ACCT 5316 Study Guide for Federal Income Tax (Includes Solutions -Questions and Answers)

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Jim had a car accident in 2014 in which his car was completely destroyed. At the time of the accident the car had a fair market calue of $30,000 and an adjusted basis of $40,000. Jim used the car 100%... of the time for buisness use. Jim received an insurance recovery of 70% of the value of the car at the time of the accident. If Jim’s Agi for the year is $60,000, determine his deductible loss on the car. a. 3000 b. 9000 c. 900 d. 2900 e. none Jackson uses his automobile 84% for buisness and during 2014 drove a total of 24,800 buisness miles. Information regarding his car expenses is listed below. (.56) Business parking 190 Auto insurance 1900 Auto club dues (includes towing services) 228 Toll road charges (buisness-related) 285 Oil changes and engine tune-ups 304 Repairs 209 Depreciation allowanble 3800 Fines for traffic 380 Gasoline purchases 4180 What is jackson’s deduction in 2014 for the use of his care if he uses: The actual cost method? 9928.64 The automatic mileage method? 13888? 24800*.56 Matilda works for a company with 1,000 employees. The company has a hospitalization insurance plan that covers all employees. However, the employee must pay the first $3,000 of his or her medical expenses each year. Each year, the employer contributes $1,500 to each employee's health savings account (HSA). Matilda's employer made the contributions in 2014 and 2015, and the account earned $100 interest in 2015. At the end of 2015, Matilda withdrew $3,200 from the account to pay the deductible portion of her medical expenses for the year and other medical expenses not covered by the hospitalization insurance policy. As a result, Matilda must include in her 2015 gross income: A1600 b. 0 c none d3100 e 100 Taxpayer (TP) is a cash basis taxpayer for tax purposes with a calendar year end. TP is an accrual basis taxpayer for financial statement purposes also with a calendar year end. TP receives $100,000 cash on Dec. 31, 2014 for payment of services to be rendered in 2015. As a result: TP recognizes $100,000 of income for tax purposes in 2014, but does not recognize $100,000 of income for financial statement purposes in 2014 1. A taxpayer who loses in a U.S. Court of Federal Claims may appeal directly to the: Which of the following indicates that a decision was the result of all judges of the court hearing the case? En banc 2. A characteristic of FICA is that: It does not apply to a child under 18 years of age employed in a parent's unincorporated trade or business, but does apply to a spouse employed by a spouse's unincorporated trade or business (FICA is imposed on both the employer and the employee ("It is imposed only on the employer"). Spouses who work for each other are not exempt from the tax ("It does not apply when one spouse works for the other spouse"). Its objective is retirement income, not loss of employment ("It provides a modest source of income in the event of loss of employment"). It is administered only by the Federal government ("It is administered by both state and Federal governments"). 3. Statutory sources of law include: a. US Supreme Court Decision b. The US constitution c. None of the above are correct d. Internal revenue regulations that are interpretive 4. Taxpayer (TP) is a cash basis taxpayer for tax purposes with a calendar year end. TP is a cash basis taxpayer for financial statement purposes also with a calendar year end. TP receives $100,000 cash on Dec. 31, 2014 for payment of services to be rendered in 2015. As a result: TP recognizes $100,000 of income for tax purposes in 2014 and recognizes $100,000 of income for financial statement purposes in 2014 5. Property can be transferred within the family group by gift or at death. One motivation for preferring the gift approach is: The per donee annual exclusion is only available for gift tax purposes ("To take advantage of the per donee annual exclusion"). Ideally, gifts should involve property that is expected to appreciate in value ("To avoid a future decline in value of the property transferred"). A higher unified tax credit is not available for gift tax purposes ("To take advantage of the higher unified transfer tax credit available under the gift tax"). Usually the donor is trying to shift future income to lower bracket donees ("To shift income to higher bracket donees"). a. To take advantage of the per donor annual exclusion b. To avoid a future decline in value of the property transferred c. To take advantage of the higher unified transfer tax credit available under the gift tax d. None are correct e. To shift income to higher bracket donees 6. Burt and Lisa are married and live in a common law state. Burt wants to make gifts to their five children in 2014 what is the maximum amount of the annual exclusion they will be allowed for these gifts? 4 (number of donees) × $14,000 (annual exclusion) × 2 (number of donors) = $112,000. It is assumed that Lisa will make the election to split the gifts a. 28000 b. 112000 c. 14000 d. 56000 e. none 7. Taxpayer (TP) has a deduction for 2014 that is supported and justified by a United States Tax Court case decided in 1985. The case involves a statute that has been effective since enacted in 1920. Which of the following statements is correct? If the case involves a statute that is still valid in 2014, but the IRS nonacquiesced to the case, then TP is legally allowed to use the case as support for TP's deduction but the TP will have to go to trial to resolve the deductibility of the deduction 8. Sylvia, age 17, is claimed by her parents as a dependent. During 2014, she had interest income from a bank savings account of $2,000 and income from a part-time job of $4,200. Sylvia's taxable income is: $6,200 – $4,550 = $1,650 Sylvia's standard deduction is $4,200 (earned income) + $350 = $4,550. Thus, her taxable income is $1,650 ($6,200 – $4,550). She is not eligible for a personal exemption. 9. During 2014, Esther had the following transactions: Salary $70,000 Interest income on Xerox bonds 2,000 Inheritance from uncle 40,000 Contribution to traditional IRA 5,500 Capital losses Ester’s AGI is: 64000 $70,000 (salary) + $2,000 (interest) – $5,500 (IRA contribution) – $2,500 (capital losses) = $64,000. The inheritance is a nontaxable exclusion. The capital losses are deductible. 10. Which, if any, of the following statements relating to the standard deduction is correct? If a taxpayer dies during the year, his (or her) standard deduction is not proratedIn the case of death, no apportionment is required and the full standard deduction is allowed ("If a taxpayer dies during the year, his (or her) standard deduction must be prorated"). If married taxpayers file separate returns and one spouse itemizes, the other spouse must also itemize. However, there is no requirement that they each claim the standard deduction—although they may do so ("If spouses file separate returns, both spouses must claim the standard deduction (rather than itemize their deductions from AGI)"). A basic standard deduction is allowed for dependents although its determination is subject to special rules ("If a taxpayer is claimed as a dependent of another, no basic standard deduction is allowed"). 11. For 2014, Taxpayer (TP) wants to recognize a deduction. The deduction involves a statute that has not changed since enacted in 1920. TP is relying on a case called JONES, which is a case decided by the United States Tax Court in 1965 which held in favor of the taxpayer. The JONES case was decided by a United States Tax Court that lies in the 5th Circuit Court of Appeals. At the time the JONES case was decided, its holding was contrary to precedent set by the 5th Circuit Court of Appeals. Which of the following is correct: The Golsen rule applies here and weakens the legal justification for the deduction 12. During 2014, Marvin had the following transactions: Salary $50,000 Bank loan (proceeds used to buy personal auto) 10,000 Alimony paid 18,000 Child support paid 6,000 Gift from aunt 20,000 Marvin's AGI is: 32000 $50,000 (salary) – $12,000 (alimony) = $38,000. The gift is an exclusion while the child support is nondeductible. Amounts borrowed are not income. 13. Lessor is the taxpayer who leases property to lessee for three years from Jan. 1, 2012 through Dec. 31, 2014. Lessee made $100.000 (cost and fair value) of leasehold, real property improvements to Lessor's property on Jan 1, 2013. Leasehold improvements are not made in lieu of rent. Under current law, lessor recognizes the $100,000 as income when : the lessor sells the property at a future date 14. If a taxpayer decides to pay a tax deficiency and wants a jury trial, he or she must go to which court? U.S. District Court 15. Which, if any, of the statements regarding the standard deduction is correct? May be taken as a from AGI deduction An example of two additional standard deductions would be a taxpayer who is age 65 (or older) and blind ("Some taxpayers may qualify for two types of standard deductions"). Both the basic and the additional standard deductions are subject to indexation ("The basic standard deduction is indexed for inflation but the additional standard deduction is not"). Personal and dependency exemptions are deductible in any event ("Not available to taxpayers who choose to deduct their personal and dependency exemptions"). The standard deductions are in lieu of deductions from AGI—not for AGI ("May be taken as a for AGI deduction"). 16. During 2014, Sarah had the following transactions: Salary $ 80,000 Interest income on City of Baltimore bonds 1,000 Damages for personal injury (car accident) 100,000 Punitive damages (same car accident) 200,000 Cash dividends from Chevron Corporation stock 7,000 Sarah's AGI is: 287000 $80,000 (salary) + $200,000 (punitive damages) + $7,000 (cash dividends) = $287,000. The damages from personal injury and the municipal bond interest are nontaxable exclusions 17. In 2014, Cindy had the following transactions: Salary $ 90,000 Short-term capital gain from a stock investment 4,000 Moving expense to change jobs (11,000) Received repayment of $20,000 loan she made to her sister in 2010 (includes no interest) 20,000 State income taxes (5,000) Cindy's AGI is: 83000$90,000 (salary) + $4,000 (gain on stock investment) – $11,000 (moving expenses) = $83,000. The loan repayment of $20,000 is a return of capital and has no effect on gross income. State income taxes paid are a deduction from AGI (or a standard deduction) and has no impact on the determination of AGI 18. As a result of studying MAYO FOUNDATION FOR MEDICAL EDUCATION AND RESEARCH, et al., Petitioners v. UNITED STATES, we can conclude: that the MAYO case confuses existing distinctions between interpretive regulations from legislative regulations   1. Because Scott is three months delinquent on the mortgage payments for his personal residence, Jeanette (his sister) is going to cover the arrearage. Based on past experience, she does not expect to be repaid by Scott. Which of the following statements is correct? Only "If Jeanette pays the mortgage company directly, neither Scott nor Jeanette can deduct the interest part" and "If Jeanette pays the mortgage company directly, she cannot deduct the interest part" are correct The obligation is that of Scott and not of Jeanette. If Scott pays his mortgage company, he can deduct the mortgage interest part of the payment. Under no circumstances can Jeanette deduct Scott's mortgage interest 2. Jack received a court award in a civil libel and slander suit against National Gossip. He received $120,000 for damages to his professional reputation, $100,000 for damages to his personal reputation, and $50,000 in punitive damages. However, National Gossip is appealing the case and they may win on appeal. Jack is concerned about "the claim of right doctrine". How much, if any, must Jack include in his gross income as a damage award: 270000---None of the damages received were the result of a physical personal injury or sickness and therefore the total amount received must be included in gross income. Even if the damages were the result of physical personal injury, the punitive damages would be included in his gross income 3. Daniel purchased a bond on July 1, 2014, at par of $10,000 plus accrued interest of $600. On December 31, 2014, Daniel collected the $1,200 interest for the year. On January 1, 2015, Daniel sold the bond for $10,200. Daniel must recognize $600 interest income for 2014 and a $200 gain on the sale of the bond in 2015The $600 collected consists of $300 of gross income for the interest earned from July 1 through December 31 and $300 of accrued interest that was purchased. The cost of the bond was $10,000; thus Daniel has a $200 gain ($10,200 – $10,000) on the sale. 4. On January 2, 2014, Fran acquires a business from Chuck. Among the assets purchased are the following intangibles: patent with a 7-year remaining life, a covenant not to compete for 10 years, and goodwill. Of the purchase price, $140,000 was paid for the patent and $60,000 for the covenant. The amount of the excess of the purchase price over the identifiable assets was $100,000. What is the amount of the amortization deduction for 2014? 20000 All of these intangibles are § 197 intangibles and are amortized over a 15-year statutory period. Patent $140,000 ÷ 15 = $ 9,333 Covenant $60,000 ÷ 15 = 4,000 Goodwill $100,000 ÷ 15 = 6,667 $20,000 5. On January 5, 2013, Tim purchased a bond paying interest at 6% for $30,000. On March 31, 2013, he gave the bond to Jane. The bond pays $1,800 interest on December 31. Tim and Jane are cash basis taxpayers. When Jane collects the interest in December 2014: Jane must report $1,800 gross income for 2014. Tim held the bond for 3 months before he gave it to Jane, who held the bond for the other 9 months that the interest accrued. Therefore, Tim must recognize $450 (3/12 × $1,800), and Jane must recognize $1,350 (9/12 × $1,800). 6. Christie sued her former employer for a back injury she suffered on the job in 2014. As a result of the injury, she was partially disabled. In 2015, she received $240,000 for her loss of future income, $160,000 in punitive damages because of the employer's flagrant disregard for the employee's safety, and $15,000 for medical expenses. The medical expenses were deducted on her 2014 return, reducing her taxable income by $15,000. Christie's 2015gross income from the above is: 175000---Christie must include in gross income the $160,000 of punitive damages received and the $12,000 for the previously deducted medical expenses. The medical expense recovery is included in gross income under the tax benefit rule. 7. For a president of a publicly held corporation, which of the following are not subject to the $1 million limit on executive compensation? "Contribution to medical insurance plan", "Contribution to pension plan", and "Premiums on group term life insurance of $50,000", are not subject to the limit. 8.George, an unmarried cash basis taxpayer, received the following amounts during 2014: Interest on savings accounts $2,000 Interest on a State tax refund 600 Interest on corporate bonds 350 Interest portion of proceeds of a 5% bank certificate of deposit 250 Dividends on USG common stock 300 What amount should George report as gross income from dividends and interest for 2014? 3500----The interest on the Salem school bonds of $350 is tax exempt, but the interest on the State tax refund of $600 is taxable. Since the life of the certificate of deposit was not more than 1 year, the OID rules do not apply and, therefore, all of the interest is taxable in 2014. Thus, the gross income is $3,150 ($2,000 + $600 + $250 + $300). 9. Nikeya sells land (adjusted basis of $120,000) to her adult son, Shamed, for its appraised value of $95,000. Which of the following statements is correct? If Shamed subsequently sells the land for $112,000, he has no recognized gain or lossNikeya's realized loss of $25,000 ($95,000 amount realized – $120,000 adjusted basis) is disallowed because Shamed is a related party. Shamed's adjusted basis for the land is his cost of $95,000. However, when he sells the land for $112,000, his realized gain of $17,000 ($112,000 amount realized – $95,000 adjusted basis) is not recognized because he can offset it against $17,000 of Nikeya's $25,000 disallowed loss in calculating his taxable income. 10. Sammy, a calendar year cash basis taxpayer who is age 60, has the following transactions: Salary from job $90,000 Alimony received from ex-wife 10,000 Medical expenses 8,000 Based on this information, Sammy has: Deduction for medical expenses of $0. Sammy's AGI is calculated as follows: Salary from job $ 90,000 Alimony received from ex-wife 10,000 AGI $100,000 Sammy's deduction for medical expenses, an itemized deduction, is $500 [$8,000 – 7.5%($100,000)] 11. Velma and Bud divorced. Velma's attorney fee of $5,000 is allocated as follows: General representation in obtaining the divorce $1,500 Services in obtaining custody of the child 900 Services in settlement of martial property 600 Determining the tax consequences of: Dependency deduction for child 700 Property settlement 1,300 Of the $5,000 Velma pays to her attorney, the amount she may not deduct as an itemized deduction is: 3,000 Velma may deduct only the legal fees that relate solely to tax advice in the divorce proceedings. Thus, she may deduct $2,000 ($700 + $1,300). 