Final Testbank for Tax 4001

Deductions for AGI are: a. Deductions for AGI are always deductible.To be deductible for tax purposes, trade or business expenses must be: d. To be deductible, trade or business expenses must satisfy all of the requirements listed.d. All of the aboveTo be deductible for tax purposes, a trade or business expenditure must be: c. A deductible trade or business expenditure must be both ordinary and necessary.Hobby expenditures are deductible to the extent of: b. Hobby expenditures are deductible only to the extent of hobby gross income.If an expenditure is part business-related and part personal d. A part business-related and part personal expenditure is deductible only to the extent of the businessrelated portion of the expenditure.Fines and penalties paid to the government for the violation of a law are: b. Fines and penalties paid to the government for the violation of a law are not deductible.Job-seeking expenses are deductible if incurred by an individual who is presently employed and looking for work in the same trade or business: b. Job-seeking expenses are deductible by an individual who is presently employed and looking for work in the same trade or business regardless of whether the individual nds a new job.Dealers in illegal drugs can deduct: b. Dealers in illegal drugs can deduct cost of goods sold.Employment-related expenses of employees are: d. Employment-related expenses of employees are allowed as trade or business tax deductions..For tax purposes, nonbusiness expenses are d. Nonbusiness expenses include all the expenses mentioned in the question. All of the aboveWhich of the following investment related expenses are deductible for AGI? c. Rent and royalty expenses are deductible for AGI.Tax planning and compliance expenses incurred by individual taxpayers are not: c. Tax planning and compliance expenses are not limited to the income tax area but also extend to gift and estate tax returns.For individual taxpayers, deductible losses for tax purposes do not include: c. Personal losses other than casualty and theft losses are not deductible for tax purposes.Under the cash method of tax accounting, tax deductions are taken when a. Deductions are taken when expenditures are made under the cash basis of accounting.The Cohan rule has to do with: c. The Cohan rule has to do with substantiation of tax deductions.For MACRS depreciation purposes, autos and light-duty trucks are depreciated over what period? b. Autos and light-duty trucks are depreciated over ve years under MACRS.Business depreciable property placed in service prior to what year is not eligible for ACRS depreciation? c. ACRS came into existence in 1981.Research and experimentation expenditures connected with a trade or business can be capitalized and amortized for tax purposes over a period of not less than: b. Capitalized research and experimentation expenditures can be amortized over a period of not less than 60 months.A percentage depletion deduction computed on a natural resource cannot exceed what percent of the taxpayers taxable income derived from the natural resource for the year before deducting the depletion deduction? a. A percentage depletion deduction cannot exceed 50 percent of the taxpayers taxable income derived from the natural resource for the year before deducting the depletion deduction.A business tax deduction for business gifts is restricted to $25 per year per: d. A business tax deduction for business gifts is restricted to $25 per individual donee per year.For tax purposes, the term research and experimentation expenditures includes which of the following: b. The term research and experimentation expenditures includes development of a plant process..A business bad debt is deductible for tax purposes as a(n): d. A business bad debt is deductible for tax purposes as an ordinary business deduction.A nonbusiness bad debt is deductible for tax purposes as a(n): a. A nonbusiness bad debt is deductible for tax purposes as a short-term capital loss.A deduction for salaries and wages can include: d. A deduction for salaries and wages can include both bonus payments and payments for services performed in prior years.If rental payments are paid in advance, they are usually deductible by a taxpayer: b. Advance rental payments are deductible in the period covered by the payments.The IRS takes the position that a taxpayers tax home, for purposes of determining travel expenses, is at the location of the taxpayers: a. A taxpayers home for purposes of determining travel expenses is at the location of the taxpayers principal place of business. .If a taxpayer has two places of business in different areas, the IRS usually considers the following factors in determining the taxpayers principal place of business: (Choose the wrong answer.) a. The taxpayers preference for principal place of business is not considered by the IRS in determining the taxpayers principal place of business.Employee travel expenses are deductible b. Travel expenses are deductible from AGI.Travel expenses must be incurred by a taxpayer while away from home. To the IRS, the term away from home means: c. To the IRS, the term away from home means away from home overnight.In order to qualify for the moving expense deduction, the taxpayer: b. The taxpayer must move because of a new job location.Trade or business expenses are only deductible if they are: e. Business capital expenditures must be recovered through depreciation. Business noncapital expenditures are deductible if they are ordinary, necessary and reasonable in amount.An example of an expense not allowed as a deduction under Code Sec. 162(a) would be: d. Government imposed nes and penalties are not deductible. Costs incurred in investigating the creation or acquisition of an active trade or business are classied as: b. Investigation costs are not organization expenditures because no business activity has yet begun. Similarly, they are not acquisition costs, because the business has not yet been acquired and may never be. They are classied as start-up costs.Which of the following types of taxes is not deductible? c. State income and property taxes are deductible against federal taxable income. Federal income taxes are not.The tax laws allow taxpayers to use which of the following methods of accounting for research and experimental costs paid or incurred in connection with a trade or business? d. Taxpayers have the option of capitalizing R&D expenses or expensing them. If capitalized, taxpayers could choose not to amortize them, although such an election would be unlikely.Nonbusiness bad debts are deductible: a. Nonbusiness bad debts are treated as investment losses and are limited to capital gains plus $3,000.Deductions for business gifts are limited to what amount per individual each year? a. The deduction for business gifts is limited to $25 per donee per year.During the holiday season, a taxpayer gives business gifts to 25 customers. The gifts have the following fair market values: 7 gifts of property valued at $10 each 5 gifts of property valued at $20 each 13 gifts of property valued at $50 each How much can the taxpayer deduct for business gifts? b. The maximum deduction for business gifts is $25 per donee. Thus, the deduction is this case is equal to $70 (7 at 10) plus $100 (5 at 20) plus $325 (13 at 25).Research and experimental expenditures connected with a trade or business can be capitalized and amortized for tax purposes over a period of not less than: b. R & D expenditures may be amortized over a period not less than 60 months.A calendar$3,4 17During the current year, a calendar year corporation incurred $52,000 of research and experimental expenditures. The corporation elects to capitalize and amortize the costs over 60 months. If the corporation rst realizes benets from the research and experimental expenditures on November 1 of the current year, its R&E deduction will equal: d. $52,000 / 60 = $867 per month. For November and December, the corporation would be allowed a deduction of $1,733.PDQ, Inc., a calendar-year company, paid $15,000 as a prepayment of two years of its liability insurance on November 1 of the current year. How much insurance expense can PDQ deduct on its current year income tax return? b. The prepayment will provide benets for more than one year after the end of the year. The taxpayer must therefore use the accrual method for this expenditure.HMP Inc. reported the following information: Net sales (U.S. production) Cost of goods sold Operating expenses W-2 wages for the year(included in cost of goods sold and operating expenses) $550,000 300,000 100,000 80,000 What is HMPs taxable income? a. $141,000 b. $145,500 c. $150,000 d. $154,500 Moving expenses qualify as deductions if: c. The employee must satisfy both the distance and employment tests.Taxpayers generally can deduct meal and entertainment expenses provided that the expenses are b. Meal and entertainment expenses are only deductible if they can be directly association with the taxpayers trade or business activities.Expenses that are costs paid or incurred while traveling around town on business are known as: b. Transportation expenses are incurred while traveling around town for business purposes. Travel expenses are those incurred while traveling away from home for business.A self-employed attorney uses a country club to entertain clients and spends the following amounts at the club: 94. 95. 96. 97. Annual dues $1,000 Personal meals 1,500 Business meals 2,500 What amount can the attorney deduct against business income on his personal tax return? b. The attorney can deduct 50% of business meals. No deduction is allowed for country club dues, nor for personal meals.

An employee of a corporation takes a 10-day trip from Chicago to New York. He spends seven days conducting business and three days sightseeing and visiting friends. His expenses included: $ 800 2,800 1,000 250 $4,850 The corporation reimburses the employee under an accountable plan. What amount of the $4,850 qualies as deductible travel expenses for the corporation? c. The allowable deduction is $800 for airfare, $1,960 for lodging (7 days at $280), and $350 for meals (7 at 100 x 50%). These expenses total to $3,110.If a taxpayer drives 10,000 business miles during 2009, and uses the standard mileage method, the taxpayers deduction is: d. The 2009 mileage allowance is 55 cents per mile.Susnne Watome.The process used to recover the cost of intangible assets over time is known as a. Intangible assets are amortized. Tangible assets are depreciated. Natural resources are depleted. .Depletion is dened as: b. The costs of regulating the usage of natural resources are not incurred by the taxpayer, but by the regulatory agency. Depletion refers to the recovery of the costs incurred to acquire and exploit natural resources. .Code Sec. 179 allows certain taxpayers to: a. Section 179 is available only for depreciable personal property placed in service in the taxable year. Amounts expenses under Code Sec. 179 may not be depreciated.The two types of depletion methods are b. Taxpayers may choose either cost or percentage depletion.Last year, a corporation purchased an ofce building for $220,000, of which $30,000 was allocated to the land on which the building was located. The buildings salvage value was estimated to be $50,000. The corporations current year depreciation deduction for the building is b. Land is not depreciable. Subtracting this cost leaves $190,000 as the cost of the building. Depreciation is calculated using the straight-line method over 39 years, and ignoring salvage value: $190,000 / 39 = $4,872.During 2009, a corporation purchased machinery costing $450,000 and a warehouse costing $500,000. These are the only two acquisitions of depreciable property purchased by the corporation in 2009. The maximum deduction the corporation can claim under Code Sec. 179 in 2009 is: a. The Section 179 deduction is limited to $250,000 in 2009. It is reduced to the extent that acquisitions of eligible personal property exceed $800,000.Two years ago, a corporation purchased residential real estate (an apartment complex) at a total cost of $250,000. Of this amount, $50,000 was allocated to the underlying land. What is the corporations allowable depreciation deduction for the current year under MACRS d. Depreciation = $200,000 / 27.5 years = $7,272.Nonresidential realty costing $300,000 was placed in service three years ago, and was sold on March 25 of the current year. Current year depreciation expense with respect to the real estate will be: b. The mid-month convention is used both in the year of acquisition and the year of sale. ($300,000/39 years) x (2.5/12) = $1,603.Five-year property costing $25,000 was placed in service on January 11 of the current year. The property is depreciated using straight-line MACRS. Assuming Code Sec. 179 is not elected and the mid-quarter convention applies to all ve-year property placed in service this year, what will be depreciation expense with regard to this property for the current year? (Ignore bonus depreciation.) c. ($25,000 x .2) x (10.5/12) = $4,375.During 2009, Klecker, Inc. placed in service $865,000 of Code Sec. 179 property. How much can Klecker elect to immediately expense in 2009? a. The Code Sec. 179 deduction is reduced by the amount by which property placed in service in the current year exceeds $800,000. Thus, the limitation in this case is equal to $250,000 - $65,000 = $185,000.This year,was con ver ted from personal to business-use property. Subtracting $12,500 for the land, the depreciable basis is $343,750. The house is residential realty and is depreciated using the SL method over 27.5 years using the mid-month convention. Thus, depreciation expense is equal to $343,750 27.5 x 6.5/12 = $6,771.Ann Jones uses a dry cleaning machine in her business, and it was completely destroyed by re. At the time of the re, the adjusted basis was $20,000 and its fair market value was $18,000. How much is Anns loss? a. $18,000 b. $2,000 c. $20,000 d. None of the above c. If business or investment property is totally destroyed in a casualty, the amount of the loss is the taxpayers adjusted basis in the property, even if it is greater than the propertys fair market value.

Ann Jones uses a dry cleaning machine in her business, and it was partially destroyed by re. At the time of the re, the adjusted basis was $20,000 and its fair market value was $18,000. The adjusted basis after the re is $10,000 and the fair market value after the casualty is $10,000. How much is the casualty loss? a. $10,000 b. $8,000 c. $18,000 d. $20,000 32. b. If business or investment property is partially destroyed in a casualty, the amount of the loss is the lesser of adjusted basis or decline in fair market value.

ABC, Inc.d as a d isa ster area by the President

Which of the following is not a passive activity? a. Owning a business and not materially participating b. Having rental condos c. Owning a limited partnership interest in a real estate limited partnership d. Owning a working interest in oil and gas properties. d. A working interest is excluded from passive activities.

All of th ness ) in com e bu t not its portfolio income.

All of the outstanding stock of a closely held C corporation is owned equally by Evelyn Humo and Steve Bufusno. In 2009, the corporation generates taxable income of $20,000 from its active business activities. In addition, it earns $20,000 of interest from investments and incurs a $40,000 loss from a passive activity. How much of a passive loss carryover does the corporation have? a. $20,000 b. $0 c. $40,000 d. None of the above a. Only $20,000 of the $40,000 passive loss may be deducted in 2009.

During 2009, Hugh Hughes reported the following income and loss: Activity X ($50,000) Activity Y $20,000 Both Activity X and Activity Y are passive to Mr. Hughes. Hugh purchased Activity X in 1987 and Activity Y in 1993. How much is the loss that Mr. Hughes may deduct in 2009? a. $50,000 b. $30,000 c. $3,000 d. $0 Chapter 7 2009 CCH. All Rights Reserved. Testbank 605 . d. Passive loss limitations were phased out in 1991

John Mapp dies with passive activity property having an adjusted basis of $50,000, suspended losses of $20,000, and a fair market value at the date of Mr. Mapps death of $77,000. How much suspended loss can be taken on Mr. Mapps nal Form 1040 return? a. $20,000 b. $77,000 c. $7,000 d. $0 . d. Suspended losses are lost to the extent of the amount of the basis increase.

John Mapp dies with passive activity property having an adjusted basis of $50,000, suspended losses of $20,000, and a fair market value at the date of Mr. Mapps death of $60,000. How much suspended loss can be taken on Mr. Mapps nal Form 1040 return? a. $10,000 b. $20,000 c. $0 d. None of the above . a. The deductible suspended losses are limited to the difference between the suspended losses at death less the basis adjustment

Billy Ray owns several parcels of rental real estate, and he actively participates in managing the properties. His total loss from these activities in 2009 is $30,000. Assuming that his AGI for 2009 is $110,000, what is the allowable deduction from these properties in 2009? a. $0 b. $15,000 c. $20,000 d. $30,000 c. Four-fths of the $25,000 exception to the passive loss rules is allowed based on his AGI.

Billy Ray owns several parcels of rental real estate, and he actively participates in managing the properties. His total loss from these activities in 2009 is $30,000 and his AGI for 2009 is $110,000. How much of the disallowed loss from rental real estate activities may be carried over to future years? a. 0% b. 10% c. 50% d. 100% d. All of the disallowed loss is suspended and may be carried forward to future years.

Billy Ray rd i nden ite ly. d. The disallowed loss may be carried forward until the property is sold, regardless of how long that time period may be.

The percentage of passive losses that may offset nonpassive income for 2009 is: a. 0% b. 10% c. The percentage varies depending on the level of AGI. d. 100% . a. For all tax years beginning after 1990, passive losses may not offset nonpassive income.

Which of pter 7 6 6 CCH Federal TaxationComprehensive Topics d. Hobby expenses are generally deductible only to the extent of income produced by the activity. The nancial status of the taxpayer is considered in determining whether activities are engaged in for prot. The deduction for the allowed hobby expenses is an itemized deduction subject to the 2 percent oor.

Which of to $25, 0 of losses can be used to offset nonpassive income. . c. The losses are allowed to be deducted for AGI

John Hughfor the cu rren t year. a. $4,000 b. $24,000 c. $28,000.. d. $20,000 c. Amount of loss (adjusted basis for business property that is completely destroyed) $100,000 Less: Insurance proceeds received ( $80,000 x 90%) (72,000) Business loss $28,000

When a taxpayer incurs an NOL in 2009, that is not attributable to a casualty or theft loss, the taxpayer may: a. Carry the NOL forward instead of back. b. Carry the NOL back three years . c. Carry the NOL back ve years. d. All of the above. a. A taxpayer can elect to forgo the NOL carryback and carry it forward only.

During 20e pr oper ty.

Which of the following is not a passive activity? a. Owning a working interest in oil and gas wells. b. Owning a limited partnership interest in oil and gas wells. c. Owning a limited partnership interest in real estate. d. Owning a business and not materially participating. . a. A working interest is specically excluded from the passive loss rules

Bill Goggans died and left passive activity property to his nephew, Travis. Bills basis in the activity was $30,000, while Travis basis was stepped up to $50,000. Suspended losses amounted to $22,000. How much is the passive loss deduction that can offset nonpassive income? a. $22,000 b. $30,000 c. $2,000 d. None of the above. c. The $20,000 step-up means that only $2,000 passive loss is allowed.

Bob Mapp gave his daughter a limited partnership interest in a real estate activity. Suspended losses amounted to $30,000. Bobs adjusted basis at the time of the gift was $40,000 ( fair market value was greater than $40,000). What is the daughters basis in the property? a. $40,000 b. $30,000 c. $70,000 d. None of the above. c. $40,000 + $30,000.

Net operating losses can be increased by which of the following? a. Theft losses. b. Business casualty losses. c. Unreimbursed employee business expenses. d. All of the above. d. All of the items can increase an NOL.

The manufacturing deduction in 2009 is based on what percentage? a. 9% b. 6% c. 3% d. None of the above. b. From 2007 through 2009, it is 6%.

Which of the following is not deductible? a. NOLs b. Expenses incurred for the production of income. c. Hobby expenses in excess of hobby income. d. All of the above. . c. Hobby expenses cannot be greater than hobby income

Steve Colburns portable sawmill used 100% for business, was completely destroyed by re. The sawmill had an adjusted basis of $35,000 and a fair market value of $50,000 before the re. The sawmill was uninsured. Steves casualty loss is: a. $34,900. b. $50,000. c. $49,900. d. $35,000. d. Complete business loss is limited to adjusted basis.

Tammy has the following items for the current year: Nonbusiness capital gains Nonbusiness capital losses $10,000 (2,000) 57. 58. 59. 60. Interest Income 7,000 Itemized deductions (none of the amount realized from a casualty loss) (9,000) In calculating Tammys net operating loss, and with respect to the above amounts only, what amount must be added back to taxable income (loss)? a. $0 b. $2,000 c. $3,000 d. $6,000 56. a. $9,000 (7,000 + (10,000 - 2,000)) = ($6,000). Therefore, nothing is added back.

Jim owns l pa rtic ipa nt w ith respect to Activities A, B and C. d. Losses from all of the activities can be used to offset Jims active income. c. Jim did not participate more than 100 hrs. and not more than another party

Freds at-isk rule s a re a pplied before the passive activity rules.

Mike, who is single, has $100,000 of salary, $15,000 of income from a limited partnership, and a $30,000 passive loss from a real estate rental activity in which he actively participates. His modied adjusted gross income is $100,000. Of the $30,000 loss, how much is deductible? a. $30,000 b. $10,000 c. $25,000 d. $0.. a. Because of material participation, the full loss is deductible.

Which of the listed dispositions for a passive activity allow a taxpayer to keep the suspended losses from the disposed activity and utilize them on a subsequent taxable disposition? a. Disposition of death. b. Disposition by gift. c. All of the above. d. None of the above. . d. Nontaxable exchange.

During 20 2009 . Jo hns net operating loss for 2009 is $41,850, computed as follows: Taxable income ($48,500) Plus: Nonbusiness deduction: Itemized deductions $8,000 Less: Casualty loss

Mark Millme. Tota l m edic al expenses $2,650 Less: 7.5% of AGI 1,500 Medical expense deduction $1,150John Jay ense s $1 ,80 0 Le ss: 7.5% of AGI 1,050 Medical expense deduction $750.Malcolm Moore had medical expenses of $500 last year and took a $300 deduction. He was reimbursed $450 this year by the insurance company. What amount must be included in this year's tax return as gross income? c. The amount that must be included in income is the lesser of the reimbursement or the excess itemized deductions for the previous year. .Unnecessary cosmetic surgery costs directed solely at improving the patient's physical appearance: c. Unnecessary cosmetic surgery will not qualify for the medical expense deduction.Which one of the following is not deductible when itemizing? c. The cigarette tax is considered a penalty and is nondeductible.Karen Bake($1 14) bec ause it did not exceed the amount of state income tax paid. The other taxes and the fine are not deductible expenses.The followot d educ tib le t axes. The real estate taxes paid for Mrs. Brown's mother are not deductible by the Browns since it is not a tax that they incurred.John Bakerre d educ tib le.Max Murphey, a cash basis taxpayer, borrowed $1,000 from a bank for a business loan on August 1, to be repaid one year later. The interest for one year at 6 percent was deducted from the loan proceeds in advance. His interest deduction for the current year is: e. There is no interest deduction allowed for the year because interest deducted from the loan proceeds is not considered prepaid interest. The cash basis taxpayer must pay interest to be allowed the deduction.During therren t ye ar is: c. The interest deduction is: Income tax interest $400 Bank loan on machinery 700 Interest on 60-day note ($500 x 30/60 = $250) 250 Deductible interest $1,350Cathy buys a house (her principal residence) for $2,000,000, paying $500,000 down and borrowing the other $1,500,000 at 6% interest. If her interest expense for the year is $90,000, how much will her deduction for interest expenses be? c. Only interest on $1,000,000 of acquisition indebtedness is deductible. The deductible interest is $90,000 x ($1,000,000/$1,500,000) = $60,000.Darrin ownome is $ 150 ,000 . The deductible home equity loan interest is therefore $9,000 x ($100,000/$120,000) = $7,500.What is the amount of interest deduction allowed for the year 2009, assuming Marge Meyer incurred the following: Interest on loan used to purchase land for investment $18,000 (assume no net investment income) Interest on loan used to purchase personal residence $1,000 Interest on loan used to purchase boat $500 Interest on loan to purchase 100 shares of General Auto $3,000 (no dividends received during the year) b. Only the home mortgage interest is deductible.All interest payments in the following category are not deductible for tax purposes: b. Personal credit card interest is not deductible.

Non-home-mortgage interest prepaid in cash can only be deducted: d. Except for home-mortgage "points", prepaid interest can only be deducted over the period of the loan.If an individual taxpayer contributes capital gain property to a qualified public charity and wants to deduct fair market value, the deduction would be subject to which of the following limits? b. 30 percent of the taxpayer's AGIIf an individual taxpayer contributes ordinary property to a qualified public charity, the deduction would be subject to which of the following limits? d.50 percent of the taxpayer's AGIA business machine valued at $800 was contributed to a charitable organization during the year. The machine cost $1,000 but was depreciated down to $600 before the donation was made. Indicate the correct income tax treatment with respect to the donation. a. An ordinary income property charitable deduction is limited to basis. There is no income recognition when making a charitable donation.Stock in the ABC Corporation was contributed to a public charitable organization. The basis in the stock was $1,000, but its fair market value was $1,500 at the time of the donation. Indicate the correct income tax treatment as a result of the donation. The stock was held long term. b. In general, long-term capital gain assets are deductible at fair market value.Albert All ver woul d b e $1 1,000. Contribution % Limit % Limit Amount Amounts Deductions 50% $ 5,000 $5,000 $5,000 30% Public 12,000 9,000 9,000 20% 8,000 --0---0-Determine the amount of charitable contribution allowed for the current year assuming Guy Gallworthy has adjusted gross income of $30,000 and gave inventory costing $2,000 but worth $2,500 to a public foundation. c. $2,000 Inventory is ordinary income property and limited to basis in the charitable contribution computation.A contribution made to the following donee is not deductible: b. Oxford University, England Charitable contributions must be made to charities that are incorporated in the United States.Private foundations are organizations which do not normally receive donations: b. Private foundations are organizations which normally do not receive donations from the general public.Kenneth Kruise purchased a personal residence for $66,000. It had a fair market value of $80,000 when it was damaged by a fire. The fair market value after the fire was $40,000 and insurance proceeds totaled $15,000. What is the net amount of casualty loss he can claim if his adjusted gross income is $20,000? d. The reduction in fair market value is less than the basis; thus, that amount must be reduced by the insurance proceeds, $500 and 10 percent of adjusted gross income because of the nonbusiness casualty loss.In 2009, John Barraclough has $50,000 of adjusted gross income, a $10,000 casualty loss and a $2,000 casualty gain. How much is John's net deductible casualty loss after making all appropriate reductions? b. The deduction is $10,000 - $500 - $5,000 - $2,000 = $2,500. 67.Gwen had tcove red) $0 Sto rm damage to lake house ($200,000 - $150,000 - $20,000 -$500) $29,500 Total $30,000 $4,000 10% of AGI Net deduction $26,000Frank Fox won $10,000 in a state lottery. He also lost $3,000 at the horse races. On his income tax return he should report: d. Gambling winnings are reported as gross income and gambling losses are deductible to the extent of winnings as itemized deductions.Unreimbursed expenses of employees are considered to be deductions: b. Unreimbursed expenses of employees are deductible from AGI.Lisa incurred the following employee business expenses: Meals $2,000 Lodging $4,000 Her employer reimburses her a total of $4,500 for all of these expenses under an accountable plan. Ignoring any floor based on percent of AGI, what is her deduction for these expenses? a. $1500/$6000, or 25% of each expense, is not reimbursed, and 50% of the unreimbursed meal expense is not deductible. That means that the following amounts of each expense are deductible: Meals (25% x $2,000 x 50% deductible) Lodging (25% x $4,000) TotalMiscellaneous itemized deductions are deductible only: a. to the extent that in aggregate they exceed two percent of AGI.Which of the following expenditures is always an itemized deduction for individual taxpayers? d. Both a. and b.During themay cla im $1,2 25 as their medical expense deduction, computed as follows: Hospitalization insurance premiums $ 560 Hospital 1,700 Doctors 390 Prescription drugs and medicines 250 Prescription drugs for brother 200 Cosmetic surgery (liposuction) 0 Total medical expenses $3,100 Less: 7.5% of AGI 1,875 Medical expense deduction $1,225What is the amount of dependent care credit for a couple with two children where they spend $5,000 for dependent care and the husband earns $40,000 for the year and the wife earns $4,500? a. $1,000 b. $990 c. $900 d. $0 e. None of the above c. The expenses for dependent care are limited to $4,500, the income of the lower-earning spouse, and the credit percentage for $44,500 of adjusted gross income is 20%.What is the amount of dependent care credit allowed Sally Smith, a divorcee, who pays $3,100 for the year to send her daughter to a babysitter while she works? The daughter is claimed as a dependent by the father. Sally has adjusted gross income of $16,500 for the year. a. $1,085 b. $1,054 c. $1,020 d. $500 e. None of the above. c. Sally is limited to $3,000 of expenses and must multiply that amount by 34% since she exceeds $15,000 of adjusted gross income.Joe CollegThe $4,6 0 expe nses incurred are not reduced since they are less than the $6,000 maximum allowed for two children. Also, there is no reduction for the lower income of the spouses since the earned income imputed to the student- husband would be $6,000 ($500 x 12), but this amount is not added into AGI. Thus, the $4,600 is multiplied by 35% to arrive at the dependent care credit to give $1,610.What is the 263 The cr edit is limited to the tax liability of $60 [($21,500 - $13,000 - $7,300 = $600) x 10%].Mr. and Mrs. Gumball are both over age 65. They had income this year consisting of $8,500 earned income and $1,500 in social security benets. . What amount may they claim as a credit for the elderly? They le a joint return. a. $900 b. $1,165 c. $1,275 d. $0 e. None of the above d. There is no tax liability, so there is no credit.Allied Corporations tax liability for the year is $49,000 before claiming a general business credit. The corporation earns a general business credit of $60,000. What is the amount of credit allowable for the year? a. $60,000 b. $43,000 c. $18,000 d. $25,000 e. None of the above 2009 b. The general business credit is limited to the tax liability minus 25% of the liability in excess of $25,000. $49,000 25,000 $24,000 x 25% $ 6,000 49,000 General business credit allowed $43,000 CCH. All Rights Reserved.On July 10,00 x 10% In vest ment credit rate Investment credit taken $ 1,500 Investment credit taken $ 1,500 x 20% Recapture rate Investment credit recapture $ 300Carlton CorMay be car ried back one year and carried forward 20 years e. None of the above d. The general business credit carryover period is back one year and forward 20 years.What is the earned income credit allowed Don Andersen assuming he has adjusted gross income of $8,500 and earned income of $5,000? He maintains a household for his daughter. a. $2,890 b. $3,043 c. $1,700 d. $0 c. The earned income credit is based on earned income up to $8,950 but reduced by adjusted gross income over $16,240. $5,000 x 34% = $1,700 earned income credit.Sam and Betty Taylor maintain a home and they have two children. Their earned income was $10,000 and adjusted gross income was $11,000. They le a joint return. What is the amount, if any, of their earned income tax credit for the year? a. $3,400 b. $4,000 c. $4,400 d. $0 . b. The earned income credit is based on earned income up to $12,570 but reduced by adjusted gross income over $19,370. $10,000 x 40% = $4,000 earned income credit.Ron Ryder wdivi dual ha ving wage income over $94,200. Since neither spouse had wages totaling more than $94,200 there were no excess social security taxes paid.Lorence Lanctin g th e p ayme nts made from the smaller of 90% of the present years tax liability or the previous years tax liability. Present years tax liability Amount needed to be paid Less: Amount paid Amount underpayment penalty applied to $7,000 x 90% $6,300 4,400 $1,900 Tax liabilityWhat is theLes s: E xem ptio n amount Net alternative minimum taxable income $100,000 Tax rate x 26% Tax at 26% for the year $ 26,000 6,000 Less: Regular tax for the year Alternative minimum tax $ 20,000An alternative minimum tax applies to items that are considered to be of a tax preference nature. Which of the following items is not considered to be a tax preference item? a. Tax-exempt bond interest issued by a school system b. Accelerated depreciation on real property acquired before 1987 c. Mining exploration and development costs d. Gain on the sale of certain small business stock e. Depletion a.Tax-exempt bond interest is not a tax preference item.

Which of the following is not a tax preference item for purposes of the alternative minimum tax? a. Percentage depletion in excess of the adjusted basis in property b. Amortized circulation costs c. Excess intangible drilling costs d. Tax-exempt interest on certain private activity bonds e. All of the above are tax preference items b.

An example of a tax preference item that must be added to taxable income when computing AMTI would be: a. Percentage depletion in excess of the adjusted basis in property b. Excess intangible drilling costs c. Tax-exempt interest on certain private activity bonds d. Only a and b e. All of the above e.

The minimum tax credit: a. Provides that the amount of AMT paid by a corporation in one year differences can be used to offset the regular tax liability of a subsequent year b. May not be used to offset any future AMT tax liability c. May be carried forward indenitely as an offset against regular tax liability d. All of the above d.

Which of the following is allowed when computing AMTI for individuals? a. Standard deduction b. Personal exemptions c. Charitable contributions d. Real estate taxes e. None of the above c.

The tax structure of the individual AMT is a two-tier progressive tax where: a. The rst $175,000 of AMT base is taxed at a 15 percent rate and any excess over that amount is taxed at 25 percent b. The rst $175,000 of AMT base is taxed at a 26 percent rate and any excess over that amount is taxed at 28 percent c. The rst $175,000 of AMT base is taxed at a 25 percent rate and any excess over that amount is taxed at 35 percent d. b.

All other things being equal, the tax benets of a tax credit outweigh the tax savings produced by a tax deduction because: a. It reduces a taxpayers tax liability b. It reduces a taxpayers taxable income c. It reduces a taxpayers capital gains d. None of the above a.

Which of the following taxpayers derives the most benets from a $1 tax credit? a. Moderate-income taxpayers b. Higher-income taxpayers c. Lower-income taxpayers d. All of the above derive the same benet for a $1 tax credit d.

The difference between a refundable credit and a nonrefundable credit is: a. A refundable credit can only reduce a taxpayers tax liability to zero b. A nonrefundable credit can only reduce a taxpayers tax liability to zero c. Refundable tax credits are only available to individual taxpayers d. Nonrefundable tax credits are only available to corporations b.Unused general business credits can be: a. Carried back one year and carried forward ten years b. Carried back two years and carried forward ten years c. Carried back one year and carried forward 20 years d. Carried back two years and carried forward 20 years e. Carried back three years and carried forward ve years c.

The amount amou nt b y w hich the taxpayers net regular tax liability exceeds $15,000 d. The taxpayers alternative minimum tax for the tax year or 15 percent of the amount by which the taxpayers net regular tax liability exceeds $15,000 e. None of the above aWhen tentative minimum tax exceeds the taxpayers regular tax liability, the excess represents the taxpayers: a. Net income tax b. Alternative minimum tax (AMT) c. Total income tax liability d. None of the above . bWhich method is used to determine the order in which unused tax credits are carried forward and back? a. First-in, rst-out method b. Last-in, rst-out method c. First-in, last-out method d. None of the above . a

A work opportunity credit is available for qualied second-year wages paid to which one of the following? a. Qualied veterans b. Long-term family assistance recipient c. Qualied ex-felon d. High-risk youth . b.

The rehabilitation credit can be taken by businesses: a. For costs associated with business activities that contribute to the revitalization of economically depressed areas b. For costs associated with the substantial rehabilitation of certied historic structure or other depreciable building that was originally placed in service prior to 1936 c. Who purchase or substantially rehabilitate residential rental property used for low-income housing d. All of the above bTo claim the disabled access credit, an eligible small business is dened as: a. One whose gross receipts did not exceed $1 million b. One who employed no more than 30 full-time employees c. One who is located in one of the target areas dened by the government d. a. and b. e. All of the above . d.

Which of the following tax credits is not part of the general business credit? a. Low-income housing credit b. Foreign tax credit c. Employer-provided child care credit d. Research credit e. All of the above are part of the general business b

The low-income housing credit can be claimed by owners of qualied low-income building for a period of: a. 5 years b. 10 years c. 15 years d. 20 years e. None of the above . b.During the current year a corporation pays $8,000 to install ramps to the entrance of the corporations ofce building that will allow disabled individuals better access to the building. The corporations disabled access credit equals: a. $0 b. $2,000 c. $3,750 d. $3,875 e. $4,000 d. ($8,000 - $250) x 50%A corporation paid $50,000 for qualied child care expenses during the year in order to provide child care for its employees. The corporations child care credit is: a. $0 b. $5,000 c. $10,000 d. $12,500 e. $25,000 d. $50,000 x 25%During 2008, a corporation pays $200,000 in federal income taxes and $120,000 in foreign income taxes to Country X. The corporations worldwide taxable income is $550,000 and its taxable income from Country X was $250,000. What is the corporations foreign tax credit for 2008? a. $0 b. $100,000 c. $120,000 d. $80,000 e. None of the above b. $220,000 U.S. income taxes x ($250,000/$550,000) = $100,000.

Hyman Homecre dit for the year is $2,250 ($750 + $1,500). During 2008, a corporation pays $200,000 in federal income taxes and $120,000 in foreign income taxes to Country X. The corporations worldwide taxable income is $550,000 and its taxable income from Country X was $250,000. What is the corporations foreign tax credit for 2008? a. $0 b. $100,000 c. $120,000 d. $80,000 e. None of the above b. $220,000 U.S. income taxes x ($250,000/$550,000) = $100,000.

