Test Bank for Income Tax Fundamentals 2023 41st Edition by Gerald E. Whittenburg, Steven Gill.

Test Bank for Income Tax Fundamentals 2023 41st Edition by Gerald E. Whittenburg, Steven Gill.

Test Bank for Income Tax Fundamentals 2023 41st Edition by Gerald E. Whittenburg, Steven Gill.

Test Bank for Income Tax Fundamentals 2023 41st Edition by Gerald E. Whittenburg, Steven Gill.

Test Bank for Income Tax Fundamentals 2023 41st Edition by Gerald E. Whittenburg, Steven Gill.

a. True b. False 12. If your spouse dies during the tax year and you do not remarry, you must file as single for the year of death. a. True b. False 13. Taxpayers who do not qualify for married, head of household, or surviving spouse filing status must file as single. a. True b. False 14. If an unmarried taxpayer paid more than half the cost of keeping a home which is the principal place of residence of a nephew who is not their dependent, they may use the head of household filing status. a. True b. False 15. The maximum official individual income tax rate for 2022 is 39.6 percent, not including the Medicare surtax on net investment income. a. True b. False 16. All taxpayers may use the tax rate schedule to determine their tax liability. a. True b. False 17. The head of household tax rates are higher than the rates for a single taxpayer. a. True b. False 18. Most states are community property states. a. True b. False 19. If taxpayers are married and living together at the end of the year, they must file a joint tax return. a. True b. False 20. A taxpayer who maintains a household with an unmarried child may qualify to file as head of household even if the child is not the taxpayer's dependent. a. True b. False 21. A married person with a dependent child may choose to file as head of household if it reduces the taxpayer's tax liability. a. True b. False 22. Taxpayers who live alone, are legally separated from their spouses under a separate maintenance decree at year-end, and have no dependents should file as single.

Powered by Cognero

Page 2

a. True b. False 23. Malik, age 22, is enrolled in college on a full-time basis. His parents provide all of his support. Malik may be claimed as a dependent by his parents. a. True b. False 24. A dependent that dies during the tax year may still qualify as a dependent. a. True b. False 25. For 2022, the deductions for personal and dependency exemptions are $4,300 each. a. True b. False 26. Scholarships received by a student may be excluded for purposes of the support test for determining the availability of the dependency exemption. a. True b. False 27. The two types of dependents are qualifying child or qualifying relative. a. True b. False 28. An 18-year-old full-time student who is claimed on the parents' tax return as a dependent is eligible for the child tax credit. a. True b. False 29. Most taxpayers may deduct the standard deduction amount or the amount of their itemized deductions, whichever is higher. a. True b. False 30. An individual taxpayer with a net capital loss may deduct up to $3,000 per year against ordinary income. a. True b. False 31. Taxpayers can download tax forms from the IRS Internet site. a. True b. False

Indicate the answer choice that best completes the statement or answers the question.

32. Which of the following is a goal of the tax law? a. Encouraging certain social goals such as contributions to charity b. Supporting certain economic goals such as increasing unemployment c. Encouraging smaller families Powered by Cognero

Page 3

d. Promoting good will with other countries 33. Which one of the following provisions was passed by Congress to meet a social goal of the tax law? a. The deduction for job hunting expenses b. The child and dependent care credit c. The moving expense deduction for adjusted gross income d. The deduction for soil and water conservation costs available to farmers 34. Which of the following is an economic goal of the tax law? a. Ensuring that all persons pay the same amount of tax b. Reducing unemployment c. Lowering the cost of adoption d. Encouraging charitable contributions 35. In 2022, Wesley has a fairly simple tax situation with moderate wage income and a modest amount of interest income.

Wesley, age 45, wishes to use the easiest possible tax form. He may file which of the following? a. Form 1040-EZ b. Form 1040-SR c. Form 1040 d. Form 1065 36. Which of the following forms may be filed by individual taxpayers? a. Form 1040 b. Form 1041 c. Form 1065 d. Form 1120 37. Which of the following is true of partnerships? a. They are not taxable entities. b. They are taxed in the same manner as individuals. c. They file tax returns on Form 1120. d. They file tax returns on Form 1041.

38. Which of the following is correct regarding reporting and taxable entities? a. An individual is a reporting entity but not a taxable entity. b. A partnership is a taxable entity and a reporting entity. c. A corporation is a reporting entity but not a taxable entity. d. A partnership is a reporting entity but not a taxable entity.