12. Office Palace, Inc., leased an all-in-one printer to a new customer, Ashley, on December 27, 2014. The printer was to rent for $600 per month for a period of 36 months beginning January 1, 2015. Ashley was required to pay the first and last month's rent at the time the lease was signed. Ashley was also required to pay a $1,500 damage deposit. Office Palace must recognize as income for the lease: $1,200 in 2014, if Office Palace is a cash basis taxpayerThe company is required to recognize the $1,200 (January 2014 and December 2017 rent) in 2014 because prepaid income from rents is ineligible for deferral. The damage deposit of $1,500 is not income. 13. Under the original issue discount (OID) rules as applied to a three-year certificate of deposit: a. The OID will be included in gross income for the year of purschase b. the interest income will be the same each year c. none d. all of the income must be recognized in the year of maturity by a cash basis taxpayer e. the interest income will be less in the third year than in the first year The OID is amortized using the effective interest rate method. Because the principal amount is increased each year by the amount of the OID which is amortized, the total interest income increases each year. Thus, answers "All of the income must be recognized in the year of maturity by a cash basis taxpayer", "The OID will be included in gross income for the year of purchase", "The interest income will be the same each year", and "None of these choices is correct" are incorrect. 14. Darryl, a cash basis taxpayer, gave 1,000 shares of Copper Company common stock to his daughter on October 16, 2014. Copper Company is a publicly held company that has declared a $2.00 per share dividend on September 30th every year for the last 20 years. Just as Darryl had expected, Copper Company declared a $2.00 per share dividend on September 30th, payable on October 15th, to stockholders of record as of October 10th. The daughter received the $2,000 dividend on October 18, 2014. (The gift of the stock is made prior to the declaration date.) a. Darryl must recognize the $2,000 dividend as his income because he constructively received the dividend. b. None of these choices are correct. c. The daughter must recognize the income because she owned the stock when the dividend was declared and she received the $2,000. d. Darryl must recognize $1,500 of the dividend because he owned the stock for three-fourths of the year. e. Darryl must recognize the income of $2,000 because the purpose of the gift was to avoid taxes 15. Iris, a calendar year cash basis taxpayer, owns and operates several TV rental outlets in Florida, and wants to expand to other states. During 2014, she spends $14,000 to investigate TV rental stores in South Carolina and $9,000 to investigate TV rental stores in Georgia. She acquires the South Carolina operations, but not the outlets in Georgia. As to these expenses, Iris should: Expense $23,000 for 2014Since Iris owns and operates TV rental outlets, all of the investigation expenses can be deducted. 16. Theresa, a cash basis taxpayer, purchased a bond on July 1, 2010, for $10,000, plus $400 of accrued interest. The bond paid $800 of interest each December 31. On March 31, 2014, she sold the bond for $10,400, which included $200 of accrued interest. Theresa has $200 interest income and a $200 gain from the bond in 2014 The cost of the bond was $10,000 and the proceeds from the sale were $9,600 ($9,800 – $200 accrued interest). Therefore, Theresa had a $400 ($9,600 – $10,000) loss from the sale, and $200 of interest income 17. A scholarship recipient at State University must include in gross income the scholarship proceeds used to pay for: Meals and lodging 18. In December 2014, Todd, a cash basis taxpayer, paid $1,200 of fire insurance premiums for the calendar year 2015 on a building he held for rental income. Todd did not deduct the $1,200 of insurance premiums on his 2014 tax return. He had $150,000 of taxable income that year. On June 30, 2015, he sold the building and, as a result, received a $500 refund on his fire insurance premiums. As a result of the above: a. Todd should amend his 2014 return and claim $500 less insurance expense. b. Todd should add the $500 to his sales proceeds from the building. c. None of these choices are correct. d. Todd should include the $500 in 2015 gross income in accordance with the tax benefit rule. e. Todd should include the $500 in 2015 gross income in accordance with the claim of right doctrine As a cash basis taxpayer, Todd can deduct the one-year prepayment for insurance in the year it was paid, 2014. Because he deducted $1,200 and his net cost was only $700 ($1,200 – $500), Todd should include the $500 refund in gross income for 2015 under the tax benefit rule. 19. On a particular Saturday, Tom had planned to paint a room in his house, but his employer gave him the opportunity to work that day. If Tom works, he must hire a painter for $180. For Tom to have a positive cash flow from working and hiring the painter: Tom must earn more than $212 if he is in the 15% marginal tax bracketIf Tom earns $160, he will have after-tax pay of $120 [(1 – .25)($160)], which is equal to what he must pay the painter 20. The taxpayer's marginal tax bracket is 33%. Which would the taxpayer prefer? a. $1.40 taxable income rather than $1.00 tax-exempt income. b. $1.00 taxable income rather than $.75 tax-exempt income. c. $1.00 taxable income rather than $1.25 tax-exempt income. d. None of these choices are correct. e. $1.25 taxable income rather than $1.00 tax-exempt income. The $1.40 of taxable income is greater after-tax than $1.00 in taxable income [(1 – .25)($1.40) = $1.05]. "$1.00 taxable income rather than $.75 tax-exempt income" is incorrect because the $1.00 of taxable income and $.75 of tax-exempt income are equal on an after-tax basis (1 – .25) × $1.00 = $.75. "$1.25 taxable income rather than $1.00 tax-exempt income" is incorrect because (1 – .25) × $1.25 = $.9375. Last Exam 1. In 2013, Gail had a § 179 deduction carryover of $30,000. In 2014, she elected § 179 for an asset acquired at a cost of $115,000. Gail's § 179 business income limitation for 2014 is $140,000. Determine Gail's § 179 deduction for 2014. $55,000; $30,000 + $25,000 [$25,000 - ($115,000 - $200,000 is 2014 limit)]. 2. The § 222 deduction for tuition and related expenses is available: Even if a taxpayer does claim the standard deduction No deduction at all is allowed if the taxpayer has AGI in excess of $80,000 ($160,000 in the case of a joint return) ("Regardless of the amount of a taxpayer's MAGI"). Section 222 does not cover room and board ("To cover room and board expenses to attend college"). In order to claim a deduction under § 222, a married taxpayer must file a joint return ("To a married taxpayer filing a separate return"). Since § 222 provides for a deduction for AGI, it does not matter if a taxpayer claims the standard deduction. 3. White Company acquires a new machine (seven-year property) on January 10, 2013, at a cost of $600,000. White makes the election to expense the maximum amount under § 179. No election is made to use the straight-line method. White does take additional first-year depreciation. Determine the total deductions in calculating taxable income related to the machine for 2013 assuming White has taxable income of $800,000. d. None of these choices are correct § 179 expense $500,000 Additional first-year depreciation [($600,000 – $500,000) × .50] 50,000 MACRS cost recovery ($50,000 × .1429) 7,145 Total $557,145 4. Rachel is single and has a college degree in finance. She is employed as a loan officer at a bank; her yearly AGI approximates $50,000. During the year, she enrolled in a weekend MBA program and incurred the following nonreimbursed expenses: $4,100 (tuition), $300 (books), $200 (other school supplies), and $200 (transportation to and from campus). Disregarding the 2%-of-AGI limitation, as to the MBA program, Rachel has a: Deduction for AGI of $4,000 and deduction from AGI of $800 Section 222 allows up to $4,000 for qualified tuition and related expenses. As Rachel spent $4,100, she can claim only $4,000 as a deduction for AGI. The remaining expenses of $800 ($100 + $300 + $200 + $200) can be claimed as deductions from AGI. 5. The § 222 deduction for tuition and related expenses is available: None of these choices are correct The § 222 deduction is a deduction for AGI ("Only if the taxpayer itemizes deductions from AGI"). The deduction is not available when the lifetime learning credit is used ("To deduct that portion of the tuition in excess of that allowed under the lifetime learning credit"). The student involved is not a dependent of the taxpayer ("To cover the tuition of a son who does not qualify as taxpayer's dependent"). The education need not be job related ("Only if job related"). A. only if job related b. to cover the tuition of a son who does not qualify as taxpayer’s dependent c. none d. to deduct that portion of the tuition in excess of that allowed under the lifetime learning credit e. only if the taxpayers itemizes deduction from AGI 6. Diane purchased a factory building on April 15, 1994, for $5,000,000. She sells the factory building on February 2, 2014. Determine the cost recovery deduction for the year of the sale. $16,025 .02564 x $5,000,000 x 1.5/12 = $16,025 7. Cora purchased a hotel building on May 17, 2014, for $3,000,000. Determine the cost recovery deduction for 2015. $76920 The hotel building is nonresidential realty. .02564 × $3,000,000 = $76,920 8. Doug purchased a new factory building on January 15, 1989, for $400,000. On March 1, 2014, the building was sold. Determine the cost recovery deduction for the year of the sale assuming he did not use the MACRS straight-line method. $2645 .03174 × $400,000 × 2.5/12 = $2,645 9. Cream, Inc.'s taxable income for 2014 before any deduction for an NOL carryforward of $30,000 is $70,000. Cream's qualified production activities income (QPAI) is $60,000. What is the amount of Cream's domestic production activities deduction (DPAD) for 2014? $3600 Taxable income for purposes of calculating the DPAD is reduced by any NOL carryforward. Thus, the amount of the DPAD is $3,600 [($70,000 – $30,000) × 9%]. 10. Carlos purchased an apartment building on November 16, 2014, for $3,000,000. Determine the cost recovery for 2015. $3,000,000 × .00455 = $13,650 / a. none b. 11910 c. 22740 d. 13950 e 9630 11. Which, if any, of the following is subject to a cutback adjustment? An airline pilot for an executive jet rental company who pays his own travel expenses Although a reduced rate is in effect, the cutback adjustment still applies to persons subject to regulation by the U.S. Department of Transportation 12. Augie purchased one new asset during the year (five-year property) on November 10, 2014, at a cost of $650,000. She would like to use the § 179 election if available. The income from the business before the cost recovery deduction and the § 179 deduction was $600,000. Determine the total cost recovery deduction with respect to the asset for 2014. $32500 The mid-quarter convention applies to the MACRS calculation and § 179 is not available as the asset cost exceeds $225,000 MACRS cost recovery ($650,000 × .05) $32500 13. In the computation of a net operating loss, which of the following items is not added to the negative taxable income? A. Deductible alimony payments b. losses incurred in a transaction entered into for profit c. losses from theft of securities d. none e. personal theft loss 14. Mary incurred a $20,000 nonbusiness bad debt last year. She also had an $8,000 long-term capital gain last year. Her taxable income for last year was an NOL of $15,000. During the current year, she unexpectedly collected $12,000 on the debt. How should Mary account for the collection? $8,000 income Nonbusiness bad debts are treated as short-term capital losses. Hence, the $20,000 bad debt can offset the $8,000 of long-term capital gains. Because Mary has an NOL, she cannot use $3,000 of the remaining loss to offset any ordinary income. Therefore, the tax benefit was only $8,000 and $8,000 would be recognized as income. 15. Tracy, the regional sales director for a manufacturer of exercise equipment, pays $2,500 to rent a skybox for a visiting performance of the Harlem Globetrotters. The skybox holds 10 seats, and Tracy invites 7 clients to the event. Nonluxury seats range in price from $80 to $120. The refreshments provided during the event cost $600. If Tracy meets all of the requirements for deductibility (i.e., business discussion, substantiation), she may deduct: 50% × [(10 × $120) + $600] = $900 16. For the year 2014, Amber Corporation has taxable income of $880,000, alternative minimum taxable income of $600,000, and qualified production activities income (QPAI) of $640,000. The total W-2 wages paid to employees engaged in qualified domestic production activities are $116,000. Amber's DPAD for 2014 is: $54000 Amber's DPAD is limited to 9% of alternative minimum taxable income of $600,000. $600,000 × 9% = $54,000 17. Jed is an electrician. Jed and his wife are accrual basis taxpayers and file a joint return. Jed wired a new house for Alison and billed her $15,000. Alison paid Jed $10,000 and refused to pay the remainder of the bill, claiming the fee to be exorbitant. Jed took Alison to Small Claims Court for the unpaid amount and was awarded a $2,000 judgement. Jed was able to collect the judgement but not the remainder of the bill from Alison. What amount of loss may Jed deduct in the current year? 3000 Jed is an accrual basis taxpayer and therefore, has a basis in the $3,000 not collected 18. Ivory, Inc., has taxable income of $600,000 and qualified production activities income (QPAI) of $700,000 in 2014. Ivory's domestic production activities deduction is: 54000 DPAD is calculated for Ivory for 2014 as the lesser of the following: $700,000 × 9% = $63,000 $600,000 × 9% = $54,000 19. Robert entertains several of his key clients on January 1 of the current year. Expenses paid by Robert are as follows: Cab fare $ 60 Cover charge at supper club 200 Dinner at club 800 Tips to waiter 160 Presuming proper substantiation, Robert's deduction is: 640 $60 + [50% × ($200 + $800 + $160)] = $640 20. Blue Corporation incurred the following expenses in connection with the development of a new product: Salaries $100,000 Utilities 18,000 Materials 25,000 Advertising 5,000 Market survey 3,000 Depreciation on machine 9,000 Blue expects to begin selling the product next year. If Blue elects to amortize research and experimental expenditures over 60 months, determine the amount of the deduction for research and experimental expenditures for the current year. 0 The qualified research expenditures are $152,000 ($100,000 + $18,000 + $25,000 + $9,000). Under the election to amortize, the monthly amortization is $2,533 ($152,000 ÷ 60 months). However, since sales will not start until next year, there is no deduction for the current year Chapter 10 Quiz Define medical expenses and compute the medical expense deduction. Indicate whether the following statements are "True or False" regarding capital expenditures incurred for medical purposes. a. The capital expenditures must be deemed medically necessary by a physician. b. The item or facility must be used primarily by the patient alone and the expense must be reasonable. c. Appraisal costs related to capital improvements are deductible as medical expenses. d. The full cost of certain home-related capital expenditures incurred to enable a physically handicapped individual to live independently and productively qualifies as a medical expense. e. Additional costs to operate and maintain the item are deductible as medical expenses as long as the medical reason for the capital expenditure continues to exist. a. The capital expenditures must be deemed medically necessary by a physician. b. The item or facility must be used primarily by the patient alone and the expense must be reasonable. True. c. Appraisal costs related to capital improvements are deductible as medical expenses. d. The full cost of certain home-related capital expenditures incurred to enable a physically handicapped individual to live independently and productively qualifies as a medical expense. e. Additional costs to operate and maintain the item are deductible as medical expenses as long as the medical reason for the capital expenditure continues to exist. 2. Medical and Casualty Loss Reimbursement (LO. 2) Arturo, a calendar year taxpayer, paid $26,900 in medical expenses and sustained a $32,280 casualty loss in 2014. He expects $18,830 of the medical expenses and $22,596 of the casualty loss to be reimbursed by insurance companies in 2015. Before considering any limitations on these deductions, how much can Arturo include in determining his itemized deductions for 2014? Before considering any limitations (or reductions) on deductions, Arturo can include $ 26900 of the medical expenses and $9684 of the casualty loss when determining his itemized deductions in 2014. 