Chapter 9

7) In which of the following situations is the individual is more likely to be classified as an independent contractor rather than an employee?
A) A nurse who is directly supervised by doctors in an office
B) A computer programmer who is instructed as to

C) A nurse who travels to several different patients. She sets her own hours and is responsible for the delivery of nursing care and end result

8) Which of the following statements regarding independent contractors and employees is true?
A) Independent contractors pay Social Security and Medicare tax of 15.3%.
B) Employees must pay unemployment taxes.
C) Independent contractors and employees pay

A) Independent contractors pay Social Security and Medicare tax of 15.3%.

9) West's adjusted gross income was $90,000. During the current year he incurred and paid the following:
Professional journals
$2,000
Tax return preparation fee
1,000
Dues to professional organizations
1,500
Fees for will preparation (no tax advice)
800
L

A) 2,700

10) Allison, who is single, incurred $4,000 for unreimbursed employee expenses, $10,000 for mortgage interest and real estate taxes on her home, and $500 for investment counseling fees. Allison's AGI is $80,000. Allison's allowable deductions from AGI are

B) 12,900

12) All of the following are allowed a "for AGI" deduction except:
A) Cora owns her own CPA firm and travels from Lafayette, LA. to Washington, D.C. to attend a tax conference.
B) Jennifer, who lives in Houston, is the owner or several apartment buildings

D) Alison is an employee who is required to travel to company facilities throughout the U.S. in the conduct of her management responsibilities. She is not reimbursed by her employer.

13) Ron is a university professor who accepts a visiting position at another university for six months and obtains a leave of absence from his current employer. Ron rents an apartment near the university and purchases his food. These living expenses incur

C) deductible from AGI, subject to the 2% of AGI floor.

14) Gwen traveled to New York City on a business trip for her employer. Gwen spent 4 days in business meetings and conferences and then spent 2 days sightseeing in the area. Gwen's plane fare for the trip was $250. Meals cost $160 per day. Hotels and othe

A) $570.

15) Norman traveled to San Francisco for four days on vacation, and while there spent another two days conducting business for his employer. Norman's plane fare for the trip was $500; meals cost $150 per day; hotels cost $300 per day; and a rental car cos

A) 250

16) Gayle, a doctor with significant investments in the stock market, traveled on a cruise ship to Bermuda. Investment specialists provided daily seminars which Gayle attended. The cost of the cruise for four days is $2,500. Gayle can deduct (before appli

A) 0

6) Chelsea, who is self-employed, drove her automobile a total of 20,000 business miles in 2016. This represents about 75% of the auto's use. She has receipts as follows:
Parking (business only)
$500
Tolls (business only)
200
Repairs
$1,000
Chelsea has an

11,500

7) Brittany, who is an employee, drove her automobile a total of 20,000 business miles in 2016. This represents about 75% of the auto's use. She has receipts as follows:
Parking (business only)
$500
Tolls (business only)
200
Repairs
$1,000
Brittany's AGI

10,500

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Copyright � 2017 Pearson Education, Inc.
8) Rajiv, a self-employed consultant, drove his auto 20,000 miles this year, 15,000 to meetings with clients and 5,000 for commuting and personal use. The cost of operating the auto for the year was as follows:

9,000

9) Jordan, an employee, drove his auto 20,000 miles this year, 15,000 to meetings with clients and 5,000 for commuting and personal use. The cost of operating the auto for the year was as follows:
Gasoline and repairs
$7,000
Insurance
1,000
Depreciation
4

B) 500

10) David acquired an automobile for $30,000 for use in his unincorporated business at the beginning of 2016 and used the standard mileage rate method in 2016. He plans to switch to the actual expense method for 2017. The automobile was used 25,000 miles

24,000

11) Sarah incurred employee business expenses of $5,000 consisting of $3,000 business meals and $2,000 customer entertainment. She provided an adequate accounting to her employer's accountable plan and received reimbursement for one-half of the total expe

