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Flashcards in TBS Deck (125):
1

Must a cashier check be payable to order or bearer to be negociable?

A cashier's check is an actual check and thus does not have to be payable to order or to bearer.

2

Must Certificates of deposit be payable to order or bearer?

Certificates of deposit, unlike checks, must be payable to order or to bearer.

3

When is a check not payable on demand?

Normally a check is demand paper. However, when it is postdated, it is not payable until that date.

4

When was The $5,000 employee death benefit exclusion repaled?

The $5,000 employee death benefit exclusion was repealed for decedents dying after August 20, 1996.

5

Give ordering rules for how basis is adjusted at the end of the tax year

The tax law provides ordering rules for how basis is adjusted at the end of the tax year, as follows:
1.Increase basis for all income items
2.Decrease basis for distributions
3.Decrease basis for all loss items

6

Sales income $ 100,000
Interest income 9,000
Municipal interest income 6,000
Section 1231 gain 9,000
Cost of goods sold 70,000
Advertising expense 4,000
Supplies expense 4,000
Depreciation expense 4,000
Taxes 9,000
Charitable contributions 2,100
Life insurance premium on partners' lives (proceeds to partnership) 3,000
guaranteed payment of $12,000 for 2014. Sophie received a $15,000 cash distribution
Recourse 30'000
Basis 20'000
1/3 of interests

Give split for adjusted basis

Interest income 9,000
Municipal interest income 6,000
Section 1231 gain 9,000
Charitable contributions 2,100
Life insurance premium on partners' lives (proceeds to partnership) 3,000
=> 1/3 of all amount

ordinary income (loss)
Sales income $100,000
Cost of goods sold (70,000)
Advertising expense (4,000)
Supplies expense (4,000)
Depreciation expense (4,000)
Taxes (9,000)
Guaranteed payment (12,000)
Total Ordinary loss (3,000)
=>1.3 of total

Dividend = as is

7

How much deduction is applicable to dividend received from a 35%-owned domestic corporation?

Dividends received from a 35%-owned domestic corporation would be eligible for an 80% dividends received deduction.

8

How is A lease cancellation payment treated?

A lease cancellation payment is treated as rent and must be fully included in income when received.

9

Capital gain/loss / Operating Income / Distribution Income : how are they treated on the personal income tax return of shareholder/partner accounding to Corporation and other form of entities (S corp, partnership, etc.)?

Capital gain/loss : for corp, only owner's capital transaction (ex, sell of investment)
For other entities : capital net gain/loss + owner transaction (limit of 3'000 if loss)
Operating income : for corp 0
For other entities : full amount
Distribution income : for corp, full amount if corp has at least the amount distributed
Other entities : 0

10

In case of multiple suport agreement filed what is the minimum % to claim dependency?

10%

11

Lucas itemized for federal income tax purposes in 2013. Refund from 2013 Alabama state income taxes paid of $250 : which amount of income must be recognized

Since Lucas itemized in 2013 he received a tax benefit for the state income taxes paid that year. The tax benefit rule provides that if an item deducted in a previous year is recovered in the current year, the recovery is included in income only to the extent that the deduction provided a tax benefit in the year of deduction. (Tax Benefit Rule)

12

On December 28, 2014, a customer from his home repair business offered to pay Lucas $2,200 for work completed, but Lucas deferred receipt until 2015 : which amount of income must be recognized?

Constructively received since Lucas could have accepted payment with no substantial restrictions on the use of the funds. The constructive receipt doctrine provides that if income is made available without substantial restrictions or limitations, it is deemed received to a cash basis taxpayer and taxed currently. (Constructive Receipt Doctrine)

13

On December 1, 2014, Lucas rented his condominium. The new tenants paid $750 for December, an additional $750 for the last month's rent (non-refundable) on the contract, and a $500 deposit (refundable) : which amount of income must be recognized?

The December rent and the rent prepaid for the last month of the contract are included in income. Prepaid rental income is included in income when received unless it is potentially refundable. (Prepaid Income)

14

Lucas owns a $1,000, 12% General Electric bond that pays interest semiannually on December 1 and June 1. He had bought the bond for $1,000 in 2012. On September 1, 2014, he sold the bond for $1,230 which included $30 of accrued interest.

GE Bond: $60 of interest income for June 1 payment. $30 of interest income from June 1 to August 31. $200 gain on sale ($1,200 - basis of $1,000).
Interest income accrued to the date of sale is included in income. The remaining proceeds are applied against the adjusted basis in the bond (capital recovery) to determine the gain or loss on sale. (Recovery of Capital Doctrine/Interest Income Accrual)

15

While jogging in August, Lucas found $300 cash on the sidewalk which he kept

Included in income under the treasure trove rule. All increases in wealth are included in gross income unless a specific exclusion exists. Therefore, this "treasure trove" is included in income. (Broad Based Income Definition)

16

Lucas purchased ABC stock in January 2014 for $2,000. At December 31, 2014, the stock is now valued at $800. Lucas sells the stock on December 31 to take his tax loss for the year, but repurchases the stock on January 2, 2015 for $820 because he believes the stock will rebound.

Loss is disallowed under the wash sale rule since he repurchased ABC stock within 30 days of selling it. The loss from securities sold at a loss is not recognized if a similar security is purchased within 30 days (either before or after) the sale of the security. (Wash Sales)

17

Lucas sued his employer this year for age-discrimination and was awarded $100,000 in an out-of-court settlement.

Discrimination award: Age-discrimination is considered a non-physical injury so the payment is included in income. Damages received due to non-physical injuries are included in income. (Damages - nonphysical)

18

USC Corporation, an accrual basis corporation, was organized during 2014 and incurred the following expenses:

Attorneys' fees for organizing the corporation $20,000
Training costs paid to employees before opening the business $54,000
Fees paid to an underwriter to sell shares to new investors $10,000

USC began business operations on April 1, 2014. It is a calendar-year corporation.
Part A : Using the chart below, compute the amount of organizational expenses related to these costs that will appear on USC's 2014 tax return.


Expenses incurred in connection with the organization of a corporation are known as organizational expenses. Typical organizational expenses are legal services incident to organization, accounting services, organizational meetings of directors and shareholders, and fees paid to incorporate. They must be incurred before the end of the taxable year that business begins (but they do not have to be paid, even if on the cash basis).