3. Self-Employed Versus Employee Medical Insurance (LO. 2) David, a sole proprietor of a bookstore, pays a $7,500 premium for medical insurance for him and his family. Joan, an employee of a small firm that doesn't provide her with medical insurance, pays medical insurance premiums of $8,000 for herself. How does the tax treatment differ for David and Joan? DAVID DECDUCTS 100% OF THE PREMIUM AS A DEDECTION FOR AGI, WHEREAS JOAN INCLUDES THE PREMIUMS IN COMPUTING MEDICAL EXPENSE DEDUCTIONS. Medical expenses paid for the care of the taxpayer, spouse, and dependents are allowed as an itemized deduction to the extent the expenses are not reimbursed. The medical expense deduction is limited to the amount by which such expenses exceed a threshold percentage of the taxpayer’s AGI. The threshold percentage is 10 percent for most taxpayers. For taxpayers age 65 and older, however, the threshold is 7.5 percent of AGI until 2017, when it increases to 10 percent. Medical insurance premiums paid by the taxpayer under an individual plan (or a group plan) are included as itemized deductions along with other medical expenses subject to the 10% floor. If a taxpayer is self-employed, insurance premiums paid for medical coverage are deductible as a business expense (for AGI). The deduction for AGI is allowed for premiums paid on behalf of the taxpayer, the taxpayer's spouse, and dependents of the taxpayer. Note: The deduction is not allowed to any taxpayer who is eligible to participate in a subsidized health plan maintained by any employer of the taxpayer or of the taxpayer's spouse. David, who is self-employed, may deduct 100% of the premium of $7,500 as a deduction for AGI. Joan, who is an employee, may include the premiums of $8,000 she paid in computing her itemized deduction for medical expenses (subject to the 10% floor). 4. Medical Expense Qualifications (LO. 2) During the current year, Pauline and her three dependent children had annual physical exams, which cost $750, and dental checkups for all four of them, which cost $420. In addition, Pauline paid $800 for medically supervised treatments to enable her to stop smoking. After she stopped smoking, she began to gain weight and incurred $1,200 in costs for a medically supervised weight loss program. Indicate whether these expenses are deductible or not deductible for the medical expense deduction. a. Annual physical exams b. Dental checkups c. Medically supervised treatments to stop smoking. D d. Medically supervised weight loss program DE Medical expenses paid for the care of the taxpayer, spouse, and dependents are allowed as an itemized deduction to the extent the expenses are not reimbursed. The medical expense deduction is limited to the amount by which such expenses exceed a threshold percentage of the taxpayer’s AGI.. a. Annual physical exams . b. Dental checkups c. Medically supervised treatments to stop smoking. d. Medically supervised weight loss program 5. Jerry and Ernie are comparing their tax situations. Both are paying all of the nursing home expenses of their parents. Jerry can include the expenses in computing his medical expense deduction, but Ernie cannot. Complete the explanation on why their tax situations may differ. The cost of care in a nursing home, along with BOTH MEALS AND LODGING, ARE INCLUDED with the costs for medical or nursing care if the primary reason is TO GET MEDICAL CARE. If the primary reason for being there is personal, ANY, costs for medical or nursing care CAN BE INCLUDED in the total of deductible medical expenses, BUT MEALS AND LODGING MUST BE EXCLUDED. Consequently, it appears that Jerry's parents are in the nursing home TO GET MEDICAL CARE, while Ernie's parents are in the nursing home FOR REASONS OTHER THEN MEDICAL CARE. 6. Health Savings Account (HSA) (LO. 2) Hubert, a self-employed taxpayer, is married and has two children. With respect to health savings accounts (HSAs), indicate whether of the following statements are true or false. a. The taxpayer must itemize deductions in order to take the deduction. b. The income earned on the HSA is not included in gross income if it is used to pay medical expenses not covered by the high-deductible plan. c. Contributions to an HSA are deductible for AGI. d. The HSA distributions not used for medical expenses are subject to a 20% penalty. . a. The taxpayer must itemize deductions in order to take the deduction. b. The income earned on the HSA is not included in gross income if it is used to pay medical expenses not covered by the high-deductible plan. c. Contributions to an HSA are deductible for AGI. d. The HSA distributions not used for medical expenses are subject to a 20% penalty. 7. Cosmetic Surgery as a Medical Expense (LO. 2) Joe was in an accident and required cosmetic surgery for injuries to his nose. He also had the doctor do additional surgery to reshape his chin, which had not been injured. a. Will the cosmetic surgery to Joe's nose qualify as a medical expense? b. Will the cosmetic surgery to Joe's chin qualify as a medical expense? paid for the unnecessary cosmetic surgery (reshaping the chin) are not deductible as a medical expense 8. Medical and Casualty Loss Reimbursement (LO. 2) Arturo, a calendar year taxpayer, paid $16,000 in medical expenses and sustained a $20,000 casualty loss in 2014. He expects $12,000 of the medical expenses and $14,000 of the casualty loss to be reimbursed by insurance companies in 2015. Before considering any limitations on these deductions, how much can Arturo include in determining his itemized deductions for 2014? Medical Expense (LO. 2) Barbara incurred the following expenses during the year: $840 dues at a health club she joined at the suggestion of her physician to improve her general physical condition, $240 for multiple vitamins and antioxidant vitamins, $500 for a smoking cessation program, $240 for nonprescription nicotine gum, $600 for insulin, and $7,200 for funeral expenses for her mother who passed away in June. Which of these expenses may be included in computing the medical expense deduction? a. $840 dues at a health club she joined at the suggestion of her physician to improve her general physical condition. b. $240 for multiple vitamins and antioxidant vitamins. c. $500 for a smoking cessation program. d. $240 for nonprescription nicotine gum. MAY NOT BE INCLUDED e. $ f. $7,200 for funeral expenses. MAY NOT BE INCLUDED 10. Timing of Medical Insurance Reimbursement (LO. 2) Caroyl incurred $8,700 of medical expenses in November 2014. On December 5, the clinic where she was treated mailed her the insurance claim form it had prepared for her with a suggestion that she sign and return the form immediately to receive her reimbursement from the insurance company by December 31. Indicate which of following are tax issues that Caroyl should consider in deciding whether to sign and return the form in December 2014 or January 2015. a. If she receives reimbursement in 2015, she is not required to reduce her 2014 medical expense deduction by the amount of the anticipated reimbursement. b. If she receives reimbursement in 2015, she must increase her medical expense deduction by the amount of the reimbursement. c. She should consider her expected marginal tax rates for 2014 and 2015 and determine whether it is better to receive the reimbursement in 2014 or 2015. d. If she receives the reimbursement in 2015 and deducted it in 2014, she must include the reimbursement in gross income to the extent she received a tax benefit from the medical expense deduction in 2014. a. If she receives reimbursement in 2015, she is not required to reduce her 2014 medical expense deduction by the amount of the anticipated reimbursement. b. If she receives reimbursement in 2015, she must increase her medical expense deduction by the amount of the reimbursement. c. She should consider her expected marginal tax rates for 2014 and 2015 and determine whether it is better to receive the reimbursement in 2014 or 2015. d. If she receives the reimbursement in 2015 and deducted it in 2014, she must include the reimbursement in gross income to the extent she received a tax benefit from the medical expense deduction in 2014. In 2014, Wally had the following insured personal casualty losses (arising from one casualty). Wally also had $42,000 AGI for the year before considering the casualty. Wally's casualty loss deduction is: a. None of these choices are correct. When using the automatic mileage method, which, if any, of the following expenses also can be claimed? PARKING "Engine tune-up", "Interest on automobile loan", and "MACRS depreciation" would be allowed under the actual cost method. Formula for Federal Income Tax on Individuals Income (broadly conceived) $xx,xxx Less: Exclusions (income that is not subject to tax) (x,xxx) Gross income (income that is subject to tax) $xx,xxx Less: Certain deductions (usually referred to as deductions for adjusted gross income) (x,xxx) Adjusted gross income $xx,xxx Less: The greater of certain personal and employee deductions (usually referred to as itemized deductions) or The standard deduction (including any additional standard deduction) (x,xxx) and Less: Personal and dependency exemptions (x,xxx) Taxable income $xx,xxx Tax on taxable income (see the Tax Tables and Tax Rate Schedules in Appendix A) $ x,xxx Less: Tax credits (including Federal income tax withheld and other prepayments of Federal income taxes) (xxx) Tax due (or refund) $ xxx Partial List of Exclusions from Gross Income Accident insurance proceeds Annuities (cost element) Bequests Child support payments Cost-of-living allowance (for military) Damages for personal injury or sickness Gifts received Group term life insurance, premium paid by employer (For coverage up to $50,000) Inheritances Interest from state and local (i.e., municipal) bonds Life insurance paid upon death Meals and lodging (if furnished for employer’s convenience) Military allowances Minister’s dwelling rental value allowance Railroad retirement benefits (to a limited extent) Scholarship grants (to a limited extent) Social Security benefits (to a limited extent) Veterans’ benefits Welfare payments Workers’ compensation benefits Alimony Annuities (income element) Awards Back pay Bargain purchase from employer Bonuses Breach of contract damages Business income Clergy fees Commissions Compensation for services Death benefits Debts forgiven Director’s fees Dividends Embezzled funds Employee awards (in certain cases) Employee benefits (except certain fringe benefits) Estate and trust income Farm income Fees Gains from illegal activities Gains from sale of property Gambling winnings Group term life insurance, premium paid by employer (for coverage over $50,000) Hobby income Interest Jury duty fees Living quarters, meals (unless furnished for employer’s convenience) Mileage allowance Military pay (unless combat pay) Notary fees Partnership income Pensions Prizes Professional fees Punitive damages Rents Rewards Royalties Salaries Severance pay Strike and lockout benefits Supplemental unemployment benefits Tips and gratuities Travel allowance (in certain cases) Treasure trove (found property) Wage Deductions from Adjusted Gross Income Itemized or standard deduction Nondeductible Expenditures Many expenditures are not deductible and, therefore, provide no tax benefit. Examples include, but are not limited to, the following: • Personal living expenses, including any losses on the sale of personal use property. • Hobby losses. • Life insurance premiums. • Expenses incident to jury duty. • Gambling losses (in excess of gains). • Child support payments. • Fines and penalties. • Political contributions. • Certain passive losses. • Funeral expenses. • Expenses paid on another’s behalf. • Capital expenditures EXAMPLES Susan, who is 17 years old and single, is claimed as a dependent on her parents’ tax return. During 2014, she received $1,200 interest (unearned income) on a savings account. She also earned $400 from a part-time job. When Susan files her own tax return, her standard deduction is $1,000 (the greater of $1,000 or the sum of earned income of $400 plus $350). Assume the same facts as in Example 8, except that Susan is 67 years old and is claimed as a dependent on her son’s tax return. In this case, when Susan files her own tax return, her standard deduction is $2,550 [$1,000 (the greater of $1,000 or the sum of earned income of $400 plus $350) þ $1,550 (the additional standard deduction allowed because Susan is 65 or over)]. Peggy, who is 16 years old and single, earned $700 from a summer job and had no unearned income during 2014. She is claimed as a dependent on her parents’ tax return. Her standard deduction is $1,050 (the greater of $1,000 or the sum of $700 earned income plus $350). Jack, who is a 20-year-old, single, full-time college student, is claimed as a dependent on his parents’ tax return. He worked as a musician during the summer of 2014, earning $6,400. Jack’s standard deduction is $6,200 (the greater of $1,000 or the sum of $6,400 earned income plus $350, but limited to the $6,200 standard deduction for a single taxpayer). Property can be transferred within the family group by gift or at death. One motivation for preferring the gift approach is: e. To avoid a future decline in value of the property transferred. In terms of probability, which of the following taxpayers would be least likely to be audited by the IRS? a. Taxpayer is an employed electrician. David files his tax return 45 days after the due date. Along with the return, David remits a check for $40,000 which is the balance of the tax owed. Disregarding the interest element, David's total failure to file and to pay penalties are: Failure to pay penalty [0.5% × $40,000 × 2 (two months violation)] $ 400 Plus: Failure to file penalty [5% × $40,000 × 2 (two months violation)] $4,000 Less: Failure to pay penalty (400) 3,600 Total penalties $4,000 Failure to pay penalty [0.5% × $40,000 × 2 (two months violation)] $ 400 Plus: Failure to file penalty [5% × $40,000 × 2 (two months violation)] $4,000 Less: Failure to pay penalty (400) 3,600 Total penalties $4,000 Failure to pay penalty [0.5% × $40,000 × 2 (two months violation)] $ 400 Plus: Failure to file penalty [5% × $40,000 × 2 (two months violation)] $4,000 Less: Failure to pay penalty (400) 3,600 Total penalties $4,000 a. $4,000. Provisions in the tax law that promote energy conservation and more use of alternative (non-fossil) fuels can be justified by: a. Economic and social considerations. A characteristic of FICA is that: a. It is administered by both state and Federal governments. b. It provides a modest source of income in the event of loss of employment. c. None of these choices are correct. Indicate which, if any, statement is incorrect. State income taxes: e. Cannot apply to visiting nonresidents. A characteristic of the fraud penalties is: d. Criminal fraud can result in a fine and a prison sentence. A characteristic of FUTA is that: a. Compliance requires following guidelines issued by both state and Federal regulatory authorities. Which of the following is a characteristic of the audit process? a. Less important issues are handled by means of a correspondence audit. Regarding proper ethical guidelines, which (if any) of the following is correct? a. If a client has made a mistake in a prior year's return and refuses to correct it, you should withdraw from the engagement. b. The use of client estimates in preparing a return may be acceptable. Which court decision would probably carry more weight? a. Regular U.S. Tax Court decision b. U.S. District Court decision c. Reviewed U.S. Tax Court decision A taxpayer may not appeal a case from which court: a. U.S. Court of Federal Claims. b. None of these choices are correct. c. Small Case Division of the U.S. Tax Court. What administrative release deals with a proposed transaction rather than a completed transaction? a. Field Service Advice b. Technical Advice Memorandum c. Determination Letter d. Letter Ruling If a taxpayer decides not to pay a tax deficiency, he or she must go to which court? a. None of these choices are correct. b. U.S. Tax Court Which publisher offers the Standard Federal Tax Reporter? a. LexisNexis b. Commerce Clearing House Which of the following indicates that a decision has precedential value for future cases? a. Stare decisis The IRS will not acquiesce to the following tax decisions: a. U.S. District Court. b. Small Case Division of the U.S. Tax Court. A taxpayer who loses in a U.S. District Court may appeal directly to the: a. U.S. Tax Court. b. U.S. Supreme Court. c. U.S. Circuit Court of Appeals. What statement is not true with respect to Temporary Regulations? a. Issued as Proposed Regulations. b. May not be cited as precedent. A jury trial is available in the following trial court: a. U.S. District Court. In 2014, Cindy had the following transactions: Salary $ 90,000 Short-term capital gain from a stock investment 4,000 Moving expense to change jobs (11,000) Received repayment of $20,000 loan she made to her sister in 2010 (includes no interest) 20,000 State income taxes (5,000) Cindy's AGI is: a. $114,000. b. $83,000. During 2014, Esther had the following transactions: Salary $70,000 Interest income on Xerox bonds 2,000 Inheritance from uncle 40,000 Contribution to traditional IRA 5,500 Capital losses 2,500 Esther's AGI is: a. $67,000. b. $102,000. c. $62,000. d. $64,000 Which, if any, of the statements regarding the standard deduction is correct? a. The basic standard deduction is indexed for inflation but the additional standard deduction is not. b. None of these choices