1,250

12) Austin incurs $3,600 for business meals while traveling for his employer, Tex, Inc. Austin is reimbursed in full by Tex pursuant to an accountable plan. What amounts can Austin and Tex deduct?
A)
Austin
Tex
$0
$1,800
B)
Austin
Tex
$0
$3,600
C)
Austin

A

13) Joe is a self-employed tax attorney who frequently entertains his clients at his country club. Joe's club expenses include the following:
Annual dues
$ 5,400
Initiation fees
1,200
Charges for personal meals with his family
3,100
Meal and entertainment

2,000

14) Shane, an employee, makes the following gifts, none of which are reimbursed:
Shane's manager
$30
Shane's personal assistant
40
4 customers ($27 each)
108
What amount of the gifts is deductible before application of the 2% of AGI floor for miscellaneou

A) 125

Having recently been to a company seminar on tax laws, Steven makes sure that business is discussed at the various dinners, and that the entertainment is on the same day as the meetings with customers. Steven is reimbursed $2,000 by his employer under an

A) $500 from AGI

4) Matt is a sales representative for a local company. He entertains customers as part of his job. During the current year he spends $3,000 on business entertainment. The company provides him an expense allowance of $2,000 under a nonaccountable plan. How

D) He will recognize $2,000 of income and deduct $1,500 as a miscellaneous itemized deduction, subject to the 2% of AGI floor.

By how many miles does the move exceed the minimum distance requirement for the moving expense deduction?
A) 12 miles
B) 20 miles
C) 62 miles
D) none of the above

12 miles

4) Which of the following situations will disqualify a taxpayer from taking a deduction for moving expenses?
A) Pam moves from Phoenix to Los Angeles to take a new job. She works at the Los Angeles job for 45 weeks before starting a new job in Las Vegas.

Paul moves from Boston to Miami to start a new business selling t-shirts. The business is not successful and Paul returns to Boston after 52 weeks.

5) Bill obtained a new job in Boston. He incurred the following moving expenses:
Transportation of household goods and personal effects
$2,600
Cost of transporting Bill's family
2,000
House-hunting trip
1,700
Payments to landlord to cancel a lease
500
Ass

B) 4,600

6) Ron obtained a new job and moved from Houston to Washington. He incurred the following moving expenses:
Transportation of household goods
$3,200
House-hunting trips
1,500
Temporary living expenses (20 days)
3,400
Commissions on new lease
500
Costs of s

$3,466

7) Edward incurs the following moving expenses:
Direct moving expenses
$4,000
Indirect moving expense
6,000
The employer reimburses Edward for the full $10,000. What is the amount to be reported as income by Edward?
A) $0
B) $4,000
C) $6,000
D) $10,000

6,000

Who is entitled to a home office deduction?
A) Dr Austin
B) Dr. Austin and June
C) Cassie and June
D) All of the taxpayers are entitled to a deduction.

Dr. Austin and June

8) Alex is a self-employed dentist who operates a qualifying office in his home. Alex has $180,000 gross income from his practice and $160,000 of expenses directly related to the business, i.e., non-home office expenses. Alex's allocable home office expen

20,000

9) Charles is a self-employed CPA who maintains a qualifying office in his home. Charles has $110,000 gross income from his practice and incurs $88,000 in salaries, supplies, computer services, etc. Charles's mortgage interest and real estate taxes alloca

22,000

16) In a contributory defined contribution pension plan, all of the following are true with the exception of
A) a separate account is established for each participant.
B) both the employee and employer can make contributions to the plan.
C) amounts are co

D) retirement benefits are a fixed amount based on the level of compensation earned by the employee during the working years.

17) Characteristics of profit-sharing plans include all of the following with the exception of:
A) A predetermined formula is used to allocate employer contributions to individual employees and to establish benefit payments.
B) Forfeitures of benefits und

C) The company must make contributions to the plan if it has profits during the year.