$5,000 of these expenses may be deducted, but the $5,000 is reduced by the amount of expenditures incurred that exceed $50,000. Expenses not deducted must be capitalized, and amortized over 180 months, beginning with the month that the corporation begins its business operations. An election can be filed to forego the deduction and amortization.

Total organization expenses are the $20,000 paid to the attorneys. $5,000 of these expenses can be deducted. The remaining $15,000 can be amortized over 180 months beginning in the first month that business begins (April). Therefore, they can be amortized for nine months in 2014, for a deduction of $750 ($15,000/180 months x 9 months).
Total Organization Expenses 2014 Deduction (no amortization) 2014 Amortization Expensed
A: Total Organization Expenses
B: 2014 Deduction (no amortization)
C: 2014 Amortization Expensed
A B C
$20000 $5000 $750

19

USC Corporation, an accrual basis corporation, was organized during 2014 and incurred the following expenses:

Attorneys' fees for organizing the corporation $20,000
Training costs paid to employees before opening the business $54,000
Fees paid to an underwriter to sell shares to new investors $10,000

USC began business operations on April 1, 2014. It is a calendar-year corporation.
Part B: Using the chart below, compute the amount of start-up expenses related to these costs that will appear on USC's 2014 tax return.


Start-Up expenses are expenses that would usually be deducted as ordinary and necessary business expenses, but they cannot be deducted because the business has not yet opened for business. $5,000 of these expenses may be deducted, but the $5,000 is reduced by the amount of expenditures incurred that exceed $50,000. Expenses not deducted must be capitalized, and amortized over 180 months, beginning with the month that the corporation begins its business operations. An election can be filed to forego the deduction and amortization.

Total start-up expenses are the $54,000 paid for training before business operations begins. Only $1,000 of these expenses can be deducted because the total start-up expenses exceed the $50,000 threshold by $4,000 ($54,000 - $50,000 = $4,000 reduction in the original $5,000 deduction). The remaining $53,000 can be amortized over 180 months beginning in the first month that business begins (April). Therefore, they can be amortized for nine months in 2014, for a deduction of $2,650 ($53,000/180 months x 9 months).
A: Total Organization Expenses
B: 2014 Deduction (no amortization)
C: 2014 Amortization Expensed
A B C
$54000 $1000 $2650

20

Ben and LeeAnn Green have two children, MaryAnn and Skip, who are ages 10 and 16, respectively, at the end of 2014. MaryAnn and Skip are qualified dependents of the Greens. They also have a niece, Kayleigh (age 12), who lives with them and qualifies as a dependent. AGI for 2014 is $129,070.

Included in the AGI of $129,070 is salary for Ben of $100,000 and for LeeAnn of $12,000.
Compute the Green's child tax credit for 2014. Phase-out of the child tax credit begins at AGI of $110,000 for taxpayers filing married joint ($75,000 for single).
Number of eligible individuals
Credit before phase-out
Reduction in credit due to AGI
Child credit allowed

Number of eligible individuals 3
Credit before phase-out 3000
Reduction in credit due to AGI 1000
Child credit allowed 2000

The child tax credit is $1,000 per qualifying child in 2014. Qualifying children must be less than 17 and meet the same definition as is used for the dependency rules. Therefore, the Green's will receive a credit for Kayleigh because she is a niece.

Before phase-out, the Greens credit is $3,000 (3x $1,000). The credit is reduced by $50 for each $1,000 (or part thereof) of excess AGI. Phase-out of credit begins at AGI of $110,000 for taxpayers filing married joint ($75,000 for single). Note that these thresholds are NOT indexed for inflation so you should know them for the exam.

Excess AGI is $19,070 ($129,070 - $110,000). $19,070 divided by $1,000 provides 19.07 increments, which is increased to 20 (any portion of a $1,000 increment counts as a full increment). Therefore, the Greens lose $1,000 of their credit (20 x $50). Their final credit is $2,000.

21

Retainer fees received from clients : which schedule?

All trade or business income and deductions of a self-employed individual are reported on Schedule C—Profit or Loss from Business. Retainer fees received from clients is reported in Schedule C as trade or business income.

22

Oil royalties received.: which schedule?

Income derived from royalties is reported in Schedule E—Supplemental Income and Loss. Schedule E also is used to report the income or loss from rental real estate, partnerships, S corporations, estates, and trusts.

23

Interest income on general obligation state and local government bonds. : which schedule?

Interest from general obligation state and local government bonds is tax-exempt and is excluded from gross income.

24

Interest on refund of federal taxes: which schedule?

The interest income on a refund of federal income taxes must be included in gross income and is reported in Schedule B—Interest and Dividend Income. The actual refund of federal income taxes itself is excluded from gross income.

25

Death benefits from term life insurance policy on parent.: which schedule?

Life insurance proceeds paid by reason of death are generally excluded from gross income. Here, the death benefits received by Green from a term life insurance policy on the life of Green's parent are not taxable.

26

Interest income on U.S. Treasury bonds.: which schedule?

Interest income from U.S. Treasury bonds and treasury bills must be included in gross income and is reported in Schedule B—Interest and Dividend Income.

27

Share of ordinary income from an investment in a limited partnership reported in Form 1065, Schedule K-1.: which schedule?

A partner's share of a partnership's ordinary income that is reported to the partner on Form 1065, Schedule K-1 must be included in the partner's gross income and is reported in Schedule E—Supplemental Income and Loss.

28

Taxable income from rental of a townhouse owned by Green.: which schedule?

The taxable income from the rental of a townhouse owned by Green must be included in gross income and is reported in Schedule E—Supplemental Income and Loss.

29

Prize won as a contestant on a TV quiz show.: which schedule?

A prize won as a contestant on a TV quiz show must be included in gross income. Since there is no separate line on Form 1040 for prizes, they are taxable as other income on Form 1040.

30

Payment received for jury service.: which schedule?

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

31

Dividends received from mutual funds that invest in tax-free government obligations.: which schedule?

An investor in a mutual fund may receive several different kinds of distributions including ordinary dividends, capital gain distributions, tax-exempt interest dividends, and return of capital distributions. A mutual fund may pay tax-exempt interest dividends to its shareholders if it meets certain requirements. These dividends are paid from the tax-exempt state and local obligation interest earned by the fund and retain their tax-exempt character when reported by the shareholder. Thus, Green's dividends received from mutual funds that invest in tax-free government obligations are not taxable.

32

Qualifying medical expenses not reimbursed by insurance.: which schedule?