are correct. c. Not available to taxpayers who choose to deduct their personal and dependency exemptions. d. May be taken as a for AGI deduction. e. Some taxpayers may qualify for two types of standard deductions. Sylvia, age 17, is claimed by her parents as a dependent. During 2014, she had interest income from a bank savings account of $2,000 and income from a part-time job of $4,200. Sylvia's taxable income is: a. $4,200 – $4,550 = $0. b. $6,200 – $4,550 = $1,650. During 2014, Sarah had the following transactions: Salary $ 80,000 Interest income on City of Baltimore bonds 1,000 Damages for personal injury (car accident) 100,000 Punitive damages (same car accident) 200,000 Cash dividends from Chevron Corporation stock 7,000 Sarah's AGI is: a. $285,000. b. $187,000. c. $287,000. Kyle and Liza are married and under 65 years of age. During 2014, they furnish more than half of the support of their 19-year old daughter, May, who lives with them. She graduated from high school in May 2013. May earns $15,000 from a part-time job, most of which she sets aside for future college expenses. Kyle and Liza also provide more than half of the support of Kyle's cousin who lives with them. Liza's father, who died on January 3, 2014, at age 90, has for many years qualified as their dependent. How many personal and dependency exemptions should Kyle and Liza claim? a. None of these choices are correct. b. Four During 2014, Marvin had the following transactions: Salary $50,000 Bank loan (proceeds used to buy personal auto) 10,000 Alimony paid 12,000 Child support paid 6,000 Gift from aunt 20,000 Marvin's AGI is: c. $38,000. Wilma, age 70 and single, is claimed as a dependent on her daughter's tax return. During 2014, she had interest income of $2,500 and $800 of earned income from babysitting. Wilma's taxable income is: a. $900. b. $1,750. c. $750. d. $2,200. e. None of these choices are correct. Which, if any, of the following statements relating to the standard deduction is correct? a. If spouses file separate returns, both spouses must claim the standard deduction (rather than itemize their deductions from AGI). b. If a taxpayer is claimed as a dependent of another, no basic standard deduction is allowed. c. None of these choices are correct. d. If a taxpayer is claimed as a dependent of another, his (or her) additional standard deduction is allowed in full (i.e., no adjustment is necessary). Tony, age 15, is claimed as a dependent by his grandmother. During 2014, Tony had interest income from Boeing Corporation bonds of $1,000 and earnings from a part-time job of $700. Tony's taxable income is: a. $1,700 – $700 – $1,000 = $0. b. $1,700 – $1,050 = $650. The Hutters filed a joint return for 2014. They provide more than 50% of the support of Carla, Melvin, and Aaron. Carla (age 18) is a cousin and earns $2,800 from a part-time job. Melvin (age 25) is their son and is a full-time law student. He received from the university a $3,800 scholarship for tuition. Aaron is a brother who is a citizen of Israel but resides in France. Carla and Melvin live with the Hutters. How many personal and dependency exemptions can the Hutters claim on their Federal income tax return? a. Three b. Five c. Four Title 26 of the U.S. Code in Subtitle A (LO. 1) In which title and subtitle of the U.S. Code is the income tax portion of the Internal Revenue Code of 1986 found? Title 26 and Subtitle A LO.1 Distinguish between the statutory, administrative, and judicial sources of the tax law and understand the purpose of each source. Indicate whether the following statements are "True or False" regarding the legislative process. a. When the Senate version of the bill differs from that passed by the House, the President resolves these differences. b. Assuming no disagreement between the House and the Senate, a bill passed by the Senate is referred to the President for approval or veto. c. Joint Conference Committee Reports often explain the provisions of the proposed legislation and are therefore a valuable source in ascertaining the intent of Congress. F, T, T LO.4 Identify the different taxes imposed in the United States at the Federal, state, and local levels. Indicate whether the following statements are "True or False" regarding the characteristics of gift tax. a. All gifts are subject to the gift tax. b. Gift splitting, by spouses, effectively allows the annual exclusion to double. c. Each donor is allowed an annual exclusion of $14,000 for each donee. d. The Federal gift tax is cumulative in effect. F,T,T,T Conversion of Tax-Exempt Realty to Commercial Status and Effect on Ad Valorem Property Tax (LO. 4) The Adams Independent School District wants to sell a parcel of unimproved land that it does not need. Its three best offers are as follows: Organization/Company Offer Proposed Use The State's Department of Public Safety (DPS) $7.9 million New state highway patrol barracks The Trinity Lutheran Church $7.8 million Start a church school Truly Car Dealers $7.7 million Open a car dealership If you are the financial adviser for the school district, which offer would you prefer? True Car Dealers Millie, age 80, is supported during the current year as follows: Percent of Support Weston (a son) 20% Faith (a daughter) 35% Jake (a cousin) 25% Brayden (unrelated close family friend) 20% During the year, Millie lives in an assisted living facility. Under a multiple support agreement, indicate which parties can qualify to claim Millie as a dependent. a. Faith. b. Weston and Faith Recognize the economic, social, equity, and political considerations that justify various aspects of the tax law. The wherewithal to pay concept recognizes the of taxing a transaction when the taxpayer lacks the means with which to pay the tax. It is particularly suited to situations in which the taxpayer’s economic position changed significantly as a result of the transaction. Inequity, has not Ellen, age 12, lives in the same household with her father, grandfather, and uncle. The cost of maintaining the household is provided by her grandfather (40%) and her uncle (60%). Disregarding tie-breaker rules, Ellen is a qualifying child as to: a. None of these choices are correct. b. All parties involved (i.e., father, grandfather, and uncle). Which court decision carries more weight? a. Second Circuit Court of Appeals LO.4 Identify the different taxes imposed in the United States at the Federal, state, and local levels. a. Patel is single and gives each of his six grandchildren $30,000 this year. Patel's gift tax exclusion is $ . b. Assume Patel is married and elects to gift-splitting with his wife. Patel's gift tax exclusion is 84000, 168000 Kyle, whose wife died in December 2011, filed a joint tax return for 2011. He did not remarry, but has continued to maintain his home in which his two dependent children live. What is Kyle's filing status as to 2014? d. Head of household Types of Regulations (LO. 1, 4) Distinguish between legislative, interpretive, and procedural Regulations by selecting the correct type of regulation for each statement. • Issued under a delegation of legislative powers • Provides information on the management and conduct of the IRS • Possesses the force and effect of law • Elaborates on the meaning of a particular Code Section • Is a "housekeeping-type" instruction • Clarifies congressional intent LR,PR,LR,IR,PR,IR Evan and Eileen Carter are husband and wife and file a joint return for 2014. Both are under 65 years of age. They provide more than half of the support of their daughter, Pamela (age 25), who is a full-time medical student. Pamela receives a $5,000 scholarship covering her tuition at college. They furnish all of the support of Belinda (Evan's grandmother), who is age 80 and lives in a nursing home. They also support Peggy (age 66), who is a friend of the family and lives with them. How many dependency exemptions may the Carters claim? a. Three A qualifying child cannot include: a. A daughter who is away at college. b. A married son who files a joint return. c. A grandmother. Which, if any, of the following is a deduction for AGI? a. None of these choices are correct. b. Charitable contributions c. Unreimbursed moving expenses of an employee LO.5 Explain the administration of the tax law, including the audit process utilized by the IRS. Indicate whether the following statements are "True or False" regarding the statute of limitations. a. Under the general rule, the IRS may assess an additional tax liability against a taxpayer within five years of the filing of the income tax return. b. A statute of limitations is a provision in the law that offers a party a defense against a suit brought by another party after the expiration of a specified period of time. c. If a taxpayer omits an amount of gross income in excess of 25 percent of the gross income reported on the return, the statute of limitations is increased to six years. d. A claim for refund generally must be filed within three years from the date the return was filed or within two years from the date the tax was paid, whichever is later. F<T<T<T LO.8 Describe the role played by the IRS and the courts in the evolution of the Federal tax system. Indicate whether the following statements are "True or False" regarding the influence of the Federal courts on tax law. a. Some court decisions have been of such consequence that Congress has incorporated them into statutory tax law. b. A leading tax concept developed by the courts deals with the interpretation of statutory tax provisions that operate to benefit taxpayers. c. The courts have established the rule that the relief provisions are to be broadly construed if there is any doubt about their application. T>T<F Which items tell taxpayers the IRS's reaction to certain court decisions? a. Legislative Regulations b. Actions on Decisions In which, if any, of the following situations may the individual not be claimed as a dependent of the taxpayer? c. A cousin who does not live with the taxpayer. Where does the Federal tax legislation generally originate? The house ways and means committee As a general rule: I. Income from property is taxed to the person who owns the property. II. Income from services is taxed to the person who earns the income. III. The assignee of income from property must pay tax on the income. IV. The person who receives the benefit of the income must pay the tax on the income. a. Only I and II are true. On January 5, 2014, Tim purchased a bond paying interest at 6% for $30,000. On March 31, 2014, he gave the bond to Jane. The bond pays $1,800 interest on December 31. Tim and Jane are cash basis taxpayers. When Jane collects the interest in December 2014: a. Tim must include all of the interest in his gross income. b. Jane must report $1,800 gross income for 2014. c. None of these choices are correct. d. Jane reports $450 of interest income in 2014, and Tim reports $1,350 of interest income in 2014. e. Jane reports $1,350 of interest income in 2014, and Tim reports $450 of interest income in 2014. Theresa, a cash basis taxpayer, purchased a bond on July 1, 2010, for $10,000, plus $400 of accrued interest. The bond paid $800 of interest each December 31. On March 31, 2014, she sold the bond for $9,800, which included $200 of accrued interest. a. Theresa has $200 interest income and a $400 loss from the bond in 2014. Teal company is an accrual basis taxpayer. On December 1, 2014, a customer paid for an item that was on hand, but the customer wanted the item delivered in early January 2015. Teal delivered the item on January 4, 2015. Teal included the sale in its 2014 income for financial accounting purposes. a. Teal must recognize the income in the year title to the goods passed to the customer, as determined under the state laws in which the store is located. b. Teal must recognize the income in 2015. c. None of these choices are correct. d. Teal can elect to recognize the income in either 2014 or 2015. e. Teal must recognize the income in 2014. With respect to income from services, which of the following is true? a. A cash basis taxpayer can spread the income from a 24-month service contract over the contract period. b. The income is always amortized over the period the services will be rendered by an accrual basis taxpayer. c. If an accrual basis taxpayer sells a 36-month service contract on July 1, 2014 for $3,600, the taxpayer's 2014 gross income from the contract is $600. Darryl, a cash basis taxpayer, gave 1,000 shares of Copper Company common stock to his daughter on September 29, 2014. Copper Company is a publicly held company that has declared a $2.00 per share dividend on September 30th every year for the last 20 years. Just as Darryl had expected, Copper Company declared a $2.00 per share dividend on September 30th, payable on October 15th, to stockholders of record as of October 10th. The daughter received the $2,000 dividend on October 18, 2014. a. Darryl must recognize the $2,000 dividend as his income because he constructively received the dividend. b. Darryl must recognize the income of $2,000 because the purpose of the gift was to avoid taxes. c. The daughter must recognize the income because she owned the stock when the dividend was declared and she received the $2,000. Office Palace, Inc., leased an all-in-one printer to a new customer, Ashley, on December 27, 2014. The printer was to rent for $600 per month for a period of 36 months beginning January 1, 2015. Ashley was required to pay the first and last month's rent at the time the lease was signed. Ashley was also required to pay a $1,500 damage deposit. Office Palace must recognize as income for the lease: a. $7,800 in 2015, if Office Palace is a cash basis taxpayer. b. $0 in 2014, if Office Palace is an accrual basis taxpayer. c. $1,200 in 2014, if Office Palace is an accrual basis taxpayer. Daniel purchased a bond on July 1, 2014, at par of $10,000 plus accrued interest of $300. On December 31, 2014, Daniel collected the $600 interest for the year. On January 1, 2015, Daniel sold the bond for $10,200. a. Daniel must recognize $600 interest income for 2014 and a $200 gain on the sale of the bond in 2015. b. Daniel must recognize $600 interest income for 2014 and a $100 loss on the sale of the bond in 2015. c. Daniel must recognize $300 interest income for 2014 and a $200 gain on the sale of the bond in 2015. The Maroon & Orange Gym, Inc., uses the accrual method of accounting. The corporation sells memberships that entitle the member to use the facilities at any time. A one-year membership costs $480 ($480/12 = $40 per month); a two-year membership costs $720 ($720/24 = $30 per month). Cash payment is required at the beginning of the membership period. On July 1, 2014, the company sold a one-year membership and a two-year membership. The company should report as gross income from the two contracts: a. $960 in 2014. b. $1,200 in 2014. c. $780 in 2015. Mike contracted with Kram Company, Mike's controlled corporation. Mike was a medical doctor and the contract provided that he would work exclusively for the corporation. No other doctor worked for the corporation. The corporation contracted to perform an operation for Rosa for $8,000. The corporation paid Mike $6,500 to perform the operation under the terms of his employment contract. a. None of these choices are correct. b. Mike must recognize the $8,000 gross income because he provided the service. c. Mike must recognize $8,000 gross income since the patient obviously wanted him to perform the operation. d. The Kram Company corporation's gross income is $1,500. e. Mike's gross income is $6,500. Christie sued her former employer for a back injury she suffered on the job in 2014. As a result of the injury, she was partially disabled. In 2015, she received $240,000 for her loss of future income, $160,000 in punitive damages because of the employer's flagrant disregard for the employee's safety, and $15,000 for medical expenses. The medical expenses were deducted on her 2014 return, reducing her taxable income by $12,000. Christie's 2015gross income from the above is: a. $175,000. b. $412,000. c. $172,000. A scholarship recipient at State University may exclude from gross income the scholarship proceeds used to pay for: a. Tuition, books, and supplies. In December 2014, Todd, a cash basis taxpayer, paid $1,200 of fire insurance premiums for the calendar year 2015 on a building he held for rental income. Todd deducted the $1,200 of insurance premiums on his 2014 tax return. He had $150,000 of taxable income that year. On June 30, 2015, he sold the building and, as a result, received a $500 refund on his fire insurance premiums. As a result of the above: d. Todd should include the $500 in 2015 gross income in accordance with the tax benefit rule. The taxpayer's marginal tax bracket is 25%. Which would the taxpayer prefer? a. None of these choices are correct. b. $1.25 taxable income rather than $1.00 tax-exempt income. c. $1.40 taxable income rather than $1.00 tax-exempt income. George, an unmarried cash basis taxpayer, received the following amounts during 2014: Interest on savings accounts $2,000 Interest on a State tax refund 600 Interest on City of Salem school bonds 350 Interest portion of proceeds of a 5% bank certificate of deposit 250 Dividends on USG common stock 300 What amount should George report as gross income from dividends and interest for 2014? b. $3,150. The Perfection