $100,000. However, no distributions were made. What is Abigail's basis in her interest in Decorate Your Dream at the end of this year?
Abigail's original cost basis is increased by her share of the profits.
Therefore, her original cost basis of $50,000 is increased by $25,000.
If there had been a distribution, this would have reduced Abigail's adjusted basis in her interest in the company.
56
Does roof REPAIR add to basis?
No, only roof REPLACEMENT
57
Nancy and Oliver had been married for 25 years when Oliver died suddenly in February of the current year. Although Nancy was deeply depressed about Oliver's death, she knew that Oliver would want her to move on with her life and she began dating again. It wasn't long before Nancy was swept off of her feet by Paul. After a romantic weekend in the Catskills, Paul and Nancy got married in November of the current year. What filing status will be used for Nancy and Oliver for the current year?
Nancy cannot file MFJ on two returns. She is married to Paul currently and will file MFJ with him. Oliver's final tax return will be filed as MFS.
58
Requirements to file as head of household
The taxpayer must file a separate tax return from the spouse.
The taxpayer must furnish over one-half of the cost of maintaining the household.
The spouse must not be a member of the household during the last six months of the tax year.
59
Wilma is married to Herb, who abandoned her five years ago. She has not seen or communicated with him since June of that year. She maintains a household in which she and her two young dependent children live. Which of the following statements about Wilma's filing status in this year is correct?
You are able to file as a head of household if you are considered to be abandoned by your spouse and are claiming dependent children. An individual is required to live apart from his or her spouse for the entire last six months of the tax year to file under abandoned spouse status.
60
Josie is 17 years old and qualifies as a dependent for her parents. Josie earned $4,200 in wages and $900 in interest income during the current year. What is Josie's basic standard deduction for the current year?
Josie's basic standard deduction is equal to her earned income plus $400. Therefore, her basic standard deduction is $4,600
61
Under the Last In First Out (LIFO) inventory system...
The cost of goods is assigned the most current inventory costs.
The cost of the last units purchased will be the first costs to be transferred to cost of goods sold when the goods are sold.
62
The basis of personal property converted to business use will be...
the taxpayer's adjusted basis on that property as of the date of conversion or the FMV if lower.
63
Under the First in First Out (FIFO) inventory system...
The cost of goods sold is based on the costs of the first goods purchased.
The cost of the first units purchased are the first costs to be transferred to cost of goods sold when the goods are sold
64
If an activity is classified as a hobby, the expenses are...
not deductible
65
If an activity is classified as a trade or business, any net loss...
may be deductible against other income.
66
The accrual accounting method recognizes income when...
the taxpayer has a right to collect. This occurs usually after the completion of a job and in no case later than when the invoice is prepared and sent.
67
Accrual taxpayers who receive prepaid revenues...
do not recognize taxable income until the revenue is actually earned
68
qualifying small business taxpayer
average gross receipts below $27 million
can choose to use the cash basis or the accrual basis accounting method.
69
Under what circumstances is a taxpayer required to use a calendar year tax period?
If the taxpayer does not keep books or accounting records.
70
What is the major advantage(s) of the cash method of accounting?
Income may be deferred.
Deductible expenses may be accelerated.
71
substantial understatement of his tax liability...
more than 10 percent of the correct tax liability and at least a $5,000 tax deficiency.
The penalty imposed is generally 20% of underpayment amount.
72
penalty for filing a fraudulent income tax return...
75% of the deficiency.
73
The amount for failure to pay is...
point five percent (0.5%) per month
Clock starts April 15.
74
failure to file penalty...
5% of the unpaid tax balance for each month
if a tax return is filed more than 60 days late (as it is in Ford's case), the minimum failure to file penalty is the lower of $435 or 100% of the tax due
75
The preparer penalty for willful or reckless conduct...
greater of $5,000 or 50% of the income derived by the preparer for the return
76
Insurance proceeds which exceed the current basis of destroyed property will not be taxable if...
the taxpayer replaces that property with similar property within a two-year period from the end of the year in which realization resumed if a natural disaster (fire) or three years from the end of the year in which realization occurred in the event of a government taking (emminent domain).
77
CAT-CORN
Computers, Autos, and Trucks are 5 year
Office furniture is 7 year
Residential real property (rental houses) is 27.5 year
Nonresidential real property (commercial buildings) is 39 year.
78
Cost recovery of an intangible asset is allowed through...