Qualifying medical expenses not reimbursed by insurance are deductible in Schedule A as an itemized deduction to the extent in excess of 10% of adjusted gross income.

33

Personal life insurance premiums paid by Green.: which schedule?

Personal life insurance premiums paid on Green's life are classified as a personal expense and not deductible.

34

Expenses for business-related meals where clients were present: which schedule?

All trade or business expenses of a self-employed individual are deductible on Schedule C—Profit or Loss from Business. However, only 50% of the cost of business meals and entertainment is deductible. Therefore, Green's expenses for business-related meals where clients were present are partially deductible in Schedule C.

35

Depreciation on personal computer purchased in 2013 used for business.: which schedule?

The deduction for depreciation on listed property (e.g., automobiles, computers, and property used for entertainment etc.) is computed on Form 4562—Depreciation and Amortization. Since Green's personal computer was used in his business as a self-employed consultant, the amount of depreciation computed on Form 4562 is then deductible in Schedule C—Profit or Loss from Business.

36

Business lodging expenses, while out of town.: which schedule?

Lodging expenses while out of town on business are an ordinary and necessary business expense and are fully deductible by a self-employed individual in Schedule C—Profit or Loss from Business.

37

Subscriptions to professional journals used for business.: which schedule?

The cost of subscriptions to professional journals used for business are an ordinary and necessary business expense and are fully deductible by a self-employed individual in Schedule C—Profit or Loss from Business.

38

Self-employment taxes paid.: which schedule?

An individual's self-employment tax is computed in Schedule SE and is added as an additional tax in arriving at the individual's total tax liability. A portion of the computed self-employment tax is then allowed as a deduction on Form 1040 in arriving at adjusted gross income.

39

Qualifying contributions to a simplified employee pension plan.: which schedule?

Qualifying contributions to a self-employed individual's simplified employee pension plan are deductible on page 1 of Form 1040 to arrive at adjusted gross income.

40

Election to expense business equipment purchased in 2013.: which schedule?

For 2013, Sec. 179 permits a taxpayer to elect to treat up to $500,000 of the cost of qualifying depreciable personal business property as an expense rather than as a capital expenditure. In this case, Green's election to expense business equipment would be computed on Form 4562—Depreciation and Amortization, and then would be deductible in Schedule C—Profit or Loss from Business.

41

Qualifying alimony payments made by Green.: which schedule?

Qualifying alimony payments made by Green to a former spouse are fully deductible on Form 1040 to arrive at adjusted gross income.

42

Subscriptions for investment-related publications.: which schedule?

The costs of subscriptions for investment publications are not related to Green's trade or business, but instead are considered expenses incurred in the production of portfolio income and are reported as miscellaneous itemized deductions in Schedule A—Itemized Deductions. These investment expenses are deductible to the extent that the aggregate of expenses in this category exceed 2% of adjusted gross income.

43

Interest expense on a home-equity line of credit for an amount borrowed to finance Green's business.: which schedule?

The nature of interest expense is determined by using a tracing approach (i.e., the nature depends upon how the loan proceeds were used). Since the interest expense on Green's home-equity line of credit was for a loan to finance Green's business, the best answer is to treat the interest as a business expense fully deductible in Schedule C—Profit or Loss from Business.

44

Interest expense on a loan for an auto used 75% for business.: which schedule?

The interest expense on a loan for an auto used by a self-employed individual in a trade or business is deductible as a business expense. Since Green's auto was used 75% for business, only 75% of the interest expense is deductible in Schedule C—Profit or Loss from Business. The remaining 25% is considered personal interest expense and is not deductible.

45

Loss on sale of residence.: which schedule?

The loss resulting from the sale of Green's personal residence is not deductible because the property was held for personal use. Only losses due to casualty or theft are deductible for personal use property.

46

During 2013, Dale received a $30,000 cash gift from her aunt : amount of income/loss to be recognized

($0) Amounts received as a gift are fully excluded from gross income.

47

Dale contributed $3,500 to her traditional Individual Retirement Account (IRA) on January 15, 2013. In 2013, she earned $60,000 as a university instructor. During 2013 the Cumacks were not active participants in an employer's qualified pension or annuity plan.: amount of income/loss to be recognized

($3,500) The maximum deduction for contributions to a traditional IRA by an individual at least age 50 is the lesser of $6,500, or 100% of compensation for 2013. Since the Cumacks were not active participants in an employer's qualified pension or annuity plan, there is no phaseout of the deduction based on AGI

48

In 2013, the Cumacks received a $1,000 federal income tax refund.: amount of income/loss to be recognized

($0) Since federal income taxes are not deductible in computing a taxpayer's federal income tax liability, a refund of federal income taxes is excluded from gross income.

49

During 2013, Frank, a 50% partner in Diske General Partnership, received a $4,000 guaranteed payment from Diske for services that he rendered to the partnership that year.: amount of income/loss to be recognized

($4,000) Guaranteed payments are partnership payments to partners for services rendered or for the use of capital without regard to partnership income. A guaranteed payment is deductible by the partnership, and the receipt of a guaranteed payment must be included in the partner's gross income, and is reported as self-employment income in the computation of the partner's self-employment tax.

50

In 2013, Frank received $10,000 as beneficiary of his deceased brother's life insurance policy.: amount of income/loss to be recognized

($0) The proceeds of life insurance policies paid by reason of death of the insured are generally excluded from the beneficiary's gross income.

51

Dale's employer pays 100% of the cost of all employees' group-term life insurance under a qualified plan. Policy cost is $5 per $1,000 of coverage. Dale's group-term life insurance coverage equals $450,000.: amount of income/loss to be recognized

($2,000) An employer's payment of the cost of the first $50,000 of coverage for group-term life insurance can be excluded from an employee's gross income. Since Dale's employer provided group-term insurance of $450,000, and the cost of coverage was $5 per $1,000 of coverage, $5 x 400 = $2,000, must be included in Dale's gross income.

52

In 2013, Frank won $5,000 at a casino and had $2,000 in gambling losses.: amount of income/loss to be recognized

($5,000) Gambling winnings must be included in gross income. Gambling losses cannot be offset against gambling winnings, but instead are deducted from AGI as a miscellaneous itemized deduction limited in amount to the gambling winnings included in gross income.

53

During 2013, the Cumacks received $1,000 interest income associated with a refund of their prior years' federal income tax.: amount of income/loss to be recognized

($1,000) Although a federal income tax refund can be excluded from gross income, interest on the refund must be included in gross income.