Tax Service gives employees $12.50 as "supper money" when they are required to work overtime, approximately 25 days each year. The supper money received: a. May be excluded from the employee's gross income as a de minimis fringe benefit. Matilda works for a company with 1,000 employees. The company has a hospitalization insurance plan that covers all employees. However, the employee must pay the first $3,000 of his or her medical expenses each year. Each year, the employer contributes $1,500 to each employee's health savings account (HSA). Matilda's employer made the contributions in 2014 and 2015, and the account earned $100 interest in 2015. At the end of 2015, Matilda withdrew $3,100 from the account to pay the deductible portion of her medical expenses for the year and other medical expenses not covered by the hospitalization insurance policy. As a result, Matilda must include in her 2015 gross income: a. $1,600. b. $100. c. None of these choices are correct. d. $3,100. e. $0. Jack received a court award in a civil libel and slander suit against National Gossip. He received $120,000 for damages to his professional reputation, $100,000 for damages to his personal reputation, and $50,000 in punitive damages. Jack must include in his gross income as a damage award: a. None of these choices are correct. b. $0. c. $120,000. d. $100,000. e. $270,000. Adam repairs power lines for the Egret Utilities Company. He is generally working on a power line during the lunch hour. He must eat when and where he can and still get his work done. He usually purchases something at a convenience store and eats in his truck. Egret reimburses Adam for the cost of his meals. a. Adam may exclude from his gross income the difference between what he paid for the meals and what it would have cost him to eat at home. b. Adam must include the reimbursement in his gross income. Sharon had some insider information about a corporate takeover. She unintentionally informed a friend, who immediately bought the stock in the target corporation. The takeover occurred and the friend made a substantial profit from buying and selling the stock. The friend told Sharon about his stock dealings, and gave her a pearl necklace because she "made it all possible." The necklace was worth $10,000, but she already owned more jewelry than she desired. a. The value of the necklace is not included in Sharon's gross income because passing the information was an illegal act and the SEC can confiscate the necklace. b. The necklace is a nontaxable gift received by Sharon because the friend was not legally required to make the gift. c. None of these choices are correct. d. The value of the necklace is not included in Sharon's gross income unless she sells it. e. The value of the necklace must be included in Sharon's gross income for the tax year it was received by her. In 2014 Todd purchased an annuity for $150,000. The annuity is to pay him $2,500 per month for the rest of his life. His life expectancy is 100 months. Which of the following is correct? a. If Todd collects 20 payments and then dies in 2015, Todd's estate should amend his tax returns for 2014 and 2015 and eliminate all of the reported income from the annuity for those years. b. Todd is not required to recognize any income until he has collected 60 payments (60 × $2,500 = $150,000). c. For each $2,500 payment received in the first year, Todd must include $1,000 in gross income. Theresa sued her former employer for age, race, and gender discrimination. She claimed $200,000 in damages for loss of income, $300,000 for emotional harm, and $500,000 in punitive damages. She settled the claim for $700,000. As a result of the settlement, Theresa must include in gross income: a. None of these choices are correct. b. $490,000 [($700,000/$1,000,000) × $700,000]. c. $700,000. Which of the following is not a requirement for an alimony deduction? a. The payments must extend over at least three years. Jim and Nora, residents of a community property state, were married in early 2013. Late in 2013 they separated, and in 2014 they were divorced. Each earned a salary, and they received income from community owned investments in all relevant years. They filed separate returns in 2013 and 2014. a. In 2014, Nora must report only her salary and one-half of the income from community property on her separate return. Sarah, a majority shareholder in Teal, Inc., made a $200,000 interest-free loan to the corporation. Sarah is not an employee of the corporation. a. None of these choices are correct. b. Sarah must recognize imputed interest expense and the corporation must recognize imputed interest income. c. Sarah must recognize imputed interest income and the corporation must recognize imputed interest expense. Under the alimony rules: a. To determine whether a cash payment is alimony, one must consult the state laws that define alimony. b. None of these choices are correct. c. The income is included in the gross income of the recipient of the payments. The effects of a below-market loan for $100,000 made by a corporation to its chief executive officer as an enticement to get him to remain with the company are: a. The employee has no income unless the funds are invested and produce investment income for the year. b. The employee has imputed compensation income and the corporation has imputed interest income. Tim and Janet were divorced. Their only marital property was a personal residence with a value of $120,000 and cost of $50,000. Under the terms of the divorce agreement, Janet would receive the house and Janet would pay Tim $15,000 each year for 5 years, or until Tim's death, whichever should occur first. Tim and Janet lived apart when the payments were made to Tim. The divorce agreement did not contain the word "alimony." a. None of these choices are correct. b. Janet is allowed to deduct $15,000 each year for alimony paid. Jena is a full-time undergraduate student at State University and is claimed by her parents as a dependent. Her only source of income is a $10,000 athletic scholarship ($1,000 for books, $5,500 tuition, $500 student activity fee, and $3,000 room and board). Jena's gross income for the year is: a. $10,000. b. $3,000. Early in the year, Marion was in an automobile accident during the course of his employment. As a result of the physical injuries he sustained, he received the following payments during the year: Reimbursement of medical expenses Marion paid by a medical insurance policy he purchased $10,000 Damage settlement to replace his lost salary 15,000 What is the amount that Marion must include in gross income for the current year? a. $12,500. b. $25,000. c. $15,000. d. $0 Wayne owns a 30% interest in the capital and profits of Emerald Company (a calendar year partnership). For tax year 2013, the partnership earned revenue of $900,000 and had operating expenses of $660,000. During the year, Wayne withdrew from the partnership a total of $90,000. He also invested an additional $30,000 in the partnership. For 2013, Wayne's gross income from the partnership is: a. $162,000. b. $132,000. c. $72,000. The alimony rules: a. Permit tax deductions for property divisions. b. Look to state law to determine the definition of alimony. c. None of these choices are correct. d. Distinguish child support payments from alimony. Under the Swan Company's cafeteria plan, all full-time employees are allowed to select any combination of the benefits below, but the total received by the employee cannot exceed $8,000 a year. I. Group medical and hospitalization insurance for the employee, $3,600 a year. II. Group medical and hospitalization insurance for the employee's spouse and children, $1,200 a year. III. Child-care payments, actual cost but not more than $4,800 a year. IV. Cash required to bring the total of benefits and cash to $8,000. Which of the following statements is true? d. Sam, a full-time employee, selects choices II and III and $2,000 cash. His gross income must include the $2,000. As an executive of Cherry, Inc., Ollie receives a fringe benefit in the form of annual tuition scholarships of $10,000 to each of his three children. The scholarships are paid by the company on behalf of the children of key employees directly to each child's educational institution and are payable only if the student maintains a B average. a. The tuition payments of $30,000 must be included in Ollie's gross income. An employee can exclude from gross income the value of meals provided by his or her employer whenever: e. The meals are provided on the employer's premises for the employer's convenience. Ben was diagnosed with a terminal illness. His physician estimated that Ben would live no more than 18 months. After he received the doctor's diagnosis, Ben cashed in his life insurance policy and used the proceeds to take a trip to see relatives and friends before he died. Ben had paid $12,000 in premiums on the policy, and he collected $50,000, the cash surrender value of the policy. Henry enjoys excellent health, but he cashed in his life insurance policy to purchase a new home. He had paid premiums of $12,000 and collected $50,000 from the insurance company. a. Both Ben and Henry must recognize $38,000 ($50,000 – $12,000) of gross income. b. Henry must recognize $38,000 ($50,000 – $12,000) of gross income, but Ben does not recognize any gross income. Carin, a widow, elected to receive the proceeds of a $150,000 life insurance policy on the life of her deceased husband in 10 installments of $17,500 each. Her husband had paid premiums of $60,000 on the policy. In the first year, Carin collected $17,500 from the insurance company. She must include in gross income: a. None of these choices are correct. b. $0. c. $10,000. d. $2,500 The taxpayer is a Ph.D. student in accounting at City University. The student is paid $1,500 per month for teaching two classes. The total amount received for the year is $13,500. a. The $13,500 is taxable compensation. On January 1, Father (Dave) loaned Daughter (Debra) $100,000 to purchase a new car and to pay off college loans. There were no other loans outstanding between Dave and Debra. The relevant Federal rate on interest was 6 percent. The loan was outstanding for the entire year. a. If Debra has $15,000 of investment income, Dave must recognize $6,090 of imputed interest income. Olaf was injured in an automobile accident and received $25,000 for his physical injury, $50,000 for his loss of income, and $10,000 punitive damages. As a result of the award, the amount Olaf must include in gross income is: a. $85,000. b. $10,000. Trade and business expenses should be treated as: a. None of these choices are correct. b. A deduction from AGI subject to the 2%-of-AGI floor. c. A deduction from AGI not subject to the 2%-of-AGI floor. d. Deductible for AGI. Which of the following is not a related party for constructive ownership purposes under § 267? a. The taxpayer's grandmother. b. The taxpayer's aunt. Iris, a calendar year cash basis taxpayer, owns and operates several TV rental outlets in Florida, and wants to expand to other states. During 2014, she spends $14,000 to investigate TV rental stores in South Carolina and $9,000 to investigate TV rental stores in Georgia. She acquires the South Carolina operations, but not the outlets in Georgia. As to these expenses, Iris should: a. Capitalize $14,000 and not deduct $9,000. b. Capitalize $23,000. c. Expense $23,000 for 2014. For a president of a publicly held corporation, which of the following are not subject to the $1 million limit on executive compensation? a. Contribution to medical insurance plan. b. Premiums on group term life insurance of $50,000. c. "Contribution to medical insurance plan", "Contribution to pension plan", and "Premiums on group term life insurance of $50,000", are not subject to the limit. Velma and Bud divorced. Velma's attorney fee of $5,000 is allocated as follows: General representation in obtaining the divorce $1,500 Services in obtaining custody of the child 900 Services in settlement of martial property 600 Determining the tax consequences of: Dependency deduction for child 700 Property settlement 1,300 Of the $5,000 Velma pays to her attorney, the amount she may deduct as an itemized deduction is: a. $5,000. b. $2,000. Sammy, a calendar year cash basis taxpayer who is age 66, has the following transactions: Salary from job $90,000 Alimony received from ex-wife 10,000 Medical expenses 8,000 Based on this information, Sammy has: a. AGI of $90,000. b. None of these choices are correct. On January 2, 2014, Fran acquires a business from Chuck. Among the assets purchased are the following intangibles: patent with a 7-year remaining life, a covenant not to compete for 10 years, and goodwill. Of the purchase price, $140,000 was paid for the patent and $60,000 for the covenant. The amount of the excess of the purchase price over the identifiable assets was $100,000. What is the amount of the amortization deduction for 2014? a. $32,667. b. None of these choices are correct. c. $20,000. Nikeya sells land (adjusted basis of $120,000) to her adult son, Shamed, for its appraised value of $95,000. Which of the following statements is correct? a. Only "Nikeya's recognized loss is $25,000 ($95,000 amount realized – $120,000 adjusted basis)" and "Shamed's adjusted basis for the land is $120,000 ($95,000 cost + $25,000 disallowed loss for Nikeya)" are correct. b. Nikeya's recognized loss is $25,000 ($95,000 amount realized – $120,000 adjusted basis). c. Shamed's adjusted basis for the land is $120,000 ($95,000 cost + $25,000 disallowed loss for Nikeya). d. If Shamed subsequently sells the land for $112,000, he has no recognized gain or loss. Which of the following is not relevant in determining whether an activity is profit-seeking or a hobby? a. Whether the activity is enjoyed by the taxpayer. b. The expertise of the taxpayers or their advisers. c. The relationship of profits earned and losses incurred. d. All of these choices are relevant factors. Because Scott is three months delinquent on the mortgage payments for his personal residence, Jeanette (his sister) is going to cover the arrearage. Based on past experience, she does not expect to be repaid by Scott. Which of the following statements is correct? a. If Jeanette pays the mortgage company directly, she cannot deduct the interest part. b. Only "If Jeanette pays the mortgage company directly, neither Scott nor Jeanette can deduct the interest part" and "If Jeanette pays the mortgage company directly, she cannot deduct the interest part" are correct. In 2014, Theo, an employee, had a salary of $30,000 and experienced the following losses: Loss from damage to rental property ($10,000) Unreimbursed loss from theft of business computer (5,000) Personal casualty gain 4,000 Personal casualty loss (after $100 floor) (9,000) Determine the amount of Theo's itemized deduction from these losses. a. None of these choices are correct. In 2014, Grant's personal residence was completely destroyed by fire. Grant was insured for 100% of his actual loss, and he received the insurance settlement. Grant had adjusted gross income, before considering the casualty item, of $30,000. Pertinent data with respect to the residence follows: Cost basis $280,000 Value before casualty 250,000 Value after casualty –0– What is Grant's allowable casualty loss deduction? a. $10,000 b. $6,500 c. $6,900 d. $0 In 2014, Wally had the following insured personal casualty losses (arising from one casualty). Wally also had $42,000 AGI for the year before considering the casualty. Wally's casualty loss deduction is: a. $1,600. b. $58,000. c. None of these choices are correct. In 2014, Mary had the following items: Salary $30,000 Personal use casualty gain 10,000 Personal use casualty loss (after $100 floor) 17,000 Other itemized deductions 4,000 Assuming that Mary files as head of household (has one dependent child), determine her taxable income for 2014. d. $13,000 Regarding research and experimental expenditures, which of the following are not qualified expenditures? a. Costs of ordinary testing of materials. Norm's car, which he uses 100% for personal purposes, was completely destroyed in an accident in 2014. The car's adjusted basis at the time of the accident was $13,000. Its fair market value was $10,000. The car was covered by a $2,000 deductible insurance policy. Norm did not file a claim against the insurance policy because of a fear that reporting the accident would result in a substantial increase in his insurance rates. His adjusted gross income was $14,000 (before considering the loss). What is Norm's deductible loss? a. $9,500 b. $100 c. None of these choices are correct. d. $0 e. $500 Jim had a car accident in 2014 in which his car was completely destroyed. At the time of the accident, the car had a fair market value of $30,000 and an adjusted basis of $40,000. Jim used the car 100% of the time for business use. Jim received an insurance recovery of 70% of the value of the car at the time of the accident. If Jim's AGI for the year is $60,000, determine his deductible loss on the car. a. None of these choices are correct. John had adjusted gross income of $60,000. During the year his personal use summer home was damaged by a fire. Pertinent data with respect to the home follows: Cost basis $260,000 Value before the fire 400,000 Value after the fire 100,000 Insurance recovery 