Hyman Homes, Inc. paid $3,000 of qualied rst-year wages to a qualied summer youth employee who worked 400 hours and $7,000 of qualied rst-year wages to a qualied ex-felon who worked 350 hours during the year. What is the companys work opporutunity credit for the year? a. $1,200 b. $2,250 c. $3,600 d. $4,000 b. The work opportunity credit for a qualied summer youth employee is $750 ($3,000 x 25%). The credit for a qualied ex-felon who works between 120 and 400 hours is $1,500 (25% x $6,000). The companys total work opportunity credit for the year is $2,250 ($750 + $1,500).

To be deductible for tax purposes, trade or business expenses must be: d. To be deductible, trade or business expenses must satisfy all of the requirements listed.d. All of the aboveTo be deductible for tax purposes, a trade or business expenditure must be: c. A deductible trade or business expenditure must be both ordinary and necessary.Hobby expenditures are deductible to the extent of: b. Hobby expenditures are deductible only to the extent of hobby gross income.If an expenditure is part business-related and part personal d. A part business-related and part personal expenditure is deductible only to the extent of the businessrelated portion of the expenditure.Fines and penalties paid to the government for the violation of a law are: b. Fines and penalties paid to the government for the violation of a law are not deductible.Job-seeking expenses are deductible if incurred by an individual who is presently employed and looking for work in the same trade or business: b. Job-seeking expenses are deductible by an individual who is presently employed and looking for work in the same trade or business regardless of whether the individual nds a new job.

Employment-related expenses of employees are: d. Employment-related expenses of employees are allowed as trade or business tax deductions..For tax purposes, nonbusiness expenses are d. Nonbusiness expenses include all the expenses mentioned in the question. All of the aboveWhich of the following investment related expenses are deductible for AGI? c. Rent and royalty expenses are deductible for AGI.Tax planning and compliance expenses incurred by individual taxpayers are not: c. Tax planning and compliance expenses are not limited to the income tax area but also extend to gift and estate tax returns.For individual taxpayers, deductible losses for tax purposes do not include: c. Personal losses other than casualty and theft losses are not deductible for tax purposes.Under the cash method of tax accounting, tax deductions are taken when a. Deductions are taken when expenditures are made under the cash basis of accounting.

For MACRS depreciation purposes, autos and light-duty trucks are depreciated over what period? b. Autos and light-duty trucks are depreciated over ve years under MACRS.Business depreciable property placed in service prior to what year is not eligible for ACRS depreciation? c. ACRS came into existence in 1981.Research and experimentation expenditures connected with a trade or business can be capitalized and amortized for tax purposes over a period of not less than: b. Capitalized research and experimentation expenditures can be amortized over a period of not less than 60 months.A percentage depletion deduction computed on a natural resource cannot exceed what percent of the taxpayers taxable income derived from the natural resource for the year before deducting the depletion deduction? a. A percentage depletion deduction cannot exceed 50 percent of the taxpayers taxable income derived from the natural resource for the year before deducting the depletion deduction.A business tax deduction for business gifts is restricted to $25 per year per: d. A business tax deduction for business gifts is restricted to $25 per individual donee per year.For tax purposes, the term research and experimentation expenditures includes which of the following: b. The term research and experimentation expenditures includes development of a plant process..A business bad debt is deductible for tax purposes as a(n): d. A business bad debt is deductible for tax purposes as an ordinary business deduction.A nonbusiness bad debt is deductible for tax purposes as a(n): a. A nonbusiness bad debt is deductible for tax purposes as a short-term capital loss.A deduction for salaries and wages can include: d. A deduction for salaries and wages can include both bonus payments and payments for services performed in prior years.If rental payments are paid in advance, they are usually deductible by a taxpayer: b. Advance rental payments are deductible in the period covered by the payments.The IRS takes the position that a taxpayers tax home, for purposes of determining travel expenses, is at the location of the taxpayers: a. A taxpayers home for purposes of determining travel expenses is at the location of the taxpayers principal place of business. .If a taxpayer has two places of business in different areas, the IRS usually considers the following factors in determining the taxpayers principal place of business: (Choose the wrong answer.) a. The taxpayers preference for principal place of business is not considered by the IRS in determining the taxpayers principal place of business.

Travel expenses must be incurred by a taxpayer while away from home. To the IRS, the term away from home means: c. To the IRS, the term away from home means away from home overnight.In order to qualify for the moving expense deduction, the taxpayer: b. The taxpayer must move because of a new job location.Trade or business expenses are only deductible if they are: e. Business capital expenditures must be recovered through depreciation. Business noncapital expenditures are deductible if they are ordinary, necessary and reasonable in amount.An example of an expense not allowed as a deduction under Code Sec. 162(a) would be: d. Government imposed nes and penalties are not deductible. Costs incurred in investigating the creation or acquisition of an active trade or business are classied as: b. Investigation costs are not organization expenditures because no business activity has yet begun. Similarly, they are not acquisition costs, because the business has not yet been acquired and may never be. They are classied as start-up costs.Which of the following types of taxes is not deductible? c. State income and property taxes are deductible against federal taxable income. Federal income taxes are not.The tax laws allow taxpayers to use which of the following methods of accounting for research and experimental costs paid or incurred in connection with a trade or business? d. Taxpayers have the option of capitalizing R&D expenses or expensing them. If capitalized, taxpayers could choose not to amortize them, although such an election would be unlikely.Nonbusiness bad debts are deductible: a. Nonbusiness bad debts are treated as investment losses and are limited to capital gains plus $3,000.Deductions for business gifts are limited to what amount per individual each year? a. The deduction for business gifts is limited to $25 per donee per year.During the holiday season, a taxpayer gives business gifts to 25 customers. The gifts have the following fair market values: 7 gifts of property valued at $10 each 5 gifts of property valued at $20 each 13 gifts of property valued at $50 each How much can the taxpayer deduct for business gifts? b. The maximum deduction for business gifts is $25 per donee. Thus, the deduction is this case is equal to $70 (7 at 10) plus $100 (5 at 20) plus $325 (13 at 25).Research and experimental expenditures connected with a trade or business can be capitalized and amortized for tax purposes over a period of not less than: b. R & D expenditures may be amortized over a period not less than 60 months.

During the current year, a calendar year corporation incurred $52,000 of research and experimental expenditures. The corporation elects to capitalize and amortize the costs over 60 months. If the corporation rst realizes benets from the research and experimental expenditures on November 1 of the current year, its R&E deduction will equal: d. $52,000 / 60 = $867 per month. For November and December, the corporation would be allowed a deduction of $1,733.PDQ, Inc., a calendar-year company, paid $15,000 as a prepayment of two years of its liability insurance on November 1 of the current year. How much insurance expense can PDQ deduct on its current year income tax return? b. The prepayment will provide benets for more than one year after the end of the year. The taxpayer must therefore use the accrual method for this expenditure.HMP Inc. reported the following information: Net sales (U.S. production) Cost of goods sold Operating expenses W-2 wages for the year(included in cost of goods sold and operating expenses) $550,000 300,000 100,000 80,000 What is HMPs taxable income? a. $141,000 b. $145,500 c. $150,000 d. $154,500 Moving expenses qualify as deductions if: c. The employee must satisfy both the distance and employment tests.Taxpayers generally can deduct meal and entertainment expenses provided that the expenses are b. Meal and entertainment expenses are only deductible if they can be directly association with the taxpayers trade or business activities.Expenses that are costs paid or incurred while traveling around town on business are known as: b. Transportation expenses are incurred while traveling around town for business purposes. Travel expenses are those incurred while traveling away from home for business.A self-employed attorney uses a country club to entertain clients and spends the following amounts at the club: 94. 95. 96. 97. Annual dues $1,000 Personal meals 1,500 Business meals 2,500 What amount can the attorney deduct against business income on his personal tax return? b. The attorney can deduct 50% of business meals. No deduction is allowed for country club dues, nor for personal meals.

An employee of a corporation takes a 10-day trip from Chicago to New York. He spends seven days conducting business and three days sightseeing and visiting friends. His expenses included: $ 800 2,800 1,000 250 $4,850 The corporation reimburses the employee under an accountable plan. What amount of the $4,850 qualies as deductible travel expenses for the corporation? c. The allowable deduction is $800 for airfare, $1,960 for lodging (7 days at $280), and $350 for meals (7 at 100 x 50%). These expenses total to $3,110.If a taxpayer drives 10,000 business miles during 2009, and uses the standard mileage method, the taxpayers deduction is: d. The 2009 mileage allowance is 55 cents per mile.

The process used to recover the cost of intangible assets over time is known as a. Intangible assets are amortized. Tangible assets are depreciated. Natural resources are depleted. .Depletion is dened as: b. The costs of regulating the usage of natural resources are not incurred by the taxpayer, but by the regulatory agency. Depletion refers to the recovery of the costs incurred to acquire and exploit natural resources. .Code Sec. 179 allows certain taxpayers to: a. Section 179 is available only for depreciable personal property placed in service in the taxable year. Amounts expenses under Code Sec. 179 may not be depreciated.The two types of depletion methods are b. Taxpayers may choose either cost or percentage depletion.Last year, a corporation purchased an ofce building for $220,000, of which $30,000 was allocated to the land on which the building was located. The buildings salvage value was estimated to be $50,000. The corporations current year depreciation deduction for the building is b. Land is not depreciable. Subtracting this cost leaves $190,000 as the cost of the building. Depreciation is calculated using the straight-line method over 39 years, and ignoring salvage value: $190,000 / 39 = $4,872.During 2009, a corporation purchased machinery costing $450,000 and a warehouse costing $500,000. These are the only two acquisitions of depreciable property purchased by the corporation in 2009. The maximum deduction the corporation can claim under Code Sec. 179 in 2009 is: a. The Section 179 deduction is limited to $250,000 in 2009. It is reduced to the extent that acquisitions of eligible personal property exceed $800,000.Two years ago, a corporation purchased residential real estate (an apartment complex) at a total cost of $250,000. Of this amount, $50,000 was allocated to the underlying land. What is the corporations allowable depreciation deduction for the current year under MACRS d. Depreciation = $200,000 / 27.5 years = $7,272.Nonresidential realty costing $300,000 was placed in service three years ago, and was sold on March 25 of the current year. Current year depreciation expense with respect to the real estate will be: b. The mid-month convention is used both in the year of acquisition and the year of sale. ($300,000/39 years) x (2.5/12) = $1,603.Five-year property costing $25,000 was placed in service on January 11 of the current year. The property is depreciated using straight-line MACRS. Assuming Code Sec. 179 is not elected and the mid-quarter convention applies to all ve-year property placed in service this year, what will be depreciation expense with regard to this property for the current year? (Ignore bonus depreciation.) c. ($25,000 x .2) x (10.5/12) = $4,375.During 2009, Klecker, Inc. placed in service $865,000 of Code Sec. 179 property. How much can Klecker elect to immediately expense in 2009? a. The Code Sec. 179 deduction is reduced by the amount by which property placed in service in the current year exceeds $800,000. Thus, the limitation in this case is equal to $250,000 - $65,000 = $185,000.

from personal to business-use property. Subtracting $12,500 for the land, the depreciable basis is $343,750. The house is residential realty and is depreciated using the SL method over 27.5 years using the mid-month convention. Thus, depreciation expense is equal to $343,750 27.5 x 6.5/12 = $6,771.Ann Jones uses a dry cleaning machine in her business, and it was completely destroyed by re. At the time of the re, the adjusted basis was $20,000 and its fair market value was $18,000. How much is Anns loss? a. $18,000 b. $2,000 c. $20,000 d. None of the above c. If business or investment property is totally destroyed in a casualty, the amount of the loss is the taxpayers adjusted basis in the property, even if it is greater than the propertys fair market value.









d. The disallowed loss may be carried forward until the property is sold, regardless of how long that time period may be.


Federal TaxationComprehensive Topics d. Hobby expenses are generally deductible only to the extent of income produced by the activity. The nancial status of the taxpayer is considered in determining whether activities are engaged in for prot. The deduction for the allowed hobby expenses is an itemized deduction subject to the 2 percent oor.

losses can be used to offset nonpassive income. . c. The losses are allowed to be deducted for AGI

t year. a. $4,000 b. $24,000 c. $28,000.. d. $20,000 c. Amount of loss (adjusted basis for business property that is completely destroyed) $100,000 Less: Insurance proceeds received ( $80,000 x 90%) (72,000) Business loss $28,000






The manufacturing deduction in 2009 is based on what percentage? a. 9% b. 6% c. 3% d. None of the above. b. From 2007 through 2009, it is 6%.




ith respect to Activities A, B and C. d. Losses from all of the activities can be used to offset Jims active income. c. Jim did not participate more than 100 hrs. and not more than another party



operating loss for 2009 is $41,850, computed as follows: Taxable income ($48,500) Plus: Nonbusiness deduction: Itemized deductions $8,000 Less: Casualty loss

al expenses $2,650 Less: 7.5% of AGI 1,500 Medical expense deduction $1,150ss: 7.5% of AGI 1,050 Medical expense deduction $750

.Malcolm Moore had medical expenses of $500 last year and took a $300 deduction. He was reimbursed $450 this year by the insurance company. What amount must be included in this year's tax return as gross income? c. The amount that must be included in income is the lesser of the reimbursement or the excess itemized deductions for the previous year. .Unnecessary cosmetic surgery costs directed solely at improving the patient's physical appearance: c. Unnecessary cosmetic surgery will not qualify for the medical expense deduction.Which one of the following is not deductible when itemizing? c. The cigarette tax is considered a penalty and is nondeductible.

it did not exceed the amount of state income tax paid. The other taxes and the fine are not deductible expenses.axes. The real estate taxes paid for Mrs. Brown's mother are not deductible by the Browns since it is not a tax that they incurred.

Max Murphey, a cash basis taxpayer, borrowed $1,000 from a bank for a business loan on August 1, to be repaid one year later. The interest for one year at 6 percent was deducted from the loan proceeds in advance. His interest deduction for the current year is: e. There is no interest deduction allowed for the year because interest deducted from the loan proceeds is not considered prepaid interest. The cash basis taxpayer must pay interest to be allowed the deduction.c. The interest deduction is: Income tax interest $400 Bank loan on machinery 700 Interest on 60-day note ($500 x 30/60 = $250) 250 Deductible interest $1,350

Cathy buys a house (her principal residence) for $2,000,000, paying $500,000 down and borrowing the other $1,500,000 at 6% interest. If her interest expense for the year is $90,000, how much will her deduction for interest expenses be? c. Only interest on $1,000,000 of acquisition indebtedness is deductible. The deductible interest is $90,000 x ($1,000,000/$1,500,000) = $60,000.. The deductible home equity loan interest is therefore $9,000 x ($100,000/$120,000) = $7,500.

What is the amount of interest deduction allowed for the year 2009, assuming Marge Meyer incurred the following: Interest on loan used to purchase land for investment $18,000 (assume no net investment income) Interest on loan used to purchase personal residence $1,000 Interest on loan used to purchase boat $500 Interest on loan to purchase 100 shares of General Auto $3,000 (no dividends received during the year) b. Only the home mortgage interest is deductible.All interest payments in the following category are not deductible for tax purposes: b. Personal credit card interest is not deductible.

Non-home-mortgage interest prepaid in cash can only be deducted: d. Except for home-mortgage "points", prepaid interest can only be deducted over the period of the loan.If an individual taxpayer contributes capital gain property to a qualified public charity and wants to deduct fair market value, the deduction would be subject to which of the following limits? b. 30 percent of the taxpayer's AGIIf an individual taxpayer contributes ordinary property to a qualified public charity, the deduction would be subject to which of the following limits? d.50 percent of the taxpayer's AGIA business machine valued at $800 was contributed to a charitable organization during the year. The machine cost $1,000 but was depreciated down to $600 before the donation was made. Indicate the correct income tax treatment with respect to the donation. a. An ordinary income property charitable deduction is limited to basis. There is no income recognition when making a charitable donation.Stock in the ABC Corporation was contributed to a public charitable organization. The basis in the stock was $1,000, but its fair market value was $1,500 at the time of the donation. Indicate the correct income tax treatment as a result of the donation. The stock was held long term. b. In general, long-term capital gain assets are deductible at fair market value.

1,000. Contribution % Limit % Limit Amount Amounts Deductions 50% $ 5,000 $5,000 $5,000 30% Public 12,000 9,000 9,000 20% 8,000 --0---0-Determine the amount of charitable contribution allowed for the current year assuming Guy Gallworthy has adjusted gross income of $30,000 and gave inventory costing $2,000 but worth $2,500 to a public foundation. c. $2,000 Inventory is ordinary income property and limited to basis in the charitable contribution computation.A contribution made to the following donee is not deductible: b. Oxford University, England Charitable contributions must be made to charities that are incorporated in the United States.Private foundations are organizations which do not normally receive donations: b. Private foundations are organizations which normally do not receive donations from the general public.Kenneth Kruise purchased a personal residence for $66,000. It had a fair market value of $80,000 when it was damaged by a fire. The fair market value after the fire was $40,000 and insurance proceeds totaled $15,000. What is the net amount of casualty loss he can claim if his adjusted gross income is $20,000? d. The reduction in fair market value is less than the basis; thus, that amount must be reduced by the insurance proceeds, $500 and 10 percent of adjusted gross income because of the nonbusiness casualty loss.In 2009, John Barraclough has $50,000 of adjusted gross income, a $10,000 casualty loss and a $2,000 casualty gain. How much is John's net deductible casualty loss after making all appropriate reductions? b. The deduction is $10,000 - $500 - $5,000 - $2,000 = $2,500. 67.

rm damage to lake house ($200,000 - $150,000 - $20,000 -$500) $29,500 Total $30,000 $4,000 10% of AGI Net deduction $26,000Frank Fox won $10,000 in a state lottery. He also lost $3,000 at the horse races. On his income tax return he should report: d. Gambling winnings are reported as gross income and gambling losses are deductible to the extent of winnings as itemized deductions.Unreimbursed expenses of employees are considered to be deductions: b. Unreimbursed expenses of employees are deductible from AGI.Lisa incurred the following employee business expenses: Meals $2,000 Lodging $4,000 Her employer reimburses her a total of $4,500 for all of these expenses under an accountable plan. Ignoring any floor based on percent of AGI, what is her deduction for these expenses? a. $1500/$6000, or 25% of each expense, is not reimbursed, and 50% of the unreimbursed meal expense is not deductible. That means that the following amounts of each expense are deductible: Meals (25% x $2,000 x 50% deductible) Lodging (25% x $4,000) TotalMiscellaneous itemized deductions are deductible only: a. to the extent that in aggregate they exceed two percent of AGI.Which of the following expenditures is always an itemized deduction for individual taxpayers? d. Both a. and b.

25 as their medical expense deduction, computed as follows: Hospitalization insurance premiums $ 560 Hospital 1,700 Doctors 390 Prescription drugs and medicines 250 Prescription drugs for brother 200 Cosmetic surgery (liposuction) 0 Total medical expenses $3,100 Less: 7.5% of AGI 1,875 Medical expense deduction $1,225What is the amount of dependent care credit for a couple with two children where they spend $5,000 for dependent care and the husband earns $40,000 for the year and the wife earns $4,500? a. $1,000 b. $990 c. $900 d. $0 e. None of the above c. The expenses for dependent care are limited to $4,500, the income of the lower-earning spouse, and the credit percentage for $44,500 of adjusted gross income is 20%.What is the amount of dependent care credit allowed Sally Smith, a divorcee, who pays $3,100 for the year to send her daughter to a babysitter while she works? The daughter is claimed as a dependent by the father. Sally has adjusted gross income of $16,500 for the year. a. $1,085 b. $1,054 c. $1,020 d. $500 e. None of the above. c. Sally is limited to $3,000 of expenses and must multiply that amount by 34% since she exceeds $15,000 of adjusted gross income.

nses incurred are not reduced since they are less than the $6,000 maximum allowed for two children. Also, there is no reduction for the lower income of the spouses since the earned income imputed to the student- husband would be $6,000 ($500 x 12), but this amount is not added into AGI. Thus, the $4,600 is multiplied by 35% to arrive at the dependent care credit to give $1,610.is limited to the tax liability of $60 [($21,500 - $13,000 - $7,300 = $600) x 10%].

Mr. and Mrs. Gumball are both over age 65. They had income this year consisting of $8,500 earned income and $1,500 in social security benets. . What amount may they claim as a credit for the elderly? They le a joint return. a. $900 b. $1,165 c. $1,275 d. $0 e. None of the above d. There is no tax liability, so there is no credit.Allied Corporations tax liability for the year is $49,000 before claiming a general business credit. The corporation earns a general business credit of $60,000. What is the amount of credit allowable for the year? a. $60,000 b. $43,000 c. $18,000 d. $25,000 e. None of the above 2009 b. The general business credit is limited to the tax liability minus 25% of the liability in excess of $25,000. $49,000 25,000 $24,000 x 25% $ 6,000 49,000 General business credit allowed $43,000 CCH. All Rights Reserved.

ment credit rate Investment credit taken $ 1,500 Investment credit taken $ 1,500 x 20% Recapture rate Investment credit recapture $ 300back one year and carried forward 20 years e. None of the above d. The general business credit carryover period is back one year and forward 20 years.

What is the earned income credit allowed Don Andersen assuming he has adjusted gross income of $8,500 and earned income of $5,000? He maintains a household for his daughter. a. $2,890 b. $3,043 c. $1,700 d. $0 c. The earned income credit is based on earned income up to $8,950 but reduced by adjusted gross income over $16,240. $5,000 x 34% = $1,700 earned income credit.Sam and Betty Taylor maintain a home and they have two children. Their earned income was $10,000 and adjusted gross income was $11,000. They le a joint return. What is the amount, if any, of their earned income tax credit for the year? a. $3,400 b. $4,000 c. $4,400 d. $0 . b. The earned income credit is based on earned income up to $12,570 but reduced by adjusted gross income over $19,370. $10,000 x 40% = $4,000 earned income credit.

wage income over $94,200. Since neither spouse had wages totaling more than $94,200 there were no excess social security taxes paid.nts made from the smaller of 90% of the present years tax liability or the previous years tax liability. Present years tax liability Amount needed to be paid Less: Amount paid Amount underpayment penalty applied to $7,000 x 90% $6,300 4,400 $1,900 Tax liabilityn amount Net alternative minimum taxable income $100,000 Tax rate x 26% Tax at 26% for the year $ 26,000 6,000 Less: Regular tax for the year Alternative minimum tax $ 20,000

An alternative minimum tax applies to items that are considered to be of a tax preference nature. Which of the following items is not considered to be a tax preference item? a. Tax-exempt bond interest issued by a school system b. Accelerated depreciation on real property acquired before 1987 c. Mining exploration and development costs d. Gain on the sale of certain small business stock e. Depletion a.Tax-exempt bond interest is not a tax preference item.




Which of the following is allowed when computing AMTI for individuals? a. Standard deduction b. Personal exemptions c. Charitable contributions d. Real estate taxes e. None of the above c.





the taxpayers net regular tax liability exceeds $15,000 d. The taxpayers alternative minimum tax for the tax year or 15 percent of the amount by which the taxpayers net regular tax liability exceeds $15,000 e. None of the above aWhen tentative minimum tax exceeds the taxpayers regular tax liability, the excess represents the taxpayers: a. Net income tax b. Alternative minimum tax (AMT) c. Total income tax liability d. None of the above . bWhich method is used to determine the order in which unused tax credits are carried forward and back? a. First-in, rst-out method b. Last-in, rst-out method c. First-in, last-out method d. None of the above . a

A work opportunity credit is available for qualied second-year wages paid to which one of the following? a. Qualied veterans b. Long-term family assistance recipient c. Qualied ex-felon d. High-risk youth . b.



The low-income housing credit can be claimed by owners of qualied low-income building for a period of: a. 5 years b. 10 years c. 15 years d. 20 years e. None of the above . b.During the current year a corporation pays $8,000 to install ramps to the entrance of the corporations ofce building that will allow disabled individuals better access to the building. The corporations disabled access credit equals: a. $0 b. $2,000 c. $3,750 d. $3,875 e. $4,000 d. ($8,000 - $250) x 50%A corporation paid $50,000 for qualied child care expenses during the year in order to provide child care for its employees. The corporations child care credit is: a. $0 b. $5,000 c. $10,000 d. $12,500 e. $25,000 d. $50,000 x 25%During 2008, a corporation pays $200,000 in federal income taxes and $120,000 in foreign income taxes to Country X. The corporations worldwide taxable income is $550,000 and its taxable income from Country X was $250,000. What is the corporations foreign tax credit for 2008? a. $0 b. $100,000 c. $120,000 d. $80,000 e. None of the above b. $220,000 U.S. income taxes x ($250,000/$550,000) = $100,000.

During 2008, a corporation pays $200,000 in federal income taxes and $120,000 in foreign income taxes to Country X. The corporations worldwide taxable income is $550,000 and its taxable income from Country X was $250,000. What is the corporations foreign tax credit for 2008? a. $0 b. $100,000 c. $120,000 d. $80,000 e. None of the above b. $220,000 U.S. income taxes x ($250,000/$550,000) = $100,000.


Job-seeking expenses are deductible if incurred by an individual who is presently employed and looking for work in the same trade or business: b. Job-seeking expenses are deductible by an individual who is presently employed and looking for work in the same trade or business regardless of whether the individual nds a new job.

Tax planning and compliance expenses incurred by individual taxpayers are not: c. Tax planning and compliance expenses are not limited to the income tax area but also extend to gift and estate tax returns.

Research and experimentation expenditures connected with a trade or business can be capitalized and amortized for tax purposes over a period of not less than: b. Capitalized research and experimentation expenditures can be amortized over a period of not less than 60 months.A percentage depletion deduction computed on a natural resource cannot exceed what percent of the taxpayers taxable income derived from the natural resource for the year before deducting the depletion deduction? a. A percentage depletion deduction cannot exceed 50 percent of the taxpayers taxable income derived from the natural resource for the year before deducting the depletion deduction.

For tax purposes, the term research and experimentation expenditures includes which of the following: b. The term research and experimentation expenditures includes development of a plant process.

The IRS takes the position that a taxpayers tax home, for purposes of determining travel expenses, is at the location of the taxpayers: a. A taxpayers home for purposes of determining travel expenses is at the location of the taxpayers principal place of business. .If a taxpayer has two places of business in different areas, the IRS usually considers the following factors in determining the taxpayers principal place of business: (Choose the wrong answer.) a. The taxpayers preference for principal place of business is not considered by the IRS in determining the taxpayers principal place of business.

Trade or business expenses are only deductible if they are: e. Business capital expenditures must be recovered through depreciation. Business noncapital expenditures are deductible if they are ordinary, necessary and reasonable in amount.An example of an expense not allowed as a deduction under Code Sec. 162(a) would be: d. Government imposed nes and penalties are not deductible. Costs incurred in investigating the creation or acquisition of an active trade or business are classied as: b. Investigation costs are not organization expenditures because no business activity has yet begun. Similarly, they are not acquisition costs, because the business has not yet been acquired and may never be. They are classied as start-up costs.

The tax laws allow taxpayers to use which of the following methods of accounting for research and experimental costs paid or incurred in connection with a trade or business? d. Taxpayers have the option of capitalizing R&D expenses or expensing them. If capitalized, taxpayers could choose not to amortize them, although such an election would be unlikely.

During the holiday season, a taxpayer gives business gifts to 25 customers. The gifts have the following fair market values: 7 gifts of property valued at $10 each 5 gifts of property valued at $20 each 13 gifts of property valued at $50 each How much can the taxpayer deduct for business gifts? b. The maximum deduction for business gifts is $25 per donee. Thus, the deduction is this case is equal to $70 (7 at 10) plus $100 (5 at 20) plus $325 (13 at 25).Research and experimental expenditures connected with a trade or business can be capitalized and amortized for tax purposes over a period of not less than: b. R & D expenditures may be amortized over a period not less than 60 months.

During the current year, a calendar year corporation incurred $52,000 of research and experimental expenditures. The corporation elects to capitalize and amortize the costs over 60 months. If the corporation rst realizes benets from the research and experimental expenditures on November 1 of the current year, its R&E deduction will equal: d. $52,000 / 60 = $867 per month. For November and December, the corporation would be allowed a deduction of $1,733.PDQ, Inc., a calendar-year company, paid $15,000 as a prepayment of two years of its liability insurance on November 1 of the current year. How much insurance expense can PDQ deduct on its current year income tax return? b. The prepayment will provide benets for more than one year after the end of the year. The taxpayer must therefore use the accrual method for this expenditure.HMP Inc. reported the following information: Net sales (U.S. production) Cost of goods sold Operating expenses W-2 wages for the year(included in cost of goods sold and operating expenses) $550,000 300,000 100,000 80,000 What is HMPs taxable income? a. $141,000 b. $145,500 c. $150,000 d. $154,500 Moving expenses qualify as deductions if: c. The employee must satisfy both the distance and employment tests.Taxpayers generally can deduct meal and entertainment expenses provided that the expenses are b. Meal and entertainment expenses are only deductible if they can be directly association with the taxpayers trade or business activities.Expenses that are costs paid or incurred while traveling around town on business are known as: b. Transportation expenses are incurred while traveling around town for business purposes. Travel expenses are those incurred while traveling away from home for business.A self-employed attorney uses a country club to entertain clients and spends the following amounts at the club: 94. 95. 96. 97. Annual dues $1,000 Personal meals 1,500 Business meals 2,500 What amount can the attorney deduct against business income on his personal tax return? b. The attorney can deduct 50% of business meals. No deduction is allowed for country club dues, nor for personal meals.

An employee of a corporation takes a 10-day trip from Chicago to New York. He spends seven days conducting business and three days sightseeing and visiting friends. His expenses included: $ 800 2,800 1,000 250 $4,850 The corporation reimburses the employee under an accountable plan. What amount of the $4,850 qualies as deductible travel expenses for the corporation? c. The allowable deduction is $800 for airfare, $1,960 for lodging (7 days at $280), and $350 for meals (7 at 100 x 50%). These expenses total to $3,110.

Depletion is dened as: b. The costs of regulating the usage of natural resources are not incurred by the taxpayer, but by the regulatory agency. Depletion refers to the recovery of the costs incurred to acquire and exploit natural resources. .Code Sec. 179 allows certain taxpayers to: a. Section 179 is available only for depreciable personal property placed in service in the taxable year. Amounts expenses under Code Sec. 179 may not be depreciated.

Last year, a corporation purchased an ofce building for $220,000, of which $30,000 was allocated to the land on which the building was located. The buildings salvage value was estimated to be $50,000. The corporations current year depreciation deduction for the building is b. Land is not depreciable. Subtracting this cost leaves $190,000 as the cost of the building. Depreciation is calculated using the straight-line method over 39 years, and ignoring salvage value: $190,000 / 39 = $4,872.During 2009, a corporation purchased machinery costing $450,000 and a warehouse costing $500,000. These are the only two acquisitions of depreciable property purchased by the corporation in 2009. The maximum deduction the corporation can claim under Code Sec. 179 in 2009 is: a. The Section 179 deduction is limited to $250,000 in 2009. It is reduced to the extent that acquisitions of eligible personal property exceed $800,000.Two years ago, a corporation purchased residential real estate (an apartment complex) at a total cost of $250,000. Of this amount, $50,000 was allocated to the underlying land. What is the corporations allowable depreciation deduction for the current year under MACRS d. Depreciation = $200,000 / 27.5 years = $7,272.Nonresidential realty costing $300,000 was placed in service three years ago, and was sold on March 25 of the current year. Current year depreciation expense with respect to the real estate will be: b. The mid-month convention is used both in the year of acquisition and the year of sale. ($300,000/39 years) x (2.5/12) = $1,603.Five-year property costing $25,000 was placed in service on January 11 of the current year. The property is depreciated using straight-line MACRS. Assuming Code Sec. 179 is not elected and the mid-quarter convention applies to all ve-year property placed in service this year, what will be depreciation expense with regard to this property for the current year? (Ignore bonus depreciation.) c. ($25,000 x .2) x (10.5/12) = $4,375.During 2009, Klecker, Inc. placed in service $865,000 of Code Sec. 179 property. How much can Klecker elect to immediately expense in 2009? a. The Code Sec. 179 deduction is reduced by the amount by which property placed in service in the current year exceeds $800,000. Thus, the limitation in this case is equal to $250,000 - $65,000 = $185,000.












t year. a. $4,000 b. $24,000 c. $28,000.. d. $20,000 c. Amount of loss (adjusted basis for business property that is completely destroyed) $100,000 Less: Insurance proceeds received ( $80,000 x 90%) (72,000) Business loss $28,000









ith respect to Activities A, B and C. d. Losses from all of the activities can be used to offset Jims active income. c. Jim did not participate more than 100 hrs. and not more than another party



.Malcolm Moore had medical expenses of $500 last year and took a $300 deduction. He was reimbursed $450 this year by the insurance company. What amount must be included in this year's tax return as gross income? c. The amount that must be included in income is the lesser of the reimbursement or the excess itemized deductions for the previous year. .

Max Murphey, a cash basis taxpayer, borrowed $1,000 from a bank for a business loan on August 1, to be repaid one year later. The interest for one year at 6 percent was deducted from the loan proceeds in advance. His interest deduction for the current year is: e. There is no interest deduction allowed for the year because interest deducted from the loan proceeds is not considered prepaid interest. The cash basis taxpayer must pay interest to be allowed the deduction.

Cathy buys a house (her principal residence) for $2,000,000, paying $500,000 down and borrowing the other $1,500,000 at 6% interest. If her interest expense for the year is $90,000, how much will her deduction for interest expenses be? c. Only interest on $1,000,000 of acquisition indebtedness is deductible. The deductible interest is $90,000 x ($1,000,000/$1,500,000) = $60,000.

What is the amount of interest deduction allowed for the year 2009, assuming Marge Meyer incurred the following: Interest on loan used to purchase land for investment $18,000 (assume no net investment income) Interest on loan used to purchase personal residence $1,000 Interest on loan used to purchase boat $500 Interest on loan to purchase 100 shares of General Auto $3,000 (no dividends received during the year) b. Only the home mortgage interest is deductible.

If an individual taxpayer contributes capital gain property to a qualified public charity and wants to deduct fair market value, the deduction would be subject to which of the following limits? b. 30 percent of the taxpayer's AGI

A business machine valued at $800 was contributed to a charitable organization during the year. The machine cost $1,000 but was depreciated down to $600 before the donation was made. Indicate the correct income tax treatment with respect to the donation. a. An ordinary income property charitable deduction is limited to basis. There is no income recognition when making a charitable donation.Stock in the ABC Corporation was contributed to a public charitable organization. The basis in the stock was $1,000, but its fair market value was $1,500 at the time of the donation. Indicate the correct income tax treatment as a result of the donation. The stock was held long term. b. In general, long-term capital gain assets are deductible at fair market value.

