Sammy, a calendar year cash basis taxpayer who is age 6, 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. AGI of $95,000
c. AGI o
e. None of the above
RATIONALE: 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)].
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.
d. An itemized deduction if not reimbursed.
e. None of the above.
c. Deduction for AGI
Which of the following can be claimed as a deduction for AGI?
a. Personal casualty losses.
b. Investment interest expenses.
c. Medical expenses.
d. Property taxes on personal use real estate.
e. None of the above.
e. None of the above
RATIONALE: All of these expenses are classified as itemized deductions.
Which of the following is not a "trade or business" expense?
a. Interest on business indebtedness.
b. Property taxes on business property.
c. Parking ticket paid on business auto.
d. Depreciation on business property.
e. All of the above are "trade or bus
c. Parking ticket paid on business auto
Which of the following is a required test for the deduction of a business expense?
a. Ordinary.
b. Necessary.
c. Reasonable.
d. All of the above.
e. None of the above.
d. All of the above
Benita incurred a business expense on December 10, 2014, which she charged on her bank credit card. She
paid the credit card statement which included the charge on January 5, 2015. Which of the following is
correct?
a. If Benita is a cash method taxpayer,
b. If Benita is an accrual method taxpayer, she can deduct the expense in 2014.
RATIONALE: Choice a. is incorrect because charging the expense on a bank credit card is treated as a
constructive payment. Thus, as a cash method taxpayer, she can deduct the
Payments by a cash basis taxpayer of capital expenditures:
a. Must be expensed at the time of payment.
b. Must be expensed by the end of the first year after the asset is acquired.
c. Must be deducted over the actual or statutory life of the asset.
d. Can
c. Must be deducted over the actual or statutory life of the asset.
RATIONALE: Both cash basis and accrual basis taxpayers are required to recover the cost of capital assets
through amortization, depletion, or depreciation over the actual or statutory lif
Which of the following legal expenses are deductible for AGI?
a. Incurred in connection with a trade or business.
b. Incurred in connection with rental or royalty property held for the production of income.
c. Incurred for tax advice relative to the prepa
d. Only a. and b. qualify.
RATIONALE: Expenses incurred for tax advice relative to the preparation of an individual's income tax
return are classified as itemized deductions.
Terry and Jim are both involved in operating illegal businesses. Terry operates a gambling business and
Jim operates a drug running business. Both businesses have gross revenues of $500,000. The businesses
incur the following expenses.
Terry
Employee sala
b. Terry should report profit from his business of $250,000.
RATIONALE: Terry and Jim should report net profit from their businesses as follows:
Jim
Gross revenues $500,000
Less: Cost of goods sold (125,000)
Gross income $375,000
Less: Expenses
Employee s
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. Contribution to pension plan.
c. Premiums on group term life insurance
e. a., b., and c., are not subject to the limit.
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 s
b. Expense $23,000 for 2014
RATIONALE: Since Iris owns and operates TV rental outlets, all of the investigation expenses can be
deducted.
. For an activity classified as a hobby, the expenses are categorized as follows:
(1) Amounts that affect adjusted basis and would be deductible under other Code sections if the activity
had been engaged in for profit (e.g., depreciation, amortization, an
c. (2), (3), (1).
Priscilla pursued a hobby of making bedspreads in her spare time. Her AGI before considering the hobby
is $40,000. During the year she sold the bedspreads for $10,000. She incurred expenses as follows:
Supplies $4,000
Interest on loan to get business star
c. Include $10,000 in income, deduct nothing for AGI, and claim $11,000 of the expenses as itemized
deductions, subject to the 2% of AGI limitation..
If a residence is used primarily for personal use (rented for fewer than 15 days per year), which of the
following is correct?
a. No income is included in AGI.
b. No expenses are deductible.
c. Expenses must be allocated between rental and personal use.
d
a. No income is included in AGI.
RATIONALE: Expenses that would otherwise be deductible (e.g., property taxes and interest on mortgage
of personal residence) can be claimed (choice b.).
