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- In preparing his 2011 Federal income tax return, Sam, who is not
- married and using single filing status, incorrectly claimed alimony
- payments of $12,000 as an itemized deduction (rather than as a
- $20,000. Which of the following statements is correct?
- overstated or understated.
- *d. The error will have no effect on taxable income.
- Trade and business expenses should be treated as:
- *c. Deductible
- Paul is single, age 63, and has gross income of $70,000. His deductible
- Alimony
- Charitable contributions
- Contribution to a traditional IRA
- Expenses paid on rental property
- Interest on home mortgage and property taxes on personal residence
- State income tax
- What is Paul’s AGI?
- $15,000
- 2,000
- 5,000
- 7,500
- 6,800
- 2,200*b. $42,500.
- Janice is single, had gross income of $38,000, and incurred the
- following expenses:
- Charitable contribution
- Taxes and interest on home
- Legal fees incurred in a tax dispute
- Medical expenses
- Penalty on early withdrawal of savings
- $2,500
- 9,000
- 1,000
- 4,000
- 200
- Her AGI is:
- *e. $37,800.
- For individuals who are employees, which of the following is correct?
- *c. Some deductions may be classified as deductions for AGI and
- some may be classified as deductions from AGI.
- Which of the following is a deduction from AGI (itemized deduction)?
- *c. Safe deposit box rental fee in which stock certificates are
- stored.
- Which of the following is correct?
- *d. Only a. and b. are correct.
- Which of the following are deductions for AGI?
- *c. Mortgage interest on a building used in a business.
- Which of the following is incorrect?
- *b. The expenses associated with royalty property are a deduction
- from AGI.
- Which of the following is not a “trade or business” expense?
- *c. Parking ticket paid on business auto.
- Which of the following cannot be deducted as a § 162 business expense?
- *e. a., b., and c. cannot.
- Agnes is the sole shareholder of Violet, Inc. For 2011, she receives
- from Violet a salary of $200,000 and dividends of $100,000. Violet’s
- taxable income for 2011 is $500,000. On audit, the IRS treats $50,000
- of Agnes’s salary as unreasonable. Which of the following statements is
- the IRS adjustment.
- the IRS adjustment.
- *d. Violet’s taxable income will increase by $50,000 as a result
- of the IRS adjustment.
- Which of the following is incorrect?
- *a. All salaries of a business are deductible.
- necessary.
- reported on Schedule C.
- Benita incurred a business expense on December 10, 2011, which she
- which included the charge on January 5, 2012. Which of the following is
- *b. If Benita is an accrual method taxpayer, she can deduct the
- the expense in either 2011 or 2012.
- Payments by a cash basis taxpayer of capital expenditures:
- is acquired.
- *c. Must be deducted over the actual or statutory life of the
- Petal, Inc. is an accrual basis taxpayer. Petal uses the aging approach
- to calculate the reserve for bad debts. During 2011, the following
- occur associated with bad debts.Credit sales
- Collections on credit sales
- Amount added to the reserve
- Beginning balance in the reserve
- Identifiable bad debts during 2011
- $325,000
- 290,000
- 15,000
- –0–
- 12,000
- The amount of the deduction for bad debt expense for Petal for 2011 is:
- *a. $12,000.
- Which of the following is deductible as a trade or business expense?
- fund.
- weight and speeding.
- *e. None of the above.
- Rex, a cash basis calendar year taxpayer, runs a bingo operation which
- is illegal under state law. During 2011, a bill designated H.R. 9 is
- introduced into the state legislature which, if enacted, would
- legitimize bingo games. In 2011, Rex had the following expenses:
- Operating expenses in conducting bingo games
- Payoff money to state and local police
- Newspaper ads supporting H.R. 9
- Political contributions to legislators who support H.R. 9
- $247,000
- 24,000
- 3,000
- 8,000
- Of these expenditures, Rex may deduct:
- *a. $247,000.