Determine the amount of charitable contribution allowed for the current year assuming Guy Gallworthy has adjusted gross income of $30,000 and gave inventory costing $2,000 but worth $2,500 to a public foundation. c. $2,000 Inventory is ordinary income property and limited to basis in the charitable contribution computation.

Kenneth Kruise purchased a personal residence for $66,000. It had a fair market value of $80,000 when it was damaged by a fire. The fair market value after the fire was $40,000 and insurance proceeds totaled $15,000. What is the net amount of casualty loss he can claim if his adjusted gross income is $20,000? d. The reduction in fair market value is less than the basis; thus, that amount must be reduced by the insurance proceeds, $500 and 10 percent of adjusted gross income because of the nonbusiness casualty loss.In 2009, John Barraclough has $50,000 of adjusted gross income, a $10,000 casualty loss and a $2,000 casualty gain. How much is John's net deductible casualty loss after making all appropriate reductions? b. The deduction is $10,000 - $500 - $5,000 - $2,000 = $2,500. 67.

Frank Fox won $10,000 in a state lottery. He also lost $3,000 at the horse races. On his income tax return he should report: d. Gambling winnings are reported as gross income and gambling losses are deductible to the extent of winnings as itemized deductions.

Lisa incurred the following employee business expenses: Meals $2,000 Lodging $4,000 Her employer reimburses her a total of $4,500 for all of these expenses under an accountable plan. Ignoring any floor based on percent of AGI, what is her deduction for these expenses? a. $1500/$6000, or 25% of each expense, is not reimbursed, and 50% of the unreimbursed meal expense is not deductible. That means that the following amounts of each expense are deductible: Meals (25% x $2,000 x 50% deductible) Lodging (25% x $4,000) Total


nses incurred are not reduced since they are less than the $6,000 maximum allowed for two children. Also, there is no reduction for the lower income of the spouses since the earned income imputed to the student- husband would be $6,000 ($500 x 12), but this amount is not added into AGI. Thus, the $4,600 is multiplied by 35% to arrive at the dependent care credit to give $1,610.



nts made from the smaller of 90% of the present years tax liability or the previous years tax liability. Present years tax liability Amount needed to be paid Less: Amount paid Amount underpayment penalty applied to $7,000 x 90% $6,300 4,400 $1,900 Tax liabilityn amount Net alternative minimum taxable income $100,000 Tax rate x 26% Tax at 26% for the year $ 26,000 6,000 Less: Regular tax for the year Alternative minimum tax $ 20,000









the taxpayers net regular tax liability exceeds $15,000 d. The taxpayers alternative minimum tax for the tax year or 15 percent of the amount by which the taxpayers net regular tax liability exceeds $15,000 e. None of the above a



During the current year a corporation pays $8,000 to install ramps to the entrance of the corporations ofce building that will allow disabled individuals better access to the building. The corporations disabled access credit equals: a. $0 b. $2,000 c. $3,750 d. $3,875 e. $4,000 d. ($8,000 - $250) x 50%A corporation paid $50,000 for qualied child care expenses during the year in order to provide child care for its employees. The corporations child care credit is: a. $0 b. $5,000 c. $10,000 d. $12,500 e. $25,000 d. $50,000 x 25%During 2008, a corporation pays $200,000 in federal income taxes and $120,000 in foreign income taxes to Country X. The corporations worldwide taxable income is $550,000 and its taxable income from Country X was $250,000. What is the corporations foreign tax credit for 2008? a. $0 b. $100,000 c. $120,000 d. $80,000 e. None of the above b. $220,000 U.S. income taxes x ($250,000/$550,000) = $100,000.



Job-seeking expenses are deductible if incurred by an individual who is presently employed and looking for work in the same trade or business: b. Job-seeking expenses are deductible by an individual who is presently employed and looking for work in the same trade or business regardless of whether the individual nds a new job.

A percentage depletion deduction computed on a natural resource cannot exceed what percent of the taxpayers taxable income derived from the natural resource for the year before deducting the depletion deduction? a. A percentage depletion deduction cannot exceed 50 percent of the taxpayers taxable income derived from the natural resource for the year before deducting the depletion deduction.

If a taxpayer has two places of business in different areas, the IRS usually considers the following factors in determining the taxpayers principal place of business: (Choose the wrong answer.) a. The taxpayers preference for principal place of business is not considered by the IRS in determining the taxpayers principal place of business.

An example of an expense not allowed as a deduction under Code Sec. 162(a) would be: d. Government imposed nes and penalties are not deductible. Costs incurred in investigating the creation or acquisition of an active trade or business are classied as: b. Investigation costs are not organization expenditures because no business activity has yet begun. Similarly, they are not acquisition costs, because the business has not yet been acquired and may never be. They are classied as start-up costs.

The tax laws allow taxpayers to use which of the following methods of accounting for research and experimental costs paid or incurred in connection with a trade or business? d. Taxpayers have the option of capitalizing R&D expenses or expensing them. If capitalized, taxpayers could choose not to amortize them, although such an election would be unlikely.

During the holiday season, a taxpayer gives business gifts to 25 customers. The gifts have the following fair market values: 7 gifts of property valued at $10 each 5 gifts of property valued at $20 each 13 gifts of property valued at $50 each How much can the taxpayer deduct for business gifts? b. The maximum deduction for business gifts is $25 per donee. Thus, the deduction is this case is equal to $70 (7 at 10) plus $100 (5 at 20) plus $325 (13 at 25).

During the current year, a calendar year corporation incurred $52,000 of research and experimental expenditures. The corporation elects to capitalize and amortize the costs over 60 months. If the corporation rst realizes benets from the research and experimental expenditures on November 1 of the current year, its R&E deduction will equal: d. $52,000 / 60 = $867 per month. For November and December, the corporation would be allowed a deduction of $1,733.PDQ, Inc., a calendar-year company, paid $15,000 as a prepayment of two years of its liability insurance on November 1 of the current year. How much insurance expense can PDQ deduct on its current year income tax return? b. The prepayment will provide benets for more than one year after the end of the year. The taxpayer must therefore use the accrual method for this expenditure.HMP Inc. reported the following information: Net sales (U.S. production) Cost of goods sold Operating expenses W-2 wages for the year(included in cost of goods sold and operating expenses) $550,000 300,000 100,000 80,000 What is HMPs taxable income? a. $141,000 b. $145,500 c. $150,000 d. $154,500 Moving expenses qualify as deductions if: c. The employee must satisfy both the distance and employment tests.

A self-employed attorney uses a country club to entertain clients and spends the following amounts at the club: 94. 95. 96. 97. Annual dues $1,000 Personal meals 1,500 Business meals 2,500 What amount can the attorney deduct against business income on his personal tax return? b. The attorney can deduct 50% of business meals. No deduction is allowed for country club dues, nor for personal meals.


Last year, a corporation purchased an ofce building for $220,000, of which $30,000 was allocated to the land on which the building was located. The buildings salvage value was estimated to be $50,000. The corporations current year depreciation deduction for the building is b. Land is not depreciable. Subtracting this cost leaves $190,000 as the cost of the building. Depreciation is calculated using the straight-line method over 39 years, and ignoring salvage value: $190,000 / 39 = $4,872.During 2009, a corporation purchased machinery costing $450,000 and a warehouse costing $500,000. These are the only two acquisitions of depreciable property purchased by the corporation in 2009. The maximum deduction the corporation can claim under Code Sec. 179 in 2009 is: a. The Section 179 deduction is limited to $250,000 in 2009. It is reduced to the extent that acquisitions of eligible personal property exceed $800,000.Two years ago, a corporation purchased residential real estate (an apartment complex) at a total cost of $250,000. Of this amount, $50,000 was allocated to the underlying land. What is the corporations allowable depreciation deduction for the current year under MACRS d. Depreciation = $200,000 / 27.5 years = $7,272.Nonresidential realty costing $300,000 was placed in service three years ago, and was sold on March 25 of the current year. Current year depreciation expense with respect to the real estate will be: b. The mid-month convention is used both in the year of acquisition and the year of sale. ($300,000/39 years) x (2.5/12) = $1,603.Five-year property costing $25,000 was placed in service on January 11 of the current year. The property is depreciated using straight-line MACRS. Assuming Code Sec. 179 is not elected and the mid-quarter convention applies to all ve-year property placed in service this year, what will be depreciation expense with regard to this property for the current year? (Ignore bonus depreciation.) c. ($25,000 x .2) x (10.5/12) = $4,375.During 2009, Klecker, Inc. placed in service $865,000 of Code Sec. 179 property. How much can Klecker elect to immediately expense in 2009? a. The Code Sec. 179 deduction is reduced by the amount by which property placed in service in the current year exceeds $800,000. Thus, the limitation in this case is equal to $250,000 - $65,000 = $185,000.



















.Malcolm Moore had medical expenses of $500 last year and took a $300 deduction. He was reimbursed $450 this year by the insurance company. What amount must be included in this year's tax return as gross income? c. The amount that must be included in income is the lesser of the reimbursement or the excess itemized deductions for the previous year. .


Cathy buys a house (her principal residence) for $2,000,000, paying $500,000 down and borrowing the other $1,500,000 at 6% interest. If her interest expense for the year is $90,000, how much will her deduction for interest expenses be? c. Only interest on $1,000,000 of acquisition indebtedness is deductible. The deductible interest is $90,000 x ($1,000,000/$1,500,000) = $60,000.


A business machine valued at $800 was contributed to a charitable organization during the year. The machine cost $1,000 but was depreciated down to $600 before the donation was made. Indicate the correct income tax treatment with respect to the donation. a. An ordinary income property charitable deduction is limited to basis. There is no income recognition when making a charitable donation.Stock in the ABC Corporation was contributed to a public charitable organization. The basis in the stock was $1,000, but its fair market value was $1,500 at the time of the donation. Indicate the correct income tax treatment as a result of the donation. The stock was held long term. b. In general, long-term capital gain assets are deductible at fair market value.

Determine the amount of charitable contribution allowed for the current year assuming Guy Gallworthy has adjusted gross income of $30,000 and gave inventory costing $2,000 but worth $2,500 to a public foundation. c. $2,000 Inventory is ordinary income property and limited to basis in the charitable contribution computation.

Kenneth Kruise purchased a personal residence for $66,000. It had a fair market value of $80,000 when it was damaged by a fire. The fair market value after the fire was $40,000 and insurance proceeds totaled $15,000. What is the net amount of casualty loss he can claim if his adjusted gross income is $20,000? d. The reduction in fair market value is less than the basis; thus, that amount must be reduced by the insurance proceeds, $500 and 10 percent of adjusted gross income because of the nonbusiness casualty loss.










The difference between a refundable credit and a nonrefundable credit is: a. A refundable credit can only reduce a taxpayers tax liability to zero b. A nonrefundable credit can only reduce a taxpayers tax liability to zero c. Refundable tax credits are only available to individual taxpayers d. Nonrefundable tax credits are only available to corporations b.

The rehabilitation credit can be taken by businesses: a. For costs associated with business activities that contribute to the revitalization of economically depressed areas b. For costs associated with the substantial rehabilitation of certied historic structure or other depreciable building that was originally placed in service prior to 1936 c. Who purchase or substantially rehabilitate residential rental property used for low-income housing d. All of the above b




A percentage depletion deduction computed on a natural resource cannot exceed what percent of the taxpayers taxable income derived from the natural resource for the year before deducting the depletion deduction? a. A percentage depletion deduction cannot exceed 50 percent of the taxpayers taxable income derived from the natural resource for the year before deducting the depletion deduction.


During the holiday season, a taxpayer gives business gifts to 25 customers. The gifts have the following fair market values: 7 gifts of property valued at $10 each 5 gifts of property valued at $20 each 13 gifts of property valued at $50 each How much can the taxpayer deduct for business gifts? b. The maximum deduction for business gifts is $25 per donee. Thus, the deduction is this case is equal to $70 (7 at 10) plus $100 (5 at 20) plus $325 (13 at 25).

During the current year, a calendar year corporation incurred $52,000 of research and experimental expenditures. The corporation elects to capitalize and amortize the costs over 60 months. If the corporation rst realizes benets from the research and experimental expenditures on November 1 of the current year, its R&E deduction will equal: d. $52,000 / 60 = $867 per month. For November and December, the corporation would be allowed a deduction of $1,733.

HMP Inc. reported the following information: Net sales (U.S. production) Cost of goods sold Operating expenses W-2 wages for the year(included in cost of goods sold and operating expenses) $550,000 300,000 100,000 80,000 What is HMPs taxable income? a. $141,000 b. $145,500 c. $150,000 d. $154,500 Moving expenses qualify as deductions if: c. The employee must satisfy both the distance and employment tests.

A self-employed attorney uses a country club to entertain clients and spends the following amounts at the club: 94. 95. 96. 97. Annual dues $1,000 Personal meals 1,500 Business meals 2,500 What amount can the attorney deduct against business income on his personal tax return? b. The attorney can deduct 50% of business meals. No deduction is allowed for country club dues, nor for personal meals.


Last year, a corporation purchased an ofce building for $220,000, of which $30,000 was allocated to the land on which the building was located. The buildings salvage value was estimated to be $50,000. The corporations current year depreciation deduction for the building is b. Land is not depreciable. Subtracting this cost leaves $190,000 as the cost of the building. Depreciation is calculated using the straight-line method over 39 years, and ignoring salvage value: $190,000 / 39 = $4,872.During 2009, a corporation purchased machinery costing $450,000 and a warehouse costing $500,000. These are the only two acquisitions of depreciable property purchased by the corporation in 2009. The maximum deduction the corporation can claim under Code Sec. 179 in 2009 is: a. The Section 179 deduction is limited to $250,000 in 2009. It is reduced to the extent that acquisitions of eligible personal property exceed $800,000.

Five-year property costing $25,000 was placed in service on January 11 of the current year. The property is depreciated using straight-line MACRS. Assuming Code Sec. 179 is not elected and the mid-quarter convention applies to all ve-year property placed in service this year, what will be depreciation expense with regard to this property for the current year? (Ignore bonus depreciation.) c. ($25,000 x .2) x (10.5/12) = $4,375.

Ann Jones uses a dry cleaning machine in her business, and it was completely destroyed by re. At the time of the re, the adjusted basis was $20,000 and its fair market value was $18,000. How much is Anns loss? a. $18,000 b. $2,000 c. $20,000 d. None of the above c. If business or investment property is totally destroyed in a casualty, the amount of the loss is the taxpayers adjusted basis in the property, even if it is greater than the propertys fair market value.













A business machine valued at $800 was contributed to a charitable organization during the year. The machine cost $1,000 but was depreciated down to $600 before the donation was made. Indicate the correct income tax treatment with respect to the donation. a. An ordinary income property charitable deduction is limited to basis. There is no income recognition when making a charitable donation.



What is the amount of dependent care credit for a couple with two children where they spend $5,000 for dependent care and the husband earns $40,000 for the year and the wife earns $4,500? a. $1,000 b. $990 c. $900 d. $0 e. None of the above c. The expenses for dependent care are limited to $4,500, the income of the lower-earning spouse, and the credit percentage for $44,500 of adjusted gross income is 20%.What is the amount of dependent care credit allowed Sally Smith, a divorcee, who pays $3,100 for the year to send her daughter to a babysitter while she works? The daughter is claimed as a dependent by the father. Sally has adjusted gross income of $16,500 for the year. a. $1,085 b. $1,054 c. $1,020 d. $500 e. None of the above. c. Sally is limited to $3,000 of expenses and must multiply that amount by 34% since she exceeds $15,000 of adjusted gross income.


Allied Corporations tax liability for the year is $49,000 before claiming a general business credit. The corporation earns a general business credit of $60,000. What is the amount of credit allowable for the year? a. $60,000 b. $43,000 c. $18,000 d. $25,000 e. None of the above 2009 b. The general business credit is limited to the tax liability minus 25% of the liability in excess of $25,000. $49,000 25,000 $24,000 x 25% $ 6,000 49,000 General business credit allowed $43,000 CCH. All Rights Reserved.

Sam and Betty Taylor maintain a home and they have two children. Their earned income was $10,000 and adjusted gross income was $11,000. They le a joint return. What is the amount, if any, of their earned income tax credit for the year? a. $3,400 b. $4,000 c. $4,400 d. $0 . b. The earned income credit is based on earned income up to $12,570 but reduced by adjusted gross income over $19,370. $10,000 x 40% = $4,000 earned income credit.




b. The work opportunity credit for a qualied summer youth employee is $750 ($3,000 x 25%). The credit for a qualied ex-felon who works between 120 and 400 hours is $1,500 (25% x $6,000). The companys total work opportunity credit for the year is $2,250 ($750 + $1,500).









A business bad debt is deductible for tax purposes as a(n): d. A business bad debt is deductible for tax purposes as an ordinary business deduction. A business machine valued at $800 was contributed to a charitable organization during the year. The machine cost $1,000 but was depreciated down to $600 before the donation was made. Indicate the correct income tax treatment with respect to the donation. a. An ordinary income property charitable deduction is limited to basis. There is no income recognition when making a charitable donation. A business tax deduction for business gifts is restricted to $25 per year per: d. A business tax deduction for business gifts is restricted to $25 per individual donee per year. A calendar-year corporation incurs $53,000 of start-up costs. If the corporation began business on August 1 of the current year, what is the maximum amount of the start-up costs that it can deduct against business income in the current year? d. Taxpayers are allowed $5,000 in the rst year, plus amortization of the remaining balance over 180 months. The $5,000 is reduced, however, by the amount by which start-up costs exceed $50,000. Thus, in this case, the corporation may deduct $2,000 plus ($51,000 / 180 months x 5 months) = $3,417. A contribution made to the following donee is not deductible: b. Oxford University, England Charitable contributions must be made to charities that are incorporated in the United States. A corporation paid $50,000 for qualied child care expenses during the year in order to provide child care for its employees. The corporations child care credit is: a. $0 b. $5,000 c. $10,000 d. $12,500 e. $25,000 d. $50,000 x 25%A deduction for salaries and wages can include: d. A deduction for salaries and wages can include both bonus payments and payments for services performed in prior years. A nonbusiness bad debt is deductible for tax purposes as a(n): a. A nonbusiness bad debt is deductible for tax purposes as a short-term capital loss. A percentage depletion deduction computed on a natural resource cannot exceed what percent of the taxpayers taxable income derived from the natural resource for the year before deducting the depletion deduction? a. A percentage depletion deduction cannot exceed 50 percent of the taxpayers taxable income derived from the natural resource for the year before deducting the depletion deduction. A self-employed attorney uses a country club to entertain clients and spends the following amounts at the club: 94. 95. 96. 97. Annual dues $1,000 Personal meals 1,500 Business meals 2,500 What amount can the attorney deduct against business income on his personal tax return? b. The attorney can deduct 50% of business meals. No deduction is allowed for country club dues, nor for personal meals. A work opportunity credit is available for qualied second-year wages paid to which one of the following? a. Qualied veterans b. Long-term family assistance recipient c. Qualied ex-felon d. High-risk youth . b. ABC, Inc. of Jasper, Georgia suffered a casualty loss of $150,000 in March 2009. This loss was caused by heavy rains that completely ooded their factory. As a result of these rains, the President declared North Georgia (including Jasper) a disaster area on March 23, 2009. In what year can ABC, Inc. elect to deduct the casualty loss? a. 2009 or 2010 b. 2009 or 2008 c. Only 2009 d. Only 2008 Albert Allgood has adjusted gross income in the current year of $30,000. He gave $5,000 cash and a capital gain asset costing $10,000, worth $12,000, to a public charity, and an $8,000 cash contribution to a 20 percent charity. What is the amount of his maximum allowable current charitable contribution deduction? (Assume carryover will be used in the future.) d. $14,000 The 20 percent category must be taken after considering the contribution amounts, not just the deduction amounts from the percent limit deductions. The carryover would be $11,000. Contribution % Limit % Limit Amount Amounts Deductions 50% $ 5,000 $5,000 $5,000 30% Public 12,000 9,000 9,000 20% 8,000 --0---0- All interest payments in the following category are not deductible for tax purposes: b. Personal credit card interest is not deductible. All of the outstanding stock of a closely held C corporation is owned equally by Evelyn Humo and Steve Bufusno. In 2009, the corporation generates taxable income of $20,000 from its active business activities. In addition, it earns $20,000 of interest from investments and incurs a $40,000 loss from a passive activity. How much of a passive loss carryover does the corporation have? a. $20,000 b. $0 c. $40,000 d. None of the above All of the outstanding stock of a closely held C corporation is owned equally by Evelyn Humo and Steve Bufusno. In 2009, the corporation generates taxable income of $20,000 from its active business activities. In addition, it earns $20,000 of interest from investments and incurs a $40,000 loss from a passive activity. How much income does the C corporation report for 2009? a. $10,000 of portfolio income b. $0 c. $20,000 of portfolio income d. None of the above All other things being equal, the tax benets of a tax credit outweigh the tax savings produced by a tax deduction because: a. It reduces a taxpayers tax liability b. It reduces a taxpayers taxable income c. It reduces a taxpayers capital gains d. None of the above a. Allied Corporations tax liability for the year is $49,000 before claiming a general business credit. The corporation earns a general business credit of $60,000. What is the amount of credit allowable for the year? a. $60,000 b. $43,000 c. $18,000 d. $25,000 e. None of the above 2009 b. The general business credit is limited to the tax liability minus 25% of the liability in excess of $25,000. $49,000 25,000 $24,000 x 25% $ 6,000 49,000 General business credit allowed $43,000 CCH. All Rights Reserved.An alternative minimum tax applies to items that are considered to be of a tax preference nature. Which of the following items is not considered to be a tax preference item? a. Tax-exempt bond interest issued by a school system b. Accelerated depreciation on real property acquired before 1987 c. Mining exploration and development costs d. Gain on the sale of certain small business stock e. Depletion a.Tax-exempt bond interest is not a tax preference item.An employee of a corporation takes a 10-day trip from Chicago to New York. He spends seven days conducting business and three days sightseeing and visiting friends. His expenses included: $ 800 2,800 1,000 250 $4,850 The corporation reimburses the employee under an accountable plan. What amount of the $4,850 qualies as deductible travel expenses for the corporation? c. The allowable deduction is $800 for airfare, $1,960 for lodging (7 days at $280), and $350 for meals (7 at 100 x 50%). These expenses total to $3,110. An example of a tax preference item that must be added to taxable income when computing AMTI would be: a. Percentage depletion in excess of the adjusted basis in property b. Excess intangible drilling costs c. Tax-exempt interest on certain private activity bonds d. Only a and b e. All of the above e. An example of an expense not allowed as a deduction under Code Sec. 162(a) would be: d. Government imposed nes and penalties are not deductible. Costs incurred in investigating the creation or acquisition of an active trade or business are classied as: b. Investigation costs are not organization expenditures because no business activity has yet begun. Similarly, they are not acquisition costs, because the business has not yet been acquired and may never be. They are classied as start-up costs. Ann Jones uses a dry cleaning machine in her business, and it was completely destroyed by re. At the time of the re, the adjusted basis was $20,000 and its fair market value was $18,000. How much is Anns loss? a. $18,000 b. $2,000 c. $20,000 d. None of the above Ann Jones uses a dry cleaning machine in her business, and it was partially destroyed by re. At the time of the re, the adjusted basis was $20,000 and its fair market value was $18,000. The adjusted basis after the re is $10,000 and the fair market value after the casualty is $10,000. How much is the casualty loss? a. $10,000 b. $8,000 c. $18,000 d. $20,000 Bill Goggans died and left passive activity property to his nephew, Travis. Bills basis in the activity was $30,000, while Travis basis was stepped up to $50,000. Suspended losses amounted to $22,000. How much is the passive loss deduction that can offset nonpassive income? a. $22,000 b. $30,000 c. $2,000 d. None of the above. Billy Ray owns several parcels of rental real estate, and he actively participates in managing the properties. His total loss from these activities in 2009 is $30,000 and his AGI for 2009 is $110,000. For how many years may the disallowed loss be carried forward? a. The disallowed loss may not be carried forward. b. The disallowed loss may be carried forward for 15 years. c. The disallowed loss may be carried forward for 15 years, but only after it has been carried back for 3 years. d. The disallowed loss may be carried forward indenitely. Billy Ray owns several parcels of rental real estate, and he actively participates in managing the properties. His total loss from these activities in 2009 is $30,000 and his AGI for 2009 is $110,000. How much of the disallowed loss from rental real estate activities may be carried over to future years? a. 0% b. 10% c. 50% d. 100% Billy Ray owns several parcels of rental real estate, and he actively participates in managing the properties. His total loss from these activities in 2009 is $30,000. Assuming that his AGI for 2009 is $110,000, what is the allowable deduction from these properties in 2009? a. $0 b. $15,000 c. $20,000 d. $30,000 Bob Mapp gave his daughter a limited partnership interest in a real estate activity. Suspended losses amounted to $30,000. Bobs adjusted basis at the time of the gift was $40,000 ( fair market value was greater than $40,000). What is the daughters basis in the property? a. $40,000 b. $30,000 c. $70,000 d. None of the above.Business depreciable property placed in service prior to what year is not eligible for ACRS depreciation? c. ACRS came into existence in 1981. Carlton Corporations 2009 general business credit exceeded its 2009 income tax liability. The resultant general business credit: a. May be placed in a reserve account and, based on the useful lives of the related assets, applied against the income tax liabilities of subsequent year b. May be returned to the depreciation bases of the related assets and claimed as depreciation over the useful lives of the assets c. May be carried over for ve years except that the carryover is limited to the useful lives of the related assets d. May be carried back one year and carried forward 20 years e. None of the above d. The general business credit carryover period is back one year and forward 20 years.Cathy buys a house (her principal residence) for $2,000,000, paying $500,000 down and borrowing the other $1,500,000 at 6% interest. If her interest expense for the year is $90,000, how much will her deduction for interest expenses be? c. Only interest on $1,000,000 of acquisition indebtedness is deductible. The deductible interest is $90,000 x ($1,000,000/$1,500,000) = $60,000. Code Sec. 179 allows certain taxpayers to: a. Section 179 is available only for depreciable personal property placed in service in the taxable year. Amounts expenses under Code Sec. 179 may not be depreciated. Darrin owns a house with a FMV of $400,000, and acquisition indebtedness (first mortgage) of $250,000. He took out a home equity loan of $120,000 on the house, and used the proceeds to buy a yacht. If his interest on the home equity loan this year is $9,000, how much of the interest from the home equity loan will be deductible? b. Home mortgage interest is deductible only on the interest on the lesser of (a) the amount of equity in the home (fair market value minus acquisition indebtedness) or (b) $100,000. The equity in the home is $150,000. The deductible home equity loan interest is therefore $9,000 x ($100,000/$120,000) = $7,500. Dealers in illegal drugs can deduct: b. Dealers in illegal drugs can deduct cost of goods sold. Deductions for AGI are: a. Deductions for AGI are always deductible. Deductions for business gifts are limited to what amount per individual each year? a. The deduction for business gifts is limited to $25 per donee per year. Depletion is dened as: b. The costs of regulating the usage of natural resources are not incurred by the taxpayer, but by the regulatory agency. Depletion refers to the recovery of the costs incurred to acquire and exploit natural resources. . Determine the amount of charitable contribution allowed for the current year assuming Guy Gallworthy has adjusted gross income of $30,000 and gave inventory costing $2,000 but worth $2,500 to a public foundation. c. $2,000 Inventory is ordinary income property and limited to basis in the charitable contribution computation. During 2008, a corporation pays $200,000 in federal income taxes and $120,000 in foreign income taxes to Country X. The corporations worldwide taxable income is $550,000 and its taxable income from Country X was $250,000. What is the corporations foreign tax credit for 2008? a. $0 b. $100,000 c. $120,000 d. $80,000 e. None of the above b. $220,000 U.S. income taxes x ($250,000/$550,000) = $100,000. During 2009, a corporation purchased machinery costing $450,000 and a warehouse costing $500,000. These are the only two acquisitions of depreciable property purchased by the corporation in 2009. The maximum deduction the corporation can claim under Code Sec. 179 in 2009 is: a. The Section 179 deduction is limited to $250,000 in 2009. It is reduced to the extent that acquisitions of eligible personal property exceed $800,000. During 2009, Hugh Hughes reported the following income and loss: Activity X ($50,000) Activity Y $20,000 Both Activity X and Activity Y are passive to Mr. Hughes. Hugh purchased Activity X in 1987 and Activity Y in 1993. How much is the loss that Mr. Hughes may deduct in 2009? a. $50,000 b. $30,000 c. $3,000 d. $0 Chapter 7 2009 CCH. All Rights Reserved. Testbank 605