270,000 John had an accident with his personal use car. As a result of the accident, John was cited with reckless driving and willful negligence. Pertinent data with respect to the car follows: Cost basis $80,000 Value before the accident 56,000 Value after the accident 20,000 Insurance recovery 18,000 What is John's itemized casualty loss deduction? a. $17,000 b. $2,000 c. None of these choices are correct. d. $0 In 2013, Sarah (who files as single) had silverware worth $10,000 (basis $6,000) stolen from her home. Sarah's insurance company told her that her policy did not cover the theft. Sarah's other itemized deductions last year were $2,000. She had AGI of $30,000 last year. In August of 2014, Sarah's insurance company decided that Sarah's policy did cover the theft of the silverware and they paid Sarah $5,000. Determine the tax treatment of the $5,000 received by Sarah during 2014. a. None of these choices are correct. b. None of the $5,000 should be included in gross income. Alma is in the business of dairy farming. During the year, one of her barns was completely destroyed by fire. The adjusted basis of the barn was $90,000. The fair market value of the barn before the fire was $75,000. The barn was insured for 95% of its fair market value, and Alma recovered this amount under the insurance policy. Alma has adjusted gross income for the year of $40,000 (before considering the casualty). Determine the amount of loss she can deduct on her tax return for the current year. a. $14,650 b. $14,750 c. $3,750 d. None of these choices are correct. e. $18,750 Cora purchased a hotel building on May 17, 2014, for $3,000,000. Determine the al deduction for 2015. a. None of these choices are correct. b. $48,150 c. $76,920 Howard's business is raising and harvesting peaches. On March 10, 2014, Howard purchased 10,000 new peach trees at a cost of $60,000. Howard does not make an election to expense assets under § 179 and does not take additional first-year depreciation (if available). Determine the cost recovery deduction for 2014. a. None of these choices are correct. b. $3,000 Doug purchased a new factory building on January 15, 1989, for $400,000. On March 1, 2014, the building was sold. Determine the cost recovery deduction for the year of the sale assuming he did not use the MACRS straight-line method. a. $12,696 b. None of these choices are correct. c. $1,587 d. $0 e. $2,645 Diane purchased a factory building on April 15, 1994, for $5,000,000. She sells the factory building on February 2, 2014. Determine the cost recovery deduction for the year of the sale. a. $19,838 b. $26,458 c. $16,025 75. Hans purchased a new passenger automobile on August 17, 2013, for $30,000. During the year the car was used 40% for business and 60% for personal use. Determine his cost recovery deduction for the car for 2013. A. $500. B. $1,000. C. $1,224. D. $1,500. E. None of the above. Hans purchased a new passenger automobile on August 17, 2014, for $30,000. During the year the car was used 40% for business and 60% for personal use. Determine his cost recovery deduction for the car for 2014. a. $1,500 b. None of these choices are correct. Augie purchased one new asset during the year (five-year property) on November 10, 2014, at a cost of $650,000. She would like to use the § 179 election if available. The income from the business before the cost recovery deduction and the § 179 deduction was $600,000. Determine the total cost recovery deduction with respect to the asset for 2014. a. None of these choices are correct. b. $150,000 c. $130,000 d. $32,500 In 2013, Gail had a § 179 deduction carryover of $30,000. In 2014, she elected § 179 for an asset acquired at a cost of $115,000. Gail's § 179 business income limitation for 2014 is $140,000. Determine Gail's § 179 deduction for 2014. a. $55,000 b. None of these choices are correct. c. $25,000 Carlos purchased an apartment building on November 16, 2014, for $3,000,000. Determine the cost recovery for 2015. e. None of these choices are correct. White Company acquires a new machine (seven-year property) on January 10, 2013, at a cost of $600,000. White makes the election to expense the maximum amount under § 179. No election is made to use the straight-line method. White does take additional first-year depreciation. Determine the total deductions in calculating taxable income related to the machine for 2013 assuming White has taxable income of $800,000. a. $385,296 b. None of these choices are correct. On June 1, 2014, Irene places in service a new automobile that cost $21,000. The car is used 70% for business and 30% for personal use. (Assume this percentage is maintained for the life of the car.) She does not take additional first-year depreciation (if available). Determine the cost recovery deduction for 2015. a. $3,160 b. None of these choices are correct. c. $6,720 d. $3,290 e. $3,570 Which of the following can be claimed as a deduction for AGI? a. Medical expenses. b. Investment interest expenses. c. Property taxes on personal use real estate. d. Personal casualty losses. e. None of these choices are correct. Trade and business expenses should be treated as: a. A deduction from AGI subject to the 2%-of-AGI floor. b. A deduction from AGI not subject to the 2%-of-AGI floor. c. Deductible for AGI. Ivory, Inc., has taxable income of $600,000 and qualified production activities income (QPAI) of $700,000 in 2014. Ivory's domestic production activities deduction is: a. $42,000. b. None of these choices are correct. c. $63,000. d. $54,000. Blue Corporation incurred the following expenses in connection with the development of a new product: Salaries $100,000 Utilities 18,000 Materials 25,000 Advertising 5,000 Market survey 3,000 Depreciation on machine 9,000 Blue expects to begin selling the product next year. If Blue elects to amortize research and experimental expenditures over 60 months, determine the amount of the deduction for research and experimental expenditures for the current year. a. $0 Which of the following is incorrect? a. Property taxes on taxpayer's personal residence are a deduction from AGI b. All of these choices are correct. c. The expenses associated with royalty property are a deduction from AGI. On June 1 of the current year, Tab converted a machine from personal use to rental property. At the time of the conversion, the machine was worth $90,000. Five years ago Tab purchased the machine for $120,000. The machine is still encumbered by a $50,000 mortgage. What is the basis of the machine for cost recovery? a. $140,000 b. $90,000 Mary incurred a $20,000 nonbusiness bad debt last year. She also had an $8,000 long-term capital gain last year. Her taxable income for last year was an NOL of $15,000. During the current year, she unexpectedly collected $12,000 on the debt. How should Mary account for the collection? a. $8,000 income james purchased a new business asset (three-year personalty) on July 23, 2013, at a cost of $40,000. James takes additional first-year depreciation Determine the cost recovery deduction for 2013. a. $8,333 b. $41,665 c. None of these choices are correct. d. $33,333 e. $26,666 Marsha is single, had gross income of $50,000, and incurred the following expenses: Charitable contribution $2,000 Taxes and interest on home 7,000 Legal fees incurred in a tax dispute 1,000 Medical expenses 3,000 Penalty on early withdrawal of savings 250 Her AGI is: a. $40,000. b. $39,750. c. $49,750. Al is single, age 60, and has gross income of $140,000. His deductible expenses are as follows: Alimony $20,000 Charitable contributions 4,000 Contribution to a traditional IRA 5,500 Expenses paid on rental property 7,500 Interest on home mortgage and property taxes on personal residence 7,200 State income tax 2,200 What is Al's AGI? a. $127,000. b. $107,000. Hazel purchased a new business asset (five-year asset) on September 30, 2014, at a cost of $100,000. On October 4, 2014, Hazel placed the asset in service. This was the only asset Hazel placed in service in 2014. Hazel did not elect § 179 or additional first-year depreciation if available. On August 20, 2015, Hazel sold the asset. Determine the cost recovery for 2015 for the asset. a. $23,750 Cream, Inc.'s taxable income for 2014 before any deduction for an NOL carryforward of $30,000 is $70,000. Cream's qualified production activities income (QPAI) is $60,000. What is the amount of Cream's domestic production activities deduction (DPAD) for 2014? a. None of these choices are correct. b. $1,200 c. $3,600 Which of the following are deductions for AGI? e. Mortgage interest on a building used in a business. Last year, Green Corporation incurred the following expenditures in the development of a new plant process: Salaries $250,000 Materials 90,000 Utilities 20,000 Quality control testing costs 40,000 Management study costs 5,000 Depreciation of equipment 18,000 During the current year, benefits from the project began being realized in May. If Green Corporation elects a 60 month deferral and amortization period, determine the amount of the deduction for the current year. a. None of these choices are correct. b. $48,000 c. $50,400 On June 1, 2014, James places in service a new automobile that cost $40,000. The car is used 60% for business and 40% for personal use. (Assume this percentage is maintained for the life of the car.) James does not take additional first-year depreciation (if available). Determine the cost recovery deduction for 2014. a. $1,776 b. $4,800 c. None of these choices are correct. d. $8,000 e. $1,896 Grape Corporation purchased a machine in December of the current year. This was the only asset purchased during the current year. The machine was placed in service in January of the following year. No assets were purchased in the following year. Grape Corporation's cost recovery would begin: a. In the current year using a half-year convention. b. In the following year using a mid-quarter convention. c. None of these choices are correct. d. In the following year using a half-year convention. Which of the following is correct? d. "A personal casualty loss is classified as a deduction from AGI", "Real estate taxes on a taxpayer's personal residence are classified as deductions from AGI", and "An expense associated with rental property is classified as a deduction for AGI" are correct. In 2014, Morley, a single taxpayer, had an AGI of $30,000 before considering the following items: Loss from damage to rental property ($6,000) Loss from theft of bonds (3,000) Personal casualty gain 4,000 Personal casualty loss (after $100 floor) (9,000) Determine the amount of Morley's itemized deduction from the losses. a. $0 b. $5,120 c. $5,600 Which of the following is a deduction for AGI ? a. Safe deposit box rental fee in which stock certificates are stored. b. All of these choices are correct. c. Roof repairs to a personal use home. d. Contribution to a traditional IRA. Peggy is in the business of factoring accounts receivable. Last year, she purchased a $30,000 account receivable for $25,000. This year, the account was settled for $25,000. How much loss can Peggy deduct and in which year? a. None of these choices are correct. In which, if any, of the following situations may the individual not be claimed as a dependent of the taxpayer? a. A cousin who lives with the taxpayer all year. b. A married daughter who lives with the taxpayer. c. A former spouse who lives with the taxpayer (divorce took place this year) LO.8 Describe the role played by the IRS and the courts in the evolution of the Federal tax system. Indicate whether the following statements are "True or False" regarding the influence of the Federal courts on tax law. a. Some court decisions have been of such consequence that Congress has incorporated them into statutory tax law. b. A leading tax concept developed by the courts deals with the interpretation of statutory tax provisions that operate to benefit taxpayers. c. The courts have established the rule that the relief provisions are to be broadly construed if there is any doubt about their application. TTT LO.4 Identify the different taxes imposed in the United States at the Federal, state, and local levels. Indicate whether the following statements are "True or False" regarding the characteristics of gift tax. a. All gifts are subject to the gift tax. b. Gift splitting, by spouses, effectively allows the annual exclusion to double. c. Each donor is allowed an annual exclusion of $14,000 for each donee. d. The Federal gift tax is cumulative in effect. FTTT Where does the Federal tax legislation generally originate? The house ways and means committee Millie, age 80, is supported during the current year as follows: Percent of Support Weston (a son) 10% Faith (a daughter) 45% Jake (a cousin) 25% Brayden (unrelated close family friend) 20% During the year, Millie lives in an assisted living facility. Under a multiple support agreement, indicate which parties can qualify to claim Millie as a dependent. a. None of these choices are correct. b. Weston, Faith, Jake, and Brayden. c. Weston and Faith. d. Faith. Which, if any, of the following is a deduction for AGI? a. None of these choices are correct. b. Charitable contributions c. Part of the self-employment tax Kyle, whose wife died in December 2011, filed a joint tax return for 2011. He did not remarry and continued to maintained his home in which his two dependent children live. One child is 25 years old and a full time student, and the other is 24 years of age and a full time student. What is Kyle's filing status as to 2012? d. Head of household Which of these carries more weight? a. Legislative Regulations Ellen, age 12, lives in the same household with her father, grandfather, and uncle. The cost of maintaining the household is provided by her grandfather (40%) and her uncle (60%). With regard to tie-breaker rules, Ellen is a qualifying child as to: a. Only her grandfather and uncle. b. Only her uncle. c. Only her father. The Hutters filed a joint return for 2014. They provide more than 50% of the support of Carla, Melvin, and Aaron. Carla (age 18) is a cousin and earns $2,800 from a part-time job. Melvin (age 25) is their son and is a full-time law student. He received from the university a $3,800 scholarship for tuition. Aaron is a brother who is a citizen of Israel but resides in France. Carla and Melvin live with the Hutters. How many personal exemptions can the Hutters claim on their Federal income tax return? d. Two Which court decision carries the least weight? a. Federal District Court b. U.S. Court of Federal Claims c. Small Cases Division of U.S. Tax Court LO.1 Distinguish between the statutory, administrative, and judicial sources of the tax law and understand the purpose of each source. Indicate whether the following statements are "True or False" regarding the legislative process. a. When the Senate version of the bill differs from that passed by the House, the President resolves these differences. b. Assuming no disagreement between the House and the Senate, a bill passed by the Senate is referred to the President for approval or veto. c. Joint Conference Committee Reports often explain the provisions of the proposed legislation and are therefore a valuable source in ascertaining the intent of Congress. FTT LO.5 Explain the administration of the tax law, including the audit process utilized by the IRS. Indicate whether the following statements are "True or False" regarding the statute of limitations. a. Under the general rule, the IRS may assess an additional tax liability against a taxpayer within five years of the filing of the income tax return. b. A statute of limitations is a provision in the law that offers a party a defense against a suit brought by another party after the expiration of a specified period of time. c. If a taxpayer omits an amount of gross income in excess of 25 percent of the gross income reported on the return, the statute of limitations is increased to six years. d. A claim for refund generally must be filed within three years from the date the return was filed or within two years from the date the tax was paid, whichever is later. FTTT Evan and Eileen Carter are husband and wife and file a joint return for 2014. Both are under 65 years of age. They provide more than half of the support of their daughter, Pamela (age 25), who is a full-time medical student. Pamela receives a $5,000 scholarship covering her room and board at college. They furnish all of the support of Belinda (Evan's grandmother), who is age 80 and lives in a nursing home. They also support Peggy (age 66), who is a friend of the family and lives with them. How many dependency exemptions may the Carters claim? e. Two A qualifying child cannot include: a. A daughter who is away at college. b. A married son who files a joint return. c. A brother who is 28 years of age State the rationale for the cost consumption concept and identify the relevant time periods for depreciation, ACRS, and MACRS. Three years ago, Marshall purchased an automobile for personal purposes for $38,000. In 2014, he contributes the automobile to his business. At the time of the contribution the automobile was appraised for $22,000. The basis for cost recovery of the automobile is $22000 1. During 2014, Kylie, a single taxpayer, had the following items: Salary $35,000 Personal use casualty gain 16,000 Personal use casualty loss (after $100 floor) 33,000 Other itemized deductions survey 12,000 Determine Kylie's taxable income for the current year. $5,500. 