- Angela, a real estate broker, had the following income and expenses inher business:
- Commissions income
- Expenses:
- Commissions paid to non-brokers for referrals
- (illegal under state law and subject to criminal penalties)
- Commissions paid to other real estate brokers for referrals
- (not illegal under state law)
- Travel and transportation
- Supplies
- Office and phone
- Parking tickets
- $100,000
- 20,000
- 10,000
- 12,000
- 4,000
- 5,000
- 500
- How much net income must Angela report from this business?
- *e. $69,000.
- Gerald owns an illegal casino. Which of the following expenses incurred
- in connection with this activity are deductible?
- *a. Rent.
- Terry and Jim are both involved in operating illegal businesses. Terry
- operates a gambling business and Jim operates a drug running business.
- Both businesses have gross revenues of $500,000. The businesses incur
- the following expenses.
- Employee salaries
- Bribes to police
- Rent and utilities
- Cost of goods sold
- Terry
- $200,000
- 25,000
- 50,000
- –0–
- Jim
- $200,000
- 25,000
- 50,000
- 125,000
- Which of the following statements is correct?
- *b. Terry should report profit from his business of $250,000.
- Tom operates an illegal drug-running operation and incurred the
- following expenses:
- Salaries
- Illegal kickbacks
- Bribes to border guards
- Cost of goods sold
- Rent
- Interest
- Insurance on furniture and fixtures
- Utilities and telephone
- $ 75,000
- 20,000
- 25,000
- 160,000
- 8,000
- 10,000
- 6,000
- 20,000
- Which of the above amounts reduces his taxable income?
- *b. $160,000.
- Vera is the CEO of Brunettes, a publicly held corporation. For the
- year, she receives a salary of $900,000, a bonus of $500,000, and
- paying job with a competitor. What amount may Brunettes deduct?
- *b. $1,042,000.
- Tommy, an automobile mechanic employed by an auto dealership, is
- *e. Not deductible.711. CHAPTER 6DEDUCTIONS AND LOSSES: IN GENERAL Question MC #25
- Iris, a calendar year cash basis taxpayer, owns and operates several TV
- rental outlets in Florida, and wants to expand to other states. During
- 2011, she spends $14,000 to investigate TV rental stores in South
- Carolina and $9,000 to investigate TV rental stores in Georgia. She
- As to these expenses, Iris should:
- *b. Expense $23,000 for 2011.
- Which of the following statements is correct in connection with the
- investigation of a business?
- *b. If the business is acquired, the expenses may be deducted
- immediately by a taxpayer engaged in a similar trade or business.
- trade or business, the expenses must be capitalized and amortized.
- Which of the following is relevant in deciding whether an activity is
- profit-seeking or a hobby?
- *e. All of the above factors are to be considered.
- For an activity classified as a hobby, the expenses are categorized as
- follows:
- (1)
- Amounts that affect adjusted basis and would be deductible
- under other Code sections if the activity had been engaged in for
- profit (e.g., depreciation, amortization, and depletion).
- (2)
- Amounts deductible under other Code sections without regard to
- the nature of the activity, such as property taxes and home mortgage
- interest.
- (3)
- Amounts deductible under other Code sections if the activity had been engaged in for profit, but only if those amounts do not affect
- If these expenses exceed the gross income from the activity and are
- thus limited, the sequence in which they are deductible is:
- *c. (2), (3), (1).
- Priscella pursued a hobby of making bedspreads in her spare time. Her
- AGI before considering the hobby is $40,000. During the year she sold
- the bedspreads for $10,000. She incurred expenses as follows:
- Supplies
- Interest on loan to get business started
- Advertising
- $4,000
- 500
- 6,500
- Assuming that the activity is deemed a hobby, how should she report
- these items on her tax return?
- *c. Include $10,000 in income, deduct nothing for AGI, and claim
- $10,000 of the expenses as itemized deductions.