During 2009, John Colburn, a single individual, reports the following taxable income: Gross income from business $200,150 Less: Business expenses 240,000 ($39,850) Plus: Interest income 1,000 Dividend income 2,000 AGI ($36,850) Less: Greater of itemized deductions or standard deduction Casualty loss (reduced by $100 limit) $2,000 Taxes 3,000 Interest expense 3,000 Total itemized deductions $8,000 or Standard deduction $5,700 $ 8,000 Personal exemption 3,650 ($48,500) Taxable income Compute John Colburns net operating loss for 2009. Johns net operating loss for 2009 is $41,850, computed as follows: Taxable income ($48,500) Plus: Nonbusiness deduction: Itemized deductions $8,000 Less: Casualty loss During 2009, Klecker, Inc. placed in service $865,000 of Code Sec. 179 property. How much can Klecker elect to immediately expense in 2009? a. The Code Sec. 179 deduction is reduced by the amount by which property placed in service in the current year exceeds $800,000. Thus, the limitation in this case is equal to $250,000 - $65,000 = $185,000.During 2009, Tommys home was burglarized. Tommy had the following items stolen. A block of securities worth $20,000. Tommy purchased of securities three years ago for $8,000. A block of securities worth $30,000. Tommy purchased the securities for $24,000 two years ago. Tommys homeowners policy had an $80,000 deductible clause for thefts. How much is Tommys theft loss for 2009? a. $50,000 b. $32,000 c. $44,000 d. None of the above. During the current year a corporation pays $8,000 to install ramps to the entrance of the corporations ofce building that will allow disabled individuals better access to the building. The corporations disabled access credit equals: a. $0 b. $2,000 c. $3,750 d. $3,875 e. $4,000 d. ($8,000 - $250) x 50% During the current year, a calendar year corporation incurred $52,000 of research and experimental expenditures. The corporation elects to capitalize and amortize the costs over 60 months. If the corporation rst realizes benets from the research and experimental expenditures on November 1 of the current year, its R&E deduction will equal: d. $52,000 / 60 = $867 per month. For November and December, the corporation would be allowed a deduction of $1,733. During the holiday season, a taxpayer gives business gifts to 25 customers. The gifts have the following fair market values: 7 gifts of property valued at $10 each 5 gifts of property valued at $20 each 13 gifts of property valued at $50 each How much can the taxpayer deduct for business gifts? b. The maximum deduction for business gifts is $25 per donee. Thus, the deduction is this case is equal to $70 (7 at 10) plus $100 (5 at 20) plus $325 (13 at 25). During the year, George Gable, age 66, and his wife, age 61, incurred and paid the following medical expenses for which they received no reimbursement: Hospitalization insurance premiums $ 560 Hospital 1,700 Doctors 390 Prescription drugs and medicines 250 Cosmetic surgery (liposuction) 800 George also paid $200 for prescription drugs for his dependent brother, age 78. Assuming the Gables' adjusted gross income for the year was $25,000, what is the amount that they may claim as a medical deduction on a joint return? The Gables may claim $1,225 as their medical expense deduction, computed as follows: Hospitalization insurance premiums $ 560 Hospital 1,700 Doctors 390 Prescription drugs and medicines 250 Prescription drugs for brother 200 Cosmetic surgery (liposuction) 0 Total medical expenses $3,100 Less: 7.5% of AGI 1,875 Medical expense deduction $1,225 During the year, the following items were charged to the interest expense account of Doe Corporation: Interest on additional income taxes assessed for two years ago $400 Interest on bank loan to finance installation of new machinery. $700 Bank loan was refinanced when installation was completed Interest deducted by bank from proceeds of Doe Corporation's 60-day note signed $500 December 1, payable in full 60 days later The maximum amount of interest expense that Doe Corporation, an accrual basis taxpayer, can deduct for the current year is: c. The interest deduction is: Income tax interest $400 Bank loan on machinery 700 Interest on 60-day note ($500 x 30/60 = $250) 250 Deductible interest $1,350 Employee travel expenses are deductible b. Travel expenses are deductible from AGI. Employment-related expenses of employees are: d. Employment-related expenses of employees are allowed as trade or business tax deductions. Expenses that are costs paid or incurred while traveling around town on business are known as: b. Transportation expenses are incurred while traveling around town for business purposes. Travel expenses are those incurred while traveling away from home for business.Fines and penalties paid to the government for the violation of a law are: b. Fines and penalties paid to the government for the violation of a law are not deductible. Five-year property costing $25,000 was placed in service on January 11 of the current year. The property is depreciated using straight-line MACRS. Assuming Code Sec. 179 is not elected and the mid-quarter convention applies to all ve-year property placed in service this year, what will be depreciation expense with regard to this property for the current year? (Ignore bonus depreciation.) c. ($25,000 x .2) x (10.5/12) = $4,375. For individual taxpayers, deductible losses for tax purposes do not include: c. Personal losses other than casualty and theft losses are not deductible for tax purposes. For MACRS depreciation purposes, autos and light-duty trucks are depreciated over what period? b. Autos and light-duty trucks are depreciated over ve years under MACRS. For tax purposes, nonbusiness expenses are d. Nonbusiness expenses include all the expenses mentioned in the question. All of the above For tax purposes, the term research and experimentation expenditures includes which of the following: b. The term research and experimentation expenditures includes development of a plant process. Frank Fox won $10,000 in a state lottery. He also lost $3,000 at the horse races. On his income tax return he should report: d. Gambling winnings are reported as gross income and gambling losses are deductible to the extent of winnings as itemized deductions. Freds at-risk amount in a passive activity is $50,000 at the beginning of the current year. His current loss from the activity is $60,000. He had no passive activity income during the year. At the end of the year, which of the following statements is incorrect? a. Fred has a loss of $50,000 suspended under the passive loss rules. b. Fred has an at-risk amount in the activity of $0. c. Fred has a loss of $10,000 suspended under the at-risk rules. d. Fred has a loss of $60,000 suspended under the passive loss rules. Gwen had the following occur in 2009: Car wreck repairs were $2,000, insurance paid $1,000. Theft of boat from lake house in December fair market value = $10,000, cost = $15,000. She didn't discover the theft until the next taxable year. Storm damage to lake house FMV before = $200,000, after = $150,000, insurance paid $20,000. If Gwen's AGI is $40,000, what is her net casualty loss deduction in 2009? b. The deduction is computed as follows: Car wreck ($2,000 - $1,000 - $500) $500 Theft of boat (deducted in year when theft discovered) $0 Storm damage to lake house ($200,000 - $150,000 - $20,000 -$500) $29,500 Total $30,000 $4,000 10% of AGI Net deduction $26,000 HMP Inc. reported the following information: Net sales (U.S. production) Cost of goods sold Operating expenses W-2 wages for the year(included in cost of goods sold and operating expenses) $550,000 300,000 100,000 80,000 What is HMPs taxable income? a. $141,000 b. $145,500 c. $150,000 d. $154,500 Moving expenses qualify as deductions if: c. The employee must satisfy both the distance and employment tests. Hobby expenditures are deductible to the extent of: b. Hobby expenditures are deductible only to the extent of hobby gross income. Hyman Homes, Inc. paid $3,000 of qualied rst-year wages to a qualied summer youth employee who worked 400 hours and $7,000 of qualied rst-year wages to a qualied ex-felon who worked 350 hours during the year. What is the companys work opporutunity credit for the year? a. $1,200 b. $2,250 c. $3,600 d. $4,000 b. The work opportunity credit for a qualied summer youth employee is $750 ($3,000 x 25%). The credit for a qualied ex-felon who works between 120 and 400 hours is $1,500 (25% x $6,000). The companys total work opportunity credit for the year is $2,250 ($750 + $1,500).If a taxpayer drives 10,000 business miles during 2009, and uses the standard mileage method, the taxpayers deduction is: d. The 2009 mileage allowance is 55 cents per mile. If a taxpayer has two places of business in different areas, the IRS usually considers the following factors in determining the taxpayers principal place of business: (Choose the wrong answer.) a. The taxpayers preference for principal place of business is not considered by the IRS in determining the taxpayers principal place of business. If an expenditure is part business-related and part personal d. A part business-related and part personal expenditure is deductible only to the extent of the businessrelated portion of the expenditure. If an individual taxpayer contributes capital gain property to a qualified public charity and wants to deduct fair market value, the deduction would be subject to which of the following limits? b. 30 percent of the taxpayer's AGI If an individual taxpayer contributes ordinary property to a qualified public charity, the deduction would be subject to which of the following limits? d.50 percent of the taxpayer's AGI If rental payments are paid in advance, they are usually deductible by a taxpayer: b. Advance rental payments are deductible in the period covered by the payments. In 2009, John Barraclough has $50,000 of adjusted gross income, a $10,000 casualty loss and a $2,000 casualty gain. How much is John's net deductible casualty loss after making all appropriate reductions? b. The deduction is $10,000 - $500 - $5,000 - $2,000 = $2,500. 67. In order to qualify for the moving expense deduction, the taxpayer: b. The taxpayer must move because of a new job location. Jim owns four separate activities. He elects not to group them together as a single activity under the appropriate economic unit standard. Jim participates for 140 hours in Activity A, 130 hours in Activity B, 140 hours in Activity C, and 100 hours in Activity D. He has one employee who works 135 hours in Activity D. Which of the following statements is correct? a. Activities A, B, C, and D are all signicant participation activities. b. Jim is a material participant with respect to Activities A, B, C and D. c. Jim is a material participant with respect to Activities A, B and C. d. Losses from all of the activities can be used to offset Jims active income. Job-seeking expenses are deductible if incurred by an individual who is presently employed and looking for work in the same trade or business: b. Job-seeking expenses are deductible by an individual who is presently employed and looking for work in the same trade or business regardless of whether the individual nds a new job. Joe College is married and attends State University for 12 months. Joe and his wife have two children. Mrs. College works to help put Joe through school. The children, who are four and ve years old, are kept at Sleepy Time Day Care School. The Colleges paid the school $4,600 this year to keep the children. The Colleges had adjusted gross income of $10,000 this year, all of which was earned by Mrs. College. What amount may the Colleges claim as a child care credit? a. $920 b. $480 c. $1,610 d. $1,200 e. None of the above c. The $4,600 expenses incurred are not reduced since they are less than the $6,000 maximum allowed for two children. Also, there is no reduction for the lower income of the spouses since the earned income imputed to the student- husband would be $6,000 ($500 x 12), but this amount is not added into AGI. Thus, the $4,600 is multiplied by 35% to arrive at the dependent care credit to give $1,610.John Baker, a cash basis calendar year taxpayer, paid the following during the year: Social security tax (withheld from wages) $215 Ad valorem personal property taxes $52 State income tax $190 General sales tax $114 Cigarette taxes $50 Fine for speeding $25 What itemized deduction may John claim for taxes on his return? . d. Social security taxes, cigarette taxes, and fines for speeding are not allowed deductions. Sales taxes are less than state income taxes, so the state income taxes, as well as the personal property taxes, are deductible. John Hughes is in the business of truck farming (i.e., growing tomatoes, bell peppers and green beans). During the year, one of his barns was completely destroyed by re. The adjusted basis of the barn was $100,000. The fair market value of the barn before the re was $80,000. The barn was insured for 90% of its fair market value and John recovered this amount under the insurance policy. John has adjusted basis for the year of $60,000 (before considering the casualty). Determine the amount of loss he can deduct on his tax return for the current year. a. $4,000 b. $24,000 c. $28,000.. d. $20,000 John Jay is married and supports his mother, age 67. During the year, he paid $300 for prescription medicines for his mother, $100 for prescription medicines for his wife, and $1,400 for doctor and hospital bills for himself. His gross income is $15,000 and adjusted gross income is $14,000. In itemizing his deductions, Jay may claim a medical expense deduction, after application of proper limitations, of: a. All the medical expenses are deductible but they must be reduced by 7.5% of the adjusted gross income. Total medical expenses $1,800 Less: 7.5% of AGI 1,050 Medical expense deduction $750 John Mapp dies with passive activity property having an adjusted basis of $50,000, suspended losses of $20,000, and a fair market value at the date of Mr. Mapps death of $60,000. How much suspended loss can be taken on Mr. Mapps nal Form 1040 return? a. $10,000 b. $20,000 c. $0 d. None of the above John Mapp dies with passive activity property having an adjusted basis of $50,000, suspended losses of $20,000, and a fair market value at the date of Mr. Mapps death of $77,000. How much suspended loss can be taken on Mr. Mapps nal Form 1040 return? a. $20,000 b. $77,000 c. $7,000 d. $0 Karen Baker, a cash basis calendar year taxpayer, paid the following during the year: Social security tax (withheld from wages) $215 Personal property taxes (ad valorem) 52 State income tax 190 State sales tax 114 Cigarette taxes 50 Fine for speeding 25 What itemized deduction may John claim for taxes on his return before considering the percentage of AGI reduction? a. John is eligible to deduct the personal property taxes paid ($52) and the state income taxes paid ($190). He is not eligible to deduct the state sales tax paid ($114) because it did not exceed the amount of state income tax paid. The other taxes and the fine are not deductible expenses. Kenneth Kruise purchased a personal residence for $66,000. It had a fair market value of $80,000 when it was damaged by a fire. The fair market value after the fire was $40,000 and insurance proceeds totaled $15,000. What is the net amount of casualty loss he can claim if his adjusted gross income is $20,000? d. The reduction in fair market value is less than the basis; thus, that amount must be reduced by the insurance proceeds, $500 and 10 percent of adjusted gross income because of the nonbusiness casualty loss. Last year, a corporation purchased an ofce building for $220,000, of which $30,000 was allocated to the land on which the building was located. The buildings salvage value was estimated to be $50,000. The corporations current year depreciation deduction for the building is b. Land is not depreciable. Subtracting this cost leaves $190,000 as the cost of the building. Depreciation is calculated using the straight-line method over 39 years, and ignoring salvage value: $190,000 / 39 = $4,872. Lisa incurred the following employee business expenses: Meals $2,000 Lodging $4,000 Her employer reimburses her a total of $4,500 for all of these expenses under an accountable plan. Ignoring any floor based on percent of AGI, what is her deduction for these expenses? a. $1500/$6000, or 25% of each expense, is not reimbursed, and 50% of the unreimbursed meal expense is not deductible. That means that the following amounts of each expense are deductible: Meals (25% x $2,000 x 50% deductible) Lodging (25% x $4,000) Total Lorence Langes tax for the year is $7,000. He has paid in $4,400 in four quarterly payments during the year. Last year, his tax liability was $6,600. Which of the following is correct? a. Lorence will not have an underpayment penalty. b. Lorence will have an underpayment penalty on $2,600. c. Lorence will have an underpayment penalty on $1,900. d. Lorence will have an underpayment penalty on $2,200. e. None of the above Chapter 9 2009 CCH. All Rights Reserved. Testbank 637 . c. The underpayment penalty is determined by subtracting the payments made from the smaller of 90% of the present years tax liability or the previous years tax liability. Present years tax liability Amount needed to be paid Less: Amount paid Amount underpayment penalty applied to $7,000 x 90% $6,300 4,400 $1,900 Tax liabilityMalcolm Moore had medical expenses of $500 last year and took a $300 deduction. He was reimbursed $450 this year by the insurance company. What amount must be included in this year's tax return as gross income? c. The amount that must be included in income is the lesser of the reimbursement or the excess itemized deductions for the previous year. .

Mark Miller paid the following medical expenses during the year (all in excess of reimbursement): Hospital and doctor bills (for self and wife) $840 Medicine and drugs (for self and wife) $730 Hospitalization insurance premiums $920 Medicine and drugs (for dependent mother, age 71) $160 Assuming the Millers' adjusted gross income was $20,000, how much of a medical expense deduction may the Millers claim on their joint return? c. All the medical expenses are deductible but they must be reduced by 7.5% of the adjusted gross income. Total medical expenses $2,650 Less: 7.5% of AGI 1,500 Medical expense deduction $1,150 Max Murphey, a cash basis taxpayer, borrowed $1,000 from a bank for a business loan on August 1, to be repaid one year later. The interest for one year at 6 percent was deducted from the loan proceeds in advance. His interest deduction for the current year is: e. There is no interest deduction allowed for the year because interest deducted from the loan proceeds is not considered prepaid interest. The cash basis taxpayer must pay interest to be allowed the deduction. Mike, who is single, has $100,000 of salary, $15,000 of income from a limited partnership, and a $30,000 passive loss from a real estate rental activity in which he actively participates. His modied adjusted gross income is $100,000. Of the $30,000 loss, how much is deductible? a. $30,000 b. $10,000 c. $25,000 d. $0.Miscellaneous itemized deductions are deductible only: a. to the extent that in aggregate they exceed two percent of AGI. Mr. and Mrs. Gumball are both over age 65. They had income this year consisting of $8,500 earned income and $1,500 in social security benets. . What amount may they claim as a credit for the elderly? They le a joint return. a. $900 b. $1,165 c. $1,275 d. $0 e. None of the above d. There is no tax liability, so there is no credit. Net operating losses can be increased by which of the following? a. Theft losses. b. Business casualty losses. c. Unreimbursed employee business expenses. d. All of the above. Nonbusiness bad debts are deductible: a. Nonbusiness bad debts are treated as investment losses and are limited to capital gains plus $3,000. Non-home-mortgage interest prepaid in cash can only be deducted: d. Except for home-mortgage "points", prepaid interest can only be deducted over the period of the loan. Nonresidential realty costing $300,000 was placed in service three years ago, and was sold on March 25 of the current year. Current year depreciation expense with respect to the real estate will be: b. The mid-month convention is used both in the year of acquisition and the year of sale. ($300,000/39 years) x (2.5/12) = $1,603. On July 10, 2005, Test Corporation purchased energy equipment for $15,000. The equipment has a 5-year cost recovery period. The corporation took the appropriate investment credit for 2005. On August 15, 2009, the corporation sold the asset for $10,000. What is the amount of investment credit recapture that is due to the IRS? a. $300 b. $900 c. $1,000 d. $1,500 e. None of the above a. The asset was held for over four but less than ve years; thus, 20% of the investment credit taken must be recaptured. Asset purchase price $15,000 x 10% Investment credit rate Investment credit taken $ 1,500 Investment credit taken $ 1,500 x 20% Recapture rate Investment credit recapture $ 300 PDQ, Inc., a calendar-year company, paid $15,000 as a prepayment of two years of its liability insurance on November 1 of the current year. How much insurance expense can PDQ deduct on its current year income tax return? b. The prepayment will provide benets for more than one year after the end of the year. The taxpayer must therefore use the accrual method for this expenditure. Private foundations are organizations which do not normally receive donations: b. Private foundations are organizations which normally do not receive donations from the general public. Research and experimental expenditures connected with a trade or business can be capitalized and amortized for tax purposes over a period of not less than: b. R & D expenditures may be amortized over a period not less than 60 months. Research and experimentation expenditures connected with a trade or business can be capitalized and amortized for tax purposes over a period of not less than: b. Capitalized research and experimentation expenditures can be amortized over a period of not less than 60 months. Ron Ryder worked for both Boilerworks and Diemakers during the year. His total wages from Boilerworks were $49,000. His total wages from Diemakers were $20,000. Rons wife worked for Stenographers during the year and earned total wages of $28,000. What amount can Ron and his wife claim as a credit against their income tax for the year because of excess social security tax withheld if they le a joint return? a. $290 b. $580 c. $1,240 d. $1,530 e. None of the above . e. The credit for excess social security only applies to an individual having wage income over $94,200. Since neither spouse had wages totaling more than $94,200 there were no excess social security taxes paid.Sam and Betty Taylor maintain a home and they have two children. Their earned income was $10,000 and adjusted gross income was $11,000. They le a joint return. What is the amount, if any, of their earned income tax credit for the year? a. $3,400 b. $4,000 c. $4,400 d. $0 . b. The earned income credit is based on earned income up to $12,570 but reduced by adjusted gross income over $19,370. $10,000 x 40% = $4,000 earned income credit.Steve Colburns portable sawmill used 100% for business, was completely destroyed by re. The sawmill had an adjusted basis of $35,000 and a fair market value of $50,000 before the re. The sawmill was uninsured. Steves casualty loss is: a. $34,900. b. $50,000. c. $49,900. d. $35,000Stock in the ABC Corporation was contributed to a public charitable organization. The basis in the stock was $1,000, but its fair market value was $1,500 at the time of the donation. Indicate the correct income tax treatment as a result of the donation. The stock was held long term. b. In general, long-term capital gain assets are deductible at fair market value. Susnne Watson is an employee and sole-shareholder of Klaxon. Klaxon is a calendar-year company which uses the accrual method of accounting. On December 30, 2009, Klaxon awarded Susanne a bonus of $30,000 based on the companys 2008 year-end prot. The bonus was reasonable, ordinary and necessary. It was paid on February 11, 2010. In what year can Klaxon deduct the bonus it paid to Susanne? Susanne is a calendar-year, cash method taxpayer. c. The company must deduct the bonus in the same year that the employee includes it in income. Tammy has the following items for the current year: Nonbusiness capital gains Nonbusiness capital losses $10,000 (2,000) 57. 58. 59. 60. Interest Income 7,000 Itemized deductions (none of the amount realized from a casualty loss) (9,000) In calculating Tammys net operating loss, and with respect to the above amounts only, what amount must be added back to taxable income (loss)? a. $0 b. $2,000 c. $3,000 d. $6,000 Tax planning and compliance expenses incurred by individual taxpayers are not: c. Tax planning and compliance expenses are not limited to the income tax area but also extend to gift and estate tax returns. Taxpayers generally can deduct meal and entertainment expenses provided that the expenses are b. Meal and entertainment expenses are only deductible if they can be directly association with the taxpayers trade or business activities. The amount of a taxpayers general business credit for any tax year is limited to the amount by which the taxpayers net income tax exceeds the greater of: a. The taxpayers tentative minimum tax for the tax year or 25 percent of the amount by which the taxpayers net regular tax liability exceeds $25,000 b. The taxpayers tentative minimum tax for the tax year or 15 percent of the amount by which the taxpayers net regular tax liability exceeds $25,000 c. The taxpayers alternative minimum tax for the tax year or 25 percent of the amount by which the taxpayers net regular tax liability exceeds $15,000 d. The taxpayers alternative minimum tax for the tax year or 15 percent of the amount by which the taxpayers net regular tax liability exceeds $15,000 e. None of the above aThe Cohan rule has to do with: c. The Cohan rule has to do with substantiation of tax deductions. The difference between a refundable credit and a nonrefundable credit is: a. A refundable credit can only reduce a taxpayers tax liability to zero b. A nonrefundable credit can only reduce a taxpayers tax liability to zero c. Refundable tax credits are only available to individual taxpayers d. Nonrefundable tax credits are only available to corporations b. The following taxes were paid by the Browns--real estate taxes on their home, $600; state income taxes, $700; city sales tax, $50; state sales taxes of $10 paid while on vacation to states other than the state in which they resided; state gasoline tax (personal use of automobile), $30; dog licenses, $20; and real estate taxes on the home of Mrs. George Brown, mother of Barney Brown, $450. In itemizing their deductions, the Browns should claim a deduction of taxes of: b. State sales taxes, gasoline taxes, and dog licenses are not deductible taxes. The real estate taxes paid for Mrs. Brown's mother are not deductible by the Browns since it is not a tax that they incurred. The IRS takes the position that a taxpayers tax home, for purposes of determining travel expenses, is at the location of the taxpayers: a. A taxpayers home for purposes of determining travel expenses is at the location of the taxpayers principal place of business. .The low-income housing credit can be claimed by owners of qualied low-income building for a period of: a. 5 years b. 10 years c. 15 years d. 20 years e. None of the above . b.The manufacturing deduction in 2009 is based on what percentage? a. 9% b. 6% c. 3% d. None of the above. The minimum tax credit: a. Provides that the amount of AMT paid by a corporation in one year differences can be used to offset the regular tax liability of a subsequent year b. May not be used to offset any future AMT tax liability c. May be carried forward indenitely as an offset against regular tax liability d. All of the above d. The percentage of passive losses that may offset nonpassive income for 2009 is: a. 0% b. 10% c. The percentage varies depending on the level of AGI. d. 100% The process used to recover the cost of intangible assets over time is known as a. Intangible assets are amortized. Tangible assets are depreciated. Natural resources are depleted. . The rehabilitation credit can be taken by businesses: a. For costs associated with business activities that contribute to the revitalization of economically depressed areas b. For costs associated with the substantial rehabilitation of certied historic structure or other depreciable building that was originally placed in service prior to 1936 c. Who purchase or substantially rehabilitate residential rental property used for low-income housing d. All of the above bThe tax laws allow taxpayers to use which of the following methods of accounting for research and experimental costs paid or incurred in connection with a trade or business? d. Taxpayers have the option of capitalizing R&D expenses or expensing them. If capitalized, taxpayers could choose not to amortize them, although such an election would be unlikely. The tax structure of the individual AMT is a two-tier progressive tax where: a. The rst $175,000 of AMT base is taxed at a 15 percent rate and any excess over that amount is taxed at 25 percent b. The rst $175,000 of AMT base is taxed at a 26 percent rate and any excess over that amount is taxed at 28 percent c. The rst $175,000 of AMT base is taxed at a 25 percent rate and any excess over that amount is taxed at 35 percent d. b. The two types of depletion methods are b. Taxpayers may choose either cost or percentage depletion. This year, Ellen Smith converted her principal residence to rental property. She originally purchased the home 8 years ago for $425,000. The home was appraised at $356,250 just before she placed it on the rental market. Assuming that $12,500 of the tax basis of the home is attributable to the land on which the home is located, if the home was converted to rental property on June 20, how much depreciation expense can Ellen claim on her current year return? b. The propertys tax basis is limited to its $356,250 FMV at the time it was converted from personal to business-use property. Subtracting $12,500 for the land, the depreciable basis is $343,750. The house is residential realty and is depreciated using the SL method over 27.5 years using the mid-month convention. Thus, depreciation expense is equal to $343,750 27.5 x 6.5/12 = $6,771. To be deductible for tax purposes, a trade or business expenditure must be: c. A deductible trade or business expenditure must be both ordinary and necessary. To be deductible for tax purposes, trade or business expenses must be: d. To be deductible, trade or business expenses must satisfy all of the requirements listed.d. All of the above To claim the disabled access credit, an eligible small business is dened as: a. One whose gross receipts did not exceed $1 million b. One who employed no more than 30 full-time employees c. One who is located in one of the target areas dened by the government d. a. and b. e. All of the above . d. Trade or business expenses are only deductible if they are: e. Business capital expenditures must be recovered through depreciation. Business noncapital expenditures are deductible if they are ordinary, necessary and reasonable in amount. Travel expenses must be incurred by a taxpayer while away from home. To the IRS, the term away from home means: c. To the IRS, the term away from home means away from home overnight. Two years ago, a corporation purchased residential real estate (an apartment complex) at a total cost of $250,000. Of this amount, $50,000 was allocated to the underlying land. What is the corporations allowable depreciation deduction for the current year under MACRS d. Depreciation = $200,000 / 27.5 years = $7,272. Under the cash method of tax accounting, tax deductions are taken when a. Deductions are taken when expenditures are made under the cash basis of accounting. Unnecessary cosmetic surgery costs directed solely at improving the patient's physical appearance: c. Unnecessary cosmetic surgery will not qualify for the medical expense deduction.

Unreimbursed expenses of employees are considered to be deductions: b. Unreimbursed expenses of employees are deductible from AGI. Unused general business credits can be: a. Carried back one year and carried forward ten years b. Carried back two years and carried forward ten years c. Carried back one year and carried forward 20 years d. Carried back two years and carried forward 20 years e. Carried back three years and carried forward ve years c. What is the alternative minimum tax that must be paid by a taxpayer ling a joint return, if the taxpayer has taxable income of $90,950, adjustments to taxable income of $29,000, tax preferences of $50,000, and an income tax before the alternative minimum tax of $6,000? a. $21,000 b. $15,000 c. $20,000 d. $0 e. None of the above . c. The alternative minimum tax that must be paid by the taxpayer is $20,000, computed as follows: Taxable income $90,950 Plus: Adjustments to taxable income 29,000 Plus: Tax preferences 50,000 69,950 Less: Exemption amount Net alternative minimum taxable income $100,000 Tax rate x 26% Tax at 26% for the year $ 26,000 6,000 Less: Regular tax for the year Alternative minimum tax $ 20,000What is the amount of dependent care credit allowed Sally Smith, a divorcee, who pays $3,100 for the year to send her daughter to a babysitter while she works? The daughter is claimed as a dependent by the father. Sally has adjusted gross income of $16,500 for the year. a. $1,085 b. $1,054 c. $1,020 d. $500 e. None of the above . c. Sally is limited to $3,000 of expenses and must multiply that amount by 34% since she exceeds $15,000 of adjusted gross income.What is the amount of dependent care credit for a couple with two children where they spend $5,000 for dependent care and the husband earns $40,000 for the year and the wife earns $4,500? a. $1,000 b. $990 c. $900 d. $0 e. None of the above c. The expenses for dependent care are limited to $4,500, the income of the lower-earning spouse, and the credit percentage for $44,500 of adjusted gross income is 20%.What is the amount of interest deduction allowed for the year 2009, assuming Marge Meyer incurred the following: Interest on loan used to purchase land for investment $18,000 (assume no net investment income) Interest on loan used to purchase personal residence $1,000 Interest on loan used to purchase boat $500 Interest on loan to purchase 100 shares of General Auto $3,000 (no dividends received during the year) b. Only the home mortgage interest is deductible. What is the earned income credit allowed Don Andersen assuming he has adjusted gross income of $8,500 and earned income of $5,000? He maintains a household for his daughter. a. $2,890 b. $3,043 c. $1,700 d. $0 c. The earned income credit is based on earned income up to $8,950 but reduced by adjusted gross income over $16,240. $5,000 x 34% = $1,700 earned income credit.What is the maximum amount that Mr. and Mrs. Jones, both over 65, may take as a credit for the elderly before the income tax limitation, assuming that they have gross income of $23,000 and adjusted gross income of $21,500? a. $1,125 b. $263 c. $60 d. $0 e. None of the above c. The maximum base amount must be reduced by one-half of the adjusted gross income over $10,000. Maximum base amount $7,500 Less: 1/2 of adjusted gross income over $10,000 5,750 Balance available for credit $1,750 x 15% Credit rate Credit for the elderly $ 263 The credit is limited to the tax liability of $60 [($21,500 - $13,000 - $7,300 = $600) x 10%].When a taxpayer incurs an NOL in 2009, that is not attributable to a casualty or theft loss, the taxpayer may: a. Carry the NOL forward instead of back. b. Carry the NOL back three years . c. Carry the NOL back ve years. d. All of the above. When tentative minimum tax exceeds the taxpayers regular tax liability, the excess represents the taxpayers: a. Net income tax b. Alternative minimum tax (AMT) c. Total income tax liability d. None of the above . bWhich method is used to determine the order in which unused tax credits are carried forward and back? a. First-in, rst-out method b. Last-in, rst-out method c. First-in, last-out method d. None of the above . aWhich of the following expenditures is always an itemized deduction for individual taxpayers? d. Both a. and b. Which of the following investment related expenses are deductible for AGI? c. Rent and royalty expenses are deductible for AGI. Which of the following is allowed when computing AMTI for individuals? a. Standard deduction b. Personal exemptions c. Charitable contributions d. Real estate taxes e. None of the above c. Which of the following is not a passive activity? a. Owning a business and not materially participating b. Having rental condos c. Owning a limited partnership interest in a real estate limited partnership d. Owning a working interest in oil and gas propertiesWhich of the following is not a passive activity? a. Owning a working interest in oil and gas wells. b. Owning a limited partnership interest in oil and gas wells. c. Owning a limited partnership interest in real estate. d. Owning a business and not materially participating.Which of the following is not a tax preference item for purposes of the alternative minimum tax? a. Percentage depletion in excess of the adjusted basis in property b. Amortized circulation costs c. Excess intangible drilling costs d. Tax-exempt interest on certain private activity bonds e. All of the above are tax preference items b. Which of the following is not deductible? a. NOLs b. Expenses incurred for the production of income. c. Hobby expenses in excess of hobby income. d. All of the above. Which of the following statements is correct? a. Hobby expenses are always fully deductible. b. The nancial status of the taxpayer is not considered in determining whether activities are engaged in for prot. c. The deduction for the allowed hobby expenses is an itemized deduction, but not subject to the 2 percent oor. d. Hobby expenses that are deductible without reference to whether they are incurred in an activity designed to produce income, such as certain taxes, remain fully deductible. 2009 CCH. All Rights Reserved. Chapter 7 606 CCH Federal TaxationComprehensive Topics Which of the following statements is incorrect? a. A vacation home becomes a personal residence when its owner uses it more than the greater of 14 days or 10 percent of the number of rental days. b. If a dwelling is classied as a personal residence, rental losses are not deductible. c. If an individual rents out a vacation home for more than 14 days and does not use it excessively for personal purposes, losses are allowed to be deducted from AGI. d. If an individual actively participates in the rental real estate activity, up to $25,000 of losses can be used to offset nonpassive income. Which of the following tax credits is not part of the general business credit? a. Low-income housing credit b. Foreign tax credit c. Employer-provided child care credit d. Research credit e. All of the above are part of the general business bWhich of the following taxpayers derives the most benets from a $1 tax credit? a. Moderate-income taxpayers b. Higher-income taxpayers c. Lower-income taxpayers d. All of the above derive the same benet for a $1 tax credit d. Which of the following types of taxes is not deductible? c. State income and property taxes are deductible against federal taxable income. Federal income taxes are not. Which of the listed dispositions for a passive activity allow a taxpayer to keep the suspended losses from the disposed activity and utilize them on a subsequent taxable disposition? a. Disposition of death. b. Disposition by gift. c. All of the above. d. None of the above.Which one of the following is not deductible when itemizing? c. The cigarette tax is considered a penalty and is nondeductible.

d. A business bad debt is deductible for tax purposes as an ordinary business deduction. A business machine valued at $800 was contributed to a charitable organization during the year. The machine cost $1,000 but was depreciated down to $600 before the donation was made. Indicate the correct income tax treatment with respect to the donation. a. An ordinary income property charitable deduction is limited to basis. There is no income recognition when making a charitable donation.

d. A business tax deduction for business gifts is restricted to $25 per individual donee per year. A calendar-year corporation incurs $53,000 of start-up costs. If the corporation began business on August 1 of the current year, what is the maximum amount of the start-up costs that it can deduct against business income in the current year? d. Taxpayers are allowed $5,000 in the rst year, plus amortization of the remaining balance over 180 months. The $5,000 is reduced, however, by the amount by which start-up costs exceed $50,000. Thus, in this case, the corporation may deduct $2,000 plus ($51,000 / 180 months x 5 months) = $3,417.

: b. Oxford University, England Charitable contributions must be made to charities that are incorporated in the United States. A corporation paid $50,000 for qualied child care expenses during the year in order to provide child care for its employees. The corporations child care credit is: a. $0 b. $5,000 c. $10,000 d. $12,500 e. $25,000 d. $50,000 x 25%

d. A deduction for salaries and wages can include both bonus payments and payments for services performed in prior years. a. A nonbusiness bad debt is deductible for tax purposes as a short-term capital loss.

A percentage depletion deduction computed on a natural resource cannot exceed what percent of the taxpayers taxable income derived from the natural resource for the year before deducting the depletion deduction? a. A percentage depletion deduction cannot exceed 50 percent of the taxpayers taxable income derived from the natural resource for the year before deducting the depletion deduction. A self-employed attorney uses a country club to entertain clients and spends the following amounts at the club: 94. 95. 96. 97. Annual dues $1,000 Personal meals 1,500 Business meals 2,500 What amount can the attorney deduct against business income on his personal tax return? b. The attorney can deduct 50% of business meals. No deduction is allowed for country club dues, nor for personal meals. A work opportunity credit is available for qualied second-year wages paid to which one of the following? a. Qualied veterans b. Long-term family assistance recipient c. Qualied ex-felon d. High-risk youth . b. ABC, Inc. of Jasper, Georgia suffered a casualty loss of $150,000 in March 2009. This loss was caused by heavy rains that completely ooded their factory. As a result of these rains, the President declared North Georgia (including Jasper) a disaster area on March 23, 2009. In what year can ABC, Inc. elect to deduct the casualty loss? a. 2009 or 2010 b. 2009 or 2008 c. Only 2009 d. Only 2008 Albert Allgood has adjusted gross income in the current year of $30,000. He gave $5,000 cash and a capital gain asset costing $10,000, worth $12,000, to a public charity, and an $8,000 cash contribution to a 20 percent charity. What is the amount of his maximum allowable current charitable contribution deduction? (Assume carryover will be used in the future.) d. $14,000 The 20 percent category must be taken after considering the contribution amounts, not just the deduction amounts from the percent limit deductions. The carryover would be $11,000. Contribution % Limit % Limit Amount Amounts Deductions 50% $ 5,000 $5,000 $5,000 30% Public 12,000 9,000 9,000 20% 8,000 --0---0-

b. Personal credit card interest is not deductible. All of the outstanding stock of a closely held C corporation is owned equally by Evelyn Humo and Steve Bufusno. In 2009, the corporation generates taxable income of $20,000 from its active business activities. In addition, it earns $20,000 of interest from investments and incurs a $40,000 loss from a passive activity. How much of a passive loss carryover does the corporation have? a. $20,000 b. $0 c. $40,000 d. None of the above All of the outstanding stock of a closely held C corporation is owned equally by Evelyn Humo and Steve Bufusno. In 2009, the corporation generates taxable income of $20,000 from its active business activities. In addition, it earns $20,000 of interest from investments and incurs a $40,000 loss from a passive activity. How much income does the C corporation report for 2009? a. $10,000 of portfolio income b. $0 c. $20,000 of portfolio income d. None of the above All other things being equal, the tax benets of a tax credit outweigh the tax savings produced by a tax deduction because: a. It reduces a taxpayers tax liability b. It reduces a taxpayers taxable income c. It reduces a taxpayers capital gains d. None of the above a. Allied Corporations tax liability for the year is $49,000 before claiming a general business credit. The corporation earns a general business credit of $60,000. What is the amount of credit allowable for the year? a. $60,000 b. $43,000 c. $18,000 d. $25,000 e. None of the above 2009 b. The general business credit is limited to the tax liability minus 25% of the liability in excess of $25,000. $49,000 25,000 $24,000 x 25% $ 6,000 49,000 General business credit allowed $43,000 CCH. All Rights Reserved.An alternative minimum tax applies to items that are considered to be of a tax preference nature. Which of the following items is not considered to be a tax preference item? a. Tax-exempt bond interest issued by a school system b. Accelerated depreciation on real property acquired before 1987 c. Mining exploration and development costs d. Gain on the sale of certain small business stock e. Depletion a.Tax-exempt bond interest is not a tax preference item.An employee of a corporation takes a 10-day trip from Chicago to New York. He spends seven days conducting business and three days sightseeing and visiting friends. His expenses included: $ 800 2,800 1,000 250 $4,850 The corporation reimburses the employee under an accountable plan. What amount of the $4,850 qualies as deductible travel expenses for the corporation? c. The allowable deduction is $800 for airfare, $1,960 for lodging (7 days at $280), and $350 for meals (7 at 100 x 50%). These expenses total to $3,110. An example of a tax preference item that must be added to taxable income when computing AMTI would be: a. Percentage depletion in excess of the adjusted basis in property b. Excess intangible drilling costs c. Tax-exempt interest on certain private activity bonds d. Only a and b e. All of the above e. An example of an expense not allowed as a deduction under Code Sec. 162(a) would be: d. Government imposed nes and penalties are not deductible. Costs incurred in investigating the creation or acquisition of an active trade or business are classied as: b. Investigation costs are not organization expenditures because no business activity has yet begun. Similarly, they are not acquisition costs, because the business has not yet been acquired and may never be. They are classied as start-up costs. Ann Jones uses a dry cleaning machine in her business, and it was completely destroyed by re. At the time of the re, the adjusted basis was $20,000 and its fair market value was $18,000. How much is Anns loss? a. $18,000 b. $2,000 c. $20,000 d. None of the above Ann Jones uses a dry cleaning machine in her business, and it was partially destroyed by re. At the time of the re, the adjusted basis was $20,000 and its fair market value was $18,000. The adjusted basis after the re is $10,000 and the fair market value after the casualty is $10,000. How much is the casualty loss? a. $10,000 b. $8,000 c. $18,000 d. $20,000 Bill Goggans died and left passive activity property to his nephew, Travis. Bills basis in the activity was $30,000, while Travis basis was stepped up to $50,000. Suspended losses amounted to $22,000. How much is the passive loss deduction that can offset nonpassive income? a. $22,000 b. $30,000 c. $2,000 d. None of the above. Billy Ray owns several parcels of rental real estate, and he actively participates in managing the properties. His total loss from these activities in 2009 is $30,000 and his AGI for 2009 is $110,000. For how many years may the disallowed loss be carried forward? a. The disallowed loss may not be carried forward. b. The disallowed loss may be carried forward for 15 years. c. The disallowed loss may be carried forward for 15 years, but only after it has been carried back for 3 years. d. The disallowed loss may be carried forward indenitely. Billy Ray owns several parcels of rental real estate, and he actively participates in managing the properties. His total loss from these activities in 2009 is $30,000 and his AGI for 2009 is $110,000. How much of the disallowed loss from rental real estate activities may be carried over to future years? a. 0% b. 10% c. 50% d. 100% Billy Ray owns several parcels of rental real estate, and he actively participates in managing the properties. His total loss from these activities in 2009 is $30,000. Assuming that his AGI for 2009 is $110,000, what is the allowable deduction from these properties in 2009? a. $0 b. $15,000 c. $20,000 d. $30,000 Bob Mapp gave his daughter a limited partnership interest in a real estate activity. Suspended losses amounted to $30,000. Bobs adjusted basis at the time of the gift was $40,000 ( fair market value was greater than $40,000). What is the daughters basis in the property? a. $40,000 b. $30,000 c. $70,000 d. None of the above.Business depreciable property placed in service prior to what year is not eligible for ACRS depreciation? c. ACRS came into existence in 1981. Carlton Corporations 2009 general business credit exceeded its 2009 income tax liability. The resultant general business credit: a. May be placed in a reserve account and, based on the useful lives of the related assets, applied against the income tax liabilities of subsequent year b. May be returned to the depreciation bases of the related assets and claimed as depreciation over the useful lives of the assets c. May be carried over for ve years except that the carryover is limited to the useful lives of the related assets d. May be carried back one year and carried forward 20 years e. None of the above d. The general business credit carryover period is back one year and forward 20 years.Cathy buys a house (her principal residence) for $2,000,000, paying $500,000 down and borrowing the other $1,500,000 at 6% interest. If her interest expense for the year is $90,000, how much will her deduction for interest expenses be? c. Only interest on $1,000,000 of acquisition indebtedness is deductible. The deductible interest is $90,000 x ($1,000,000/$1,500,000) = $60,000.

a. Section 179 is available only for depreciable personal property placed in service in the taxable year. Amounts expenses under Code Sec. 179 may not be depreciated. Darrin owns a house with a FMV of $400,000, and acquisition indebtedness (first mortgage) of $250,000. He took out a home equity loan of $120,000 on the house, and used the proceeds to buy a yacht. If his interest on the home equity loan this year is $9,000, how much of the interest from the home equity loan will be deductible? b. Home mortgage interest is deductible only on the interest on the lesser of (a) the amount of equity in the home (fair market value minus acquisition indebtedness) or (b) $100,000. The equity in the home is $150,000. The deductible home equity loan interest is therefore $9,000 x ($100,000/$120,000) = $7,500.

a. The deduction for business gifts is limited to $25 per donee per year. b. The costs of regulating the usage of natural resources are not incurred by the taxpayer, but by the regulatory agency. Depletion refers to the recovery of the costs incurred to acquire and exploit natural resources. .