39. In 2022, Schedule 1 of Form 1040 is used to report what? a. Income from wages b. Capital gains and losses c. Withholding on wages d. Unemployment compensation 40. Partnership income is reported on a. Form 1040PTR Powered by Cognero

.

Page 4

b. Form 1120S c. Form 1040X d. Form 1065 41. What is reported on Schedule 2? a. Additional income b. Adjustments to income c. Additional taxes d. Itemized deductions 42. Which of the following is used to report capital gains and losses? a. Schedule A b. Schedule B c. Schedule C d. Schedule D 43. An individual is a head of household. What is this individual's 2022 standard deduction? a. $12,950 b. $25,900 c. $19,400 d. $1,750 44. Chad and Vivian are married. For 2022, Chad earned $25,000 and Vivian earned $30,000. They have decided to file separate returns. They have no deductions for adjusted gross income. Chad's itemized deductions are $14,200 and Vivian's are $4,000. Assuming Chad and Vivian do not live in a community property state and Chad deducts the greater of the standard deduction or itemized deductions, what is Chad's taxable income? a. $10,800 b. $18,000 c. $12,050 d. $21,000 45. Kelly and Morgan have no dependents and file a joint income tax return for 2022. They have adjusted gross income (all wages) of $140,000 and itemized deductions of $30,000. What is the amount of taxable income that Kelly and Morgan must report on their 2022 income tax return? a. $114,100 b. $93,600 c. $140,000 d. $110,000 46. Which of the following taxpayers is exempt from having to file a tax return for 2022? a. A single taxpayer who is under age 65, with income of $13,500 b. Married taxpayers (ages 45 and 50 years), filing jointly, with income of $26,000 c. A 22-year-old student with unearned income of $2,500 who is claimed as a dependent by her parents d. A 67-year-old surviving spouse with a dependent child and income of $18,900 47. In which of the following situations is the taxpayer excluded from having to file a 2022 income tax return? a. When an individual has a current year income tax refund and would like to obtain it b. When the taxpayer is a single 67-year-old with wages of $9,800 Powered by Cognero

Page 5

c. When the taxpayer is a 35-year-old head of household with wages of $19,900 d. When the taxpayer is a 69-year-old surviving spouse (spouse died 3 years ago) with wages of $16,500 and no dependents 48. Which of the following factors are important in determining whether an individual is required to file an income tax return? a. The taxpayer's filing status and gross income b. The taxpayer's gross income and total itemized deductions c. The taxpayer's total itemized deductions and filing status d. The taxpayer's total itemized deductions and number of dependents 49. Elliot and Karmen are married. For 2022, Elliot earned $35,000 and Karmen earned $40,000. They have decided to file separate returns. They have no deductions for adjusted gross income. Karmen's itemized deductions are $15,600 so she is going to itemize. Elliot's itemized deductions are $4,750. Assuming Elliot and Karmen do not live in a community property state, what is Elliot's taxable income? a. $22,050 b. $15,600 c. $30,250 d. $24,400 50. Juan, 45 years old and unmarried, contributed $1,000 monthly in 2022 to the support of his parents' household. The parents lived alone, and their income for 2022 consisted of $500 from dividends and interest. What is Juan's filing status, and how many dependents should he claim on his 2022 tax return? a. Single and no dependents b. Head of household and no dependents c. Single and 2 dependents d. Head of household and 2 dependents 51. During 2022, Manfred, who is 60 years old and unmarried, provided all of the support of his elderly mother. His mother was a resident of a home for the aged for the entire year and had no income. What is Manfred's filing status for 2022, and how many dependents should he report on his tax return? a. Head of household and 1 dependent b. Single and 2 dependents c. Head of household and 2 dependents d. Single and 1 dependent 52. Kofi is a 25-year-old full-time student at a state university. Kofi lives with his unmarried sister, Abbey, who provides over half of his support. His only income is $4,500 of wages from a part-time job at the college bookstore. What is Abbey's filing status for 2022? a. Single b. Head of household c. Married filing separately d. Surviving spouse 53. Roberto is a single taxpayer who has AGI of $145,000 in 2022; his taxable income is $122,000. What is his federal tax liability for 2022? a. $18,719.50 b. $15,213.50 c. $29,280.00 Powered by Cognero