The costs of natural resources are recovered through...
amortization
depletion
79
What characteristics of an automobile lease might cause the lease to be treated as a purchase for tax purposes?
Intent of the parties to the transaction.
Whether any equity results from the arrangement.
Whether any interest is paid.
Whether the fair market value of the car is less than the "lease payment" or option when the option to buy is exercised.
80
Your basis for depreciation is...
the lower of FMV or adjusted basis for depreciation.
81
Capital recovery is...
the expensing of certain acquisition costs
82
What classifications of property are subject to cost recovery?
Personalty.
Natural resources.
Intangible property.
83
when renting a personal residence for less than 15 days...
No income is required to be reported
Expenses are also disallowed in this situation.
84
uncollected rent is...
not deductible.
85
NOL can only offset...
80% of the current year's income
86
Income received but not spent is applicable to...
the gross income test but not the support test.
87
The five dependency tests are...
1) Gross Income Test
2) Support Test
3) Member of Household or Family Member Test
4) Citizenship Test (U.S., Canada or Mexico)
5) Joint Filing Test.
88
Under what circumstances will the child of divorced parents be treated as the qualifying child of the noncustodial parent?
The parents are legally divorced and not living in the same household.
The child receives over one-half of his support for the year from his parents.
The child receives over one-half of his support for the year from his parents.
The custodial parent signs a statement that he will not claim the child as a dependent for the year and the noncustodial parent attaches the statement to his return
89
To be considered material participation...
1) the Taxpayer dedicated more than 500 hours to the activity or
2) the Taxpayer dedicated more than 100 hours and the most of anyone.
90
Nell sold a passive activity with an adjusted basis of $50,000 for $90,000. Suspended losses attributable to this property were $30,000. Her taxable gain is...
If passive income is available for a year in which there are suspended losses, then loss to the extent (but not more than) the passive income, are used to offset income and thus reduce the total suspended loss. When an activity is disposed, the total suspended losses are applied to the disposition resulting in a gain or loss on disposition
$90,000 (sale price) - $50,000 (adjusted basis without application of suspended loss) = $40,000 of gain on disposition before application of suspended loss. $40,000 - $30,000 (suspended losses from prior years) = $10,000 (adjusted gain on disposition).
91
Paul and Heather are getting divorced. As part of the divorce settlement, Heather receives the vacation home worth $3,000,000. The couple originally purchased the vacation home five years ago for $1,000,000.
Heather has a carryover basis in the property. Therefore, her basis is $1,000,000.
92
The amount of premiums paid on an LTC is...
included in the medical expense deduction for total expenditures exceeding 7.5% of AGI and is from AGI. The policy must be guaranteed renewable or non-cancelable to be qualified.
93
Carry over provision for charitable deductions
There is a five-year carry-over provision for charitable deductions.
The total years are 6: The initial year plus five carry-over years.
94
Elaine incurred $26,000 of margin interest on her $600,000 investment portfolio. Her portfolio income consists of $10,000 in interest, $15,000 in qualified dividends, $3,000 in ordinary dividends, $6,000 in short-term capital gains, and $11,000 in long-term capital gains. How much of the margin interest is deductible on Elaine’s tax return assuming no special elections?
She can deduct up to her net investment income which = $10,000 + 3,000 + 6,000 = $19,000 without making a special election.
95
Casualty loss expense for non-business losses are...
no longer deductible after 12/31/17
96
unreimbursed employee business expenses are...
this deduction was eliminated for years after 12/31/17.
97
In September of this year, Rudolph refinanced his home. Prior to refinancing, his only outstanding debt was the balance due on his original mortgage of $110,000. Rudolph needed some additional money to pay for his child's college education and to take advantage of an investment opportunity, so upon refinancing, Rudolph took out a 30-year mortgage for $250,000. To reduce the interest rate on the mortgage, down to 5%, Rudolph paid $2,500 in points to refinance. Which of the following statements is correct?
$110,000 of the refinanced amount continues to be treated as acquisition indebtedness since that was the previous balance of Rudolph's mortgage.
An additional $140,000 will be considered home equity indebtedness but is not deductible based on its use
98
When tangible personal property donated to a charity will not be used by the charity to carry out its tax-exempt purpose...
deduction available to the donor is limited to the donor's cost basis and will be subject to the 50 percent limitation
99
nonprescription insulin is included as...