Determine the amount of charitable contribution allowed for the current year assuming Guy Gallworthy has adjusted gross income of $30,000 and gave inventory costing $2,000 but worth $2,500 to a public foundation. c. $2,000 Inventory is ordinary income property and limited to basis in the charitable contribution computation. During 2008, a corporation pays $200,000 in federal income taxes and $120,000 in foreign income taxes to Country X. The corporations worldwide taxable income is $550,000 and its taxable income from Country X was $250,000. What is the corporations foreign tax credit for 2008? a. $0 b. $100,000 c. $120,000 d. $80,000 e. None of the above b. $220,000 U.S. income taxes x ($250,000/$550,000) = $100,000. During 2009, a corporation purchased machinery costing $450,000 and a warehouse costing $500,000. These are the only two acquisitions of depreciable property purchased by the corporation in 2009. The maximum deduction the corporation can claim under Code Sec. 179 in 2009 is: a. The Section 179 deduction is limited to $250,000 in 2009. It is reduced to the extent that acquisitions of eligible personal property exceed $800,000. During 2009, Hugh Hughes reported the following income and loss: Activity X ($50,000) Activity Y $20,000 Both Activity X and Activity Y are passive to Mr. Hughes. Hugh purchased Activity X in 1987 and Activity Y in 1993. How much is the loss that Mr. Hughes may deduct in 2009? a. $50,000 b. $30,000 c. $3,000 d. $0 Chapter 7 2009 CCH. All Rights Reserved. Testbank 605

During 2009, John Colburn, a single individual, reports the following taxable income: Gross income from business $200,150 Less: Business expenses 240,000 ($39,850) Plus: Interest income 1,000 Dividend income 2,000 AGI ($36,850) Less: Greater of itemized deductions or standard deduction Casualty loss (reduced by $100 limit) $2,000 Taxes 3,000 Interest expense 3,000 Total itemized deductions $8,000 or Standard deduction $5,700 $ 8,000 Personal exemption 3,650 ($48,500) Taxable income Compute John Colburns net operating loss for 2009. Johns net operating loss for 2009 is $41,850, computed as follows: Taxable income ($48,500) Plus: Nonbusiness deduction: Itemized deductions $8,000 Less: Casualty loss During 2009, Klecker, Inc. placed in service $865,000 of Code Sec. 179 property. How much can Klecker elect to immediately expense in 2009? a. The Code Sec. 179 deduction is reduced by the amount by which property placed in service in the current year exceeds $800,000. Thus, the limitation in this case is equal to $250,000 - $65,000 = $185,000.During 2009, Tommys home was burglarized. Tommy had the following items stolen. A block of securities worth $20,000. Tommy purchased of securities three years ago for $8,000. A block of securities worth $30,000. Tommy purchased the securities for $24,000 two years ago. Tommys homeowners policy had an $80,000 deductible clause for thefts. How much is Tommys theft loss for 2009? a. $50,000 b. $32,000 c. $44,000 d. None of the above. During the current year a corporation pays $8,000 to install ramps to the entrance of the corporations ofce building that will allow disabled individuals better access to the building. The corporations disabled access credit equals: a. $0 b. $2,000 c. $3,750 d. $3,875 e. $4,000 d. ($8,000 - $250) x 50% During the current year, a calendar year corporation incurred $52,000 of research and experimental expenditures. The corporation elects to capitalize and amortize the costs over 60 months. If the corporation rst realizes benets from the research and experimental expenditures on November 1 of the current year, its R&E deduction will equal: d. $52,000 / 60 = $867 per month. For November and December, the corporation would be allowed a deduction of $1,733. During the holiday season, a taxpayer gives business gifts to 25 customers. The gifts have the following fair market values: 7 gifts of property valued at $10 each 5 gifts of property valued at $20 each 13 gifts of property valued at $50 each How much can the taxpayer deduct for business gifts? b. The maximum deduction for business gifts is $25 per donee. Thus, the deduction is this case is equal to $70 (7 at 10) plus $100 (5 at 20) plus $325 (13 at 25). During the year, George Gable, age 66, and his wife, age 61, incurred and paid the following medical expenses for which they received no reimbursement: Hospitalization insurance premiums $ 560 Hospital 1,700 Doctors 390 Prescription drugs and medicines 250 Cosmetic surgery (liposuction) 800 George also paid $200 for prescription drugs for his dependent brother, age 78. Assuming the Gables' adjusted gross income for the year was $25,000, what is the amount that they may claim as a medical deduction on a joint return? The Gables may claim $1,225 as their medical expense deduction, computed as follows: Hospitalization insurance premiums $ 560 Hospital 1,700 Doctors 390 Prescription drugs and medicines 250 Prescription drugs for brother 200 Cosmetic surgery (liposuction) 0 Total medical expenses $3,100 Less: 7.5% of AGI 1,875 Medical expense deduction $1,225 During the year, the following items were charged to the interest expense account of Doe Corporation: Interest on additional income taxes assessed for two years ago $400 Interest on bank loan to finance installation of new machinery. $700 Bank loan was refinanced when installation was completed Interest deducted by bank from proceeds of Doe Corporation's 60-day note signed $500 December 1, payable in full 60 days later The maximum amount of interest expense that Doe Corporation, an accrual basis taxpayer, can deduct for the current year is: c. The interest deduction is: Income tax interest $400 Bank loan on machinery 700 Interest on 60-day note ($500 x 30/60 = $250) 250 Deductible interest $1,350

d. Employment-related expenses of employees are allowed as trade or business tax deductions. Expenses that are costs paid or incurred while traveling around town on business are known as: b. Transportation expenses are incurred while traveling around town for business purposes. Travel expenses are those incurred while traveling away from home for business.

b. Fines and penalties paid to the government for the violation of a law are not deductible. Five-year property costing $25,000 was placed in service on January 11 of the current year. The property is depreciated using straight-line MACRS. Assuming Code Sec. 179 is not elected and the mid-quarter convention applies to all ve-year property placed in service this year, what will be depreciation expense with regard to this property for the current year? (Ignore bonus depreciation.) c. ($25,000 x .2) x (10.5/12) = $4,375.

c. Personal losses other than casualty and theft losses are not deductible for tax purposes. For MACRS depreciation purposes, autos and light-duty trucks are depreciated over what period? b. Autos and light-duty trucks are depreciated over ve years under MACRS.

d. Nonbusiness expenses include all the expenses mentioned in the question. All of the above For tax purposes, the term research and experimentation expenditures includes which of the following: b. The term research and experimentation expenditures includes development of a plant process. Frank Fox won $10,000 in a state lottery. He also lost $3,000 at the horse races. On his income tax return he should report: d. Gambling winnings are reported as gross income and gambling losses are deductible to the extent of winnings as itemized deductions. Freds at-risk amount in a passive activity is $50,000 at the beginning of the current year. His current loss from the activity is $60,000. He had no passive activity income during the year. At the end of the year, which of the following statements is incorrect? a. Fred has a loss of $50,000 suspended under the passive loss rules. b. Fred has an at-risk amount in the activity of $0. c. Fred has a loss of $10,000 suspended under the at-risk rules. d. Fred has a loss of $60,000 suspended under the passive loss rules. Gwen had the following occur in 2009: Car wreck repairs were $2,000, insurance paid $1,000. Theft of boat from lake house in December fair market value = $10,000, cost = $15,000. She didn't discover the theft until the next taxable year. Storm damage to lake house FMV before = $200,000, after = $150,000, insurance paid $20,000. If Gwen's AGI is $40,000, what is her net casualty loss deduction in 2009? b. The deduction is computed as follows: Car wreck ($2,000 - $1,000 - $500) $500 Theft of boat (deducted in year when theft discovered) $0 Storm damage to lake house ($200,000 - $150,000 - $20,000 -$500) $29,500 Total $30,000 $4,000 10% of AGI Net deduction $26,000 HMP Inc. reported the following information: Net sales (U.S. production) Cost of goods sold Operating expenses W-2 wages for the year(included in cost of goods sold and operating expenses) $550,000 300,000 100,000 80,000 What is HMPs taxable income? a. $141,000 b. $145,500 c. $150,000 d. $154,500 Moving expenses qualify as deductions if: c. The employee must satisfy both the distance and employment tests.

b. Hobby expenditures are deductible only to the extent of hobby gross income. Hyman Homes, Inc. paid $3,000 of qualied rst-year wages to a qualied summer youth employee who worked 400 hours and $7,000 of qualied rst-year wages to a qualied ex-felon who worked 350 hours during the year. What is the companys work opporutunity credit for the year? a. $1,200 b. $2,250 c. $3,600 d. $4,000 b. The work opportunity credit for a qualied summer youth employee is $750 ($3,000 x 25%). The credit for a qualied ex-felon who works between 120 and 400 hours is $1,500 (25% x $6,000). The companys total work opportunity credit for the year is $2,250 ($750 + $1,500).If a taxpayer drives 10,000 business miles during 2009, and uses the standard mileage method, the taxpayers deduction is: d. The 2009 mileage allowance is 55 cents per mile. If a taxpayer has two places of business in different areas, the IRS usually considers the following factors in determining the taxpayers principal place of business: (Choose the wrong answer.) a. The taxpayers preference for principal place of business is not considered by the IRS in determining the taxpayers principal place of business.

d. A part business-related and part personal expenditure is deductible only to the extent of the businessrelated portion of the expenditure. If an individual taxpayer contributes capital gain property to a qualified public charity and wants to deduct fair market value, the deduction would be subject to which of the following limits? b. 30 percent of the taxpayer's AGI If an individual taxpayer contributes ordinary property to a qualified public charity, the deduction would be subject to which of the following limits? d.50 percent of the taxpayer's AGI

b. Advance rental payments are deductible in the period covered by the payments. In 2009, John Barraclough has $50,000 of adjusted gross income, a $10,000 casualty loss and a $2,000 casualty gain. How much is John's net deductible casualty loss after making all appropriate reductions? b. The deduction is $10,000 - $500 - $5,000 - $2,000 = $2,500. 67.

b. The taxpayer must move because of a new job location. Jim owns four separate activities. He elects not to group them together as a single activity under the appropriate economic unit standard. Jim participates for 140 hours in Activity A, 130 hours in Activity B, 140 hours in Activity C, and 100 hours in Activity D. He has one employee who works 135 hours in Activity D. Which of the following statements is correct? a. Activities A, B, C, and D are all signicant participation activities. b. Jim is a material participant with respect to Activities A, B, C and D. c. Jim is a material participant with respect to Activities A, B and C. d. Losses from all of the activities can be used to offset Jims active income. Job-seeking expenses are deductible if incurred by an individual who is presently employed and looking for work in the same trade or business: b. Job-seeking expenses are deductible by an individual who is presently employed and looking for work in the same trade or business regardless of whether the individual nds a new job. Joe College is married and attends State University for 12 months. Joe and his wife have two children. Mrs. College works to help put Joe through school. The children, who are four and ve years old, are kept at Sleepy Time Day Care School. The Colleges paid the school $4,600 this year to keep the children. The Colleges had adjusted gross income of $10,000 this year, all of which was earned by Mrs. College. What amount may the Colleges claim as a child care credit? a. $920 b. $480 c. $1,610 d. $1,200 e. None of the above c. The $4,600 expenses incurred are not reduced since they are less than the $6,000 maximum allowed for two children. Also, there is no reduction for the lower income of the spouses since the earned income imputed to the student- husband would be $6,000 ($500 x 12), but this amount is not added into AGI. Thus, the $4,600 is multiplied by 35% to arrive at the dependent care credit to give $1,610.John Baker, a cash basis calendar year taxpayer, paid the following during the year: Social security tax (withheld from wages) $215 Ad valorem personal property taxes $52 State income tax $190 General sales tax $114 Cigarette taxes $50 Fine for speeding $25 What itemized deduction may John claim for taxes on his return? . d. Social security taxes, cigarette taxes, and fines for speeding are not allowed deductions. Sales taxes are less than state income taxes, so the state income taxes, as well as the personal property taxes, are deductible. John Hughes is in the business of truck farming (i.e., growing tomatoes, bell peppers and green beans). During the year, one of his barns was completely destroyed by re. The adjusted basis of the barn was $100,000. The fair market value of the barn before the re was $80,000. The barn was insured for 90% of its fair market value and John recovered this amount under the insurance policy. John has adjusted basis for the year of $60,000 (before considering the casualty). Determine the amount of loss he can deduct on his tax return for the current year. a. $4,000 b. $24,000 c. $28,000.. d. $20,000 John Jay is married and supports his mother, age 67. During the year, he paid $300 for prescription medicines for his mother, $100 for prescription medicines for his wife, and $1,400 for doctor and hospital bills for himself. His gross income is $15,000 and adjusted gross income is $14,000. In itemizing his deductions, Jay may claim a medical expense deduction, after application of proper limitations, of: a. All the medical expenses are deductible but they must be reduced by 7.5% of the adjusted gross income. Total medical expenses $1,800 Less: 7.5% of AGI 1,050 Medical expense deduction $750 John Mapp dies with passive activity property having an adjusted basis of $50,000, suspended losses of $20,000, and a fair market value at the date of Mr. Mapps death of $60,000. How much suspended loss can be taken on Mr. Mapps nal Form 1040 return? a. $10,000 b. $20,000 c. $0 d. None of the above John Mapp dies with passive activity property having an adjusted basis of $50,000, suspended losses of $20,000, and a fair market value at the date of Mr. Mapps death of $77,000. How much suspended loss can be taken on Mr. Mapps nal Form 1040 return? a. $20,000 b. $77,000 c. $7,000 d. $0 Karen Baker, a cash basis calendar year taxpayer, paid the following during the year: Social security tax (withheld from wages) $215 Personal property taxes (ad valorem) 52 State income tax 190 State sales tax 114 Cigarette taxes 50 Fine for speeding 25 What itemized deduction may John claim for taxes on his return before considering the percentage of AGI reduction? a. John is eligible to deduct the personal property taxes paid ($52) and the state income taxes paid ($190). He is not eligible to deduct the state sales tax paid ($114) because it did not exceed the amount of state income tax paid. The other taxes and the fine are not deductible expenses. Kenneth Kruise purchased a personal residence for $66,000. It had a fair market value of $80,000 when it was damaged by a fire. The fair market value after the fire was $40,000 and insurance proceeds totaled $15,000. What is the net amount of casualty loss he can claim if his adjusted gross income is $20,000? d. The reduction in fair market value is less than the basis; thus, that amount must be reduced by the insurance proceeds, $500 and 10 percent of adjusted gross income because of the nonbusiness casualty loss. Last year, a corporation purchased an ofce building for $220,000, of which $30,000 was allocated to the land on which the building was located. The buildings salvage value was estimated to be $50,000. The corporations current year depreciation deduction for the building is b. Land is not depreciable. Subtracting this cost leaves $190,000 as the cost of the building. Depreciation is calculated using the straight-line method over 39 years, and ignoring salvage value: $190,000 / 39 = $4,872. Lisa incurred the following employee business expenses: Meals $2,000 Lodging $4,000 Her employer reimburses her a total of $4,500 for all of these expenses under an accountable plan. Ignoring any floor based on percent of AGI, what is her deduction for these expenses? a. $1500/$6000, or 25% of each expense, is not reimbursed, and 50% of the unreimbursed meal expense is not deductible. That means that the following amounts of each expense are deductible: Meals (25% x $2,000 x 50% deductible) Lodging (25% x $4,000) Total Lorence Langes tax for the year is $7,000. He has paid in $4,400 in four quarterly payments during the year. Last year, his tax liability was $6,600. Which of the following is correct? a. Lorence will not have an underpayment penalty. b. Lorence will have an underpayment penalty on $2,600. c. Lorence will have an underpayment penalty on $1,900. d. Lorence will have an underpayment penalty on $2,200. e. None of the above Chapter 9 2009 CCH. All Rights Reserved. Testbank 637 . c. The underpayment penalty is determined by subtracting the payments made from the smaller of 90% of the present years tax liability or the previous years tax liability. Present years tax liability Amount needed to be paid Less: Amount paid Amount underpayment penalty applied to $7,000 x 90% $6,300 4,400 $1,900 Tax liabilityMalcolm Moore had medical expenses of $500 last year and took a $300 deduction. He was reimbursed $450 this year by the insurance company. What amount must be included in this year's tax return as gross income? c. The amount that must be included in income is the lesser of the reimbursement or the excess itemized deductions for the previous year. .

Mark Miller paid the following medical expenses during the year (all in excess of reimbursement): Hospital and doctor bills (for self and wife) $840 Medicine and drugs (for self and wife) $730 Hospitalization insurance premiums $920 Medicine and drugs (for dependent mother, age 71) $160 Assuming the Millers' adjusted gross income was $20,000, how much of a medical expense deduction may the Millers claim on their joint return? c. All the medical expenses are deductible but they must be reduced by 7.5% of the adjusted gross income. Total medical expenses $2,650 Less: 7.5% of AGI 1,500 Medical expense deduction $1,150 Max Murphey, a cash basis taxpayer, borrowed $1,000 from a bank for a business loan on August 1, to be repaid one year later. The interest for one year at 6 percent was deducted from the loan proceeds in advance. His interest deduction for the current year is: e. There is no interest deduction allowed for the year because interest deducted from the loan proceeds is not considered prepaid interest. The cash basis taxpayer must pay interest to be allowed the deduction. Mike, who is single, has $100,000 of salary, $15,000 of income from a limited partnership, and a $30,000 passive loss from a real estate rental activity in which he actively participates. His modied adjusted gross income is $100,000. Of the $30,000 loss, how much is deductible? a. $30,000 b. $10,000 c. $25,000 d. $0.

a. to the extent that in aggregate they exceed two percent of AGI. Mr. and Mrs. Gumball are both over age 65. They had income this year consisting of $8,500 earned income and $1,500 in social security benets. . What amount may they claim as a credit for the elderly? They le a joint return. a. $900 b. $1,165 c. $1,275 d. $0 e. None of the above d. There is no tax liability, so there is no credit. Net operating losses can be increased by which of the following? a. Theft losses. b. Business casualty losses. c. Unreimbursed employee business expenses. d. All of the above. d. All of the items can increase an NOL.

a. Nonbusiness bad debts are treated as investment losses and are limited to capital gains plus $3,000. d. Except for home-mortgage "points", prepaid interest can only be deducted over the period of the loan.

Nonresidential realty costing $300,000 was placed in service three years ago, and was sold on March 25 of the current year. Current year depreciation expense with respect to the real estate will be: b. The mid-month convention is used both in the year of acquisition and the year of sale. ($300,000/39 years) x (2.5/12) = $1,603. On July 10, 2005, Test Corporation purchased energy equipment for $15,000. The equipment has a 5-year cost recovery period. The corporation took the appropriate investment credit for 2005. On August 15, 2009, the corporation sold the asset for $10,000. What is the amount of investment credit recapture that is due to the IRS? a. $300 b. $900 c. $1,000 d. $1,500 e. None of the above a. The asset was held for over four but less than ve years; thus, 20% of the investment credit taken must be recaptured. Asset purchase price $15,000 x 10% Investment credit rate Investment credit taken $ 1,500 Investment credit taken $ 1,500 x 20% Recapture rate Investment credit recapture $ 300 PDQ, Inc., a calendar-year company, paid $15,000 as a prepayment of two years of its liability insurance on November 1 of the current year. How much insurance expense can PDQ deduct on its current year income tax return? b. The prepayment will provide benets for more than one year after the end of the year. The taxpayer must therefore use the accrual method for this expenditure.

b. Private foundations are organizations which normally do not receive donations from the general public. Research and experimental expenditures connected with a trade or business can be capitalized and amortized for tax purposes over a period of not less than: b. R & D expenditures may be amortized over a period not less than 60 months. Research and experimentation expenditures connected with a trade or business can be capitalized and amortized for tax purposes over a period of not less than: b. Capitalized research and experimentation expenditures can be amortized over a period of not less than 60 months. Ron Ryder worked for both Boilerworks and Diemakers during the year. His total wages from Boilerworks were $49,000. His total wages from Diemakers were $20,000. Rons wife worked for Stenographers during the year and earned total wages of $28,000. What amount can Ron and his wife claim as a credit against their income tax for the year because of excess social security tax withheld if they le a joint return? a. $290 b. $580 c. $1,240 d. $1,530 e. None of the above . e. The credit for excess social security only applies to an individual having wage income over $94,200. Since neither spouse had wages totaling more than $94,200 there were no excess social security taxes paid.Sam and Betty Taylor maintain a home and they have two children. Their earned income was $10,000 and adjusted gross income was $11,000. They le a joint return. What is the amount, if any, of their earned income tax credit for the year? a. $3,400 b. $4,000 c. $4,400 d. $0 . b. The earned income credit is based on earned income up to $12,570 but reduced by adjusted gross income over $19,370. $10,000 x 40% = $4,000 earned income credit.Steve Colburns portable sawmill used 100% for business, was completely destroyed by re. The sawmill had an adjusted basis of $35,000 and a fair market value of $50,000 before the re. The sawmill was uninsured. Steves casualty loss is: a. $34,900. b. $50,000. c. $49,900. d. $35,000Stock in the ABC Corporation was contributed to a public charitable organization. The basis in the stock was $1,000, but its fair market value was $1,500 at the time of the donation. Indicate the correct income tax treatment as a result of the donation. The stock was held long term. b. In general, long-term capital gain assets are deductible at fair market value. Susnne Watson is an employee and sole-shareholder of Klaxon. Klaxon is a calendar-year company which uses the accrual method of accounting. On December 30, 2009, Klaxon awarded Susanne a bonus of $30,000 based on the companys 2008 year-end prot. The bonus was reasonable, ordinary and necessary. It was paid on February 11, 2010. In what year can Klaxon deduct the bonus it paid to Susanne? Susanne is a calendar-year, cash method taxpayer. c. The company must deduct the bonus in the same year that the employee includes it in income. Tammy has the following items for the current year: Nonbusiness capital gains Nonbusiness capital losses $10,000 (2,000) 57. 58. 59. 60. Interest Income 7,000 Itemized deductions (none of the amount realized from a casualty loss) (9,000) In calculating Tammys net operating loss, and with respect to the above amounts only, what amount must be added back to taxable income (loss)? a. $0 b. $2,000 c. $3,000 d. $6,000

c. Tax planning and compliance expenses are not limited to the income tax area but also extend to gift and estate tax returns. Taxpayers generally can deduct meal and entertainment expenses provided that the expenses are b. Meal and entertainment expenses are only deductible if they can be directly association with the taxpayers trade or business activities. The amount of a taxpayers general business credit for any tax year is limited to the amount by which the taxpayers net income tax exceeds the greater of: a. The taxpayers tentative minimum tax for the tax year or 25 percent of the amount by which the taxpayers net regular tax liability exceeds $25,000 b. The taxpayers tentative minimum tax for the tax year or 15 percent of the amount by which the taxpayers net regular tax liability exceeds $25,000 c. The taxpayers alternative minimum tax for the tax year or 25 percent of the amount by which the taxpayers net regular tax liability exceeds $15,000 d. The taxpayers alternative minimum tax for the tax year or 15 percent of the amount by which the taxpayers net regular tax liability exceeds $15,000 e. None of the above a

The difference between a refundable credit and a nonrefundable credit is: a. A refundable credit can only reduce a taxpayers tax liability to zero b. A nonrefundable credit can only reduce a taxpayers tax liability to zero c. Refundable tax credits are only available to individual taxpayers d. Nonrefundable tax credits are only available to corporations b. The following taxes were paid by the Browns--real estate taxes on their home, $600; state income taxes, $700; city sales tax, $50; state sales taxes of $10 paid while on vacation to states other than the state in which they resided; state gasoline tax (personal use of automobile), $30; dog licenses, $20; and real estate taxes on the home of Mrs. George Brown, mother of Barney Brown, $450. In itemizing their deductions, the Browns should claim a deduction of taxes of: b. State sales taxes, gasoline taxes, and dog licenses are not deductible taxes. The real estate taxes paid for Mrs. Brown's mother are not deductible by the Browns since it is not a tax that they incurred. The IRS takes the position that a taxpayers tax home, for purposes of determining travel expenses, is at the location of the taxpayers: a. A taxpayers home for purposes of determining travel expenses is at the location of the taxpayers principal place of business. .The low-income housing credit can be claimed by owners of qualied low-income building for a period of: a. 5 years b. 10 years c. 15 years d. 20 years e. None of the above . b.The manufacturing deduction in 2009 is based on what percentage? a. 9% b. 6% c. 3% d. None of the above. b. From 2007 through 2009, it is 6%.The minimum tax credit: a. Provides that the amount of AMT paid by a corporation in one year differences can be used to offset the regular tax liability of a subsequent year b. May not be used to offset any future AMT tax liability c. May be carried forward indenitely as an offset against regular tax liability d. All of the above d. The percentage of passive losses that may offset nonpassive income for 2009 is: a. 0% b. 10% c. The percentage varies depending on the level of AGI. d. 100% . a. For all tax years beginning after 1990, passive losses may not offset nonpassive income.

a. Intangible assets are amortized. Tangible assets are depreciated. Natural resources are depleted. . The rehabilitation credit can be taken by businesses: a. For costs associated with business activities that contribute to the revitalization of economically depressed areas b. For costs associated with the substantial rehabilitation of certied historic structure or other depreciable building that was originally placed in service prior to 1936 c. Who purchase or substantially rehabilitate residential rental property used for low-income housing d. All of the above bThe tax laws allow taxpayers to use which of the following methods of accounting for research and experimental costs paid or incurred in connection with a trade or business? d. Taxpayers have the option of capitalizing R&D expenses or expensing them. If capitalized, taxpayers could choose not to amortize them, although such an election would be unlikely. The tax structure of the individual AMT is a two-tier progressive tax where: a. The rst $175,000 of AMT base is taxed at a 15 percent rate and any excess over that amount is taxed at 25 percent b. The rst $175,000 of AMT base is taxed at a 26 percent rate and any excess over that amount is taxed at 28 percent c. The rst $175,000 of AMT base is taxed at a 25 percent rate and any excess over that amount is taxed at 35 percent d. b.

b. Taxpayers may choose either cost or percentage depletion. This year, Ellen Smith converted her principal residence to rental property. She originally purchased the home 8 years ago for $425,000. The home was appraised at $356,250 just before she placed it on the rental market. Assuming that $12,500 of the tax basis of the home is attributable to the land on which the home is located, if the home was converted to rental property on June 20, how much depreciation expense can Ellen claim on her current year return? b. The propertys tax basis is limited to its $356,250 FMV at the time it was converted from personal to business-use property. Subtracting $12,500 for the land, the depreciable basis is $343,750. The house is residential realty and is depreciated using the SL method over 27.5 years using the mid-month convention. Thus, depreciation expense is equal to $343,750 27.5 x 6.5/12 = $6,771.

c. A deductible trade or business expenditure must be both ordinary and necessary. d. To be deductible, trade or business expenses must satisfy all of the requirements listed.d. All of the above

To claim the disabled access credit, an eligible small business is dened as: a. One whose gross receipts did not exceed $1 million b. One who employed no more than 30 full-time employees c. One who is located in one of the target areas dened by the government d. a. and b. e. All of the above . d. e. Business capital expenditures must be recovered through depreciation. Business noncapital expenditures are deductible if they are ordinary, necessary and reasonable in amount.

Travel expenses must be incurred by a taxpayer while away from home. To the IRS, the term away from home means: c. To the IRS, the term away from home means away from home overnight. Two years ago, a corporation purchased residential real estate (an apartment complex) at a total cost of $250,000. Of this amount, $50,000 was allocated to the underlying land. What is the corporations allowable depreciation deduction for the current year under MACRS d. Depreciation = $200,000 / 27.5 years = $7,272.

a. Deductions are taken when expenditures are made under the cash basis of accounting. Unnecessary cosmetic surgery costs directed solely at improving the patient's physical appearance: c. Unnecessary cosmetic surgery will not qualify for the medical expense deduction.

b. Unreimbursed expenses of employees are deductible from AGI. Unused general business credits can be: a. Carried back one year and carried forward ten years b. Carried back two years and carried forward ten years c. Carried back one year and carried forward 20 years d. Carried back two years and carried forward 20 years e. Carried back three years and carried forward ve years c. What is the alternative minimum tax that must be paid by a taxpayer ling a joint return, if the taxpayer has taxable income of $90,950, adjustments to taxable income of $29,000, tax preferences of $50,000, and an income tax before the alternative minimum tax of $6,000? a. $21,000 b. $15,000 c. $20,000 d. $0 e. None of the above . c. The alternative minimum tax that must be paid by the taxpayer is $20,000, computed as follows: Taxable income $90,950 Plus: Adjustments to taxable income 29,000 Plus: Tax preferences 50,000 69,950 Less: Exemption amount Net alternative minimum taxable income $100,000 Tax rate x 26% Tax at 26% for the year $ 26,000 6,000 Less: Regular tax for the year Alternative minimum tax $ 20,000What is the amount of dependent care credit allowed Sally Smith, a divorcee, who pays $3,100 for the year to send her daughter to a babysitter while she works? The daughter is claimed as a dependent by the father. Sally has adjusted gross income of $16,500 for the year. a. $1,085 b. $1,054 c. $1,020 d. $500 e. None of the above . c. Sally is limited to $3,000 of expenses and must multiply that amount by 34% since she exceeds $15,000 of adjusted gross income.What is the amount of dependent care credit for a couple with two children where they spend $5,000 for dependent care and the husband earns $40,000 for the year and the wife earns $4,500? a. $1,000 b. $990 c. $900 d. $0 e. None of the above c. The expenses for dependent care are limited to $4,500, the income of the lower-earning spouse, and the credit percentage for $44,500 of adjusted gross income is 20%.What is the amount of interest deduction allowed for the year 2009, assuming Marge Meyer incurred the following: Interest on loan used to purchase land for investment $18,000 (assume no net investment income) Interest on loan used to purchase personal residence $1,000 Interest on loan used to purchase boat $500 Interest on loan to purchase 100 shares of General Auto $3,000 (no dividends received during the year) b. Only the home mortgage interest is deductible. What is the earned income credit allowed Don Andersen assuming he has adjusted gross income of $8,500 and earned income of $5,000? He maintains a household for his daughter. a. $2,890 b. $3,043 c. $1,700 d. $0 c. The earned income credit is based on earned income up to $8,950 but reduced by adjusted gross income over $16,240. $5,000 x 34% = $1,700 earned income credit.What is the maximum amount that Mr. and Mrs. Jones, both over 65, may take as a credit for the elderly before the income tax limitation, assuming that they have gross income of $23,000 and adjusted gross income of $21,500? a. $1,125 b. $263 c. $60 d. $0 e. None of the above c. The maximum base amount must be reduced by one-half of the adjusted gross income over $10,000. Maximum base amount $7,500 Less: 1/2 of adjusted gross income over $10,000 5,750 Balance available for credit $1,750 x 15% Credit rate Credit for the elderly $ 263 The credit is limited to the tax liability of $60 [($21,500 - $13,000 - $7,300 = $600) x 10%].When a taxpayer incurs an NOL in 2009, that is not attributable to a casualty or theft loss, the taxpayer may: a. Carry the NOL forward instead of back. b. Carry the NOL back three years . c. Carry the NOL back ve years. d. All of the above. When tentative minimum tax exceeds the taxpayers regular tax liability, the excess represents the taxpayers: a. Net income tax b. Alternative minimum tax (AMT) c. Total income tax liability d. None of the above . bWhich method is used to determine the order in which unused tax credits are carried forward and back? a. First-in, rst-out method b. Last-in, rst-out method c. First-in, last-out method d. None of the above . aWhich of the following expenditures is always an itemized deduction for individual taxpayers? d. Both a. and b.

c. Rent and royalty expenses are deductible for AGI. Which of the following is allowed when computing AMTI for individuals? a. Standard deduction b. Personal exemptions c. Charitable contributions d. Real estate taxes e. None of the above c. Which of the following is not a passive activity? a. Owning a business and not materially participating b. Having rental condos c. Owning a limited partnership interest in a real estate limited partnership d. Owning a working interest in oil and gas propertiesWhich of the following is not a passive activity? a. Owning a working interest in oil and gas wells. b. Owning a limited partnership interest in oil and gas wells. c. Owning a limited partnership interest in real estate. d. Owning a business and not materially participating.Which of the following is not a tax preference item for purposes of the alternative minimum tax? a. Percentage depletion in excess of the adjusted basis in property b. Amortized circulation costs c. Excess intangible drilling costs d. Tax-exempt interest on certain private activity bonds e. All of the above are tax preference items b. Which of the following is not deductible? a. NOLs b. Expenses incurred for the production of income. c. Hobby expenses in excess of hobby income. d. All of the above. . c. Hobby expenses cannot be greater than hobby incomeWhich of the following statements is correct? a. Hobby expenses are always fully deductible. b. The nancial status of the taxpayer is not considered in determining whether activities are engaged in for prot. c. The deduction for the allowed hobby expenses is an itemized deduction, but not subject to the 2 percent oor. d. Hobby expenses that are deductible without reference to whether they are incurred in an activity designed to produce income, such as certain taxes, remain fully deductible. 2009 CCH. All Rights Reserved. Chapter 7 606 CCH Federal TaxationComprehensive Topics Which of the following statements is incorrect? a. A vacation home becomes a personal residence when its owner uses it more than the greater of 14 days or 10 percent of the number of rental days. b. If a dwelling is classied as a personal residence, rental losses are not deductible. c. If an individual rents out a vacation home for more than 14 days and does not use it excessively for personal purposes, losses are allowed to be deducted from AGI. d. If an individual actively participates in the rental real estate activity, up to $25,000 of losses can be used to offset nonpassive income. Which of the following tax credits is not part of the general business credit? a. Low-income housing credit b. Foreign tax credit c. Employer-provided child care credit d. Research credit e. All of the above are part of the general business bWhich of the following taxpayers derives the most benets from a $1 tax credit? a. Moderate-income taxpayers b. Higher-income taxpayers c. Lower-income taxpayers d. All of the above derive the same benet for a $1 tax credit d.

c. State income and property taxes are deductible against federal taxable income. Federal income taxes are not. Which of the listed dispositions for a passive activity allow a taxpayer to keep the suspended losses from the disposed activity and utilize them on a subsequent taxable disposition? a. Disposition of death. b. Disposition by gift. c. All of the above. d. None of the above.

c. The cigarette tax is considered a penalty and is nondeductible.