Page 6

d. $23,115.50 54. Dalton is a divorced taxpayer who provides a home for their dependent child, Edward. What filing status should Dalton indicate on their tax return? a. Head of household b. Married filing separately c. Single d. Surviving spouse 55. Iris, widowed in 2021, pays all costs related to the home in which she and her unmarried child live. Her child does not qualify as her dependent. What is her filing status for 2022? a. Single b. Married filing separately c. Head of household d. Surviving spouse 56. Alec, whose wife died in 2020, filed a joint tax return for 2020. He did not remarry and continues to maintain his home in which his four dependent children live. In the preparation of his tax return for 2022, Alec should file as . a. single b. surviving spouse c. head of household d. married filing separately 57. During 2022, Howard maintained his home in which he and his 16-year-old son resided. The son qualifies as his dependent. Howard's wife died in 2021. What is his filing status for 2022? a. Single b. Head of household c. Married filing separately d. Surviving spouse 58. An unmarried taxpayer who maintains a household for a dependent child and whose spouse died 4 years ago should file as . a. single b. head of household c. surviving spouse d. married filing separately 59. During the current tax year, Anita was entirely supported by her four children, Dudley, Mel, Carlton, and Isidore, who provided support for her in the following percentages: Dudley Mel Carlton Isidore

9 percent 15 percent 25 percent 51 percent

Which of the children may be allowed to claim Anita as a dependent, assuming a multiple support agreement exists? a. Only Isidore b. Carlton or Isidore c. Mel, Carlton, or Isidore Powered by Cognero

Page 7

d. Dudley, Carlton, Mel, or Isidore 60. Sheldon is 92 years old and in poor health. Clever investing earlier in his life has left him with a sizeable income. He therefore is able to support his son Paul. Paul is 67 years old and lives in a nursing home. Paul’s income is less than $2,000. How many dependents should Sheldon claim on his tax return? a. 0 b. 1 c. 2 d. 3 61. Which of the following is a true statement with respect to the gross income test for claiming a qualifying relative as a dependent? a. The relative must receive less than $4,400 of gross income in order to qualify. b. The gross income test does not have to be met provided the relative is under age 19 at the end of the tax year. c. The gross income test does not have to be met provided the relative is under age 24 at the end of the tax year. d. The gross income test does not have to be met provided the relative is a student.

62. Albert and Avery, ages 66 and 64, respectively, filed a joint return for 2022. They provided all of the support for their 19-year-old son, who is blind and had no gross income. They also provided the total support of Avery's father, who is a citizen and life-long resident of Peru. What is the amount of the credit for other dependents that Albert and Avery can claim? a. $0 b. $500 c. $1,000 d. $2,000 63. Which of the following relationships disqualifies an individual for dependency according to the relationship test? a. Sister b. Adopted child c. Aunt d. Cousin 64. Which of the following is a test that must be met for a child to be considered a dependent, but does not apply to other qualifying relatives? a. Joint return test b. Domicile test c. Citizenship test d. Relationship test 65. Mr. and Mrs. Vonce, both age 62, file a joint return for 2022. They provided all the support for their daughter who is 19 years old, is legally blind, and earns no income. Their 21-year-old son, a full-time student at a university, had $4,300 of income and provided 70 percent of his own support during 2022. What is the other dependent credit Mr. and Mrs. Vonce may claim on their 2022 tax return? a. $0 b. $500 c. $1,000 d. $2,000 66. Taxpayers who are blind get the benefit of Powered by Cognero

.

Page 8

a. an extra exemption b. an additional amount added to their standard deduction c. two standard deductions d. an expedited refund 67. Malay, a 50-year-old single taxpayer, paid the full cost of maintaining his dependent mother in a home for the aged for the entire year. What is the amount of Malay's standard deduction for 2022? a. $12,950 b. $19,400 c. $21,150 d. $25,900 68. Jada is a 16-year-old child who is claimed as a dependent by her parents. Jada's only income is $1,400 from her bank savings account. What is the amount of Jada's standard deduction for 2022? a. $1,200 b. $1,150 c. $1,800 d. $12,200 69. Your standard deduction will be $12,950 in 2022 if you are which of the following? a. Single and 67 years old b. Single and 45 years old c. Single, 27 years old, and blind d. Head of household 70. Sofia is 60 years old, single, and legally blind. Sofia supports her father, who is 88 years old and blind, by paying the rent and other costs of her father’s residence. What is the total standard deduction amount that Sofia should claim on her 2022 tax return? a. $19,400 b. $25,900 c. $21,150 d. $14,700 71. Lee purchased Elm Corporation stock 20 years ago for $10,000. In the current year, they sell the stock for $29,000.