18) Ross works for Houston Corporation, which has a contributory defined contribution pension plan. The employer's monthly contribution to the plan is 8 percent of each participating employee's monthly salary, while the employee contributes only 6 percent

D)

19) Sam retired last year and will receive annuity payments for life from his employer's qualified
retirement plan of $30,000 per year starting this year. During his years of employment, Sam contributed $130,000 to the plan on an after-tax basis. Based on

24,000

20) Hunter retired last year and will receive annuity payments for life from his employer's qualified retirement plan of $30,000 per year starting this year. During his years of employment, Hunter contributed $130,000 to the plan. Based on IRS tables, his

30,000

21) Which of the following statements is correct regarding limitations on employer's contributions to qualified retirement plans in 2016?
A) Defined benefit plans are limited to an annual benefit to an employee of the lesser of $53,000 or 100% of the empl

C) Defined contribution plan contributions are limited to the lesser of $53,000 or 100% of an employee's compensation

22) Which of the following statements is incorrect regarding unfunded deferred compensation plans?
A) The employee is not taxed on the compensation amount when it is deposited in an escrow account.
B) An accrual-basis employer can deduct the compensation

B) An accrual-basis employer can deduct the compensation amount when it is accrued in the year service.

23) Tobey receives 1,000 shares of YouDog! stock as part of his compensation package. Tobey's employment contract with YouDog!, Inc. states that if he leaves before completion of three years of employment, he will forfeit the stock. The stock currently ha

B) Tobey must report $12,000 as income due to the receipt of the stock in the current year.

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Copyright � 2017 Pearson Education, Inc.
24) All of the following characteristics are true of an incentive stock option with the exception of:
A) the option price must be equal to or greater than the stock's FMV on the option's grant date.
B) the emplo

D) there is no limit to the value of the options that become exercisable to an employee in a single year.

25) Wilson Corporation granted an incentive stock option to Reva on January 1, two years ago. The option price was $300, and the FMV of the Wilson stock was also $300 on the grant date. The option allowed Reva to purchase 150 shares of Wilson stock. Reva

A) no income to Reva on the grant date or exercise date but there is an alternative minimum tax adjustment item to Reva of $15,000.

26) Mirasol Corporation granted an incentive stock option to employee Josephine two years ago. The option price was $150 and the FMV of the Mirasol stock was also $150 on the grant date. The option allowed Josephine to purchase 160 shares of Mirasol stock

A) no compensation deduction.

27) Martin Corporation granted an incentive stock option to employee Caroline on January 1, 2012. The option price was $150, and the FMV of the Martin stock was also $150 on the grant date. The option allowed Caroline to purchase 160 shares of Martin stoc

D) long-term capital gain of $32,000 in 2016.

28) Jackson Corporation granted an incentive stock option to employee Caroline on January 1, two years ago. The option price was $150, and the FMV of the Jackson stock was also $150 on the grant date. The option allowed Caroline to purchase 160 shares of

D) ordinary income of $16,000 and a short-term capital gain of $24,000 in the year of sale.

29) Martin Corporation granted a nonqualified stock option to employee Caroline on January 1, 2013. The option price was $150, and the FMV of the Martin stock was also $150 on the grant date. The option allowed Caroline to purchase 1,000 shares of Martin

A

30) Martin Corporation granted a nonqualified stock option to employee Caroline on January 1, 2013. The option price was $150, and the FMV of the Martin stock was also $150 on the grant date. The option allowed Caroline to purchase 1,000 shares of Martin

B) $100,000 in 2016.

31) A partnership plans to set up a retirement plan to benefit the partners and the employees. All of the following retirement plans are appropriate except
A) an H.R. 10 (Keogh) plan.
B) a SEP IRA.
C) a SIMPLE plan.
D) a Solo 401(k).

a Solo 401(k).