- Cory incurred and paid the following expenses:
- Tax return preparation fee
- Moving expenses
- Investment expenses
- Expenses associated with rental property
- Interest expense associated with loan to finance tax-exempt bonds
- $ 600
- 2,000
- 500
- 1,500
- 400
- Calculate the amount that Cory can deduct (before any percentage
- limitations).
- *b. $4,600.
- Which of the following is not deductible?
- *d. Allowable hobby expenses in excess of hobby income.
- Which of the following statements is correct?
- rent income is not included in gross income and no expenses can
- rent income must be included in gross income and all the related
- *c. If a personal residence is rented for more than 14 days and
- the personal use days exceed 14 days and 10% of the rental days,
- the rent income must be included in gross income, but the expense
- Robyn rents her beach house for 60 days and uses it for personal use
- for 30 days during the year. The rental income is $6,000 and the
- Mortgage interest
- Real estate taxes
- Utilities
- Maintenance
- Insurance
- Depreciation (rental part)
- $9,000
- 3,000
- 2,000
- 1,000
- 500
- 4,000
- Using the IRS approach, total expenses that Robyn can deduct on her tax
- return associated with the beach house are:
- *d. $12,000.
- which of the following statements is correct?
- *e. a., b., and c. are correct.
- Bob and April own a house at the beach. The house was rented to
- unrelated parties for 8 weeks during the year. April and the children
- used the house 12 days for their vacation during the year. After
- properly dividing the expenses between rental and personal use, it was
- Gross rental income
- Less: Mortgage interest and property taxes
- Other allocated expenses
- Net rental loss
- $4,000
- $3,500
- 2,000
- (5,500)
- ($1,500)
- What is the correct treatment of the rental income and expenses on Bob
- IRS approach is used if applicable?
- *a. A $1,500 loss should be reported.
- property taxes) are limited to the gross rental income in excess
- of deductions for interest and taxes allocated to the rental use.
- April, all expenses allocated to personal use may be deducted.
- related to the beach house in their current year income tax
- return.
- Because Scott is three months delinquent on the mortgage payments for
- his personal residence, Jeanette (his sister) is going to cover the
- mortgage company, Jeanette can deduct the interest part.
- nor Jeanette can deduct the interest part.
- Melanie incurred the following expenses for her dependent son during
- the current year:
- Payment of principal on son’s automobile loan
- Payment of interest on above loan
- Payment of son’s property taxes
- Payment of principal on son’s personal residence loan
- Payment of interest on son’s personal residence loan
- $3,600
- 2,500
- 1,800
- 2,800
- 6,000
- How much may Melanie deduct in computing her itemized deductions?
- *a. $0.
- Velma and Josh divorced. Velma’s attorney fee of $4,000 is allocated as
- follows:
- General representation in obtaining the divorce
- Services in obtaining custody of the child
- Services in settlement of martial property
- Determining the tax consequences of:
- Dependency deduction for child
- Property settlement
- $1,200
- 800
- 900
- 600
- 500
- Of the $4,000 Velma pays to her attorney, the amount she may deduct as
- *b. $1,100.
- Which of the following must be capitalized by a business?
- On January 2, 2011, Fran acquires a business from Chuck. Among the
- remaining life, a covenant not to compete for 10 years, and goodwill.
- Of the purchase price, $140,000 was paid for the patent and $60,000 for
- the covenant. The amount of the excess of the purchase price over the
- identifiable assets was $100,000. What is the amount of the
- *c. $20,000.
- In January, Lance sold stock with a cost basis of $26,000 to his
- *d. Disallowed loss to Lance of $2,000; gain to James of $1,000.
- Nikeya sells land (adjusted basis of $120,000) to her adult son,
- Shamed, for its appraised value of $95,000. Which of the following
- statements is correct?
- $120,000 adjusted basis).
- + $25,000 disallowed loss for Nikeya).
- *c. If Shamed subsequently sells the land for $112,000, he has no
- recognized gain or loss.
- Which of the following is not a related party for constructive
- ownership purposes under § 267?
- *a. The taxpayer’s cousin.
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