54

In 2013, the Cumacks sold their first and only residence for $400,000. They purchased their home in 1994 for $50,000 and have lived there since then. There were no other capital gains, losses, or capital loss carryovers. The Cumacks do not intend to buy another residence.: amount of income/loss to be recognized

($0) Up to $250,000 of gain can be excluded from gross income if an individual owned and occupied a residence as a principal residence for an aggregate of at least two of the five years preceding sale. The excludable gain is increased to $500,000 for married individuals filing jointly if either spouse meets the ownership requirement, and both spouses meet the use requirement.

55

In 2013, Zeno Corp. declared a stock dividend and Dale received one additional share of Zeno common stock for three shares of Zeno common stock that she held. The stock that Dale received had a fair market value of $9,000. There was no provision to receive cash instead of stock.: amount of income/loss to be recognized

($0) Stock dividends are generally excluded from gross income because a shareholder's relative interest in earnings and assets is unaffected.

56

Cobb created a $500,000 trust that provided his mother with an income interest for her life and the remainder interest to go to his sister at the death of his mother. Cobb expressly retained the power to revoke both the income interest and the remainder interest at any time. 1. The income interest at the trust's creation./2. The remainder interest at the trust's creation : Present (P)/future (F) interest or not completed (N)?

1. (N) Since Cobb expressly retained the power to revoke the income interest transferred to his mother at any time, he has not relinquished dominion and control and the transfer of the income interest is not a completed gift.

2. (N) Since Cobb expressly retained the power to revoke the remainder interest transferred to his sister at any time, he has not relinquished dominion and control and the transfer of the remainder interest is not a completed gift.

57

Kane created a $100,000 trust that provided her nephew with the income interest until he reached forty-five years of age. When the trust was created, Kane's nephew was twenty-five. The income distribution is to start when Kane's nephew is twenty-nine. After Kane's nephew reaches the age of forty-five, the remainder interest is to go to Kane's niece. 1. The income interest : Present (P)/future (F) interest or not completed (N)?

(F) Kane's transfer of an income interest to a nephew and a remainder interest to a niece are completed gifts because Kane has relinquished dominion and control. Since Kane's nephew was twenty-five years of age when the trust was created, but income distributions will not begin until the nephew is age twenty-nine, the transfer of the income interest is a gift of future interest and does not qualify for the annual exclusion.

58

During 2013, Hall, an unmarried taxpayer, made a $10,000 cash gift to his son in May and a further $12,000 cash gift to him in August. 1. The cash transfert : Present (P)/future (F) interest or not completed (N)?

(P) Since Hall's gifts of cash to his son were outright gifts, they are gifts of a present interest and qualify for the annual exclusion.

59

During 2013, Yeats transferred property worth $20,000 to a trust with the income to be paid to her twenty-two-year-old niece Jane. After Jane reaches the age of thirty, the remainder interest is to be distributed to Yeats' brother. The income interest is valued at $9,700 and the remainder interest at $10,300. 1. The income interest./2. The remainder interest : Present (P)/future (F) interest or not completed (N)?

1. (P) Yeats' gift of the income interest to her twenty-two-year-old niece is a gift of a present interest qualifying for the annual exclusion since Jane has the unrestricted right to immediate enjoyment of the income. The fact that the value of the income interest does not exceed $14,000 does not affect its nature (i.e., completed gift of a present interest).

2. (F) Yeats' gift of the remainder interest to her brother is a completed gift of a future interest since the brother cannot enjoy the property or any of the income until Jane reaches age thirty.

60

Tom and Ann Curry, U.S. citizens, were married for the entire 2013 calendar year. Tom gave a $40,000 cash gift to his uncle, Grant. The Currys made no other gifts to Grant in 2013. Tom and Ann each signed a timely election stating that each made one-half of the $40,000 gift. The cash transfert : Present (P)/future (F) interest or not completed (N)?

(P) Tom's gift of $40,000 cash to his uncle is an outright gift of a present interest and qualifies for the annual exclusion. Since gift-splitting was elected and Tom and Ann would each receive a $14,000 annual exclusion, Tom and Ann each made a taxable gift of $20,000 - $14,000 exclusion = $6,000.

61

Murry created a $1,000,000 trust that provided his brother with an income interest for ten years, after which the remainder interest passes to Murry's sister. Murry retained the power to revoke the remainder interest at any time. The income interest was valued at $600,000. 1. The income interest./2. The remainder interest : Present (P)/future (F) interest or not completed (N)?

(P) Murry's gift of the income interest to his brother is a completed gift because Murry has relinquished dominion and control. It is a gift of a present interest qualifying for the annual exclusion since his brother has the unrestricted right to immediate enjoyment of the income.

9. (N) Since Murry retained the right to revoke the remainder interest transferred to his sister at any time, the transfer of the remainder interest does not result in a completed gift.

62

Willard, a single taxpayer, had $60,000 in adjusted gross income for 2014. During 2014 he contributed $25,000 to his church. He had a $15,000 charitable contribution carryover from his 2013 church contributions. What was the maximum amount of properly substantiated charitable contributions that Willard could claim as an itemized deduction for 2014?




$15,000



$25,000



$30,000



$40,000

This answer is correct. Willard gave $25,000 to his church during 2014 and had a $15,000 charitable contribution carryover from 2013, resulting in a total of $40,000 of contributions. Since an individual's deduction for charitable contributions cannot exceed an overall limitation of 50% of adjusted gross income, Willard's charitable contribution deduction for 2014 is limited to ($60,000 AGI × 50%) = $30,000. Since Willard's 2014 contributions will be deducted before his carry forward from 2013, Willard will carry over $10,000 of his 2013 contributions to 2015.

63

1. A corporation whose income was derived solely from dividends, interest, and royalties, and during the last six months of its year more than 50% of the value of its outstanding stock is owned by five or fewer individuals.

Personal holding company. To be classified as a personal holding company, a corporation must meet two requirements: (1) the corporation must receive at least 60% of its adjusted ordinary gross income as "personal holding company income" such as dividends, interest, rents, royalties, and other passive income; and (2) the corporation must have more than 50% of the value of its outstanding stock directly or indirectly owned by five or fewer individuals during any time in the last half of the tax year.

64

The basis used to determine gain on sale of property that was received as a gift.