32) Frank is a self-employed CPA whose 2016 net earnings from his trade or business (before the H.R. 10 plan contribution but after the deduction for one-half of self-employment taxes) is $240,000. What is the maximum contribution that Frank can make on h

$48,000

33) Tessa is a self-employed CPA whose 2016 net earnings from her business (before the H.R. 10
plan contribution but after the deduction for one-half of self-employment taxes) is $400,000. What is the maximum contribution that Tessa can make on her behalf

53,000

36) Which statement is correct regarding SIMPLE retirement plans?
A) SIMPLE plans are not subject to nondiscrimination rules.
B) This plan can only be adopted by employers with 50 or fewer employees.
C) Only the employer can contribute to the plan.
D) Emp

SIMPLE plans are not subject to

35) Which of the following statements is incorrect regarding the SEP IRA?
A) Both employers and employees can contribute to the plan.
B) Contributions made by the due date of the tax return can be treated as made on the last day of the related tax year.
C

Both employers and employees can contribute to the plan.

Objective: 9
37) Tyne is a 48-year-old an unmarried taxpayer who is not an active participant in an employer-sponsored qualified retirement plan. Before IRA contributions, her AGI is $64,000 in 2016. What is the maximum amount she may contribute to a tax

C) 5,500

38) Hannah is a 52-year-old an unmarried taxpayer who is not an active participant in an employer-sponsored qualified retirement plan. Before IRA contributions, her AGI is $64,000 in 2016. What is the maximum amount she may contribute to a tax deductible

D) $6,500

39) H (age 50) and W (age 48) are married but only W is employed. She is not covered by a retirement plan at work. She earns $75,000 during the year and they have combined AGI of $78,000 before any IRA contribution. In 2016, the maximum amount together th

D) 12,000

40) Tyler (age 50) and Connie (age 48) are a married couple. Tyler is covered under a qualified retirement plan at his job and earned $175,000 in 2016. Connie is employed as a lab technician and earned $30,000 but is not covered under a qualified retireme

A) 0

41) Tucker (age 52) and Elizabeth (age 48) are a married couple. Tucker is covered under a qualified retirement plan at his job and earned $90,000 in 2016. Elizabeth is employed as a lab technician and earned $30,000 but is not covered under a qualified r

5500

43) Feng, a single 40 year old lawyer, is covered by a qualified retirement at work. His salary is $110,000, and his total AGI is $126,000. The maximum contribution he can make to a Roth IRA in 2016 is
A) 0.
B) $3,300.
C) $2,200.
D) $5,500.

C) 2200

44) Which of the following is true about future qualified distributions from a Roth IRA by a person who will be 65 years old at the time the distributions begin? Assume the individual opened the account before age 60.
A) The entire amount of the distribut

A) The entire amount of the distributions will be tax-free.

45) All of the following are true with regard to a Roth IRA except
A) contributions to Roth IRAs are subject to special modified AGI limitations that are higher than those for traditional IRAs.
B) contributions to Roth IRAs are never tax deductible.
C) co

C) contributions to Roth IRAs must cease after the owner has reached age 70 1/2.

46) Tanya is considering whether to rollover her traditional IRA to a Roth IRA. Factors important to consider include all of the following except
A) current marginal tax rate.
B) expected tax rate after retirement.
C) whether the current year's AGI will e

C) whether the current year's AGI will exceed $100,000.

47) Which of the following statements regarding Coverdell Education Savings Accounts is incorrect, disregarding any AGI limits?
A) Distributions cannot be used for elementary and secondary education expenses.
B) Distributions to the beneficiary are not ta

A) Distributions cannot be used for elementary and secondary education expenses.

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Copyright � 2017 Pearson Education, Inc.
48) Which of the following statements regarding Health Savings Accounts is incorrect?
A) Taxpayers are allowed to deduct contributions to a health savings account for AGI.
B) All taxpayers are eligible to establ

B) All taxpayers are eligible to establish a health savings account.

49) Angie starts a new job and becomes covered under the employer's health insurance plan which has an annual deductible of $2,400. Angie contributes the maximum amount into a Health Savings Account. Which of the following statements regarding Angie's Hea

A) Angie can contribute and deduct $1,200 for AGI.

3) Which of the following conditions would generally not favor the rollover of an untaxed retirement fund (e.g. traditional IRA or 401(k) plan) to a Roth account?
A) expected higher tax rates at retirement
B) significant after-tax funds available to pay t

C) an advanced age of the taxpayer