A business machine valued at $800 was contributed to a charitable organization during the year. The machine cost $1,000 but was depreciated down to $600 before the donation was made. Indicate the correct income tax treatment with respect to the donation. a. An ordinary income property charitable deduction is limited to basis. There is no income recognition when making a charitable donation.

A calendar-year corporation incurs $53,000 of start-up costs. If the corporation began business on August 1 of the current year, what is the maximum amount of the start-up costs that it can deduct against business income in the current year? d. Taxpayers are allowed $5,000 in the rst year, plus amortization of the remaining balance over 180 months. The $5,000 is reduced, however, by the amount by which start-up costs exceed $50,000. Thus, in this case, the corporation may deduct $2,000 plus ($51,000 / 180 months x 5 months) = $3,417.

A corporation paid $50,000 for qualied child care expenses during the year in order to provide child care for its employees. The corporations child care credit is: a. $0 b. $5,000 c. $10,000 d. $12,500 e. $25,000 d. $50,000 x 25%

A percentage depletion deduction computed on a natural resource cannot exceed what percent of the taxpayers taxable income derived from the natural resource for the year before deducting the depletion deduction? a. A percentage depletion deduction cannot exceed 50 percent of the taxpayers taxable income derived from the natural resource for the year before deducting the depletion deduction. A self-employed attorney uses a country club to entertain clients and spends the following amounts at the club: 94. 95. 96. 97. Annual dues $1,000 Personal meals 1,500 Business meals 2,500 What amount can the attorney deduct against business income on his personal tax return? b. The attorney can deduct 50% of business meals. No deduction is allowed for country club dues, nor for personal meals.

ABC, Inc. of Jasper, Georgia suffered a casualty loss of $150,000 in March 2009. This loss was caused by heavy rains that completely ooded their factory. As a result of these rains, the President declared North Georgia (including Jasper) a disaster area on March 23, 2009. In what year can ABC, Inc. elect to deduct the casualty loss? a. 2009 or 2010 b. 2009 or 2008 c. Only 2009 d. Only 2008 Albert Allgood has adjusted gross income in the current year of $30,000. He gave $5,000 cash and a capital gain asset costing $10,000, worth $12,000, to a public charity, and an $8,000 cash contribution to a 20 percent charity. What is the amount of his maximum allowable current charitable contribution deduction? (Assume carryover will be used in the future.) d. $14,000 The 20 percent category must be taken after considering the contribution amounts, not just the deduction amounts from the percent limit deductions. The carryover would be $11,000. Contribution % Limit % Limit Amount Amounts Deductions 50% $ 5,000 $5,000 $5,000 30% Public 12,000 9,000 9,000 20% 8,000 --0---0-

All of the outstanding stock of a closely held C corporation is owned equally by Evelyn Humo and Steve Bufusno. In 2009, the corporation generates taxable income of $20,000 from its active business activities. In addition, it earns $20,000 of interest from investments and incurs a $40,000 loss from a passive activity. How much of a passive loss carryover does the corporation have? a. $20,000 b. $0 c. $40,000 d. None of the above All of the outstanding stock of a closely held C corporation is owned equally by Evelyn Humo and Steve Bufusno. In 2009, the corporation generates taxable income of $20,000 from its active business activities. In addition, it earns $20,000 of interest from investments and incurs a $40,000 loss from a passive activity. How much income does the C corporation report for 2009? a. $10,000 of portfolio income b. $0 c. $20,000 of portfolio income d. None of the above All other things being equal, the tax benets of a tax credit outweigh the tax savings produced by a tax deduction because: a. It reduces a taxpayers tax liability b. It reduces a taxpayers taxable income c. It reduces a taxpayers capital gains d. None of the above a. Allied Corporations tax liability for the year is $49,000 before claiming a general business credit. The corporation earns a general business credit of $60,000. What is the amount of credit allowable for the year? a. $60,000 b. $43,000 c. $18,000 d. $25,000 e. None of the above 2009 b. The general business credit is limited to the tax liability minus 25% of the liability in excess of $25,000. $49,000 25,000 $24,000 x 25% $ 6,000 49,000 General business credit allowed $43,000 CCH. All Rights Reserved.An alternative minimum tax applies to items that are considered to be of a tax preference nature. Which of the following items is not considered to be a tax preference item? a. Tax-exempt bond interest issued by a school system b. Accelerated depreciation on real property acquired before 1987 c. Mining exploration and development costs d. Gain on the sale of certain small business stock e. Depletion a.Tax-exempt bond interest is not a tax preference item.An employee of a corporation takes a 10-day trip from Chicago to New York. He spends seven days conducting business and three days sightseeing and visiting friends. His expenses included: $ 800 2,800 1,000 250 $4,850 The corporation reimburses the employee under an accountable plan. What amount of the $4,850 qualies as deductible travel expenses for the corporation? c. The allowable deduction is $800 for airfare, $1,960 for lodging (7 days at $280), and $350 for meals (7 at 100 x 50%). These expenses total to $3,110. An example of a tax preference item that must be added to taxable income when computing AMTI would be: a. Percentage depletion in excess of the adjusted basis in property b. Excess intangible drilling costs c. Tax-exempt interest on certain private activity bonds d. Only a and b e. All of the above e.

Costs incurred in investigating the creation or acquisition of an active trade or business are classied as: b. Investigation costs are not organization expenditures because no business activity has yet begun. Similarly, they are not acquisition costs, because the business has not yet been acquired and may never be. They are classied as start-up costs. Ann Jones uses a dry cleaning machine in her business, and it was completely destroyed by re. At the time of the re, the adjusted basis was $20,000 and its fair market value was $18,000. How much is Anns loss? a. $18,000 b. $2,000 c. $20,000 d. None of the above c. If business or investment property is totally destroyed in a casualty, the amount of the loss is the taxpayers adjusted basis in the property, even if it is greater than the propertys fair market value.Ann Jones uses a dry cleaning machine in her business, and it was partially destroyed by re. At the time of the re, the adjusted basis was $20,000 and its fair market value was $18,000. The adjusted basis after the re is $10,000 and the fair market value after the casualty is $10,000. How much is the casualty loss? a. $10,000 b. $8,000 c. $18,000 d. $20,000 Bill Goggans died and left passive activity property to his nephew, Travis. Bills basis in the activity was $30,000, while Travis basis was stepped up to $50,000. Suspended losses amounted to $22,000. How much is the passive loss deduction that can offset nonpassive income? a. $22,000 b. $30,000 c. $2,000 d. None of the above. Billy Ray owns several parcels of rental real estate, and he actively participates in managing the properties. His total loss from these activities in 2009 is $30,000 and his AGI for 2009 is $110,000. For how many years may the disallowed loss be carried forward? a. The disallowed loss may not be carried forward. b. The disallowed loss may be carried forward for 15 years. c. The disallowed loss may be carried forward for 15 years, but only after it has been carried back for 3 years. d. The disallowed loss may be carried forward indenitely. Billy Ray owns several parcels of rental real estate, and he actively participates in managing the properties. His total loss from these activities in 2009 is $30,000 and his AGI for 2009 is $110,000. How much of the disallowed loss from rental real estate activities may be carried over to future years? a. 0% b. 10% c. 50% d. 100% Billy Ray owns several parcels of rental real estate, and he actively participates in managing the properties. His total loss from these activities in 2009 is $30,000. Assuming that his AGI for 2009 is $110,000, what is the allowable deduction from these properties in 2009? a. $0 b. $15,000 c. $20,000 d. $30,000 Bob Mapp gave his daughter a limited partnership interest in a real estate activity. Suspended losses amounted to $30,000. Bobs adjusted basis at the time of the gift was $40,000 ( fair market value was greater than $40,000). What is the daughters basis in the property? a. $40,000 b. $30,000 c. $70,000 d. None of the above.

Carlton Corporations 2009 general business credit exceeded its 2009 income tax liability. The resultant general business credit: a. May be placed in a reserve account and, based on the useful lives of the related assets, applied against the income tax liabilities of subsequent year b. May be returned to the depreciation bases of the related assets and claimed as depreciation over the useful lives of the assets c. May be carried over for ve years except that the carryover is limited to the useful lives of the related assets d. May be carried back one year and carried forward 20 years e. None of the above d. The general business credit carryover period is back one year and forward 20 years.Cathy buys a house (her principal residence) for $2,000,000, paying $500,000 down and borrowing the other $1,500,000 at 6% interest. If her interest expense for the year is $90,000, how much will her deduction for interest expenses be? c. Only interest on $1,000,000 of acquisition indebtedness is deductible. The deductible interest is $90,000 x ($1,000,000/$1,500,000) = $60,000.

a. Section 179 is available only for depreciable personal property placed in service in the taxable year. Amounts expenses under Code Sec. 179 may not be depreciated. Darrin owns a house with a FMV of $400,000, and acquisition indebtedness (first mortgage) of $250,000. He took out a home equity loan of $120,000 on the house, and used the proceeds to buy a yacht. If his interest on the home equity loan this year is $9,000, how much of the interest from the home equity loan will be deductible? b. Home mortgage interest is deductible only on the interest on the lesser of (a) the amount of equity in the home (fair market value minus acquisition indebtedness) or (b) $100,000. The equity in the home is $150,000. The deductible home equity loan interest is therefore $9,000 x ($100,000/$120,000) = $7,500.

b. The costs of regulating the usage of natural resources are not incurred by the taxpayer, but by the regulatory agency. Depletion refers to the recovery of the costs incurred to acquire and exploit natural resources. . Determine the amount of charitable contribution allowed for the current year assuming Guy Gallworthy has adjusted gross income of $30,000 and gave inventory costing $2,000 but worth $2,500 to a public foundation. c. $2,000 Inventory is ordinary income property and limited to basis in the charitable contribution computation. During 2008, a corporation pays $200,000 in federal income taxes and $120,000 in foreign income taxes to Country X. The corporations worldwide taxable income is $550,000 and its taxable income from Country X was $250,000. What is the corporations foreign tax credit for 2008? a. $0 b. $100,000 c. $120,000 d. $80,000 e. None of the above b. $220,000 U.S. income taxes x ($250,000/$550,000) = $100,000. During 2009, a corporation purchased machinery costing $450,000 and a warehouse costing $500,000. These are the only two acquisitions of depreciable property purchased by the corporation in 2009. The maximum deduction the corporation can claim under Code Sec. 179 in 2009 is: a. The Section 179 deduction is limited to $250,000 in 2009. It is reduced to the extent that acquisitions of eligible personal property exceed $800,000. During 2009, Hugh Hughes reported the following income and loss: Activity X ($50,000) Activity Y $20,000 Both Activity X and Activity Y are passive to Mr. Hughes. Hugh purchased Activity X in 1987 and Activity Y in 1993. How much is the loss that Mr. Hughes may deduct in 2009? a. $50,000 b. $30,000 c. $3,000 d. $0 Chapter 7 2009 CCH. All Rights Reserved. Testbank 605

During 2009, John Colburn, a single individual, reports the following taxable income: Gross income from business $200,150 Less: Business expenses 240,000 ($39,850) Plus: Interest income 1,000 Dividend income 2,000 AGI ($36,850) Less: Greater of itemized deductions or standard deduction Casualty loss (reduced by $100 limit) $2,000 Taxes 3,000 Interest expense 3,000 Total itemized deductions $8,000 or Standard deduction $5,700 $ 8,000 Personal exemption 3,650 ($48,500) Taxable income Compute John Colburns net operating loss for 2009. Johns net operating loss for 2009 is $41,850, computed as follows: Taxable income ($48,500) Plus: Nonbusiness deduction: Itemized deductions $8,000 Less: Casualty loss a. The Code Sec. 179 deduction is reduced by the amount by which property placed in service in the current year exceeds $800,000. Thus, the limitation in this case is equal to $250,000 - $65,000 = $185,000.

During 2009, Tommys home was burglarized. Tommy had the following items stolen. A block of securities worth $20,000. Tommy purchased of securities three years ago for $8,000. A block of securities worth $30,000. Tommy purchased the securities for $24,000 two years ago. Tommys homeowners policy had an $80,000 deductible clause for thefts. How much is Tommys theft loss for 2009? a. $50,000 b. $32,000 c. $44,000 d. None of the above. During the current year a corporation pays $8,000 to install ramps to the entrance of the corporations ofce building that will allow disabled individuals better access to the building. The corporations disabled access credit equals: a. $0 b. $2,000 c. $3,750 d. $3,875 e. $4,000 d. ($8,000 - $250) x 50% During the current year, a calendar year corporation incurred $52,000 of research and experimental expenditures. The corporation elects to capitalize and amortize the costs over 60 months. If the corporation rst realizes benets from the research and experimental expenditures on November 1 of the current year, its R&E deduction will equal: d. $52,000 / 60 = $867 per month. For November and December, the corporation would be allowed a deduction of $1,733. During the holiday season, a taxpayer gives business gifts to 25 customers. The gifts have the following fair market values: 7 gifts of property valued at $10 each 5 gifts of property valued at $20 each 13 gifts of property valued at $50 each How much can the taxpayer deduct for business gifts? b. The maximum deduction for business gifts is $25 per donee. Thus, the deduction is this case is equal to $70 (7 at 10) plus $100 (5 at 20) plus $325 (13 at 25). During the year, George Gable, age 66, and his wife, age 61, incurred and paid the following medical expenses for which they received no reimbursement: Hospitalization insurance premiums $ 560 Hospital 1,700 Doctors 390 Prescription drugs and medicines 250 Cosmetic surgery (liposuction) 800 George also paid $200 for prescription drugs for his dependent brother, age 78. Assuming the Gables' adjusted gross income for the year was $25,000, what is the amount that they may claim as a medical deduction on a joint return? The Gables may claim $1,225 as their medical expense deduction, computed as follows: Hospitalization insurance premiums $ 560 Hospital 1,700 Doctors 390 Prescription drugs and medicines 250 Prescription drugs for brother 200 Cosmetic surgery (liposuction) 0 Total medical expenses $3,100 Less: 7.5% of AGI 1,875 Medical expense deduction $1,225 During the year, the following items were charged to the interest expense account of Doe Corporation: Interest on additional income taxes assessed for two years ago $400 Interest on bank loan to finance installation of new machinery. $700 Bank loan was refinanced when installation was completed Interest deducted by bank from proceeds of Doe Corporation's 60-day note signed $500 December 1, payable in full 60 days later The maximum amount of interest expense that Doe Corporation, an accrual basis taxpayer, can deduct for the current year is: c. The interest deduction is: Income tax interest $400 Bank loan on machinery 700 Interest on 60-day note ($500 x 30/60 = $250) 250 Deductible interest $1,350

b. Transportation expenses are incurred while traveling around town for business purposes. Travel expenses are those incurred while traveling away from home for business.


b. The term research and experimentation expenditures includes development of a plant process. d. Gambling winnings are reported as gross income and gambling losses are deductible to the extent of winnings as itemized deductions.

Freds at-risk amount in a passive activity is $50,000 at the beginning of the current year. His current loss from the activity is $60,000. He had no passive activity income during the year. At the end of the year, which of the following statements is incorrect? a. Fred has a loss of $50,000 suspended under the passive loss rules. b. Fred has an at-risk amount in the activity of $0. c. Fred has a loss of $10,000 suspended under the at-risk rules. d. Fred has a loss of $60,000 suspended under the passive loss rules. Gwen had the following occur in 2009: Car wreck repairs were $2,000, insurance paid $1,000. Theft of boat from lake house in December fair market value = $10,000, cost = $15,000. She didn't discover the theft until the next taxable year. Storm damage to lake house FMV before = $200,000, after = $150,000, insurance paid $20,000. If Gwen's AGI is $40,000, what is her net casualty loss deduction in 2009? b. The deduction is computed as follows: Car wreck ($2,000 - $1,000 - $500) $500 Theft of boat (deducted in year when theft discovered) $0 Storm damage to lake house ($200,000 - $150,000 - $20,000 -$500) $29,500 Total $30,000 $4,000 10% of AGI Net deduction $26,000 HMP Inc. reported the following information: Net sales (U.S. production) Cost of goods sold Operating expenses W-2 wages for the year(included in cost of goods sold and operating expenses) $550,000 300,000 100,000 80,000 What is HMPs taxable income? a. $141,000 b. $145,500 c. $150,000 d. $154,500 Moving expenses qualify as deductions if: c. The employee must satisfy both the distance and employment tests.


If a taxpayer has two places of business in different areas, the IRS usually considers the following factors in determining the taxpayers principal place of business: (Choose the wrong answer.) a. The taxpayers preference for principal place of business is not considered by the IRS in determining the taxpayers principal place of business. d. A part business-related and part personal expenditure is deductible only to the extent of the businessrelated portion of the expenditure.

b. 30 percent of the taxpayer's AGI

In 2009, John Barraclough has $50,000 of adjusted gross income, a $10,000 casualty loss and a $2,000 casualty gain. How much is John's net deductible casualty loss after making all appropriate reductions? b. The deduction is $10,000 - $500 - $5,000 - $2,000 = $2,500. 67.

Jim owns four separate activities. He elects not to group them together as a single activity under the appropriate economic unit standard. Jim participates for 140 hours in Activity A, 130 hours in Activity B, 140 hours in Activity C, and 100 hours in Activity D. He has one employee who works 135 hours in Activity D. Which of the following statements is correct? a. Activities A, B, C, and D are all signicant participation activities. b. Jim is a material participant with respect to Activities A, B, C and D. c. Jim is a material participant with respect to Activities A, B and C. d. Losses from all of the activities can be used to offset Jims active income. b. Job-seeking expenses are deductible by an individual who is presently employed and looking for work in the same trade or business regardless of whether the individual nds a new job.

Joe College is married and attends State University for 12 months. Joe and his wife have two children. Mrs. College works to help put Joe through school. The children, who are four and ve years old, are kept at Sleepy Time Day Care School. The Colleges paid the school $4,600 this year to keep the children. The Colleges had adjusted gross income of $10,000 this year, all of which was earned by Mrs. College. What amount may the Colleges claim as a child care credit? a. $920 b. $480 c. $1,610 d. $1,200 e. None of the above c. The $4,600 expenses incurred are not reduced since they are less than the $6,000 maximum allowed for two children. Also, there is no reduction for the lower income of the spouses since the earned income imputed to the student- husband would be $6,000 ($500 x 12), but this amount is not added into AGI. Thus, the $4,600 is multiplied by 35% to arrive at the dependent care credit to give $1,610.John Baker, a cash basis calendar year taxpayer, paid the following during the year: Social security tax (withheld from wages) $215 Ad valorem personal property taxes $52 State income tax $190 General sales tax $114 Cigarette taxes $50 Fine for speeding $25 What itemized deduction may John claim for taxes on his return? . d. Social security taxes, cigarette taxes, and fines for speeding are not allowed deductions. Sales taxes are less than state income taxes, so the state income taxes, as well as the personal property taxes, are deductible. John Hughes is in the business of truck farming (i.e., growing tomatoes, bell peppers and green beans). During the year, one of his barns was completely destroyed by re. The adjusted basis of the barn was $100,000. The fair market value of the barn before the re was $80,000. The barn was insured for 90% of its fair market value and John recovered this amount under the insurance policy. John has adjusted basis for the year of $60,000 (before considering the casualty). Determine the amount of loss he can deduct on his tax return for the current year. a. $4,000 b. $24,000 c. $28,000.. d. $20,000 John Jay is married and supports his mother, age 67. During the year, he paid $300 for prescription medicines for his mother, $100 for prescription medicines for his wife, and $1,400 for doctor and hospital bills for himself. His gross income is $15,000 and adjusted gross income is $14,000. In itemizing his deductions, Jay may claim a medical expense deduction, after application of proper limitations, of: a. All the medical expenses are deductible but they must be reduced by 7.5% of the adjusted gross income. Total medical expenses $1,800 Less: 7.5% of AGI 1,050 Medical expense deduction $750 John Mapp dies with passive activity property having an adjusted basis of $50,000, suspended losses of $20,000, and a fair market value at the date of Mr. Mapps death of $60,000. How much suspended loss can be taken on Mr. Mapps nal Form 1040 return? a. $10,000 b. $20,000 c. $0 d. None of the above John Mapp dies with passive activity property having an adjusted basis of $50,000, suspended losses of $20,000, and a fair market value at the date of Mr. Mapps death of $77,000. How much suspended loss can be taken on Mr. Mapps nal Form 1040 return? a. $20,000 b. $77,000 c. $7,000 d. $0 Karen Baker, a cash basis calendar year taxpayer, paid the following during the year: Social security tax (withheld from wages) $215 Personal property taxes (ad valorem) 52 State income tax 190 State sales tax 114 Cigarette taxes 50 Fine for speeding 25 What itemized deduction may John claim for taxes on his return before considering the percentage of AGI reduction? a. John is eligible to deduct the personal property taxes paid ($52) and the state income taxes paid ($190). He is not eligible to deduct the state sales tax paid ($114) because it did not exceed the amount of state income tax paid. The other taxes and the fine are not deductible expenses. Kenneth Kruise purchased a personal residence for $66,000. It had a fair market value of $80,000 when it was damaged by a fire. The fair market value after the fire was $40,000 and insurance proceeds totaled $15,000. What is the net amount of casualty loss he can claim if his adjusted gross income is $20,000? d. The reduction in fair market value is less than the basis; thus, that amount must be reduced by the insurance proceeds, $500 and 10 percent of adjusted gross income because of the nonbusiness casualty loss. Last year, a corporation purchased an ofce building for $220,000, of which $30,000 was allocated to the land on which the building was located. The buildings salvage value was estimated to be $50,000. The corporations current year depreciation deduction for the building is b. Land is not depreciable. Subtracting this cost leaves $190,000 as the cost of the building. Depreciation is calculated using the straight-line method over 39 years, and ignoring salvage value: $190,000 / 39 = $4,872. Lisa incurred the following employee business expenses: Meals $2,000 Lodging $4,000 Her employer reimburses her a total of $4,500 for all of these expenses under an accountable plan. Ignoring any floor based on percent of AGI, what is her deduction for these expenses? a. $1500/$6000, or 25% of each expense, is not reimbursed, and 50% of the unreimbursed meal expense is not deductible. That means that the following amounts of each expense are deductible: Meals (25% x $2,000 x 50% deductible) Lodging (25% x $4,000) Total Lorence Langes tax for the year is $7,000. He has paid in $4,400 in four quarterly payments during the year. Last year, his tax liability was $6,600. Which of the following is correct? a. Lorence will not have an underpayment penalty. b. Lorence will have an underpayment penalty on $2,600. c. Lorence will have an underpayment penalty on $1,900. d. Lorence will have an underpayment penalty on $2,200. e. None of the above Chapter 9 2009 CCH. All Rights Reserved. Testbank 637 . c. The underpayment penalty is determined by subtracting the payments made from the smaller of 90% of the present years tax liability or the previous years tax liability. Present years tax liability Amount needed to be paid Less: Amount paid Amount underpayment penalty applied to $7,000 x 90% $6,300 4,400 $1,900 Tax liabilityMalcolm Moore had medical expenses of $500 last year and took a $300 deduction. He was reimbursed $450 this year by the insurance company. What amount must be included in this year's tax return as gross income? c. The amount that must be included in income is the lesser of the reimbursement or the excess itemized deductions for the previous year. .

Mark Miller paid the following medical expenses during the year (all in excess of reimbursement): Hospital and doctor bills (for self and wife) $840 Medicine and drugs (for self and wife) $730 Hospitalization insurance premiums $920 Medicine and drugs (for dependent mother, age 71) $160 Assuming the Millers' adjusted gross income was $20,000, how much of a medical expense deduction may the Millers claim on their joint return? c. All the medical expenses are deductible but they must be reduced by 7.5% of the adjusted gross income. Total medical expenses $2,650 Less: 7.5% of AGI 1,500 Medical expense deduction $1,150 Max Murphey, a cash basis taxpayer, borrowed $1,000 from a bank for a business loan on August 1, to be repaid one year later. The interest for one year at 6 percent was deducted from the loan proceeds in advance. His interest deduction for the current year is: e. There is no interest deduction allowed for the year because interest deducted from the loan proceeds is not considered prepaid interest. The cash basis taxpayer must pay interest to be allowed the deduction. Mike, who is single, has $100,000 of salary, $15,000 of income from a limited partnership, and a $30,000 passive loss from a real estate rental activity in which he actively participates. His modied adjusted gross income is $100,000. Of the $30,000 loss, how much is deductible? a. $30,000 b. $10,000 c. $25,000 d. $0.

What amount may they claim as a credit for the elderly? They le a joint return. a. $900 b. $1,165 c. $1,275 d. $0 e. None of the above d. There is no tax liability, so there is no credit. Net operating losses can be increased by which of the following? a. Theft losses. b. Business casualty losses. c. Unreimbursed employee business expenses. d. All of the above. d. All of the items can increase an NOL.

Nonresidential realty costing $300,000 was placed in service three years ago, and was sold on March 25 of the current year. Current year depreciation expense with respect to the real estate will be: b. The mid-month convention is used both in the year of acquisition and the year of sale. ($300,000/39 years) x (2.5/12) = $1,603. On July 10, 2005, Test Corporation purchased energy equipment for $15,000. The equipment has a 5-year cost recovery period. The corporation took the appropriate investment credit for 2005. On August 15, 2009, the corporation sold the asset for $10,000. What is the amount of investment credit recapture that is due to the IRS? a. $300 b. $900 c. $1,000 d. $1,500 e. None of the above a. The asset was held for over four but less than ve years; thus, 20% of the investment credit taken must be recaptured. Asset purchase price $15,000 x 10% Investment credit rate Investment credit taken $ 1,500 Investment credit taken $ 1,500 x 20% Recapture rate Investment credit recapture $ 300 PDQ, Inc., a calendar-year company, paid $15,000 as a prepayment of two years of its liability insurance on November 1 of the current year. How much insurance expense can PDQ deduct on its current year income tax return? b. The prepayment will provide benets for more than one year after the end of the year. The taxpayer must therefore use the accrual method for this expenditure.

b. R & D expenditures may be amortized over a period not less than 60 months. b. Capitalized research and experimentation expenditures can be amortized over a period of not less than 60 months.

Ron Ryder worked for both Boilerworks and Diemakers during the year. His total wages from Boilerworks were $49,000. His total wages from Diemakers were $20,000. Rons wife worked for Stenographers during the year and earned total wages of $28,000. What amount can Ron and his wife claim as a credit against their income tax for the year because of excess social security tax withheld if they le a joint return? a. $290 b. $580 c. $1,240 d. $1,530 e. None of the above . e. The credit for excess social security only applies to an individual having wage income over $94,200. Since neither spouse had wages totaling more than $94,200 there were no excess social security taxes paid.Sam and Betty Taylor maintain a home and they have two children. Their earned income was $10,000 and adjusted gross income was $11,000. They le a joint return. What is the amount, if any, of their earned income tax credit for the year? a. $3,400 b. $4,000 c. $4,400 d. $0 . b. The earned income credit is based on earned income up to $12,570 but reduced by adjusted gross income over $19,370. $10,000 x 40% = $4,000 earned income credit.Steve Colburns portable sawmill used 100% for business, was completely destroyed by re. The sawmill had an adjusted basis of $35,000 and a fair market value of $50,000 before the re. The sawmill was uninsured. Steves casualty loss is: a. $34,900. b. $50,000. c. $49,900. d. $35,000Stock in the ABC Corporation was contributed to a public charitable organization. The basis in the stock was $1,000, but its fair market value was $1,500 at the time of the donation. Indicate the correct income tax treatment as a result of the donation. The stock was held long term. b. In general, long-term capital gain assets are deductible at fair market value. Susnne Watson is an employee and sole-shareholder of Klaxon. Klaxon is a calendar-year company which uses the accrual method of accounting. On December 30, 2009, Klaxon awarded Susanne a bonus of $30,000 based on the companys 2008 year-end prot. The bonus was reasonable, ordinary and necessary. It was paid on February 11, 2010. In what year can Klaxon deduct the bonus it paid to Susanne? Susanne is a calendar-year, cash method taxpayer. c. The company must deduct the bonus in the same year that the employee includes it in income. Tammy has the following items for the current year: Nonbusiness capital gains Nonbusiness capital losses $10,000 (2,000) 57. 58. 59. 60. Interest Income 7,000 Itemized deductions (none of the amount realized from a casualty loss) (9,000) In calculating Tammys net operating loss, and with respect to the above amounts only, what amount must be added back to taxable income (loss)? a. $0 b. $2,000 c. $3,000 d. $6,000

c. Tax planning and compliance expenses are not limited to the income tax area but also extend to gift and estate tax returns. b. Meal and entertainment expenses are only deductible if they can be directly association with the taxpayers trade or business activities.

The amount of a taxpayers general business credit for any tax year is limited to the amount by which the taxpayers net income tax exceeds the greater of: a. The taxpayers tentative minimum tax for the tax year or 25 percent of the amount by which the taxpayers net regular tax liability exceeds $25,000 b. The taxpayers tentative minimum tax for the tax year or 15 percent of the amount by which the taxpayers net regular tax liability exceeds $25,000 c. The taxpayers alternative minimum tax for the tax year or 25 percent of the amount by which the taxpayers net regular tax liability exceeds $15,000 d. The taxpayers alternative minimum tax for the tax year or 15 percent of the amount by which the taxpayers net regular tax liability exceeds $15,000 e. None of the above a

The difference between a refundable credit and a nonrefundable credit is: a. A refundable credit can only reduce a taxpayers tax liability to zero b. A nonrefundable credit can only reduce a taxpayers tax liability to zero c. Refundable tax credits are only available to individual taxpayers d. Nonrefundable tax credits are only available to corporations b. The following taxes were paid by the Browns--real estate taxes on their home, $600; state income taxes, $700; city sales tax, $50; state sales taxes of $10 paid while on vacation to states other than the state in which they resided; state gasoline tax (personal use of automobile), $30; dog licenses, $20; and real estate taxes on the home of Mrs. George Brown, mother of Barney Brown, $450. In itemizing their deductions, the Browns should claim a deduction of taxes of: b. State sales taxes, gasoline taxes, and dog licenses are not deductible taxes. The real estate taxes paid for Mrs. Brown's mother are not deductible by the Browns since it is not a tax that they incurred.

a. A taxpayers home for purposes of determining travel expenses is at the location of the taxpayers principal place of business. .

The minimum tax credit: a. Provides that the amount of AMT paid by a corporation in one year differences can be used to offset the regular tax liability of a subsequent year b. May not be used to offset any future AMT tax liability c. May be carried forward indenitely as an offset against regular tax liability d. All of the above d. . a. For all tax years beginning after 1990, passive losses may not offset nonpassive income.

The rehabilitation credit can be taken by businesses: a. For costs associated with business activities that contribute to the revitalization of economically depressed areas b. For costs associated with the substantial rehabilitation of certied historic structure or other depreciable building that was originally placed in service prior to 1936 c. Who purchase or substantially rehabilitate residential rental property used for low-income housing d. All of the above bd. Taxpayers have the option of capitalizing R&D expenses or expensing them. If capitalized, taxpayers could choose not to amortize them, although such an election would be unlikely.


This year, Ellen Smith converted her principal residence to rental property. She originally purchased the home 8 years ago for $425,000. The home was appraised at $356,250 just before she placed it on the rental market. Assuming that $12,500 of the tax basis of the home is attributable to the land on which the home is located, if the home was converted to rental property on June 20, how much depreciation expense can Ellen claim on her current year return? b. The propertys tax basis is limited to its $356,250 FMV at the time it was converted from personal to business-use property. Subtracting $12,500 for the land, the depreciable basis is $343,750. The house is residential realty and is depreciated using the SL method over 27.5 years using the mid-month convention. Thus, depreciation expense is equal to $343,750 27.5 x 6.5/12 = $6,771.

To claim the disabled access credit, an eligible small business is dened as: a. One whose gross receipts did not exceed $1 million b. One who employed no more than 30 full-time employees c. One who is located in one of the target areas dened by the government d. a. and b. e. All of the above . d. e. Business capital expenditures must be recovered through depreciation. Business noncapital expenditures are deductible if they are ordinary, necessary and reasonable in amount.

Two years ago, a corporation purchased residential real estate (an apartment complex) at a total cost of $250,000. Of this amount, $50,000 was allocated to the underlying land. What is the corporations allowable depreciation deduction for the current year under MACRS d. Depreciation = $200,000 / 27.5 years = $7,272.