Transferred basis. The transferred basis, equal to the basis of the donor plus any gift tax paid attributable to the net appreciation in the value of the gift, is the basis used to determine gain on sale of property that was received as a gift.

65

The trade-in of production machinery for new production machinery by a corporation, when the corporation pays additional cash.

Nontaxable exchange. A like-kind exchange, the exchange of business or investment property for property of a like-kind, qualifies as a nontaxable exchange. Thus, the exchange of production machinery for new production machinery when boot (money) is given is a nontaxable exchange.

66

An unmarried individual whose filing status enables the taxpayer to use a set of income tax rates that are lower than those applicable to other unmarried individuals, but are higher than those applicable to married persons filing a joint return.

Head of household. Head of household filing status applies to unmarried persons not qualifying for surviving spouse status who maintain a household for more than one-half of the taxable year for a dependent. The tax rates applicable to the head of household status are lower than those applicable to individuals filing as single, but are higher than rates applicable to married individuals filing a joint return.

67

If income is unqualifiedly available, it will be subject to the income tax even though it is not physically in the taxpayer's possession.

Constructive receipt. Under the doctrine of constructive receipt, income is includable in gross income and subject to income tax for the taxable year in which that income is made unqualifiedly available to the taxpayer without restriction, even though not physically in the taxpayer's possession.

68

A special tax imposed on corporations that accumulate their earnings beyond the reasonable needs of the business.

Accumulated earnings tax. Corporations may be subject to an accumulated earnings tax, in addition to regular income tax, if a corporation accumulates earnings beyond reasonable business needs in order to avoid shareholder tax on dividend distributions.

69

Corporations may be subject to an accumulated earnings tax, in addition to regular income tax, if a corporation accumulates earnings beyond reasonable business needs in order to avoid shareholder tax on dividend distributions.

Portfolio income Portfolio income is defined as income from interest, dividends, annuities, and certain royalties.

70

The classification of depreciable assets and real estate used in a trade or business and held for more than one year.

Sec. 1231 assets. Section 1231 assets include depreciable assets and real estate used in a trade or business and held for more than one year.

71

This deduction attempts to mitigate the triple taxation that would occur if one corporation paid dividends to a corporate shareholder who, in turn, distributed such amounts to its individual shareholders.

Dividends received deduction. The dividends received deduction was enacted by Congress to mitigate the triple taxation that occurs when one corporation pays dividends to a corporate stockholder who, in turn, distributes such amounts to its individual stockholders.

72

Sale of property to a corporation by a shareholder for a selling price that is in excess of the property's fair market value.

Constructive dividend. A constructive dividend results when a shareholder is considered to have received a dividend from a corporation, although the corporation did not specifically declare a dividend. This situation may occur when a shareholder/employee receives an excessive salary from a corporation, when there is a loan to a shareholder where there is no intent to repay the amount loaned, or when a corporation purchases shareholder property for an amount in excess of the property's fair market value. Constructive dividends often result when a transaction between a shareholder and corporation is not an arm's-length transaction.

73

Determine whether the transfer is subject to the generation skipping tax, the gift tax, or both taxes. Disregard the use of any exclusions and the unified credit. Martin's daughter, Kim, has one child, Dale. During 2013, Martin made an outright $6,000,000 gift to Dale.

Generation-Skipping Tax and Gift Tax
Since Martin made an outright gift of $6,000,000 to Dale, the transfer is a gift of a present interest and is subject to the gift tax. Since Dale happens to be Martin's grandchild, the gift also is subject to the generation-skipping tax. The generation-skipping tax on the transfer of property is imposed in addition to federal gift and estates taxes and is designed to prevent individuals from escaping an entire generation of gift and estate taxes by transferring property to, or in trust for the benefit of, a person that is two or more generations younger than the donor or transferor. The tax approximates the transfer tax that would be imposed if the property were actually transferred to each successive generation.

74

JJG Partnership, a calendar year, cash-method partnership has been in existence since 2012.
JJG's balance sheet as of June 30, 2014 is as follows:
Basis Fair Market Value
Cash $30,000 $30,000
Accounts Receivable -0- 30,000
Collectibles 20,000 32,000
Land 40,000 28,000
$90,000 $120,000
======== ========
Capital, Jennie 30,000 40,000
Capital, Jeff 30,000 40,000
Capital, Greg 30,000 40,000
$90,000 $120,000
======== ========
Jennie sells her partnership interest to Norm on June 30, 2014 for $50,000. On June 30, 2014, Jennie's basis in her partnership interest was $30,000. Jennie made no contributions and did not receive any distributions from the partnership during 2014. The partnership's ordinary business income/loss for the year was ($6,000).
Part A: Assuming that Jennie is a calendar year taxpayer, and that all partnership items of income and loss are earned evenly throughout the year, compute Jennie's share of the partnership's ordinary business income or loss for 2014.

When will this income/loss flow from the partnership to Jennie?

Since Jennie sold her partnership interest six months into the 2014 tax year (and since all items are earned evenly throughout the year), 50% of one-third of the ordinary loss is allocated to Jennie. Therefore, Jennie's share of the ordinary loss is $1,000 ($6,000 × 1/3 × 6 months/12 months).

When a partner sells his or her entire partnership interest, the partnership tax year closes with respect to that partner on the date of sale. Therefore, the partnership tax year closes with respect to Jennie on June 30, 2014, so Jennie's share of the ordinary loss (and all other partnership items) flows to her on June 30, 2014.

The $29,000 basis was computed in Part A. The Account Receivable is a hot asset, so $10,000 of the gain from the sale is characterized as ordinary income due to the income potential in the receivable ($30,000/3 = $10,000).

Similarly, if the collectibles were sold the gain allocated to Jennie would be $4,000 (($32,000 - $20,000)/3 = $4,000), so this gain is taxed at 28% as is gain from the sale of collectibles by an individual.

There are no buildings that are being depreciated so there is no potential 25% gain.

The residual gain is capital gain taxed at a maximum of 15%.


Jennie's basis for computing gain/loss on sale is $29,000 ($30,000 - $1,000).

75

During 2013, Adams, a general contractor, Brinks, an architect, and Carson, an interior decorator, formed the Dex Home Improvement General Partnership by contributing the assets below.


Asset Adjusted basis Fair market value % of partner share in capital, profits & losses
Adams Cash $40,000 $40,000 50%
Brinks Land $12,000 $21,000 20%
Carson Inventory $24,000 $24,000 30%

The land was a capital asset to Brinks, subject to a $5,000 mortgage, which was assumed by the partnership.