2. Cole, a married taxpayer filing a joint return, had the following items for 2014: • Salary of $60,000. • Loss of $40,000 on the sale of stock acquired two years ago from Benjamin, an investor. • Gain of $45,000 on the sale of §1244 stock acquired three years ago. • Stock acquired on January 15, 2014, for $15,000 became worthless on July 1, 2014. Determine Cole's AGI for 2014. 57,000 3. Trent is the sole proprietor of Wilderness Loan Company. On May 1, 2013, Wilderness loaned Franco $100,000. In 2014, Franco filed for bankruptcy. At that time, it was revealed that Franco's creditors could expect to receive 30 cents on the dollar. In March 2015, final settlement was made, and Wilderness received $20,000. Wilderness's policy is to deduct losses as soon as permitted. How much loss can Wilderness deduct and in which year? This debt was incurred in connection with a trade or business. Therefore, Wilderness can claim a bad debt deduction in the following years: 2013 - zero. 2014 - $70,000 [$100,000 (loan) - $30,000 (expected settlement)]. 2015 - $10,000 [$30,000 (balance) - $20,000 (proceeds)]. 4. Freddy loaned Joshua (a friend) $60,000 in 2013 with the agreement that the loan would be repaid in two years. In 2014, Joshua filed for bankruptcy and Freddy learned that he could expect to receive $0.50 on the dollar. In 2014, final settlement was made and Freddy received $12,000. Assuming the loan is a nonbusiness bad debt, how should Freddy account for the bad debt? Nonbusiness bad debts are characterized as short-term capital losses ($48,000). The loss is recognized in the year of final settlement. $48,000 short-term capital loss in 2015. 5. In the case of an accident involving a car used by an employee 100% of the time for his job, the allowable unreimbursed loss is reduced by: Unreimbursed casualty and theft losses incurred by an employee in connection with a trade or business are classified as a miscellaneous itemized deduction subject to the 2% of AGI floor. 6. During the year, Sylvester's personal residence was damaged by fire. Sylvester was insured for 80% of his actual loss, and he received the insurance settlement. Sylvester had adjusted gross income, before considering the casualty item, of $70,000. Pertinent data with respect to the residence follows: Cost basis $150,000 Value before casualty 240,000 Value after casualty 40,000 What is Sylvester's allowable casualty loss deduction? 0 The proceeds received are $160,000 [($240,000 – $40,000) X 80%]. The proceeds received are $10,000 ($160,000 – $150,000) greater than Sylvester's adjusted basis for his personal residence. Hence, Sylvester has no casualty loss. 7. During 2014, Tristan, a single taxpayer, had an AGI of $50,000 before considering the following items: Loss from damage to rental property ($6,000) Loss from theft of bonds (3,000) Personal casualty gain 20,000 Personal casualty loss (after $100 floor) (30,000) Determine the amount of Tristan's itemized deductions including the losses. $0. $8,600. $14,600. $19,000. None of the above. 8. In 2014, Sienna was involved in an automobile accident. Her car was used 100 percent for business use in her sole proprietorship. The car had originally cost $25,000. At the time of the accident, it was worth $14,000 and Sienna had taken $10,000 of depreciation. After the accident, it was worth $4,000. The car was not insured. If Sienna's AGI is $25,000 (before considering the loss), determine her itemized deduction for the casualty loss. 0 The car was used 100% for business so the casualty loss is a deduction for AGI, not an itemized deduction. 9. Last year, Tundra Corporation incurred the following expenditures in the development of a new plant process: Salaries $200,000 Materials 40,000 Utilities 10,000 Quality control testing costs 50,000 Market survey costs 10,000 Depreciation of equipment 15,000 During the current year, benefits from the project began being realized in July. If Tundra Corporation elects a 60 month deferral and amortization period, determine the amount of the deduction for the current year. $26,500. $27,500. $32,500. $65,000. None of the above. Salaries $200,000 Materials 40,000 Utilities 10,000 Depreciation 15,000 Research and experimental costs $265,000 Current deduction $26,500 [($265,000 ÷ 60) X 6 months] Neither the quality control testing costs nor the market survey costs are research and experimental expenditures. 10. The nonbusiness bad debt provisions apply to individuals but not corporations. Chapter 7 study quiz. 1. Herman, who is single, has a gain of $30,000 on the sale of §1244 stock (small business stock) and a loss of $70,000 on the sale of § 1244 stock. As a result, Herman has a $40,000 ordinary loss. False. The section 1244 gain is not netted against the Section 1244 loss. The $30,000 gain on the sale of the § 1244 stock is classified as a capital gain. The $70,000 loss on the sale of the § 1244 stock is classified as an ordinary loss to the extent of $50,000. The balance of the § 1244 stock loss of $20,000 is classified as a capital loss and is netted against the $30,000 capital gain. 2. If a bad debt arose from the sale of a product, the bad debt deduction is limited to the sales amount included in income. True – the bad debt deduction is limited to the amount included in income from the sale 3. Trade or business casualty losses, as well as personal casualty losses, may create or increase a net operating loss for and individual. True - Personal casualty losses can create (or increase) an NOL 4. The depreciation on buildings used in a research activity qualifies as a research and experimental expenditure. True. - Only depreciation on a building used for research can be a research and experimental expenditure 5. CFor tax years beginning in 2014, the production activities deduction (PAD) is calculated by multiplying 9% times the greater of (1) qualified production activities income (QPAI) or (2) taxable (after application of NOL deduction) income or alternative minimum taxable income. False - It is 9% times the lesser of QPAI or taxable income 6. On May 1, 2012, Lemon Loan Company loaned Howard $50,000. In 2013, Howard filed for bankruptcy. At that time, it was revealed that Howard's creditors could expect to receive 40 cents on the dollar. In March 2014, final settlement was made, and Lemon received $5,000. Lemon's policy is to deduct losses as soon as permitted. How much loss can Lemon deduct and in which year? This debt was incurred in connection with a trade or business. Therefore, Lemon can claim a bad debt deduction in the following years: 2012—zero 2013—$30,000 [$50,000 (loan) – $20,000 (expected settlement)] 2014—$15,000 [$20,000 (balance) – $5,000 (proceeds)] 7. Konnor loaned Melville (a friend) $50,000 in 2013 to help him start a business with the agreement that the loan would be repaid in two years. In 2014, Melville filed for bankruptcy and Konnor learned that he could expect to receive $0.40 on the dollar. In 2015, final settlement was made and Konnor received $5,000. Assuming the loan is a nonbusiness bad debt, how should Konnor account for the bad debt? Nonbusiness bad debts are characterized as short-term capital losses. The loss of $45,000 is recognized in the year of final settlement 7. On January 10, 2013, Ivory Corporation purchased stock in Ebony Corporation (the stock is § 1244 small business stock) for $75,000. On October 15, 2014, Ivory sold the stock for $15,000. How should Ivory treat the loss on the sale of the stock? Section 1244 ordinary loss treatment applies only to individuals. The term “individual” for this purpose includes partnerships. $60,000 long-term capital loss. 9. Cameron had adjusted gross income of $75,000. During 2014, his personal use summer home was partially destroyed by a fire. Pertinent data with respect to the home follows: Cost basis $175,000 Value before casualty $265,000 Value after casualty $185,000 Cameron was insured for 60% of his actual loss and he received the insurance settlement. What is Cameron's allowable casualty loss deduction? $80,000. $32,000. $24,500. $24,400. $0. Casualty loss [$80,000 – (60% X $80,000)] $32,000 Less: Statutory floor per event (100) Less: AGI limitation (10% X $75,000) (7,500) Casualty loss deduction $24,400 10. Khaki Corporation incurred the following expenditures in connection with the development of a new product: Salaries $ 80,000 Materials $ 40,000 Quality Control testing $ 20,000 Efficiency survey $ 24,000 Depreciation on research equipment $15,000 If Khaki Corporation elects to expense research and experimental expenditures, determine the amount of the deduction for research and experimental expenditures. $179,000. $155,000. $135,000. $80,000. None of the above. Incorrect. $135,000 ($80,000 salaries + $40,000 materials + $15,000 depreciation).   Edna had an accident while competing in a rodeo. She sustained facial injuries that required cosmetic surgery. While having the surgery done to restore her appearance, she had additional surgery done to reshape her chin, which was not injured in the accident. The surgery to restore her appearance cost $9,000 and the surgery to reshape her chin cost $6,000. How much of Edna's surgical fees will qualify as a deductible medical expense (before application of the AGI limitation)? _ d. $9,000 Cosmetic surgery is necessary (and therefore deductible) when it ameliorates (1) a deformity arising from a congenital abnormality, (2) a personal injury, or (3) a disfiguring disease. The $9,000 cost incurred in connection with the restorative surgery (required as a result of the accident) is deductible because the surgery was necessary. Amounts paid for the unnecessary cosmetic surgery ($6,000 for reshaping the chin) are not deductible as a medical expense Fred and Lucy are married, ages 33 and 32, and together have AGI of $120,000 in 2014. They have four dependents and file a joint return. They pay $5,000 for a high deductible health insurance policy and contribute $2,600 to a qualified Health Savings Account. During the year, they paid the following amounts for medical care: $9,200 in doctor and dentist bills and hospital expenses, and $3,000 for prescribed medicine and drugs. In October 2014, they received an insurance reimbursement of $4,400 for the hospitalization. They expect to receive an additional reimbursement of $1,000 in January 2015. Determine the maximum itemized deduction allowable for medical expenses in 2014. 800 Fred and Lucy can claim an itemized medical expense deduction for the current year of $800, determined as follows: Physician bills, dentist bills, and hospital expenses $ 9,200 Less: Reimbursement (4,400) Unreimbursed expenses $ 4,800 Health insurance premiums 5,000 Prescribed medicines and drugs 3,000 Total medical expenses $12,800 Less: 10% of $120,000 (AGI) (12,000) Deductible medical expenses $ 800 The contribution of $2,600 to the HSA is a deduction for AGI, and is not included in the medical expense calculation. Richard, age 50, is employed as an actuary. For calendar year 2014, he had AGI of $130,000 and paid the following medical expenses: Medical insurance premiums $5,300 Doctor and dentist bills for Derrick and Jane (Richard's parents) 7,900 Doctor and dentist bills for Richard 5,100 Prescribed medicines for Richard 830 Nonprescribed insulin for Richard 960 Derrick and Jane would qualify as Richard's dependents except that they file a joint return. Richard's medical insurance policy does not cover them. Richard filed a claim for $4,800 of his own expenses with his insurance company in November 2014 and received the reimbursement in January 2015. What is Richard's maximum allowable medical expense deduction for 2014? 7090 Richard's medical expense deduction is $7,090, determined as follows: Medical insurance premiums $ 5,300 Doctor and dentist bills for Derrick and Jane 7,900 Doctor and dentist bills for Richard 5,100 Prescribed medicines for Richard 830 Nonprescribed insulin for Richard 960 Total medical expenses $20,090 Less: 10% of $130,000 (AGI) (13,000) Deductible portion of medical expenses $ 7,090 Although Derrick and Jane cannot be claimed as Richard's dependents, they could have been had they not filed a joint return. Therefore, they qualify for the medical expense deduction. Insulin is an exception to the rule that nonprescribed drugs do not qualify as medical expenses. The insurance recovery was not received until 2015. Therefore, it has no effect on the medical expense deduction for 2014 Sandra is single and does a lot of business entertaining at home. Because Arthur, Sandra's 80-year old dependent grandfather who lived with Sandra, needs medical and nursing care, he moved to Twilight Nursing Home. During the year, Sandra made the following payments on behalf of Arthur: Room at Twilight $4,500 Meals for Arthur at Twilight 850 Doctor and nurse fees 700 Cable TV service for Arthur's room 107 Total $6,157 Twilight has medical staff in residence. Disregarding the AGI floor, how much, if any, of these expenses qualify for a medical deduction by Sandra? 6050 The amount that qualifies is $6,050 ($4,500 + $850 + $700). The room and board for Twilight qualifies because the move was motivated by Arthur's need for medical care. The cable fee is a personal expense and cannot be deducted. Phillip, age 66, developed hip problems and was unable to climb the stairs to reach his second-floor bedroom. His physician advised him to add a first-floor bedroom to his home. The cost of constructing the room was $32,000. The increase in the value of the residence as a result of the room addition was determined to be $17,000. In addition, Phillip paid the contractor $5,500 to construct an entrance ramp to his home and $8,500 to widen the hallways to accommodate his wheelchair. Phillip's AGI for 2014 was $100,000. How much of these expenditures can Phillip deduct as a medical expense in 2014? 21500 A capital improvement that ordinarily would not have a medical purpose qualifies as a medical expense if it is directly related to prescribed medical care and is deductible to the extent that the expenditure exceeds the increase in value of the related property. Examples of such improvements include dust elimination systems, elevators, and vans specially designed for wheelchair-bound taxpayers. Phillip's medical expense related to the room addition is $15,000 ($32,000 – $17,000). The full cost of home-related capital expenditures incurred to enable a physically handicapped individual to live independently and productively qualifies as a medical expense. Qualifying costs include expenditures for constructing entrance and exit ramps to the residence, widening hallways and doorways to accommodate wheelchairs, installing support bars and railings in bathrooms and other rooms, and adjusting electrical outlets and fixtures. These expenditures are subject to the AGI floor only, and the increase in the home's value is deemed to be zero. The 7.5% AGI floor applies to Phillip because of his age (i.e., over age 65). Phillip's medical expense related to the ramp and hallways is $14,000 ($5,500 + $8,500). So Phillip's medical expense deduction is as follows: Qualifying medical expenses ($15,000 + $14,000) $29,000 Less: 7.5% × $100,000 (AGI) (7,500) Deductible medical expenses $21,500 Quinn, who is single and lives alone, is physically handicapped as a result of a diving accident. In order to live independently, he modifies his personal residence at a cost of $30,000. The modifications included widening halls and doorways for a wheelchair, installing support bars in the bathroom and kitchen, installing a stairway lift, and rewiring so he could reach electrical outlets and appliances. Quinn pays $200 for an appraisal that places the value of the residence at $129,000 before the improvements and $140,000 after. As a result of the operation of the stairway lift, Quinn experienced an increase of $680 in his utility bills for the current year. Disregarding the percentage of AGI limitation, how much of the above expenditures qualify as medical expense deductions? 30680 Quinn, who is physically handicapped, modified his residence so he could live independently. Therefore, the $30,000 cost of the improvements is not reduced by the $11,000 ($140,000 – $129,000) increase in the value of the house. The additional operating expenses of $680 are deductible as a medical expense. The $200 appraisal fee is not deductible as a medical expense, but rather as a miscellaneous itemized deduction subject to the 2%-of-AGI floor. Therefore, $30,680 ($30,000 + $680) qualifies as medical expenses. Brad, who would otherwise qualify as Faye's dependent, had gross income of $9,000 during the year. Faye, who had AGI of $120,000, paid the following medical expenses in 2014: Cataract operation for Brad $ 5,400 Brad's prescribed contact lenses 1,800 Faye's doctor and dentist bills 12,600 Prescribed drugs for Faye 2,550 Total $22,350 Assuming Faye is age 45, she has a medical expense deduction of: 10350 Faye may claim the medical expenses she paid on behalf of Brad (cataract operation and contact lenses), even though Brad cannot be claimed as a dependent. This exception applies if the gross income and/or joint return tests are the only reasons a person cannot be otherwise claimed as a dependent. Her deduction is $10,350 [$22,350 – ($120,000 × 10%) Tom, age 48, is advised by his family physician that he needs back surgery to correct a problem from his last back surgery. Since Tom is in a wheel chair, he needs his wife, Jean, to accompany him on his trip to Rochester, Minnesota, for in-patient treatment at the Mayo Clinic, which specializes in this type of surgery. Tom incurred the following costs in 2014: Round-trip airfare ($350 each) $ 700 Jean's hotel in Rochester for four nights ($95 per night) 380 Jean's meals while in Rochester 105 Tom's medical treatment 3,500 Tom's prescription medicine 600 Compute Tom's medical expenses for the trip (subject to the 10% floor). 