Unused general business credits can be: a. Carried back one year and carried forward ten years b. Carried back two years and carried forward ten years c. Carried back one year and carried forward 20 years d. Carried back two years and carried forward 20 years e. Carried back three years and carried forward ve years c. What is the alternative minimum tax that must be paid by a taxpayer ling a joint return, if the taxpayer has taxable income of $90,950, adjustments to taxable income of $29,000, tax preferences of $50,000, and an income tax before the alternative minimum tax of $6,000? a. $21,000 b. $15,000 c. $20,000 d. $0 e. None of the above . c. The alternative minimum tax that must be paid by the taxpayer is $20,000, computed as follows: Taxable income $90,950 Plus: Adjustments to taxable income 29,000 Plus: Tax preferences 50,000 69,950 Less: Exemption amount Net alternative minimum taxable income $100,000 Tax rate x 26% Tax at 26% for the year $ 26,000 6,000 Less: Regular tax for the year Alternative minimum tax $ 20,000What is the amount of dependent care credit allowed Sally Smith, a divorcee, who pays $3,100 for the year to send her daughter to a babysitter while she works? The daughter is claimed as a dependent by the father. Sally has adjusted gross income of $16,500 for the year. a. $1,085 b. $1,054 c. $1,020 d. $500 e. None of the above . c. Sally is limited to $3,000 of expenses and must multiply that amount by 34% since she exceeds $15,000 of adjusted gross income.What is the amount of dependent care credit for a couple with two children where they spend $5,000 for dependent care and the husband earns $40,000 for the year and the wife earns $4,500? a. $1,000 b. $990 c. $900 d. $0 e. None of the above c. The expenses for dependent care are limited to $4,500, the income of the lower-earning spouse, and the credit percentage for $44,500 of adjusted gross income is 20%.What is the amount of interest deduction allowed for the year 2009, assuming Marge Meyer incurred the following: Interest on loan used to purchase land for investment $18,000 (assume no net investment income) Interest on loan used to purchase personal residence $1,000 Interest on loan used to purchase boat $500 Interest on loan to purchase 100 shares of General Auto $3,000 (no dividends received during the year) b. Only the home mortgage interest is deductible. What is the earned income credit allowed Don Andersen assuming he has adjusted gross income of $8,500 and earned income of $5,000? He maintains a household for his daughter. a. $2,890 b. $3,043 c. $1,700 d. $0 c. The earned income credit is based on earned income up to $8,950 but reduced by adjusted gross income over $16,240. $5,000 x 34% = $1,700 earned income credit.What is the maximum amount that Mr. and Mrs. Jones, both over 65, may take as a credit for the elderly before the income tax limitation, assuming that they have gross income of $23,000 and adjusted gross income of $21,500? a. $1,125 b. $263 c. $60 d. $0 e. None of the above c. The maximum base amount must be reduced by one-half of the adjusted gross income over $10,000. Maximum base amount $7,500 Less: 1/2 of adjusted gross income over $10,000 5,750 Balance available for credit $1,750 x 15% Credit rate Credit for the elderly $ 263 The credit is limited to the tax liability of $60 [($21,500 - $13,000 - $7,300 = $600) x 10%].When a taxpayer incurs an NOL in 2009, that is not attributable to a casualty or theft loss, the taxpayer may: a. Carry the NOL forward instead of back. b. Carry the NOL back three years . c. Carry the NOL back ve years. d. All of the above. a. A taxpayer can elect to forgo the NOL carryback and carry it forward only.

Which of the following is not a passive activity? a. Owning a business and not materially participating b. Having rental condos c. Owning a limited partnership interest in a real estate limited partnership d. Owning a working interest in oil and gas properties . d. A working interest is excluded from passive activities.Which of the following is not a passive activity? a. Owning a working interest in oil and gas wells. b. Owning a limited partnership interest in oil and gas wells. c. Owning a limited partnership interest in real estate. d. Owning a business and not materially participating. . a. A working interest is specically excluded from the passive loss rulesWhich of the following is not a tax preference item for purposes of the alternative minimum tax? a. Percentage depletion in excess of the adjusted basis in property b. Amortized circulation costs c. Excess intangible drilling costs d. Tax-exempt interest on certain private activity bonds e. All of the above are tax preference items b.

. c. Hobby expenses cannot be greater than hobby incomeWhich of the following statements is correct? a. Hobby expenses are always fully deductible. b. The nancial status of the taxpayer is not considered in determining whether activities are engaged in for prot. c. The deduction for the allowed hobby expenses is an itemized deduction, but not subject to the 2 percent oor. d. Hobby expenses that are deductible without reference to whether they are incurred in an activity designed to produce income, such as certain taxes, remain fully deductible. 2009 CCH. All Rights Reserved. Chapter 7 606 CCH Federal TaxationComprehensive Topics Which of the following statements is incorrect? a. A vacation home becomes a personal residence when its owner uses it more than the greater of 14 days or 10 percent of the number of rental days. b. If a dwelling is classied as a personal residence, rental losses are not deductible. c. If an individual rents out a vacation home for more than 14 days and does not use it excessively for personal purposes, losses are allowed to be deducted from AGI. d. If an individual actively participates in the rental real estate activity, up to $25,000 of losses can be used to offset nonpassive income. Which of the following tax credits is not part of the general business credit? a. Low-income housing credit b. Foreign tax credit c. Employer-provided child care credit d. Research credit e. All of the above are part of the general business bWhich of the following taxpayers derives the most benets from a $1 tax credit? a. Moderate-income taxpayers b. Higher-income taxpayers c. Lower-income taxpayers d. All of the above derive the same benet for a $1 tax credit d.


a. An ordinary income property charitable deduction is limited to basis. There is no income recognition when making a charitable donation.

d. Taxpayers are allowed $5,000 in the rst year, plus amortization of the remaining balance over 180 months. The $5,000 is reduced, however, by the amount by which start-up costs exceed $50,000. Thus, in this case, the corporation may deduct $2,000 plus ($51,000 / 180 months x 5 months) = $3,417.

of the taxpayers taxable income derived from the natural resource for the year before deducting the depletion deduction. b. The attorney can deduct 50% of business meals. No deduction is allowed for country club dues, nor for personal meals.

ABC, Inc. of Jasper, Georgia suffered a casualty loss of $150,000 in March 2009. This loss was caused by heavy rains that completely ooded their factory. As a result of these rains, the President declared North Georgia (including Jasper) a disaster area on March 23, 2009. In what year can ABC, Inc. elect to deduct the casualty loss? a. 2009 or 2010 b. 2009 or 2008 c. Only 2009 d. Only 2008 Albert Allgood has adjusted gross income in the current year of $30,000. He gave $5,000 cash and a capital gain asset costing $10,000, worth $12,000, to a public charity, and an $8,000 cash contribution to a 20 percent charity. What is the amount of his maximum allowable current charitable contribution deduction? (Assume carryover will be used in the future.) d. $14,000 The 20 percent category must be taken after considering the contribution amounts, not just the deduction amounts from the percent limit deductions. The carryover would be $11,000. Contribution % Limit % Limit Amount Amounts Deductions 50% $ 5,000 $5,000 $5,000 30% Public 12,000 9,000 9,000 20% 8,000 --0---0-

All of the outstanding stock of a closely held C corporation is owned equally by Evelyn Humo and Steve Bufusno. In 2009, the corporation generates taxable income of $20,000 from its active business activities. In addition, it earns $20,000 of interest from investments and incurs a $40,000 loss from a passive activity. How much of a passive loss carryover does the corporation have? a. $20,000 b. $0 c. $40,000 d. None of the above All of the outstanding stock of a closely held C corporation is owned equally by Evelyn Humo and Steve Bufusno. In 2009, the corporation generates taxable income of $20,000 from its active business activities. In addition, it earns $20,000 of interest from investments and incurs a $40,000 loss from a passive activity. How much income does the C corporation report for 2009? a. $10,000 of portfolio income b. $0 c. $20,000 of portfolio income d. None of the above

b. The general business credit is limited to the tax liability minus 25% of the liability in excess of $25,000. $49,000 25,000 $24,000 x 25% $ 6,000 49,000 General business credit allowed $43,000 CCH. All Rights Reserved.An alternative minimum tax applies to items that are considered to be of a tax preference nature. Which of the following items is not considered to be a tax preference item? a. Tax-exempt bond interest issued by a school system b. Accelerated depreciation on real property acquired before 1987 c. Mining exploration and development costs d. Gain on the sale of certain small business stock e. Depletion a.Tax-exempt bond interest is not a tax preference item.An employee of a corporation takes a 10-day trip from Chicago to New York. He spends seven days conducting business and three days sightseeing and visiting friends. His expenses included: $ 800 2,800 1,000 250 $4,850 The corporation reimburses the employee under an accountable plan. What amount of the $4,850 qualies as deductible travel expenses for the corporation? c. The allowable deduction is $800 for airfare, $1,960 for lodging (7 days at $280), and $350 for meals (7 at 100 x 50%). These expenses total to $3,110.

b. Investigation costs are not organization expenditures because no business activity has yet begun. Similarly, they are not acquisition costs, because the business has not yet been acquired and may never be. They are classied as start-up costs. Ann Jones uses a dry cleaning machine in her business, and it was completely destroyed by re. At the time of the re, the adjusted basis was $20,000 and its fair market value was $18,000. How much is Anns loss? a. $18,000 b. $2,000 c. $20,000 d. None of the above c. If business or investment property is totally destroyed in a casualty, the amount of the loss is the taxpayers adjusted basis in the property, even if it is greater than the propertys fair market value.Ann Jones uses a dry cleaning machine in her business, and it was partially destroyed by re. At the time of the re, the adjusted basis was $20,000 and its fair market value was $18,000. The adjusted basis after the re is $10,000 and the fair market value after the casualty is $10,000. How much is the casualty loss? a. $10,000 b. $8,000 c. $18,000 d. $20,000 32. b. If business or investment property is partially destroyed in a casualty, the amount of the loss is the lesser of adjusted basis or decline in fair market value.Bill Goggans died and left passive activity property to his nephew, Travis. Bills basis in the activity was $30,000, while Travis basis was stepped up to $50,000. Suspended losses amounted to $22,000. How much is the passive loss deduction that can offset nonpassive income? a. $22,000 b. $30,000 c. $2,000 d. None of the above. c. The $20,000 step-up means that only $2,000 passive loss is allowed.Billy Ray owns several parcels of rental real estate, and he actively participates in managing the properties. His total loss from these activities in 2009 is $30,000 and his AGI for 2009 is $110,000. For how many years may the disallowed loss be carried forward? a. The disallowed loss may not be carried forward. b. The disallowed loss may be carried forward for 15 years. c. The disallowed loss may be carried forward for 15 years, but only after it has been carried back for 3 years. d. The disallowed loss may be carried forward indenitely. Billy Ray owns several parcels of rental real estate, and he actively participates in managing the properties. His total loss from these activities in 2009 is $30,000 and his AGI for 2009 is $110,000. How much of the disallowed loss from rental real estate activities may be carried over to future years? a. 0% b. 10% c. 50% d. 100% d. All of the disallowed loss is suspended and may be carried forward to future years.Billy Ray owns several parcels of rental real estate, and he actively participates in managing the properties. His total loss from these activities in 2009 is $30,000. Assuming that his AGI for 2009 is $110,000, what is the allowable deduction from these properties in 2009? a. $0 b. $15,000 c. $20,000 d. $30,000 c. Four-fths of the $25,000 exception to the passive loss rules is allowed based on his AGI.Bob Mapp gave his daughter a limited partnership interest in a real estate activity. Suspended losses amounted to $30,000. Bobs adjusted basis at the time of the gift was $40,000 ( fair market value was greater than $40,000). What is the daughters basis in the property? a. $40,000 b. $30,000 c. $70,000 d. None of the above. c. $40,000 + $30,000.

Carlton Corporations 2009 general business credit exceeded its 2009 income tax liability. The resultant general business credit: a. May be placed in a reserve account and, based on the useful lives of the related assets, applied against the income tax liabilities of subsequent year b. May be returned to the depreciation bases of the related assets and claimed as depreciation over the useful lives of the assets c. May be carried over for ve years except that the carryover is limited to the useful lives of the related assets d. May be carried back one year and carried forward 20 years e. None of the above d. The general business credit carryover period is back one year and forward 20 years.c. Only interest on $1,000,000 of acquisition indebtedness is deductible. The deductible interest is $90,000 x ($1,000,000/$1,500,000) = $60,000.

Darrin owns a house with a FMV of $400,000, and acquisition indebtedness (first mortgage) of $250,000. He took out a home equity loan of $120,000 on the house, and used the proceeds to buy a yacht. If his interest on the home equity loan this year is $9,000, how much of the interest from the home equity loan will be deductible? b. Home mortgage interest is deductible only on the interest on the lesser of (a) the amount of equity in the home (fair market value minus acquisition indebtedness) or (b) $100,000. The equity in the home is $150,000. The deductible home equity loan interest is therefore $9,000 x ($100,000/$120,000) = $7,500.

c. $2,000 Inventory is ordinary income property and limited to basis in the charitable contribution computation. During 2008, a corporation pays $200,000 in federal income taxes and $120,000 in foreign income taxes to Country X. The corporations worldwide taxable income is $550,000 and its taxable income from Country X was $250,000. What is the corporations foreign tax credit for 2008? a. $0 b. $100,000 c. $120,000 d. $80,000 e. None of the above b. $220,000 U.S. income taxes x ($250,000/$550,000) = $100,000. During 2009, a corporation purchased machinery costing $450,000 and a warehouse costing $500,000. These are the only two acquisitions of depreciable property purchased by the corporation in 2009. The maximum deduction the corporation can claim under Code Sec. 179 in 2009 is: a. The Section 179 deduction is limited to $250,000 in 2009. It is reduced to the extent that acquisitions of eligible personal property exceed $800,000. During 2009, Hugh Hughes reported the following income and loss: Activity X ($50,000) Activity Y $20,000 Both Activity X and Activity Y are passive to Mr. Hughes. Hugh purchased Activity X in 1987 and Activity Y in 1993. How much is the loss that Mr. Hughes may deduct in 2009? a. $50,000 b. $30,000 c. $3,000 d. $0 Chapter 7 2009 CCH. All Rights Reserved. Testbank 605

During 2009, John Colburn, a single individual, reports the following taxable income: Gross income from business $200,150 Less: Business expenses 240,000 ($39,850) Plus: Interest income 1,000 Dividend income 2,000 AGI ($36,850) Less: Greater of itemized deductions or standard deduction Casualty loss (reduced by $100 limit) $2,000 Taxes 3,000 Interest expense 3,000 Total itemized deductions $8,000 or Standard deduction $5,700 $ 8,000 Personal exemption 3,650 ($48,500) Taxable income Compute John Colburns net operating loss for 2009. Johns net operating loss for 2009 is $41,850, computed as follows: Taxable income ($48,500) Plus: Nonbusiness deduction: Itemized deductions $8,000 Less: Casualty loss a. The Code Sec. 179 deduction is reduced by the amount by which property placed in service in the current year exceeds $800,000. Thus, the limitation in this case is equal to $250,000 - $65,000 = $185,000.

During 2009, Tommys home was burglarized. Tommy had the following items stolen. A block of securities worth $20,000. Tommy purchased of securities three years ago for $8,000. A block of securities worth $30,000. Tommy purchased the securities for $24,000 two years ago. Tommys homeowners policy had an $80,000 deductible clause for thefts. How much is Tommys theft loss for 2009? a. $50,000 b. $32,000 c. $44,000 d. None of the above.

During the current year, a calendar year corporation incurred $52,000 of research and experimental expenditures. The corporation elects to capitalize and amortize the costs over 60 months. If the corporation rst realizes benets from the research and experimental expenditures on November 1 of the current year, its R&E deduction will equal: d. $52,000 / 60 = $867 per month. For November and December, the corporation would be allowed a deduction of $1,733. During the holiday season, a taxpayer gives business gifts to 25 customers. The gifts have the following fair market values: 7 gifts of property valued at $10 each 5 gifts of property valued at $20 each 13 gifts of property valued at $50 each How much can the taxpayer deduct for business gifts? b. The maximum deduction for business gifts is $25 per donee. Thus, the deduction is this case is equal to $70 (7 at 10) plus $100 (5 at 20) plus $325 (13 at 25). During the year, George Gable, age 66, and his wife, age 61, incurred and paid the following medical expenses for which they received no reimbursement: Hospitalization insurance premiums $ 560 Hospital 1,700 Doctors 390 Prescription drugs and medicines 250 Cosmetic surgery (liposuction) 800 George also paid $200 for prescription drugs for his dependent brother, age 78. Assuming the Gables' adjusted gross income for the year was $25,000, what is the amount that they may claim as a medical deduction on a joint return? The Gables may claim $1,225 as their medical expense deduction, computed as follows: Hospitalization insurance premiums $ 560 Hospital 1,700 Doctors 390 Prescription drugs and medicines 250 Prescription drugs for brother 200 Cosmetic surgery (liposuction) 0 Total medical expenses $3,100 Less: 7.5% of AGI 1,875 Medical expense deduction $1,225 During the year, the following items were charged to the interest expense account of Doe Corporation: Interest on additional income taxes assessed for two years ago $400 Interest on bank loan to finance installation of new machinery. $700 Bank loan was refinanced when installation was completed Interest deducted by bank from proceeds of Doe Corporation's 60-day note signed $500 December 1, payable in full 60 days later The maximum amount of interest expense that Doe Corporation, an accrual basis taxpayer, can deduct for the current year is: c. The interest deduction is: Income tax interest $400 Bank loan on machinery 700 Interest on 60-day note ($500 x 30/60 = $250) 250 Deductible interest $1,350


Freds at-risk amount in a passive activity is $50,000 at the beginning of the current year. His current loss from the activity is $60,000. He had no passive activity income during the year. At the end of the year, which of the following statements is incorrect? a. Fred has a loss of $50,000 suspended under the passive loss rules. b. Fred has an at-risk amount in the activity of $0. c. Fred has a loss of $10,000 suspended under the at-risk rules. d. Fred has a loss of $60,000 suspended under the passive loss rules. Gwen had the following occur in 2009: Car wreck repairs were $2,000, insurance paid $1,000. Theft of boat from lake house in December fair market value = $10,000, cost = $15,000. She didn't discover the theft until the next taxable year. Storm damage to lake house FMV before = $200,000, after = $150,000, insurance paid $20,000. If Gwen's AGI is $40,000, what is her net casualty loss deduction in 2009? b. The deduction is computed as follows: Car wreck ($2,000 - $1,000 - $500) $500 Theft of boat (deducted in year when theft discovered) $0 Storm damage to lake house ($200,000 - $150,000 - $20,000 -$500) $29,500 Total $30,000 $4,000 10% of AGI Net deduction $26,000 HMP Inc. reported the following information: Net sales (U.S. production) Cost of goods sold Operating expenses W-2 wages for the year(included in cost of goods sold and operating expenses) $550,000 300,000 100,000 80,000 What is HMPs taxable income? a. $141,000 b. $145,500 c. $150,000 d. $154,500 Moving expenses qualify as deductions if: c. The employee must satisfy both the distance and employment tests.


a. The taxpayers preference for principal place of business is not considered by the IRS in determining the taxpayers principal place of business.

Jim owns four separate activities. He elects not to group them together as a single activity under the appropriate economic unit standard. Jim participates for 140 hours in Activity A, 130 hours in Activity B, 140 hours in Activity C, and 100 hours in Activity D. He has one employee who works 135 hours in Activity D. Which of the following statements is correct? a. Activities A, B, C, and D are all signicant participation activities. b. Jim is a material participant with respect to Activities A, B, C and D. c. Jim is a material participant with respect to Activities A, B and C. d. Losses from all of the activities can be used to offset Jims active income. b. Job-seeking expenses are deductible by an individual who is presently employed and looking for work in the same trade or business regardless of whether the individual nds a new job.

Joe College is married and attends State University for 12 months. Joe and his wife have two children. Mrs. College works to help put Joe through school. The children, who are four and ve years old, are kept at Sleepy Time Day Care School. The Colleges paid the school $4,600 this year to keep the children. The Colleges had adjusted gross income of $10,000 this year, all of which was earned by Mrs. College. What amount may the Colleges claim as a child care credit? a. $920 b. $480 c. $1,610 d. $1,200 e. None of the above c. The $4,600 expenses incurred are not reduced since they are less than the $6,000 maximum allowed for two children. Also, there is no reduction for the lower income of the spouses since the earned income imputed to the student- husband would be $6,000 ($500 x 12), but this amount is not added into AGI. Thus, the $4,600 is multiplied by 35% to arrive at the dependent care credit to give $1,610.John Baker, a cash basis calendar year taxpayer, paid the following during the year: Social security tax (withheld from wages) $215 Ad valorem personal property taxes $52 State income tax $190 General sales tax $114 Cigarette taxes $50 Fine for speeding $25 What itemized deduction may John claim for taxes on his return? . d. Social security taxes, cigarette taxes, and fines for speeding are not allowed deductions. Sales taxes are less than state income taxes, so the state income taxes, as well as the personal property taxes, are deductible. John Hughes is in the business of truck farming (i.e., growing tomatoes, bell peppers and green beans). During the year, one of his barns was completely destroyed by re. The adjusted basis of the barn was $100,000. The fair market value of the barn before the re was $80,000. The barn was insured for 90% of its fair market value and John recovered this amount under the insurance policy. John has adjusted basis for the year of $60,000 (before considering the casualty). Determine the amount of loss he can deduct on his tax return for the current year. a. $4,000 b. $24,000 c. $28,000.. d. $20,000 John Jay is married and supports his mother, age 67. During the year, he paid $300 for prescription medicines for his mother, $100 for prescription medicines for his wife, and $1,400 for doctor and hospital bills for himself. His gross income is $15,000 and adjusted gross income is $14,000. In itemizing his deductions, Jay may claim a medical expense deduction, after application of proper limitations, of: a. All the medical expenses are deductible but they must be reduced by 7.5% of the adjusted gross income. Total medical expenses $1,800 Less: 7.5% of AGI 1,050 Medical expense deduction $750 John Mapp dies with passive activity property having an adjusted basis of $50,000, suspended losses of $20,000, and a fair market value at the date of Mr. Mapps death of $60,000. How much suspended loss can be taken on Mr. Mapps nal Form 1040 return? a. $10,000 b. $20,000 c. $0 d. None of the above . a. The deductible suspended losses are limited to the difference between the suspended losses at death less the basis adjustmentJohn Mapp dies with passive activity property having an adjusted basis of $50,000, suspended losses of $20,000, and a fair market value at the date of Mr. Mapps death of $77,000. How much suspended loss can be taken on Mr. Mapps nal Form 1040 return? a. $20,000 b. $77,000 c. $7,000 d. $0 . d. Suspended losses are lost to the extent of the amount of the basis increase.Karen Baker, a cash basis calendar year taxpayer, paid the following during the year: Social security tax (withheld from wages) $215 Personal property taxes (ad valorem) 52 State income tax 190 State sales tax 114 Cigarette taxes 50 Fine for speeding 25 What itemized deduction may John claim for taxes on his return before considering the percentage of AGI reduction? a. John is eligible to deduct the personal property taxes paid ($52) and the state income taxes paid ($190). He is not eligible to deduct the state sales tax paid ($114) because it did not exceed the amount of state income tax paid. The other taxes and the fine are not deductible expenses. Kenneth Kruise purchased a personal residence for $66,000. It had a fair market value of $80,000 when it was damaged by a fire. The fair market value after the fire was $40,000 and insurance proceeds totaled $15,000. What is the net amount of casualty loss he can claim if his adjusted gross income is $20,000? d. The reduction in fair market value is less than the basis; thus, that amount must be reduced by the insurance proceeds, $500 and 10 percent of adjusted gross income because of the nonbusiness casualty loss.

b. Land is not depreciable. Subtracting this cost leaves $190,000 as the cost of the building. Depreciation is calculated using the straight-line method over 39 years, and ignoring salvage value: $190,000 / 39 = $4,872. a. $1500/$6000, or 25% of each expense, is not reimbursed, and 50% of the unreimbursed meal expense is not deductible. That means that the following amounts of each expense are deductible: Meals (25% x $2,000 x 50% deductible) Lodging (25% x $4,000) Total

Lorence Langes tax for the year is $7,000. He has paid in $4,400 in four quarterly payments during the year. Last year, his tax liability was $6,600. Which of the following is correct? a. Lorence will not have an underpayment penalty. b. Lorence will have an underpayment penalty on $2,600. c. Lorence will have an underpayment penalty on $1,900. d. Lorence will have an underpayment penalty on $2,200. e. None of the above Chapter 9 2009 CCH. All Rights Reserved. Testbank 637 . c. The underpayment penalty is determined by subtracting the payments made from the smaller of 90% of the present years tax liability or the previous years tax liability. Present years tax liability Amount needed to be paid Less: Amount paid Amount underpayment penalty applied to $7,000 x 90% $6,300 4,400 $1,900 Tax liabilityc. The amount that must be included in income is the lesser of the reimbursement or the excess itemized deductions for the previous year. .

Mark Miller paid the following medical expenses during the year (all in excess of reimbursement): Hospital and doctor bills (for self and wife) $840 Medicine and drugs (for self and wife) $730 Hospitalization insurance premiums $920 Medicine and drugs (for dependent mother, age 71) $160 Assuming the Millers' adjusted gross income was $20,000, how much of a medical expense deduction may the Millers claim on their joint return? c. All the medical expenses are deductible but they must be reduced by 7.5% of the adjusted gross income. Total medical expenses $2,650 Less: 7.5% of AGI 1,500 Medical expense deduction $1,150 e. There is no interest deduction allowed for the year because interest deducted from the loan proceeds is not considered prepaid interest. The cash basis taxpayer must pay interest to be allowed the deduction.

Mike, who is single, has $100,000 of salary, $15,000 of income from a limited partnership, and a $30,000 passive loss from a real estate rental activity in which he actively participates. His modied adjusted gross income is $100,000. Of the $30,000 loss, how much is deductible? a. $30,000 b. $10,000 c. $25,000 d. $0. . a. Because of material participation, the full loss is deductible.

d. There is no tax liability, so there is no credit.

b. The mid-month convention is used both in the year of acquisition and the year of sale. ($300,000/39 years) x (2.5/12) = $1,603. On July 10, 2005, Test Corporation purchased energy equipment for $15,000. The equipment has a 5-year cost recovery period. The corporation took the appropriate investment credit for 2005. On August 15, 2009, the corporation sold the asset for $10,000. What is the amount of investment credit recapture that is due to the IRS? a. $300 b. $900 c. $1,000 d. $1,500 e. None of the above a. The asset was held for over four but less than ve years; thus, 20% of the investment credit taken must be recaptured. Asset purchase price $15,000 x 10% Investment credit rate Investment credit taken $ 1,500 Investment credit taken $ 1,500 x 20% Recapture rate Investment credit recapture $ 300

b. The prepayment will provide benets for more than one year after the end of the year. The taxpayer must therefore use the accrual method for this expenditure.

Ron Ryder worked for both Boilerworks and Diemakers during the year. His total wages from Boilerworks were $49,000. His total wages from Diemakers were $20,000. Rons wife worked for Stenographers during the year and earned total wages of $28,000. What amount can Ron and his wife claim as a credit against their income tax for the year because of excess social security tax withheld if they le a joint return? a. $290 b. $580 c. $1,240 d. $1,530 e. None of the above . e. The credit for excess social security only applies to an individual having wage income over $94,200. Since neither spouse had wages totaling more than $94,200 there were no excess social security taxes paid.. b. The earned income credit is based on earned income up to $12,570 but reduced by adjusted gross income over $19,370. $10,000 x 40% = $4,000 earned income credit.

Steve Colburns portable sawmill used 100% for business, was completely destroyed by re. The sawmill had an adjusted basis of $35,000 and a fair market value of $50,000 before the re. The sawmill was uninsured. Steves casualty loss is: a. $34,900. b. $50,000. c. $49,900. d. $35,000 . d. Complete business loss is limited to adjusted basis.b. In general, long-term capital gain assets are deductible at fair market value.

Susnne Watson is an employee and sole-shareholder of Klaxon. Klaxon is a calendar-year company which uses the accrual method of accounting. On December 30, 2009, Klaxon awarded Susanne a bonus of $30,000 based on the companys 2008 year-end prot. The bonus was reasonable, ordinary and necessary. It was paid on February 11, 2010. In what year can Klaxon deduct the bonus it paid to Susanne? Susanne is a calendar-year, cash method taxpayer. c. The company must deduct the bonus in the same year that the employee includes it in income. Tammy has the following items for the current year: Nonbusiness capital gains Nonbusiness capital losses $10,000 (2,000) 57. 58. 59. 60. Interest Income 7,000 Itemized deductions (none of the amount realized from a casualty loss) (9,000) In calculating Tammys net operating loss, and with respect to the above amounts only, what amount must be added back to taxable income (loss)? a. $0 b. $2,000 c. $3,000 d. $6,000


The difference between a refundable credit and a nonrefundable credit is: a. A refundable credit can only reduce a taxpayers tax liability to zero b. A nonrefundable credit can only reduce a taxpayers tax liability to zero c. Refundable tax credits are only available to individual taxpayers d. Nonrefundable tax credits are only available to corporations b. The following taxes were paid by the Browns--real estate taxes on their home, $600; state income taxes, $700; city sales tax, $50; state sales taxes of $10 paid while on vacation to states other than the state in which they resided; state gasoline tax (personal use of automobile), $30; dog licenses, $20; and real estate taxes on the home of Mrs. George Brown, mother of Barney Brown, $450. In itemizing their deductions, the Browns should claim a deduction of taxes of: b. State sales taxes, gasoline taxes, and dog licenses are not deductible taxes. The real estate taxes paid for Mrs. Brown's mother are not deductible by the Browns since it is not a tax that they incurred.


The rehabilitation credit can be taken by businesses: a. For costs associated with business activities that contribute to the revitalization of economically depressed areas b. For costs associated with the substantial rehabilitation of certied historic structure or other depreciable building that was originally placed in service prior to 1936 c. Who purchase or substantially rehabilitate residential rental property used for low-income housing d. All of the above bd. Taxpayers have the option of capitalizing R&D expenses or expensing them. If capitalized, taxpayers could choose not to amortize them, although such an election would be unlikely.



d. Depreciation = $200,000 / 27.5 years = $7,272.

What is the alternative minimum tax that must be paid by a taxpayer ling a joint return, if the taxpayer has taxable income of $90,950, adjustments to taxable income of $29,000, tax preferences of $50,000, and an income tax before the alternative minimum tax of $6,000? a. $21,000 b. $15,000 c. $20,000 d. $0 e. None of the above . c. The alternative minimum tax that must be paid by the taxpayer is $20,000, computed as follows: Taxable income $90,950 Plus: Adjustments to taxable income 29,000 Plus: Tax preferences 50,000 69,950 Less: Exemption amount Net alternative minimum taxable income $100,000 Tax rate x 26% Tax at 26% for the year $ 26,000 6,000 Less: Regular tax for the year Alternative minimum tax $ 20,000What is the amount of dependent care credit allowed Sally Smith, a divorcee, who pays $3,100 for the year to send her daughter to a babysitter while she works? The daughter is claimed as a dependent by the father. Sally has adjusted gross income of $16,500 for the year. a. $1,085 b. $1,054 c. $1,020 d. $500 e. None of the above . c. Sally is limited to $3,000 of expenses and must multiply that amount by 34% since she exceeds $15,000 of adjusted gross income.

c. The expenses for dependent care are limited to $4,500, the income of the lower-earning spouse, and the credit percentage for $44,500 of adjusted gross income is 20%.What is the amount of interest deduction allowed for the year 2009, assuming Marge Meyer incurred the following: Interest on loan used to purchase land for investment $18,000 (assume no net investment income) Interest on loan used to purchase personal residence $1,000 Interest on loan used to purchase boat $500 Interest on loan to purchase 100 shares of General Auto $3,000 (no dividends received during the year) b. Only the home mortgage interest is deductible.

c. The earned income credit is based on earned income up to $8,950 but reduced by adjusted gross income over $16,240. $5,000 x 34% = $1,700 earned income credit. c. The maximum base amount must be reduced by one-half of the adjusted gross income over $10,000. Maximum base amount $7,500 Less: 1/2 of adjusted gross income over $10,000 5,750 Balance available for credit $1,750 x 15% Credit rate Credit for the elderly $ 263 The credit is limited to the tax liability of $60 [($21,500 - $13,000 - $7,300 = $600) x 10%].

a. A taxpayer can elect to forgo the NOL carryback and carry it forward only.

. d. A working interest is excluded from passive activities.Which of the following is not a passive activity? a. Owning a working interest in oil and gas wells. b. Owning a limited partnership interest in oil and gas wells. c. Owning a limited partnership interest in real estate. d. Owning a business and not materially participating. . a. A working interest is specically excluded from the passive loss rulesWhich of the following is not a tax preference item for purposes of the alternative minimum tax? a. Percentage depletion in excess of the adjusted basis in property b. Amortized circulation costs c. Excess intangible drilling costs d. Tax-exempt interest on certain private activity bonds e. All of the above are tax preference items b.

Which of the following statements is correct? a. Hobby expenses are always fully deductible. b. The nancial status of the taxpayer is not considered in determining whether activities are engaged in for prot. c. The deduction for the allowed hobby expenses is an itemized deduction, but not subject to the 2 percent oor. d. Hobby expenses that are deductible without reference to whether they are incurred in an activity designed to produce income, such as certain taxes, remain fully deductible. 2009 CCH. All Rights Reserved. Chapter 7 606 CCH Federal TaxationComprehensive Topics Which of the following statements is incorrect? a. A vacation home becomes a personal residence when its owner uses it more than the greater of 14 days or 10 percent of the number of rental days. b. If a dwelling is classied as a personal residence, rental losses are not deductible. c. If an individual rents out a vacation home for more than 14 days and does not use it excessively for personal purposes, losses are allowed to be deducted from AGI. d. If an individual actively participates in the rental real estate activity, up to $25,000 of losses can be used to offset nonpassive income.


a. An ordinary income property charitable deduction is limited to basis. There is no income recognition when making a charitable donation.


of the taxpayers taxable income derived from the natural resource for the year before deducting the depletion deduction. b. The attorney can deduct 50% of business meals. No deduction is allowed for country club dues, nor for personal meals.