For items 1 and 2, determine and select the initial basis of the partner's interest in Dex.
Carson and Brinks basis

The requirement is to determine Brinks' initial basis for his 20% partnership interest received in exchange for a contribution of property subject to a $5,000 mortgage. Generally, no gain or loss is recognized on the contribution of property in exchange for a partnership interest. As a result, Brinks' initial basis for the partnership interest received consists of the $12,000 basis of the land contributed to the partnership, less the net reduction in Brinks' individual liability resulting from the partnership's assumption of the mortgage. Since Brinks received a 20% partnership interest, the net reduction in Brinks' individual liability equals $5,000 x 80% = $4,000. As a result, Brinks' basis for the partnership interest is $12,000 - $4,000 = $8,000.

The requirement is to determine Carson's initial basis for his 30% partnership interest received in exchange for a contribution of inventory. Since partners are individually liable for their share of partnership liabilities, an increase in partnership liabilities increases a partner's basis in the partnership by the partner's share of the increase. Carson's initial basis is the $24,000 adjusted basis of the inventory contributed, increased by the increase in his individual liability resulting from the partnership's assumption of Brinks' mortgage ($5,000 x 30% = $1,500). Thus, Carson's initial basis for the partnership interest is $24,000 + $1,500 = $25,500.

76

Lan Corp., an accrual-basis calendar-year repair service corporation, was formed and began business on January 6, 2013. Lan's valid S corporation election took effect retroactively on January 6, 2013.

For items 1 through 4, determine the amount, if any, using the fact pattern for each item.

1. Assume the following facts:
Lan's 2013 books recorded the following items:
Gross receipts $7,260
Interest income on investments 50
Charitable contributions 1,000
Supplies 1,120

What amount of net business income should Lan report on its 2013 Form 1120S, U.S. Income Tax Return for an S Corporation, Schedule K?

($6,140) The requirement is to determine the amount of net business income that Lan should report on Schedule K of Form 1120S. The term "net business income" corresponds to an S corporation's "ordinary income (loss) from trade or business activities." The computation of this amount excludes any item that must be separately stated and passed through to shareholders in order to retain the item's special tax characteristics. Here, the interest income on investments is portfolio income and must be separately stated and passed through to shareholders as interest income. Similarly, the charitable contributions must be separately stated and passed through to shareholders in order to apply the appropriate percentage limitations at the shareholder level. As a result, Lan's net business income consists of its $7,200 of gross receipts reduced by the $1,120 of supplies expense, or $6,140.

77

As of January 6, 2013, Taylor and Barr each owned 100 shares of the 200 issued shares of Lan stock. On January 31, 2013, Taylor and Barr each sold twenty shares to Pike. No election was made to terminate the tax year. Lan had net business income of $14,400 for the year ended December 31, 2013, and made no distributions to its shareholders. Lan's 2013 calendar year had 360 days.
What amount of net business income should have been reported on Pike's 2013 Schedule K-1 from Lan? (2013 is a 360-day tax year.) Round the answer to the nearest hundred.

($2,700) The requirement is to determine the amount of net business income to be reported on Pike's 2013 Schedule K-1 from Lan. If there is no election to terminate the tax year following the sale of stock, the income of an S corporation for the entire taxable year is allocated per share, per day to anyone who was a shareholder during the year. Lan was formed on January 6, 2013, and its tax year consists of 360 days. So its net business income per share, per day would be $14,400 / 200 shares / 360 days = $.20. Since Pike purchased his forty shares on January 31, he is considered to own his stock for a total of 334 days during the year (counting February 1 as the first day). Thus, the amount of net business income to be reported on Pike's Schedule K-1 is (40 shares x 334 days x $.20) = $2,672.

78

Pike purchased forty Lan shares on January 31, 2013, for $4,000. Lan made no distributions to shareholders, and Pike's 2013 Schedule K-1 from Lan reported
Ordinary business loss $(1,000)
Municipal bond interest income 150
What was Pike's basis in his Lan stock at December 31, 2013?

($3,150) The requirement is to determine Pike's basis for his Lan stock at December 31, 2013, assuming that he had purchased the stock for $4,000. An S corporation's items of income and deduction pass through to be reported on shareholder returns even though no distributions are made. As a result, a shareholder's S corporation stock basis is increased by the pass through of all income items (including tax-exempt income), and is decreased by all loss and deduction items (including nondeductible expenses). In this case, Pike's beginning basis of $4,000 would be increased by the $150 of municipal bond interest income, and decreased by the $1,000 of ordinary business loss.

79

On January 6, 2013, Taylor and Barr each owned 100 shares of the 200 issued shares of Lan stock. Taylor's basis in Lan shares on that date was $10,000. Taylor sold all of his Lan shares to Pike on January 31, 2013, and Lan made a valid election to terminate its tax year. Taylor's share of ordinary income from Lan prior to the sale was $2,000. Lan made a cash distribution of $3,000 to Taylor on January 30, 2013.
What was Taylor's basis in Lan shares for determining gain or loss from the sale to Pike?

($9,000) The requirement is to determine Taylor's basis in Lan shares for determining gain or loss from the sale of stock to Pike. Taylor's beginning stock basis of $10,000 must be increased by his $2,000 share of the ordinary income from Lan prior to the sale, and must be decreased by the $3,000 nontaxable cash distribution that Taylor received. Recall that distributions by S corporations without accumulated earnings and profits are treated as a return of stock basis and are excluded from gross income.

80

The portion of Reliant's refund that represented the overpayment of the 2011 federal taxes.
F. Fully taxable for regular tax purposes on Reliant's 2013 federal income tax return.
P. Partially taxable for regular tax purposes on Reliant's 2013 federal income tax return.
N. Nontaxable for regular tax purposes on Reliant's 2013 federal income tax return.

(N) Since the payment of federal income tax does not result in a deduction, a subsequent refund of federal income tax will be nontaxable.

81

The portion of Reliant's refund that is attributable to the interest on the overpayment of federal taxes.
F. Fully taxable for regular tax purposes on Reliant's 2013 federal income tax return.
P. Partially taxable for regular tax purposes on Reliant's 2013 federal income tax return.
N. Nontaxable for regular tax purposes on Reliant's 2013 federal income tax return.

(F) Interest is generally fully included in gross income, including the interest on an overpayment of federal taxes.