What is Lee's gain or loss? a. $19,000 long-term b. $19,000 short-term c. $19,000 ordinary d. $3,000, with the excess carried forward 72. Alexis has a long-term capital loss of $13,000 on the sale of stock in the current year. She has no other capital gains or losses for the year. Her taxable income without this transaction is $60,000. What is her current year taxable income considering this capital loss? a. $47,000 b. $54,000 c. $57,000 d. $70,000 Powered by Cognero

Page 9

73. Which of these assets is considered an exception as it relates to capital gains and losses? a. Inventory b. Stocks c. A personal automobile d. Gold 74. Bob owns a rental property that he bought several years ago for $250,000. He has taken depreciation on the house of $35,000 since buying it. He sells it in 2022 for $290,000. His selling expenses are $12,000 for the year. What is Bob’s realized gain on the sale? a. $28,000 b. $53,000 c. $63,000 d. $75,000 75. Which of the following is true regarding the IRS? a. The IRS requires official tax forms to be obtained at the local IRS office. b. The IRS links to the ProConnect Tax website. c. The IRS provides information on how to choose a stock. d. The IRS offers an app for mobile phones users.

76. Internet users can go to www.irs.gov to do which of the following? a. Download tax forms and publications b. Get a list of approved tax preparers c. Find links to Intuit's tax preparation products d. Read reviews of tax preparation software 77. Which of the following is true of electronic filing (e-filing)? a. It reduces the error rate for tax returns. b. It generally results in a slower refund. c. It can be done only by telephone. d. It requires the services of a professional.

78. Electronically filed tax returns . a. may not be transmitted from a taxpayer’s home computer b. constitute less than 50 percent of the returns filed with the IRS c. have error rates similar to paper returns d. offer faster refunds than paper returns

79. List two general objectives of the tax code.

80. Indicate with a "Yes" or a "No" whether each of the following is an objective of the tax code. a. To provide a car to each American. b. To promote charitable contributions. c. To encourage taxpayers to send their children to college. d. To raise money to operate the government. e. To promote investment in solar energy.

Powered by Cognero

Page 10

81. Mark each of the following as a taxable entity, a reporting entity, or both. a. Individuals b. Corporations c. Partnerships 82. Determine if a form is used for an individual, a corporation, or a partnership tax return. a. Form 1065 b. Schedule A, Itemized Deductions c. Form 1040 d. Form 1120 e. Schedule B, Interest and Dividends 83. Barry is a 45-year-old single taxpayer. In 2022, he has gross income of $17,000 and itemized deductions of $6,500. If Barry claims no dependents on his 2022 income tax return, calculate the following amounts: a. b.

His personal exemption amount Barry's taxable income

84. What is the formula for computing taxable income, as summarized in the textbook?

85. Marin is a 33-year-old unmarried taxpayer with adjusted gross income for 2022 of $29,400. Marin maintains a home for three dependent children and has itemized deductions of $3,000. Calculate the following amounts for Marin's 2022 income tax return: a. b.

Marin's standard or itemized deduction amount Marin's taxable income

86. Kenzie is a research scientist in Tallahassee, Florida. Her spouse Garrett stays home to take care of their house and two dogs. Kenzie's total wages for 2022 were $60,500 from which $5,900 of federal income tax was withheld.

Calculate the income tax due or income tax refund on Kenzie and Garrett's 2022 individual income tax return. Use the tax formula for individuals and show your work.

87. Melissa is a 35-year-old single taxpayer with adjusted gross income of $49,600. She uses the standard deduction and has no dependents. a. Calculate Melissa’s 2022 taxable income. Please show your work. b. When you calculate Melissa’s tax liability, are you required to use the tax tables or the tax rate schedules, or does it matter? c. What is Melissa’s tax liability?

88. Bonnie, age 39, and Steve, age 50, are married with two dependent children. They file a joint return for 2022. Their income from salaries totals $165,000; they receive $1,000 in taxable interest and $2,000 in royalties. Their deductions for adjusted gross income amount to $3,100; they have itemized deductions totaling $41,000. Calculate the following amounts: a. b. c. d. e. f.

Gross income Adjusted gross income The greater of the amount of their itemized deduction or the standard deduction amount Deduction for exemptions Taxable income Regular income tax liability from rate schedules

89. Silvan is 35 years old, is single, and works as a commodities broker. His salary for 2022 is $111,500 and he has taxable interest income of $40,000. He has no deductions for adjusted gross income. His itemized deductions are $31,000.