ABC, Inc. of Jasper, Georgia suffered a casualty loss of $150,000 in March 2009. This loss was caused by heavy rains that completely ooded their factory. As a result of these rains, the President declared North Georgia (including Jasper) a disaster area on March 23, 2009. In what year can ABC, Inc. elect to deduct the casualty loss? a. 2009 or 2010 b. 2009 or 2008 c. Only 2009 d. Only 2008 b. ABC can take the loss in 2009 or, by making an election, it may take the loss in 2008 since the casualty occurred in an area designated as a disaster area by the Presidentd. $14,000 The 20 percent category must be taken after considering the contribution amounts, not just the deduction amounts from the percent limit deductions. The carryover would be $11,000. Contribution % Limit % Limit Amount Amounts Deductions 50% $ 5,000 $5,000 $5,000 30% Public 12,000 9,000 9,000 20% 8,000 --0---0-

All of the outstanding stock of a closely held C corporation is owned equally by Evelyn Humo and Steve Bufusno. In 2009, the corporation generates taxable income of $20,000 from its active business activities. In addition, it earns $20,000 of interest from investments and incurs a $40,000 loss from a passive activity. How much of a passive loss carryover does the corporation have? a. $20,000 b. $0 c. $40,000 d. None of the above a. Only $20,000 of the $40,000 passive loss may be deducted in 2009.All of the outstanding stock of a closely held C corporation is owned equally by Evelyn Humo and Steve Bufusno. In 2009, the corporation generates taxable income of $20,000 from its active business activities. In addition, it earns $20,000 of interest from investments and incurs a $40,000 loss from a passive activity. How much income does the C corporation report for 2009? a. $10,000 of portfolio income b. $0 c. $20,000 of portfolio income d. None of the above

b. The general business credit is limited to the tax liability minus 25% of the liability in excess of $25,000. $49,000 25,000 $24,000 x 25% $ 6,000 49,000 General business credit allowed $43,000 CCH. All Rights Reserved. a.Tax-exempt bond interest is not a tax preference item.

c. The allowable deduction is $800 for airfare, $1,960 for lodging (7 days at $280), and $350 for meals (7 at 100 x 50%). These expenses total to $3,110.

b. Investigation costs are not organization expenditures because no business activity has yet begun. Similarly, they are not acquisition costs, because the business has not yet been acquired and may never be. They are classied as start-up costs. c. If business or investment property is totally destroyed in a casualty, the amount of the loss is the taxpayers adjusted basis in the property, even if it is greater than the propertys fair market value.

Ann Jones uses a dry cleaning machine in her business, and it was partially destroyed by re. At the time of the re, the adjusted basis was $20,000 and its fair market value was $18,000. The adjusted basis after the re is $10,000 and the fair market value after the casualty is $10,000. How much is the casualty loss? a. $10,000 b. $8,000 c. $18,000 d. $20,000 32. b. If business or investment property is partially destroyed in a casualty, the amount of the loss is the lesser of adjusted basis or decline in fair market value. c. The $20,000 step-up means that only $2,000 passive loss is allowed.

Billy Ray owns several parcels of rental real estate, and he actively participates in managing the properties. His total loss from these activities in 2009 is $30,000 and his AGI for 2009 is $110,000. For how many years may the disallowed loss be carried forward? a. The disallowed loss may not be carried forward. b. The disallowed loss may be carried forward for 15 years. c. The disallowed loss may be carried forward for 15 years, but only after it has been carried back for 3 years. d. The disallowed loss may be carried forward indenitely. d. All of the disallowed loss is suspended and may be carried forward to future years.

c. Four-fths of the $25,000 exception to the passive loss rules is allowed based on his AGI.

Carlton Corporations 2009 general business credit exceeded its 2009 income tax liability. The resultant general business credit: a. May be placed in a reserve account and, based on the useful lives of the related assets, applied against the income tax liabilities of subsequent year b. May be returned to the depreciation bases of the related assets and claimed as depreciation over the useful lives of the assets c. May be carried over for ve years except that the carryover is limited to the useful lives of the related assets d. May be carried back one year and carried forward 20 years e. None of the above d. The general business credit carryover period is back one year and forward 20 years.

b. Home mortgage interest is deductible only on the interest on the lesser of (a) the amount of equity in the home (fair market value minus acquisition indebtedness) or (b) $100,000. The equity in the home is $150,000. The deductible home equity loan interest is therefore $9,000 x ($100,000/$120,000) = $7,500.

a. The Section 179 deduction is limited to $250,000 in 2009. It is reduced to the extent that acquisitions of eligible personal property exceed $800,000. During 2009, Hugh Hughes reported the following income and loss: Activity X ($50,000) Activity Y $20,000 Both Activity X and Activity Y are passive to Mr. Hughes. Hugh purchased Activity X in 1987 and Activity Y in 1993. How much is the loss that Mr. Hughes may deduct in 2009? a. $50,000 b. $30,000 c. $3,000 d. $0 Chapter 7 2009 CCH. All Rights Reserved. Testbank 605 . d. Passive loss limitations were phased out in 1991

During 2009, John Colburn, a single individual, reports the following taxable income: Gross income from business $200,150 Less: Business expenses 240,000 ($39,850) Plus: Interest income 1,000 Dividend income 2,000 AGI ($36,850) Less: Greater of itemized deductions or standard deduction Casualty loss (reduced by $100 limit) $2,000 Taxes 3,000 Interest expense 3,000 Total itemized deductions $8,000 or Standard deduction $5,700 $ 8,000 Personal exemption 3,650 ($48,500) Taxable income Compute John Colburns net operating loss for 2009. Johns net operating loss for 2009 is $41,850, computed as follows: Taxable income ($48,500) Plus: Nonbusiness deduction: Itemized deductions $8,000 Less: Casualty loss

During 2009, Tommys home was burglarized. Tommy had the following items stolen. A block of securities worth $20,000. Tommy purchased of securities three years ago for $8,000. A block of securities worth $30,000. Tommy purchased the securities for $24,000 two years ago. Tommys homeowners policy had an $80,000 deductible clause for thefts. How much is Tommys theft loss for 2009? a. $50,000 b. $32,000 c. $44,000 d. None of the above. . b. The amount of the loss is the adjusted basis because the securities are production of income property.

d. $52,000 / 60 = $867 per month. For November and December, the corporation would be allowed a deduction of $1,733. b. The maximum deduction for business gifts is $25 per donee. Thus, the deduction is this case is equal to $70 (7 at 10) plus $100 (5 at 20) plus $325 (13 at 25).

During the year, George Gable, age 66, and his wife, age 61, incurred and paid the following medical expenses for which they received no reimbursement: Hospitalization insurance premiums $ 560 Hospital 1,700 Doctors 390 Prescription drugs and medicines 250 Cosmetic surgery (liposuction) 800 George also paid $200 for prescription drugs for his dependent brother, age 78. Assuming the Gables' adjusted gross income for the year was $25,000, what is the amount that they may claim as a medical deduction on a joint return? The Gables may claim $1,225 as their medical expense deduction, computed as follows: Hospitalization insurance premiums $ 560 Hospital 1,700 Doctors 390 Prescription drugs and medicines 250 Prescription drugs for brother 200 Cosmetic surgery (liposuction) 0 Total medical expenses $3,100 Less: 7.5% of AGI 1,875 Medical expense deduction $1,225 During the year, the following items were charged to the interest expense account of Doe Corporation: Interest on additional income taxes assessed for two years ago $400 Interest on bank loan to finance installation of new machinery. $700 Bank loan was refinanced when installation was completed Interest deducted by bank from proceeds of Doe Corporation's 60-day note signed $500 December 1, payable in full 60 days later The maximum amount of interest expense that Doe Corporation, an accrual basis taxpayer, can deduct for the current year is: c. The interest deduction is: Income tax interest $400 Bank loan on machinery 700 Interest on 60-day note ($500 x 30/60 = $250) 250 Deductible interest $1,350


Freds at-risk amount in a passive activity is $50,000 at the beginning of the current year. His current loss from the activity is $60,000. He had no passive activity income during the year. At the end of the year, which of the following statements is incorrect? a. Fred has a loss of $50,000 suspended under the passive loss rules. b. Fred has an at-risk amount in the activity of $0. c. Fred has a loss of $10,000 suspended under the at-risk rules. d. Fred has a loss of $60,000 suspended under the passive loss rules. Gwen had the following occur in 2009: Car wreck repairs were $2,000, insurance paid $1,000. Theft of boat from lake house in December fair market value = $10,000, cost = $15,000. She didn't discover the theft until the next taxable year. Storm damage to lake house FMV before = $200,000, after = $150,000, insurance paid $20,000. If Gwen's AGI is $40,000, what is her net casualty loss deduction in 2009? b. The deduction is computed as follows: Car wreck ($2,000 - $1,000 - $500) $500 Theft of boat (deducted in year when theft discovered) $0 Storm damage to lake house ($200,000 - $150,000 - $20,000 -$500) $29,500 Total $30,000 $4,000 10% of AGI Net deduction $26,000

c. The employee must satisfy both the distance and employment tests.


Jim owns four separate activities. He elects not to group them together as a single activity under the appropriate economic unit standard. Jim participates for 140 hours in Activity A, 130 hours in Activity B, 140 hours in Activity C, and 100 hours in Activity D. He has one employee who works 135 hours in Activity D. Which of the following statements is correct? a. Activities A, B, C, and D are all signicant participation activities. b. Jim is a material participant with respect to Activities A, B, C and D. c. Jim is a material participant with respect to Activities A, B and C. d. Losses from all of the activities can be used to offset Jims active income.

Joe College is married and attends State University for 12 months. Joe and his wife have two children. Mrs. College works to help put Joe through school. The children, who are four and ve years old, are kept at Sleepy Time Day Care School. The Colleges paid the school $4,600 this year to keep the children. The Colleges had adjusted gross income of $10,000 this year, all of which was earned by Mrs. College. What amount may the Colleges claim as a child care credit? a. $920 b. $480 c. $1,610 d. $1,200 e. None of the above c. The $4,600 expenses incurred are not reduced since they are less than the $6,000 maximum allowed for two children. Also, there is no reduction for the lower income of the spouses since the earned income imputed to the student- husband would be $6,000 ($500 x 12), but this amount is not added into AGI. Thus, the $4,600 is multiplied by 35% to arrive at the dependent care credit to give $1,610.. d. Social security taxes, cigarette taxes, and fines for speeding are not allowed deductions. Sales taxes are less than state income taxes, so the state income taxes, as well as the personal property taxes, are deductible.

John Hughes is in the business of truck farming (i.e., growing tomatoes, bell peppers and green beans). During the year, one of his barns was completely destroyed by re. The adjusted basis of the barn was $100,000. The fair market value of the barn before the re was $80,000. The barn was insured for 90% of its fair market value and John recovered this amount under the insurance policy. John has adjusted basis for the year of $60,000 (before considering the casualty). Determine the amount of loss he can deduct on his tax return for the current year. a. $4,000 b. $24,000 c. $28,000.. d. $20,000 John Jay is married and supports his mother, age 67. During the year, he paid $300 for prescription medicines for his mother, $100 for prescription medicines for his wife, and $1,400 for doctor and hospital bills for himself. His gross income is $15,000 and adjusted gross income is $14,000. In itemizing his deductions, Jay may claim a medical expense deduction, after application of proper limitations, of: a. All the medical expenses are deductible but they must be reduced by 7.5% of the adjusted gross income. Total medical expenses $1,800 Less: 7.5% of AGI 1,050 Medical expense deduction $750

. a. The deductible suspended losses are limited to the difference between the suspended losses at death less the basis adjustment. d. Suspended losses are lost to the extent of the amount of the basis increase.

a. John is eligible to deduct the personal property taxes paid ($52) and the state income taxes paid ($190). He is not eligible to deduct the state sales tax paid ($114) because it did not exceed the amount of state income tax paid. The other taxes and the fine are not deductible expenses. d. The reduction in fair market value is less than the basis; thus, that amount must be reduced by the insurance proceeds, $500 and 10 percent of adjusted gross income because of the nonbusiness casualty loss.

b. Land is not depreciable. Subtracting this cost leaves $190,000 as the cost of the building. Depreciation is calculated using the straight-line method over 39 years, and ignoring salvage value: $190,000 / 39 = $4,872. a. $1500/$6000, or 25% of each expense, is not reimbursed, and 50% of the unreimbursed meal expense is not deductible. That means that the following amounts of each expense are deductible: Meals (25% x $2,000 x 50% deductible) Lodging (25% x $4,000) Total

Lorence Langes tax for the year is $7,000. He has paid in $4,400 in four quarterly payments during the year. Last year, his tax liability was $6,600. Which of the following is correct? a. Lorence will not have an underpayment penalty. b. Lorence will have an underpayment penalty on $2,600. c. Lorence will have an underpayment penalty on $1,900. d. Lorence will have an underpayment penalty on $2,200. e. None of the above Chapter 9 2009 CCH. All Rights Reserved. Testbank 637 . c. The underpayment penalty is determined by subtracting the payments made from the smaller of 90% of the present years tax liability or the previous years tax liability. Present years tax liability Amount needed to be paid Less: Amount paid Amount underpayment penalty applied to $7,000 x 90% $6,300 4,400 $1,900 Tax liability

Mark Miller paid the following medical expenses during the year (all in excess of reimbursement): Hospital and doctor bills (for self and wife) $840 Medicine and drugs (for self and wife) $730 Hospitalization insurance premiums $920 Medicine and drugs (for dependent mother, age 71) $160 Assuming the Millers' adjusted gross income was $20,000, how much of a medical expense deduction may the Millers claim on their joint return? c. All the medical expenses are deductible but they must be reduced by 7.5% of the adjusted gross income. Total medical expenses $2,650 Less: 7.5% of AGI 1,500 Medical expense deduction $1,150 e. There is no interest deduction allowed for the year because interest deducted from the loan proceeds is not considered prepaid interest. The cash basis taxpayer must pay interest to be allowed the deduction.

. a. Because of material participation, the full loss is deductible.

a. The asset was held for over four but less than ve years; thus, 20% of the investment credit taken must be recaptured. Asset purchase price $15,000 x 10% Investment credit rate Investment credit taken $ 1,500 Investment credit taken $ 1,500 x 20% Recapture rate Investment credit recapture $ 300

Ron Ryder worked for both Boilerworks and Diemakers during the year. His total wages from Boilerworks were $49,000. His total wages from Diemakers were $20,000. Rons wife worked for Stenographers during the year and earned total wages of $28,000. What amount can Ron and his wife claim as a credit against their income tax for the year because of excess social security tax withheld if they le a joint return? a. $290 b. $580 c. $1,240 d. $1,530 e. None of the above . e. The credit for excess social security only applies to an individual having wage income over $94,200. Since neither spouse had wages totaling more than $94,200 there were no excess social security taxes paid.. b. The earned income credit is based on earned income up to $12,570 but reduced by adjusted gross income over $19,370. $10,000 x 40% = $4,000 earned income credit.

Susnne Watson is an employee and sole-shareholder of Klaxon. Klaxon is a calendar-year company which uses the accrual method of accounting. On December 30, 2009, Klaxon awarded Susanne a bonus of $30,000 based on the companys 2008 year-end prot. The bonus was reasonable, ordinary and necessary. It was paid on February 11, 2010. In what year can Klaxon deduct the bonus it paid to Susanne? Susanne is a calendar-year, cash method taxpayer. c. The company must deduct the bonus in the same year that the employee includes it in income. Tammy has the following items for the current year: Nonbusiness capital gains Nonbusiness capital losses $10,000 (2,000) 57. 58. 59. 60. Interest Income 7,000 Itemized deductions (none of the amount realized from a casualty loss) (9,000) In calculating Tammys net operating loss, and with respect to the above amounts only, what amount must be added back to taxable income (loss)? a. $0 b. $2,000 c. $3,000 d. $6,000 56. a. $9,000 (7,000 + (10,000 - 2,000)) = ($6,000). Therefore, nothing is added back.


The following taxes were paid by the Browns--real estate taxes on their home, $600; state income taxes, $700; city sales tax, $50; state sales taxes of $10 paid while on vacation to states other than the state in which they resided; state gasoline tax (personal use of automobile), $30; dog licenses, $20; and real estate taxes on the home of Mrs. George Brown, mother of Barney Brown, $450. In itemizing their deductions, the Browns should claim a deduction of taxes of: b. State sales taxes, gasoline taxes, and dog licenses are not deductible taxes. The real estate taxes paid for Mrs. Brown's mother are not deductible by the Browns since it is not a tax that they incurred.




. c. The alternative minimum tax that must be paid by the taxpayer is $20,000, computed as follows: Taxable income $90,950 Plus: Adjustments to taxable income 29,000 Plus: Tax preferences 50,000 69,950 Less: Exemption amount Net alternative minimum taxable income $100,000 Tax rate x 26% Tax at 26% for the year $ 26,000 6,000 Less: Regular tax for the year Alternative minimum tax $ 20,000. c. Sally is limited to $3,000 of expenses and must multiply that amount by 34% since she exceeds $15,000 of adjusted gross income.


c. The maximum base amount must be reduced by one-half of the adjusted gross income over $10,000. Maximum base amount $7,500 Less: 1/2 of adjusted gross income over $10,000 5,750 Balance available for credit $1,750 x 15% Credit rate Credit for the elderly $ 263 The credit is limited to the tax liability of $60 [($21,500 - $13,000 - $7,300 = $600) x 10%].



b. ABC can take the loss in 2009 or, by making an election, it may take the loss in 2008 since the casualty occurred in an area designated as a disaster area by the Presidentd. $14,000 The 20 percent category must be taken after considering the contribution amounts, not just the deduction amounts from the percent limit deductions. The carryover would be $11,000. Contribution % Limit % Limit Amount Amounts Deductions 50% $ 5,000 $5,000 $5,000 30% Public 12,000 9,000 9,000 20% 8,000 --0---0-

a. Only $20,000 of the $40,000 passive loss may be deducted in 2009.All of the outstanding stock of a closely held C corporation is owned equally by Evelyn Humo and Steve Bufusno. In 2009, the corporation generates taxable income of $20,000 from its active business activities. In addition, it earns $20,000 of interest from investments and incurs a $40,000 loss from a passive activity. How much income does the C corporation report for 2009? a. $10,000 of portfolio income b. $0 c. $20,000 of portfolio income d. None of the above 35. c. The passive loss may offset the C corporations active (business) income but not its portfolio income.

c. The allowable deduction is $800 for airfare, $1,960 for lodging (7 days at $280), and $350 for meals (7 at 100 x 50%). These expenses total to $3,110.

b. Investigation costs are not organization expenditures because no business activity has yet begun. Similarly, they are not acquisition costs, because the business has not yet been acquired and may never be. They are classied as start-up costs. c. If business or investment property is totally destroyed in a casualty, the amount of the loss is the taxpayers adjusted basis in the property, even if it is greater than the propertys fair market value.

32. b. If business or investment property is partially destroyed in a casualty, the amount of the loss is the lesser of adjusted basis or decline in fair market value.

Billy Ray owns several parcels of rental real estate, and he actively participates in managing the properties. His total loss from these activities in 2009 is $30,000 and his AGI for 2009 is $110,000. For how many years may the disallowed loss be carried forward? a. The disallowed loss may not be carried forward. b. The disallowed loss may be carried forward for 15 years. c. The disallowed loss may be carried forward for 15 years, but only after it has been carried back for 3 years. d. The disallowed loss may be carried forward indenitely. d. The disallowed loss may be carried forward until the property is sold, regardless of how long that time period may be.

Carlton Corporations 2009 general business credit exceeded its 2009 income tax liability. The resultant general business credit: a. May be placed in a reserve account and, based on the useful lives of the related assets, applied against the income tax liabilities of subsequent year b. May be returned to the depreciation bases of the related assets and claimed as depreciation over the useful lives of the assets c. May be carried over for ve years except that the carryover is limited to the useful lives of the related assets d. May be carried back one year and carried forward 20 years e. None of the above d. The general business credit carryover period is back one year and forward 20 years.



During 2009, Tommys home was burglarized. Tommy had the following items stolen. A block of securities worth $20,000. Tommy purchased of securities three years ago for $8,000. A block of securities worth $30,000. Tommy purchased the securities for $24,000 two years ago. Tommys homeowners policy had an $80,000 deductible clause for thefts. How much is Tommys theft loss for 2009? a. $50,000 b. $32,000 c. $44,000 d. None of the above. . b. The amount of the loss is the adjusted basis because the securities are production of income property.

During the year, George Gable, age 66, and his wife, age 61, incurred and paid the following medical expenses for which they received no reimbursement: Hospitalization insurance premiums $ 560 Hospital 1,700 Doctors 390 Prescription drugs and medicines 250 Cosmetic surgery (liposuction) 800 George also paid $200 for prescription drugs for his dependent brother, age 78. Assuming the Gables' adjusted gross income for the year was $25,000, what is the amount that they may claim as a medical deduction on a joint return? The Gables may claim $1,225 as their medical expense deduction, computed as follows: Hospitalization insurance premiums $ 560 Hospital 1,700 Doctors 390 Prescription drugs and medicines 250 Prescription drugs for brother 200 Cosmetic surgery (liposuction) 0 Total medical expenses $3,100 Less: 7.5% of AGI 1,875 Medical expense deduction $1,225 During the year, the following items were charged to the interest expense account of Doe Corporation: Interest on additional income taxes assessed for two years ago $400 Interest on bank loan to finance installation of new machinery. $700 Bank loan was refinanced when installation was completed Interest deducted by bank from proceeds of Doe Corporation's 60-day note signed $500 December 1, payable in full 60 days later The maximum amount of interest expense that Doe Corporation, an accrual basis taxpayer, can deduct for the current year is: c. The interest deduction is: Income tax interest $400 Bank loan on machinery 700 Interest on 60-day note ($500 x 30/60 = $250) 250 Deductible interest $1,350

Freds at-risk amount in a passive activity is $50,000 at the beginning of the current year. His current loss from the activity is $60,000. He had no passive activity income during the year. At the end of the year, which of the following statements is incorrect? a. Fred has a loss of $50,000 suspended under the passive loss rules. b. Fred has an at-risk amount in the activity of $0. c. Fred has a loss of $10,000 suspended under the at-risk rules. d. Fred has a loss of $60,000 suspended under the passive loss rules. d. The at-risk rules are applied before the passive activity rules.b. The deduction is computed as follows: Car wreck ($2,000 - $1,000 - $500) $500 Theft of boat (deducted in year when theft discovered) $0 Storm damage to lake house ($200,000 - $150,000 - $20,000 -$500) $29,500 Total $30,000 $4,000 10% of AGI Net deduction $26,000



c. The $4,600 expenses incurred are not reduced since they are less than the $6,000 maximum allowed for two children. Also, there is no reduction for the lower income of the spouses since the earned income imputed to the student- husband would be $6,000 ($500 x 12), but this amount is not added into AGI. Thus, the $4,600 is multiplied by 35% to arrive at the dependent care credit to give $1,610.. d. Social security taxes, cigarette taxes, and fines for speeding are not allowed deductions. Sales taxes are less than state income taxes, so the state income taxes, as well as the personal property taxes, are deductible.

John Hughes is in the business of truck farming (i.e., growing tomatoes, bell peppers and green beans). During the year, one of his barns was completely destroyed by re. The adjusted basis of the barn was $100,000. The fair market value of the barn before the re was $80,000. The barn was insured for 90% of its fair market value and John recovered this amount under the insurance policy. John has adjusted basis for the year of $60,000 (before considering the casualty). Determine the amount of loss he can deduct on his tax return for the current year. a. $4,000 b. $24,000 c. $28,000.. d. $20,000 a. All the medical expenses are deductible but they must be reduced by 7.5% of the adjusted gross income. Total medical expenses $1,800 Less: 7.5% of AGI 1,050 Medical expense deduction $750

a. John is eligible to deduct the personal property taxes paid ($52) and the state income taxes paid ($190). He is not eligible to deduct the state sales tax paid ($114) because it did not exceed the amount of state income tax paid. The other taxes and the fine are not deductible expenses. d. The reduction in fair market value is less than the basis; thus, that amount must be reduced by the insurance proceeds, $500 and 10 percent of adjusted gross income because of the nonbusiness casualty loss.

a. $1500/$6000, or 25% of each expense, is not reimbursed, and 50% of the unreimbursed meal expense is not deductible. That means that the following amounts of each expense are deductible: Meals (25% x $2,000 x 50% deductible) Lodging (25% x $4,000) Total . c. The underpayment penalty is determined by subtracting the payments made from the smaller of 90% of the present years tax liability or the previous years tax liability. Present years tax liability Amount needed to be paid Less: Amount paid Amount underpayment penalty applied to $7,000 x 90% $6,300 4,400 $1,900 Tax liability

c. All the medical expenses are deductible but they must be reduced by 7.5% of the adjusted gross income. Total medical expenses $2,650 Less: 7.5% of AGI 1,500 Medical expense deduction $1,150


. e. The credit for excess social security only applies to an individual having wage income over $94,200. Since neither spouse had wages totaling more than $94,200 there were no excess social security taxes paid.

c. The company must deduct the bonus in the same year that the employee includes it in income. 56. a. $9,000 (7,000 + (10,000 - 2,000)) = ($6,000). Therefore, nothing is added back.


b. State sales taxes, gasoline taxes, and dog licenses are not deductible taxes. The real estate taxes paid for Mrs. Brown's mother are not deductible by the Browns since it is not a tax that they incurred.

b. The propertys tax basis is limited to its $356,250 FMV at the time it was converted from personal to business-use property. Subtracting $12,500 for the land, the depreciable basis is $343,750. The house is residential realty and is depreciated using the SL method over 27.5 years using the mid-month convention. Thus, depreciation expense is equal to $343,750 27.5 x 6.5/12 = $6,771.

. c. The alternative minimum tax that must be paid by the taxpayer is $20,000, computed as follows: Taxable income $90,950 Plus: Adjustments to taxable income 29,000 Plus: Tax preferences 50,000 69,950 Less: Exemption amount Net alternative minimum taxable income $100,000 Tax rate x 26% Tax at 26% for the year $ 26,000 6,000 Less: Regular tax for the year Alternative minimum tax $ 20,000

c. The maximum base amount must be reduced by one-half of the adjusted gross income over $10,000. Maximum base amount $7,500 Less: 1/2 of adjusted gross income over $10,000 5,750 Balance available for credit $1,750 x 15% Credit rate Credit for the elderly $ 263 The credit is limited to the tax liability of $60 [($21,500 - $13,000 - $7,300 = $600) x 10%].


b. ABC can take the loss in 2009 or, by making an election, it may take the loss in 2008 since the casualty occurred in an area designated as a disaster area by the Presidentd. $14,000 The 20 percent category must be taken after considering the contribution amounts, not just the deduction amounts from the percent limit deductions. The carryover would be $11,000. Contribution % Limit % Limit Amount Amounts Deductions 50% $ 5,000 $5,000 $5,000 30% Public 12,000 9,000 9,000 20% 8,000 --0---0-

35. c. The passive loss may offset the C corporations active (business) income but not its portfolio income.

Billy Ray owns several parcels of rental real estate, and he actively participates in managing the properties. His total loss from these activities in 2009 is $30,000 and his AGI for 2009 is $110,000. For how many years may the disallowed loss be carried forward? a. The disallowed loss may not be carried forward. b. The disallowed loss may be carried forward for 15 years. c. The disallowed loss may be carried forward for 15 years, but only after it has been carried back for 3 years. d. The disallowed loss may be carried forward indenitely. d. The disallowed loss may be carried forward until the property is sold, regardless of how long that time period may be.

d. The general business credit carryover period is back one year and forward 20 years.



. b. The amount of the loss is the adjusted basis because the securities are production of income property.

The Gables may claim $1,225 as their medical expense deduction, computed as follows: Hospitalization insurance premiums $ 560 Hospital 1,700 Doctors 390 Prescription drugs and medicines 250 Prescription drugs for brother 200 Cosmetic surgery (liposuction) 0 Total medical expenses $3,100 Less: 7.5% of AGI 1,875 Medical expense deduction $1,225 c. The interest deduction is: Income tax interest $400 Bank loan on machinery 700 Interest on 60-day note ($500 x 30/60 = $250) 250 Deductible interest $1,350

d. The at-risk rules are applied before the passive activity rules.b. The deduction is computed as follows: Car wreck ($2,000 - $1,000 - $500) $500 Theft of boat (deducted in year when theft discovered) $0 Storm damage to lake house ($200,000 - $150,000 - $20,000 -$500) $29,500 Total $30,000 $4,000 10% of AGI Net deduction $26,000


c. The $4,600 expenses incurred are not reduced since they are less than the $6,000 maximum allowed for two children. Also, there is no reduction for the lower income of the spouses since the earned income imputed to the student- husband would be $6,000 ($500 x 12), but this amount is not added into AGI. Thus, the $4,600 is multiplied by 35% to arrive at the dependent care credit to give $1,610.

John Hughes is in the business of truck farming (i.e., growing tomatoes, bell peppers and green beans). During the year, one of his barns was completely destroyed by re. The adjusted basis of the barn was $100,000. The fair market value of the barn before the re was $80,000. The barn was insured for 90% of its fair market value and John recovered this amount under the insurance policy. John has adjusted basis for the year of $60,000 (before considering the casualty). Determine the amount of loss he can deduct on his tax return for the current year. a. $4,000 b. $24,000 c. $28,000.. d. $20,000 c. Amount of loss (adjusted basis for business property that is completely destroyed) $100,000 Less: Insurance proceeds received ( $80,000 x 90%) (72,000) Business loss $28,000a. All the medical expenses are deductible but they must be reduced by 7.5% of the adjusted gross income. Total medical expenses $1,800 Less: 7.5% of AGI 1,050 Medical expense deduction $750

a. John is eligible to deduct the personal property taxes paid ($52) and the state income taxes paid ($190). He is not eligible to deduct the state sales tax paid ($114) because it did not exceed the amount of state income tax paid. The other taxes and the fine are not deductible expenses.

. c. The underpayment penalty is determined by subtracting the payments made from the smaller of 90% of the present years tax liability or the previous years tax liability. Present years tax liability Amount needed to be paid Less: Amount paid Amount underpayment penalty applied to $7,000 x 90% $6,300 4,400 $1,900 Tax liability

c. All the medical expenses are deductible but they must be reduced by 7.5% of the adjusted gross income. Total medical expenses $2,650 Less: 7.5% of AGI 1,500 Medical expense deduction $1,150


. e. The credit for excess social security only applies to an individual having wage income over $94,200. Since neither spouse had wages totaling more than $94,200 there were no excess social security taxes paid.


b. State sales taxes, gasoline taxes, and dog licenses are not deductible taxes. The real estate taxes paid for Mrs. Brown's mother are not deductible by the Browns since it is not a tax that they incurred.


. c. The alternative minimum tax that must be paid by the taxpayer is $20,000, computed as follows: Taxable income $90,950 Plus: Adjustments to taxable income 29,000 Plus: Tax preferences 50,000 69,950 Less: Exemption amount Net alternative minimum taxable income $100,000 Tax rate x 26% Tax at 26% for the year $ 26,000 6,000 Less: Regular tax for the year Alternative minimum tax $ 20,000

Which of the following statements is correct? a. Hobby expenses are always fully deductible. b. The nancial status of the taxpayer is not considered in determining whether activities are engaged in for prot. c. The deduction for the allowed hobby expenses is an itemized deduction, but not subject to the 2 percent oor. d. Hobby expenses that are deductible without reference to whether they are incurred in an activity designed to produce income, such as certain taxes, remain fully deductible. 2009 CCH. All Rights Reserved. Chapter 7 606 CCH Federal TaxationComprehensive Topics d. Hobby expenses are generally deductible only to the extent of income produced by the activity. The nancial status of the taxpayer is considered in determining whether activities are engaged in for prot. The deduction for the allowed hobby expenses is an itemized deduction subject to the 2 percent oor.Which of the following statements is incorrect? a. A vacation home becomes a personal residence when its owner uses it more than the greater of 14 days or 10 percent of the number of rental days. b. If a dwelling is classied as a personal residence, rental losses are not deductible. c. If an individual rents out a vacation home for more than 14 days and does not use it excessively for personal purposes, losses are allowed to be deducted from AGI. d. If an individual actively participates in the rental real estate activity, up to $25,000 of losses can be used to offset nonpassive income. . c. The losses are allowed to be deducted for AGI

d. $14,000 The 20 percent category must be taken after considering the contribution amounts, not just the deduction amounts from the percent limit deductions. The carryover would be $11,000. Contribution % Limit % Limit Amount Amounts Deductions 50% $ 5,000 $5,000 $5,000 30% Public 12,000 9,000 9,000 20% 8,000 --0---0-

d. The disallowed loss may be carried forward until the property is sold, regardless of how long that time period may be.


The Gables may claim $1,225 as their medical expense deduction, computed as follows: Hospitalization insurance premiums $ 560 Hospital 1,700 Doctors 390 Prescription drugs and medicines 250 Prescription drugs for brother 200 Cosmetic surgery (liposuction) 0 Total medical expenses $3,100 Less: 7.5% of AGI 1,875 Medical expense deduction $1,225 c. The interest deduction is: Income tax interest $400 Bank loan on machinery 700 Interest on 60-day note ($500 x 30/60 = $250) 250 Deductible interest $1,350

Jim owns four separate activities. He elects not to group them together as a single activity under the appropriate economic unit standard. Jim participates for 140 hours in Activity A, 130 hours in Activity B, 140 hours in Activity C, and 100 hours in Activity D. He has one employee who works 135 hours in Activity D. Which of the following statements is correct? a. Activities A, B, C, and D are all signicant participation activities. b. Jim is a material participant with respect to Activities A, B, C and D. c. Jim is a material participant with respect to Activities A, B and C. d. Losses from all of the activities can be used to offset Jims active income. c. Jim did not participate more than 100 hrs. and not more than another party


c. Amount of loss (adjusted basis for business property that is completely destroyed) $100,000 Less: Insurance proceeds received ( $80,000 x 90%) (72,000) Business loss $28,000

. c. The underpayment penalty is determined by subtracting the payments made from the smaller of 90% of the present years tax liability or the previous years tax liability. Present years tax liability Amount needed to be paid Less: Amount paid Amount underpayment penalty applied to $7,000 x 90% $6,300 4,400 $1,900 Tax liability



d. Hobby expenses are generally deductible only to the extent of income produced by the activity. The nancial status of the taxpayer is considered in determining whether activities are engaged in for prot. The deduction for the allowed hobby expenses is an itemized deduction subject to the 2 percent oor.. c. The losses are allowed to be deducted for AGI


The Gables may claim $1,225 as their medical expense deduction, computed as follows: Hospitalization insurance premiums $ 560 Hospital 1,700 Doctors 390 Prescription drugs and medicines 250 Prescription drugs for brother 200 Cosmetic surgery (liposuction) 0 Total medical expenses $3,100 Less: 7.5% of AGI 1,875 Medical expense deduction $1,225


c. Amount of loss (adjusted basis for business property that is completely destroyed) $100,000 Less: Insurance proceeds received ( $80,000 x 90%) (72,000) Business loss $28,000


d. Hobby expenses are generally deductible only to the extent of income produced by the activity. The nancial status of the taxpayer is considered in determining whether activities are engaged in for prot. The deduction for the allowed hobby expenses is an itemized deduction subject to the 2 percent oor.

The Gables may claim $1,225 as their medical expense deduction, computed as follows: Hospitalization insurance premiums $ 560 Hospital 1,700 Doctors 390 Prescription drugs and medicines 250 Prescription drugs for brother 200 Cosmetic surgery (liposuction) 0 Total medical expenses $3,100 Less: 7.5% of AGI 1,875 Medical expense deduction $1,225

d. Hobby expenses are generally deductible only to the extent of income produced by the activity. The nancial status of the taxpayer is considered in determining whether activities are engaged in for prot. The deduction for the allowed hobby expenses is an itemized deduction subject to the 2 percent oor.

Final Testbank for Tax 4001

Documents

betty taylor

bill goggans

nonbusiness

dry cleaning

certied historic

billy ray

ffset nonpassive

nonbusiness