82

Reliant received dividend income from a mutual fund that solely invests in municipal bonds.
F. Fully taxable for regular tax purposes on Reliant's 2013 federal income tax return.
P. Partially taxable for regular tax purposes on Reliant's 2013 federal income tax return.
N. Nontaxable for regular tax purposes on Reliant's 2013 federal income tax return.

(N) A mutual fund that invests in tax-exempt municipal bonds is permitted to pass the tax exemption on the bond interest on to its shareholders when the tax-exempt interest is distributed in the form of dividends. To qualify, the mutual fund has to have at least 50% of the value of its total assets invested in tax-exempt municipal bonds at the close of each quarter of its taxable year.

83

Reliant, the lessor, benefited from the capital improvements made to its property by the lessee in 2013. The lease agreement is for one year ending December 31, 2013, and provides for a reduction in rental payments by the lessee in exchange for the improvements.
F. Fully taxable for regular tax purposes on Reliant's 2013 federal income tax return.
P. Partially taxable for regular tax purposes on Reliant's 2013 federal income tax return.
N. Nontaxable for regular tax purposes on Reliant's 2013 federal income tax return.

(F) Generally, a lessor will not recognize any income as a result of the capital improvements made by a lessee that revert to the lessor at the expiration of the lease. However, if the parties intend the improvements to be, in whole or in part, a substitute for rental payments, then the lessor must recognize the improvements as rental income equal in amount to the reduction in rental payments.

84

Reliant collected the proceeds on the term life insurance policy on the life of a debtor who was not a shareholder. The policy was assigned to Reliant as collateral security for the debt. The proceeds exceeded the amount of the debt.
F. Fully taxable for regular tax purposes on Reliant's 2013 federal income tax return.
P. Partially taxable for regular tax purposes on Reliant's 2013 federal income tax return.
N. Nontaxable for regular tax purposes on Reliant's 2013 federal income tax return.

(P) Since Reliant was a collateral assignee as a result of the insured's indebtedness, Reliant received the insurance proceeds as payment on the debt, rather than as life insurance proceeds paid "by reason of death of the insured." Consequently, the insurance proceeds are tax-free only to the extent of the amount of unpaid debt, and any proceeds in excess of the debt repayment must be included in Reliant's gross income.

85

ABC Advisors, LLP, is partnership that provides computer consulting services on a calendar-year, accrual basis. A, B, and C are equal partners and are calendar-year, cash-basis, individual partners. Each partner has sufficient basis in the partnership to cover all distributions and withdrawals made during the year.

Partner A is partner B's father. Partner C is not related to either partner. For each of the partnership transactions shown below, double-click the appropriate tax treatment from the selection list. A tax treatment may be selected once, more than once, or not at all.
Partnership made a proportionate cash distribution

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

86

ABC Advisors, LLP, is partnership that provides computer consulting services on a calendar-year, accrual basis. A, B, and C are equal partners and are calendar-year, cash-basis, individual partners. Each partner has sufficient basis in the partnership to cover all distributions and withdrawals made during the year.

Partner A is partner B's father. Partner C is not related to either partner. For each of the partnership transactions shown below, double-click the appropriate tax treatment from the selection list. A tax treatment may be selected once, more than once, or not at all.
Partnership sold depreciable property at a gain in excess of the depreciation allowed on the property

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

87

ABC Advisors, LLP, is partnership that provides computer consulting services on a calendar-year, accrual basis. A, B, and C are equal partners and are calendar-year, cash-basis, individual partners. Each partner has sufficient basis in the partnership to cover all distributions and withdrawals made during the year.

Partner A is partner B's father. Partner C is not related to either partner. For each of the partnership transactions shown below, double-click the appropriate tax treatment from the selection list. A tax treatment may be selected once, more than once, or not at all.
Partnership claimed a section 179 deduction for depreciable property purchased during the year

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

88

ABC Advisors, LLP, is partnership that provides computer consulting services on a calendar-year, accrual basis. A, B, and C are equal partners and are calendar-year, cash-basis, individual partners. Each partner has sufficient basis in the partnership to cover all distributions and withdrawals made during the year.

Partner A is partner B's father. Partner C is not related to either partner. For each of the partnership transactions shown below, double-click the appropriate tax treatment from the selection list. A tax treatment may be selected once, more than once, or not at all.
Partnership made cash contributions to qualifying charities

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

89

ABC Advisors, LLP, is partnership that provides computer consulting services on a calendar-year, accrual basis. A, B, and C are equal partners and are calendar-year, cash-basis, individual partners. Each partner has sufficient basis in the partnership to cover all distributions and withdrawals made during the year.

Partner A is partner B's father. Partner C is not related to either partner. For each of the partnership transactions shown below, double-click the appropriate tax treatment from the selection list. A tax treatment may be selected once, more than once, or not at all.
Partnership sold an investment held for less than one year at a gain

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

90

ABC Advisors, LLP, is partnership that provides computer consulting services on a calendar-year, accrual basis. A, B, and C are equal partners and are calendar-year, cash-basis, individual partners. Each partner has sufficient basis in the partnership to cover all distributions and withdrawals made during the year.

Partner A is partner B's father. Partner C is not related to either partner. For each of the partnership transactions shown below, double-click the appropriate tax treatment from the selection list. A tax treatment may be selected once, more than once, or not at all.
Partnership paid rental of office space

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

91

ABC Advisors, LLP, is partnership that provides computer consulting services on a calendar-year, accrual basis. A, B, and C are equal partners and are calendar-year, cash-basis, individual partners. Each partner has sufficient basis in the partnership to cover all distributions and withdrawals made during the year.

Partner A is partner B's father. Partner C is not related to either partner. For each of the partnership transactions shown below, double-click the appropriate tax treatment from the selection list. A tax treatment may be selected once, more than once, or not at all.

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

92

ABC Advisors, LLP, is partnership that provides computer consulting services on a calendar-year, accrual basis. A, B, and C are equal partners and are calendar-year, cash-basis, individual partners. Each partner has sufficient basis in the partnership to cover all distributions and withdrawals made during the year.

Partner A is partner B's father. Partner C is not related to either partner. For each of the partnership transactions shown below, double-click the appropriate tax treatment from the selection list. A tax treatment may be selected once, more than once, or not at all.

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

93

1. Fees received for jury duty. appropriate tax treatment?

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

94

Interest income on mortgage loan receivable appropriate tax treatment?