Bob and April own a house at the beach. The house was rented to unrelated parties for 8 weeks during the
year. April and the children used the house 12 days for their vacation during the year. After properly
dividing the expenses between rental and person
a. A $1,500 loss should be reported.
Melba incurred the following expenses for her dependent daughter during the current year:
Payment of principal on daughter's automobile loan $3,600
Payment of interest on above loan 2,900
Payment of daughter's property taxes 1,800
Payment of principal on
a. $0.
RATIONALE: None of the items are incurred for the taxpayer's (Melba) benefit or as a result of the
taxpayer's obligation.
. Which of the following must be capitalized by a business?
a. Replacement of a windshield of a business truck which was broken in an accident.
b. Repair of a roof of a building used in business.
c. Amount paid for a covenant not to compete.
d. Only b. an
c. Amount paid for a covenant not to compete.
RATIONALE: All of these expenses, except for the covenant, can be deducted in the current tax year. The
amortization period for the covenant is 15 years.
In January, Lance sold stock with a cost basis of $26,000 to his brother, James, for $24,000, the fair market
value of the stock on the date of sale. Five months later, James sold the same stock through his broker for
$27,000. What is the tax effect of th
d. Disallowed loss to Lance of $2,000; gain to James of $1,000.
RATIONALE: Lance's realized loss of $2,000 ($24,000 - $26,000) is disallowed. James may reduce his
realized gain of $3,000 ($27,000 - $24,000) by Lance's disallowed loss of $2,000. So
James'
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.
c. $3,000.
RATIONALE: Jed is an accrual basis taxpayer and therefore, has a basis in the $3,000 not collected.
On June 2, 2013, Fred's TV Sales sold Mark a large HD TV, on account, for $12,000. Fred's TV Sales uses
the accrual method. In 2014, when the balance on the account was $8,000, Mark filed for bankruptcy. Fred
was notified that he could not expect to recei
a. $0.
RATIONALE: This debt is a business debt. Therefore, partial worthlessness can be recognized in 2014. The
loss in 2014 would be $8,000. In 2015, the account has been written down to zero and hence,
the collection of $1,000 would produce a $1,000 ($1
Last year, Lucy purchased a $100,000 account receivable for $90,000. During the current year, Lucy
collected $97,000 on the account. What are the tax consequences to Lucy associated with the collection of
the account receivable? No subsequent collections
e. None of the above.
RATIONALE: The amount collected is $7,000 ($97,000 - $90,000) more than Lucy's basis in the
receivable.
Five years ago, Tom loaned his son John $20,000 to start a business. A note was executed with an interest
rate of 8%, which is the Federal rate. The note required monthly payments of the interest with the $20,000
due at the end of ten years. John always m
b. $3,000 deduction.
RATIONALE: This is a bona fide loan to his son; therefore, Tom is entitled to a bad debt of $21,800
($20,000 + $1,800; a deduction is allowed for the $1,800 of accrued interest receivable
because Tom is an accrual basis taxpayer). The
John files a return as a single taxpayer. In 2014, he had the following items:
� Salary of $40,000.
� Loss of $65,000 on the sale of � 1244 stock acquired two years ago.
� Interest income of $6,000. Determine John's AGI for 2014.
a. ($5,000).
b. $0.
c. $4
b. $0.
RATIONALE: Salary $ 40,000
Interest income 6,000
Ordinary loss (� 1244 ordinary loss) (50,000)
AGI $ -0-
$15,000 ($65,000 - $50,000) is long-term capital loss. Of this amount, no loss can be used
because there is no ordinary income. $15,000 will be
On July 20, 2013, Matt (who files a joint return) purchased 3,000 shares of Orange Corporation stock (the
stock is � 1244 small business stock) for $24,000. On November 10, 2013, Matt purchased an additional
1,000 shares of Orange Corporation stock from a
e. None of the above.
RATIONALE:
Amount realized (1,000 shares � $30 per share) $ 30,000
Less: basis (150,000)
Recognized loss ($120,000)
STCL ($120,000)
The stock is not � 1244 stock because it was not purchased from the corporation.