5000 Tom's medical expense deduction for transportation is $700, and his medical expense deduction for lodging for Jean is $200 ($50 per night per person maximum). Tom is not allowed a deduction for the cost of Jean's meals while in Rochester. His medical treatment and prescriptions are deductible. So his total deduction (before the 10% floor) is $5,000 ($700 + $200 + $3,500 + $600) Your friend Scotty informs you that he received a "tax-free" reimbursement in 2014 of some medical expenses he paid in 2013. Which of the following statements best explains why Scotty is not required to report the reimbursement in gross income? Scotty did not itemize deductions in 2013 If Scotty did not itemize in 2013, he can exclude the reimbursement from gross income in 2014. If Scotty itemized deductions in 2013, he must report the reimbursement as gross income in 2014 to the extent he received a tax benefit from deducting medical expenses in 2013. Whether he itemized in 2014 will have no impact on the treatment of the reimbursement. In 2014, Boris pays a $3,800 premium for high-deductible medical insurance for himself and his family. In addition, he contributes $3,400 to a Health Savings Account. Which of the following statements is true? If Boris is self-employed, he may deduct $7,200 as a deduction for AGI. Boris, who is self-employed, may deduct 100% of the premium ($3,800) as a deduction for AGI. He may also deduct the $3,400 HSA contribution as a deduction for AGI. If 40% or more of the value of all property other than eligible real estate placed in service during the year is placed in service during the last quarter, the mid-quarter convention applies under MACRS. True If 40% or more of the value of property other than real estate is placed in service during the last quarter, the mid-quarter convention applies Franchises generally are § 197 intangibles. True • On June 1 of the current year, Rodney converted his personal residence into a rental property. At the time of the conversion, the house was worth $210,000. Five years ago Rodney purchased the building for $320,000. The building is still encumbered by a $100,000 mortgage. What is the basis of the building for cost recovery? 210,000. The basis is $210,000, the lower of the adjusted basis ($320,000) or fair market value ($210,000) at the date of conversion. • Vivian purchased a used business asset (five-year property) on May 10, 2014, at a cost of $100,000. She did not elect to expense any of the asset under § 179, nor did she elect straight-line cost recovery. Vivian sold the asset on January 20, 2017. Determine the cost recovery deduction for 2017. $100,000 X .1152 X 1/2 = $5,760 • Cody purchased a warehouse on July 15, 2008, for $3,000,000. She sells the factory building on February 2, 2014. Determine the cost recovery deduction for the year of the sale $9,615. .02564 X $3,000,000 X 1.5/12 = $9,615. • • In 2013, Valentina had a § 179 deduction carryover of $15,000. In 2014, she elected § 179 for an asset acquired at a cost of $20,000. Valentina's § 179 business income limitation for 2014 is $325,000. Determine Valentina's § 179 deduction for 2014.25000 $35,000 ($20,000 + $15,000), subject to the annual limit of $25,000. The only asset Sophie purchased during 2014 was a used seven-year class asset. The asset, which was listed property, was acquired on June 17 at a cost of $100,000. The asset was used 30% for business, 40% for the production of income, and the rest of the time for personal use. Sophie always elects to expense the maximum amount under § 179 whenever it is applicable. The net income from the business before the § 179 deduction is $100,000. Determine Sophie's maximum deduction with respect to the property for 2014 The listed property does not pass the predominantly business usage test. Therefore, § 179 expensing cannot be taken. In addition, only straight-line cost recovery can be used. Maximum deduction ($100,000 X .0714 X 70%) =$4,998 8. On March 15, 2013, Antonia purchased an automobile that cost $15,000. The car is used 70% for business and 30% for personal use. (Assume this percentage is maintained for the life of the car.) Determine the cost recovery deduction for 2014 the cost recovery allowance for 2014 is $3,360 ($15,000 X .320 X 70%), which is less than $3,570 ($5,100* X 70%). *These depreciation limits are indexed annually. 9 On July 1, 2014, Tatiana leases and places in service a passenger automobile. The lease will run for five years and the payments are $400 per month. During 2014, he uses his car 60% for business and 40% for personal activities. Assuming the dollar amount from the IRS table is $500, determine Tatiana's inclusion amount. $500 X (6/12) X 60% = $150. . 10 On September 1, 2014, Finch Corporation purchased an existing business. With respect to the acquired assets of the business, Finch allocated $500,000 of the purchase price to a covenant not to compete. The covenant will expire in five years. Determine the total amount that Finch may amortize for 2014 for the covenant $500,000 X (4 months/180 months) = $11,111. The statutory amortization period for § 197 intangibles is 15 years 1.. On June 14, 2013, Amir purchased a used automobile that cost $18,000. The car is used 70% for business and 20% for personal use. In 2014, he used the automobile 30% for business and 70% for personal use. Determine the cost recovery recapture for 2014. Cost recovery in 2013: • MACRS ($18,000 X .20) $ 2,212 (limited to $3,160*) X 70%] Straight-line [18,000 X .10 (limited to $3,160*) X 70%] (1,260) Cost recovery recapture in 2014 $ 952 *These depreciation limits are indexed annually. 2. Viper Company acquires a used machine (ten-year property) on January 15, 2014, at a cost of $400,000. Viper also acquires another used machine (seven-year property) on November 5, 2014, at a cost of $80,000. No election is made to use the straight-line method. The company does not make the § 179 election. Determine the total deductions in calculating taxable income related to the machines for 2014. The Regular MACRS is calculated as follows: 10-year property ($400,000 x .10) $40,000 7-year property ($80,000 x .1429) 11,432 Total regular MACRS $51,432 3. Catherine purchased office furniture on September 20, 2014, for $200,000. On October 10, she purchased business computers for $160,000. Catherine did not elect to expense any of the assets under § 179, nor did she elect straight-line cost recovery. Determine the cost recovery deduction for the business assets for 2014. The mid-quarter convention applies. Regular MACRS Furniture (seven-year property) $200,000 x .1071 $21,420 Computers (five-year property) $160,000 x .05 8,000 Total cost recovery $29,420 4. Nancy purchased a new hotel on February 15, 2014, for $2,000,000. Determine the cost recovery deduction for 2015. .02564 X $2,000,000 = $51,280. 5. Gracie purchased an apartment building on October 16, 2014, for $7,000,000. Determine the cost recovery deduction for 2014. 00758 X $7,000,000 = $53,060 6. Python Company acquires a new machine (seven-year property) on January 10, 2014, at a cost of $35,000. Python elects to expense the maximum amount under § 179. No election is made to use the straight-line method. Determine the total deductions in calculating taxable income related to the machine for 2014 assuming Python has taxable income of $700,000. § 179 deduction $25,000 Regular MACRS [($35,000 – $25,000) x .1429] 1,429 Total deduction $26,429 7. On June 1, 2013, Jamie purchased a used automobile that cost $24,000. The car is used 60% for business and 40% for personal use. (Assume this percentage is maintained for the life of the car.) Determine the cost recovery deduction for 2014. The cost recovery allowance for 2014 is $4,608 ($24,000 X .320 X 60%), which is limited to $3,060 ($5,100* X 60%). 8. On June 1, 2013, Beverly places in service a new automobile that cost $30,000. The car is used 100% for business. (Assume this percentage is maintained for the life of the car.) Determine the maximum cost recovery deduction for 2013. The limit is $11,160 ($3,160 + $8,000). 9. During the past two years, through advertising as well as extensive research and development and improved customer relations, Coral Corporation estimated that it had increased the value of its trademarks and trade name by $100,000. For the current year, 2014, determine the amount of goodwill Coral Corporation may amortize. Self-created intangibles are not a § 197 intangible and thus cannot be amortized. 10. On January 15, 2014, Shania purchased the rights to a mineral interest for $5,000,000. At that time, it was estimated that the recoverable units would be 2,500,000. During the year, 400,000 units were mined and 350,000 units were sold for $5,000,000. Shania incurred expenses during 2014 of $3,000,000. The percentage depletion rate is 22 percent. Determine Shania's depletion deduction for 2014. $5,000,000/2,500,000 = $2.00 per unit 350,000 units sold X $2.00 = $700,000 cost depletion 22% X $5,000,000 = $1,100,000 percentage depletion Percentage limit ($5,000,000 - $3,000,000) X 50% = $1,000,000 Thus, the depletion deduction is $1,000,000 Chapter 9.. Instead of going to the office first, the taxpayer goes directly to the client's location. It is 20 miles roundtrip to her office and 25 miles roundtrip to the client. Twenty-five miles are deductible as transportation expense. TRUE The commuting costs from home to a temporary work station and from the temporary work station to home are deductible. 2. Under the automatic mileage method, depreciation is not included in the mileage rate allowed. FAlSE Depreciation is built into the mileage rate allowed under the automatic mileage method 3. A moving expense deduction is not allowed if, at the time of the move, the taxpayer is unemployed and has no job at the new location. FALSE As long as the taxpayer ultimately satisfies the time test, it does not matter when the work assignment is obtained. 4. Mavis holds one job. Her main job location is on Cooper Street but after lunch she usually works at the Morris Street office. On a typical workday, she drives her car as follows: home to Irving, Irving to home (for lunch), home to Morris, and Morris to home. Applicable mileage is as follows: Miles Home to Cooper 6 Cooper to Morris 12 Morris to home 10 On a typical day, Mavis's deductible mileage is: 12 The deduction is based on the 12 mile distance between the two jobs (Irving to Morris). 5. Maria is single and has a college degree in finance. She is employed as a loan officer at a bank; her yearly AGI approximates $60,000. During 2014, she enrolled in a weekend MBA program and incurred the following nonreimbursed expenses: $4,400 (tuition), $600 (books), $200 (other school supplies), and $200 (transportation to and from campus). Disregarding the 2%-of-AGI limitation, as to the MBA program, Maria has a: Section 222 allows up to $4,000 for qualified tuition and related expenses. As Maria spent $4,400 on tuition, she can claim only $4,000 as a deduction for AGI. The remaining expenses of $1,400 ($400 + $600 + $200 + $200) can be claimed as deductions from AGI. 6. Nate made the following gifts during the year: To Frisco, a key client ($4 of the amount listed was for gift wrapping) $32 To Shane, Nate's secretary, on Shane's birthday 41 To Josh, Nate's boss, at Christmas 25 Presuming proper substantiation, Nate's deduction is: $29 + $25 = $54. The cost of gift wrapping is allowed. No deduction is available for a gift to a superior. 7. During the year, Ping took a trip from Los Angeles to Beijing, China. She was away from home for 15 days. She spent three days vacationing and twelve days on business (including the three travel days). Her expenses are as follows: Valet service (cleaning of laundry) 160 Ping's deduction is: s ince less than 25% of the time was for personal purposes, air fare of $1,800 need not be allocated between business and personal. Thus, $1,800 + $840 (12 days X $70) + $720 [50% of (12 days X $120)] + $160 = $3,520. 8. During the year, Teddy is transferred by his employer from Chicago to Atlanta. His moving expenses are not reimbursed and are as follows: Cost of moving household furnishings $11,000 Transportation 2,000 Meals 2,200 Lodging 1,400 His qualified moving expenses are: $11,000 + $2,000 + $1,400 = $14,400. No deduction is permitted for meals 9. Garrett entertains one of his clients on January 1 of the current year. Expenses paid by Garrett are as follows: Cab fare $50 Cover charge at supper club 80 Dinner at club 200 Tips to waiter 60 Presuming proper substantiation, Garrett's deduction is: $50 + [50% X ($80 + $200 + $60)] = $220. 10. Which, if any, of the following expenses are deductible as miscellaneous itemized deductions? Tax return preparation fees. Job hunting expenses. Subscription to the New England Journal of Medicine by an employed doctor. Union dues. 1. Employed individuals must use Form 2106 to report their business-related expenses. 2. Branton is the city sales manager for “Purrfect Pizza,” a national pizza franchise. Every working day, Branton drives his car as follows: Miles Home to office 4 Branton's deductible mileage is: 8 miles + 14 miles + 6 miles = 28 miles. The mileage for driving from his home to the office (4 miles) and from the last worksite to home (6 miles) is not deductible. 3. Kenneth is the regional manager for a national chain of car rentals and is based in Santa Fe, New Mexico. When the company opens new stores in Albuquerque, Kenneth is given the task of supervising their initial operation. For three months, he works weekdays in Albuquerque and returns home on weekends. He spends $350 returning to Santa Fe but would have spent $410 had he stayed in Albuquerque for the weekend. As to the weekend trips, how much, if any, qualifies as a deduction? Kenneth's assignment in Albuquerque is temporary, so his tax home has not changed (choice b.). Kenneth's deduction is limited to the lesser of what he actually spent and what he would have spent had he not returned home (choice c.). 350 4. Chris works as an auditor for a major CPA firm. During the months of August and September of each year, he is permanently assigned to the team auditing Perch Corporation. As a result, every day he drives from his home to Perch and returns home after work. Mileage is as follows: Miles For the period of August and September, Chris's deductible mileage for each workday is: he round trip from home to Perch (a temporary job site) of 28 miles (14 miles X 2) is the mileage that is deductible. 5. During the year, Lawrence went from Albany to Sacramento. After seven days of business meetings, he took three days of vacation to go sightseeing. Lawrence's expenses for the trip are as follows: Airport limo 60 Lawrence's deduction is: $500 + $560 ($80 X 7 days) + $210 [50% X ($60 X 7 days)] + $60 = $1,330. 6. Marina, who holds a bachelor of education degree, is a middle school teacher in Cody, Wyoming. The school board recently changed its minimum education requirement by prescribing five years of college training. Existing teachers, such as Marina, are allowed 5 years in which to acquire the additional year of education. Pursuant to this requirement, Marina spends her 2014 summer break attending Wyoming State University taking education courses. Her expenses are as follows: Books and tuition $6,500 Meals 800 Lodging 800 Laundry while in travel status 350 Transportation 950 Her education expense deduction is: $6,500 + (50% X $800) + $800 + $350 + $950 = $9,000. 7. Candice made the following gifts during the year: To Penny, a key client ($5 of the amount listed was for gift wrapping) $42 To Daniella, Candice's secretary, on Daniella's birthday 45 To Suki, Candice's boss, at Christmas 35 Presuming proper substantiation, Candice's deduction is: $30 + $25 = $55. The cost of gift wrapping is allowed. No deduction is available for a gift to a superior. 8. Zach works as an auditor for a large CPA firm. During the months of August and September of each year, he is permanently assigned to the team auditing Dolphin Corporation. As a result, every day he drives from his home to Dolphin and returns home after work. Mileage is as follows: Miles For the period of August and September, Zach's deductible mileage for each workday is: The round trip from home to Dolphin (a temporary job site) of 30 miles (15 miles X 2) is the mileage that is deductible. 9. Alexander entertains one of his clients on January 1 of the current year. Expenses paid by Alexander are as follows: Ca Tips to waiter 60 Presuming proper substantiation, Alexander's deduction is: $40 + [50% X ($90 + $250 + $60)] = $240 EXAM 1 A taxpayer who loses in a U.S. Court of Federal Claims may appeal directly to the: a. [Show More]

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