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

95

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

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

96

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

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

97

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

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

98

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

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

99

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

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

100

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

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

101

Loss sustained from nonbusiness bad debt. appropriate tax treatment?

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

102

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

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

103

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

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

104

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

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

105

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

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

106

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

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

107

Personal casualty loss sustained. appropriate tax treatment?

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

108

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

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

109

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

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

110

Computation of self-employment tax. appropriate tax treatment?

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

111

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

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

112

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

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

113

A corporation whose income was derived solely from dividends, interest, and royalties, and during the last six months of its year more than 50% of the value of its outstanding stock is owned by five or fewer individuals.

Personal holding company. To be classified as a personal holding company, a corporation must meet two requirements: (1) the corporation must receive at least 60% of its adjusted ordinary gross income as "personal holding company income" such as dividends, interest, rents, royalties, and other passive income; and (2) the corporation must have more than 50% of the value of its outstanding stock directly or indirectly owned by five or fewer individuals during any time in the last half of the tax year.

114

The basis used to determine gain on sale of property that was received as a gift.

Transferred basis. The transferred basis, equal to the basis of the donor plus any gift tax paid attributable to the net appreciation in the value of the gift, is the basis used to determine gain on sale of property that was received as a gift.

115

The trade-in of production machinery for new production machinery by a corporation, when the corporation pays additional cash.

Nontaxable exchange. A like-kind exchange, the exchange of business or investment property for property of a like-kind, qualifies as a nontaxable exchange. Thus, the exchange of production machinery for new production machinery when boot (money) is given is a nontaxable exchange.

116

An unmarried individual whose filing status enables the taxpayer to use a set of income tax rates that are lower than those applicable to other unmarried individuals, but are higher than those applicable to married persons filing a joint return.

Head of household. Head of household filing status applies to unmarried persons not qualifying for surviving spouse status who maintain a household for more than one-half of the taxable year for a dependent. The tax rates applicable to the head of household status are lower than those applicable to individuals filing as single, but are higher than rates applicable to married individuals filing a joint return.

117

If income is unqualifiedly available, it will be subject to the income tax even though it is not physically in the taxpayer's possession.

Constructive receipt. Under the doctrine of constructive receipt, income is includable in gross income and subject to income tax for the taxable year in which that income is made unqualifiedly available to the taxpayer without restriction, even though not physically in the taxpayer's possession.

118

A special tax imposed on corporations that accumulate their earnings beyond the reasonable needs of the business.

Accumulated earnings tax. Corporations may be subject to an accumulated earnings tax, in addition to regular income tax, if a corporation accumulates earnings beyond reasonable business needs in order to avoid shareholder tax on dividend distributions.

119

The classification of income from interest, dividends, annuities, and certain royalties.

Portfolio income. Portfolio income is defined as income from interest, dividends, annuities, and certain royalties.

120

The classification of depreciable assets and real estate used in a trade or business and held for more than one year.

Sec. 1231 assets. Section 1231 assets include depreciable assets and real estate used in a trade or business and held for more than one year.

121

This deduction attempts to mitigate the triple taxation that would occur if one corporation paid dividends to a corporate shareholder who, in turn, distributed such amounts to its individual shareholders.

Dividends received deduction. The dividends received deduction was enacted by Congress to mitigate the triple taxation that occurs when one corporation pays dividends to a corporate stockholder who, in turn, distributes such amounts to its individual stockholders.

122

Sale of property to a corporation by a shareholder for a selling price that is in excess of the property's fair market value.

Constructive dividend. A constructive dividend results when a shareholder is considered to have received a dividend from a corporation, although the corporation did not specifically declare a dividend. This situation may occur when a shareholder/employee receives an excessive salary from a corporation, when there is a loan to a shareholder where there is no intent to repay the amount loaned, or when a corporation purchases shareholder property for an amount in excess of the property's fair market value. Constructive dividends often result when a transaction between a shareholder and corporation is not an arm's-length transaction.

123

Ed and Melinda Flint have two children, Ellie and Paul, who are ages 7 and 14, respectively, at the end of 2014. Ellie and Paul are qualified dependents of the Flints. They also have a nephew, Cole (age 12), who lives with them and qualifies as a dependent. AGI for 2014 is $129,070.

Included in the AGI of $129,070 is salary for Melinda of $100,000 and for Ed of $12,000. They paid a babysitter $6,200 to watch their children when they were at work.

Compute Ed and Melinda's child and dependent care credit for 2014.

Number of Qualifying Individuals?

2. To qualify for the credit, the expenses must be incurred to care for a dependent under the age of 13. Therefore, Ellie and Cole are qualifying individuals, but Paul does not qualify since he is 14.

124

Ed and Melinda Flint have two children, Ellie and Paul, who are ages 7 and 14, respectively, at the end of 2014. Ellie and Paul are qualified dependents of the Flints. They also have a nephew, Cole (age 12), who lives with them and qualifies as a dependent. AGI for 2014 is $129,070.

Included in the AGI of $129,070 is salary for Melinda of $100,000 and for Ed of $12,000. They paid a babysitter $6,200 to watch their children when they were at work.

Compute Ed and Melinda's child and dependent care credit for 2014.
Qualifying Expenses

The amount of qualifying expenses is limited to $3,000 for one qualifying individual and $6,000 for more than one qualifying individual. Since they have 2 qualifying individuals their qualifying expenses are $6,000. Note that qualifying expenses are also limited to actual amount paid ($6,200) and the wages earned of the lowest paid spouse ($12,000).

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Ed and Melinda Flint have two children, Ellie and Paul, who are ages 7 and 14, respectively, at the end of 2014. Ellie and Paul are qualified dependents of the Flints. They also have a nephew, Cole (age 12), who lives with them and qualifies as a dependent. AGI for 2014 is $129,070.

Included in the AGI of $129,070 is salary for Melinda of $100,000 and for Ed of $12,000. They paid a babysitter $6,200 to watch their children when they were at work.

Compute Ed and Melinda's child and dependent care credit for 2014.
Applicable Percentage for Computing Credit
Credit Amount

The qualifying expenses of $6,000 are multiplied by the applicable percentage, which ranges from 20 - 35%. The 35% maximum is reduced by one percentage point for each $2,000 (or portion thereof) that AGI exceeds $15,000. Once AGI exceeds $43,000 the percentage is reduced to its minimum of 20%, so the Flint’s applicable percentage is 20%.

The Flint's credit is $6,000 x 20% = $1,200.