Amount realized (3,0
Which of the following events would produce a deductible loss?
a. Erosion of personal use land due to rain or wind.
b. Termite infestation of a personal residence over a several year period.
c. Damages to personal automobile resulting from a taxpayer's wi
e. None of the above.
RATIONALE: A "theft" does not include misplaced or lost items.
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 dat
a. $0.
RATIONALE: The proceeds received are $250,000. Therefore, Grant has no casualty gain or a casualty
loss.
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 recove
a. $0
RATIONALE: Gain on home ($260,000 - $250,000) = $10,000.
John has no itemized casualty loss deduction because casualty gains exceed casualty losses.
There is no casualty loss on the car because the accident was the result of willful negligence.
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 $
a. None of the $5,000 should be included in gross income.
RATIONALE: Sarah would have taken a casualty loss of $2,900 ($6,000 - $100 - $3,000) in 2013.
Therefore, the total itemized deductions would be $4,900 ($2,900 + $2,000). Because this is
less than t
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 fa
d. $18,750.
RATIONALE:
Amount of loss (adjusted basis for business property that is completely destroyed) $90,000
Less: Insurance proceeds received ($75,000 95%) (71,250)
Business loss $18,750
A business casualty loss is classified as an ordinary loss.
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
A. $0
RATIONALE: 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, ther
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 15,
b. $50,400.
RATIONALE: Salary $250,000
Materials 90,000
Utilities 20,000
Depreciation 18,000
Research and experimental costs $378,000
Current deduction $50,400 [($378,000 � 60) � 8 months]
Neither the quality control testing costs nor the management study
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. $36,000.
b. $42,000.
c. $54,000.
d. $63,000.
e. None of the above.
c. $54,000.
RATIONALE: DPAD is calculated for Ivory for 2014 as the lesser of the following:
? $700,000 � 9% = $63,000
? $600,000 � 9% = $54,000
So the DPAD is $54,000.
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 Cor
d. In the following year using a half-year convention.
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
b. $90,000.
RATIONALE: The basis is $90,000, the lower of the adjusted basis ($120,000) or fair market value
($90,000) at the date of conversion. The mortgage of $50,000 does not affect adjusted
basis.
Tara purchased a machine for $40,000 to be used in her business. The cost recovery allowed and allowable
for the three years the machine was used are as follows:
Cost Recovery Allowed
Year 1 $16,000
Year 2 9,600
Year 3 5,760
Cost Recovery Allowable
Year 1
d. $11,480.
RATIONALE: Cost $40,000
Less the greater of cost recovery allowed or allowable
($16,000 + $12,800 + $7,680) (36,480)
Adjusted basis $ 3,520
The recognized gain is $11,480 ($15,000 - $3,520).
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 fi
c. $23,750.
RATIONALE: The asset was placed in service in October 2014; hence, the mid-quarter convention is used.
2015 is the second year of cost recovery. ($100,000) � .38 � (2.5/4) = $23,750.
Tan Company acquires a new machine (ten-year property) on January 15, 2014, at a cost of $200,000. Tan
also acquires another new machine (seven-year property) on November 5, 2014, at a cost of $40,000. No
election is made to use the straight-line method.
b. $25,716.
RATIONALE: The total cost recovery is computed as follows:
10-year property
MACRS cost recovery ($200,000 � .10) $20,000
7-year property
MACRS cost recovery ($40,000 � .1429) 5,716
Total cost recovery $25,716
Barry purchased a used business asset (seven-year property) on September 30, 2014, at a cost of $200,000.
This is the only asset he purchased during the year. Barry did not elect to expense any of the asset under
� 179, did not take additional first-year
b. $24,490.
RATIONALE: The half-year convention applies in this case [$200,000 � .2449 � 1/2 = $24,490].
Cora purchased a hotel building on May 17, 2014, for $3,000,000. Determine the cost recovery deduction
for 2015.
a. $48,150.
b. $59,520.
c. $69,000.
d. $76,920.
e. None of the above.
d. $76,920.