Medical expenses itemized and deductible in excess of 7.5% of AGI
100
deductions for personal casualty losses...
eliminated except where Federal disaster's were declared
101
Expenses from self-employment are...
deducted above the line and have no AGI floor.
102
maximum allowable child care credit is...
20% of the total care costs (to a $6,000 maximum.)
103
A cafeteria plan must offer...
at least one taxable benefit, usually cash, and one qualified nontaxable benefit.
104
What are requirements for satisfying the bona fide resident test necessary for excluding foreign earned income?
The taxpayer must establish permanent quarters in the foreign country for himself and his family.
The taxpayer must intend to work in the foreign country for an indefinite period of time.
105
Scholarships received for ____ are all included in gross income.
living expenses including meals, housing, and stipend
106
Leon, age 32, is an active participant in his employer's defined benefit plan, but he would also like to make a deductible contribution to a traditional IRA this year. Leon is married, files a joint return with his wife, and they have an AGI of $116,000 in the current year. What is the maximum deductible contribution that they each can make to a traditional IRA, assuming his wife is also an active participant?
Reduction = Contribution Limit × (AGI-Lower Limit) ÷ $20,000
107
Moving expenses when paid by employer
no longer deductible and when paid by the employer, will be includible in the employee's W-2.
108
Prior to TCJA, the underlying rationale for the alimony rule is that...
The income should be taxed to the person who enjoys the benefits of the income.
109
QNEC, qualified non-elective contributions, to a 401K plan to maintain qualification is a...
ordinary/necessary business expense.
110
Charitable contributions by a partnership are...
personal expenses
111
____ is the only deduction allowed for illegal drug operation activities
Cost of goods sold
112
requirements for the deferral of gain in a nonsimultaneous exchange under Section 1031
The replacement property must be like-kind property with respect to the original property.
The proceeds from the sale of the original property must be held by an escrow agent.
A replacement property must be identified within 45 days of the sale of the original property.
The closing on the replacement property must take place by the earlier of 180 days from the sale of the original property or the due date (including extensions) of the tax return for the year the original property was sold.
113
Earnings on the cash value of an insurance policy...
grow tax-deferred. The earnings on cash value would be taxable if withdrawn or the policy was canceled
114
A person who rents their home for less than 15 days...
is not required to include the income as it is considered personal property, not rental or mixed use
no deductions related to the expense of renting out the home are allowed other than taxes and interest associated with the property that would normally be deductible as an itemized deduction.
115
non-business bad debt is treated as a...
short-term capital loss.
116
Self employed must file return if income is...
greater than or equal to $400 of net earnings from self-employment
117
Qualified dividends are taxed at...
the capital gains rate tables.
118
Dependent care credit amount...
lesser of actual costs or $3,000 for one qualified individual
lesser of actual costs or $6,000 for two or more qualified individuals
If AGI is greater than $43,000 the allowed credit is 20% of max credit
119
Conditions for receiving a dependent care credit
The taxpayer must provide over 1/2 cost of maintaining the household, which is also the principal residence of the child.
The child must be a dependent.
If married, both parents must work or go to school.
120
types of credits available to individual taxpayers
Refundable.
Non-refundable.
121
IRS has three classifications of income...
active, passive and portfolio.
122
Inherited cash or property is ____ from gross income
Borrowed money is also ____ from gross income
excluded
excluded
123
Iris, a widow, elected to receive the proceeds of a $50,000 face value life insurance policy on the life of her deceased husband in ten annual installments of $6,800 each beginning in 2019. In the current year, she received $6,800. Iris died in December of this year after collecting the installment payment. What is the amount subject to income tax on her final return?
$50,000 ÷ 10 = $5,000 principal each year. $6,800 - $5,000 = $1,800 of interest.
The $1,800 of interest must be included in Iris' gross income
124
Compensation for damages for personal bodily injury are ____ taxable income
not included in
125
Hospitalization premiums paid by the employer and any other benefit required by the employer for the employer's benefit are...
not included in the employee's AGI income.
126
Student loan interest deduction
above the line
limited to $2,500
127
Child support payments are neither...
deductible from nor includible in income.
128
Self-employed health insurance is a deduction...
for AGI
129
The carrybacks and carryforwards associated with the general business credit must be used in a specific order...
The business credit carryforwards to the current year
The amount of the current year business credit
The business credit carrybacks to the current year