RATIONALE: The hotel building is nonresidential realty. .02564 � $3,000,000 = $76,920.
Carlos purchased an apartment building on November 16, 2014, for $3,000,000. Determine the cost
recovery for 2014.
a. $9,630.
b. $11,910.
c. $13,650.
d. $22,740.
e. None of the above.
c. $13,650.
RATIONALE: The apartment building is residential realty. $3,000,000 � .00455 = $13,650.
Diane purchased a factory building on April 15, 1992, 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. $16,025.
b. $19,838.
c. $26,458.
d. $158,750.
e. None of the above
b. $19,838.
RATIONALE: .03174 � $5,000,000 � 1.5/12 = $19,838
0. 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 (i
b. $3,000.
RATIONALE: MACRS cost recovery ($60,000 � .05) = $3,000
On May 30, 2014, Jane signed a 20-year lease on a factory building to use for her business. The lease begins
on June 1, 2014. In August 2014, Jane paid $300,000 for leasehold improvements which were completed
that month to the building. Determine Jane's t
a. $2,889.
RATIONALE: MACRS cost recovery ($300,000 � .00963); 39-year real property; month 8 $2,889
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 firs
e. None of the above.
RATIONALE: � 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
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
a. $32,500
RATIONALE: The mid-quarter convention applies to the MACRS calculation and � 179 is not available as
the asset cost exceeds $125,000.
MACRS cost recovery ($650,000 � .05) $ 32,500
The only asset Bill purchased during 2014 was a new seven-year class asset. The asset, which was listed
property, was acquired on June 17 at a cost of $50,000. The asset was used 40% for business, 30% for the
production of income, and the rest of the time
b. $2,499.
RATIONALE: The listed property does not pass the predominantly business usage test. Therefore, neither
� 179 expensing nor additional first-year depreciation (if available) can be taken. In
addition, only straight- line cost recovery can be use
. 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 depreciatio
b. $1,896.
RATIONALE:
MACRS cost recovery ($40,000 � .20) x .60 $ 4,800
Limited to ($3,160 � .60) $ 1,896
On July 10, 2014, Ariff places in service a new sports utility vehicle that cost $70,000 and weighed 6,300
pounds. The SUV is used 100% for business. Determine Ariff's maximum deduction for 2014, assuming
Ariff's � 179 business income is $110,000. Ariff d
c. $34,000.
RATIONALE: Since the SUV weighs over 6,000 pounds, it is not subject to the statutory dollar limits on
luxury automobiles.
� 179 expensing (limited to $25,000 for such SUVs) $25,000
Regular MACRS [($70,000 - $25,000) � .20] 9,000
Total $34,000
On March 1, 2014, Lana leases and places in service a passenger automobile. The lease will run for five
years and the payments are $500 per month. During 2014, she uses her car 60% for business and 40% for
personal activities. Assuming the dollar amount f
b. $10
RATIONALE: $20 � 306/365 � 60% = $10.
Bhaskar purchased a new factory building on September 10, 2014, for $3,700,000. Five hundred thousand
of the purchase price was allocated to the land. He elected the alternative depreciation system (ADS).
Determine the cost recovery deduction for 2015.
a.
b. $80,000.
RATIONALE: .025 � $3,200,000 = $80,000
9. George purchases used seven-year class property at a cost of $200,000 on April 20, 2014. Determine
George's cost recovery deduction for 2014 for alternative minimum tax purposes, assuming George does
not elect � 179.
a. $2,500.
b. $10,000.
c. $14,280.
d. $21,420.
RATIONALE: .1071 � $200,000 = $21,420.
On June 1, 2014, Red Corporation purchased an existing business. With respect to the acquired assets of
the business, Red allocated $300,000 of the purchase price to a patent. The patent will expire in 20 years.
Determine the total amount that Red may amo
c. $11,667.
RATIONALE: $300,000 � (7 months/180 months) = $11,667. The statutory amortization period for � 197
intangibles is 15 years.