Silvan does not have any dependents.

Powered by Cognero

Page 11

a. b. c. d. e.

What is the amount of his adjusted gross income?

What are his allowable itemized deductions?

What is his deduction for personal exemptions?

What is his taxable income?

What is his regular tax liability from the tax rate schedules?

90. Nathan is 24 years old, is single, and works as an accountant in a salmon cannery in Alaska. His total wages for 2022 were $32,000. Federal income tax of $4,500 was withheld from his wages. His only other income was $260 of interest and he had no deductible expenses.

Calculate the income tax due or income tax refund on Nathan's 2022 individual income tax return. Use the tax formula for individuals and show your work.

91. In 2022, Lacinda has a salary of $40,700 from her job. She also has interest income of $400. Lacinda is single and has no dependents. During the year, Lacinda sold stock held as an investment for a $10,000 loss. Calculate the following amounts for Lacinda: a. b. c. d. e.

Adjusted gross income Standard deduction Taxable income Tax liability Explain the tax treatment of the loss from the stock sale

92. Richard, age 39, and Leah, age 37, are married taxpayers who file a joint income tax return for 2022. They have gross income of $31,100. Their deductions for adjusted gross income are $550, and they have itemized deductions of $5,400. If Richard and Leah have no dependents for 2022, calculate the following amounts: a. b. c.

Their adjusted gross income The greater of the amount of their standard deduction or their itemized deductions Their taxable income

93. Zahra and Wyatt are married taxpayers who file a joint income tax return for 2022. They have no dependents. On their 2022 income tax return, they have adjusted gross income of $62,000 and total itemized deductions of $4,000. What is their taxable income?

94. Ian, age 50, and Hanna, age 49, are married taxpayers who file a joint return for 2022. They have gross income of $150,700. Their deductions for adjusted gross income are $5,100, and they have itemized deductions of $18,000, consisting of $10,000 in state income taxes and $8,000 in mortgage interest expense. If they have no dependents for 2022, calculate the following amounts: a. Their adjusted gross income b. The greater of the amount of their standard deduction or their itemized deductions c. Their taxable income 95. Margaret, age 67, and Owen, age 63, are married taxpayers with two dependents. Their adjusted gross income for the 2022 tax year is $43,600, and they have itemized deductions of $7,800. Determine the following for Margaret and Owen's 2022 income tax return: a. b.

The greater of the amount of their standard deduction or their itemized deductions Their taxable income

96. Gabriel, age 67, and Laylah, age 60, are married taxpayers with three dependent children. Their adjusted gross income Powered by Cognero

Page 12

for the 2022 tax year is $142,000. They have itemized deductions of $24,600. Determine the following for their joint tax return for 2022: a. b. c.

Exemption deduction amount The greater of the amount of their standard deduction or their itemized deductions Taxable income

97. For each of the following situations, indicate whether the taxpayers are required to file a tax return for 2022. Explain your answer. a. b. c. d. e.

Dalia, age 68, and Dylan, age 70, are married and file a joint return. They received $25,500 in interest income from a savings account.

Maggie is a single taxpayer with wages of $8,400 and interest income of $200.

Allison, age 30, and Luke, age 28, are married and file a joint tax return. They had $17,000 in earnings from wages.

Kim, a 20-year-old single college student who is claimed as a dependent by her parents, has earnings of $2,000 from a part-time job and $450 in interest income.

Stefanie, a 25-year-old single taxpayer, has wages of $1,500, from which $80 of federal income tax was withheld.

98. Monica is a housekeeper in a San Francisco hotel. Monica received $500 in unreported tips during 2022 and owes Social Security and Medicare taxes on these tips. Her total income for the year, including tips, is $4,500. Is Monica required to file an income tax return for 2022?

Why? 99. Jerica is single and supports her 45-year-old son who has income of $350 from working in a pumpkin patch during October and lives in his own apartment. a. Can she claim him as a dependent? b. Can she claim head of household filing status? Why or why not?

100. Noah and Hailey are married taxpayers that file jointly with taxable income of $126,000 in 2022. a. When you calculate their tax liability, are you required to use the tax tables or the tax rate schedules, or does it matter? b. What is their tax liability?

101. Jeff and Lauren were married on December 31 of the prior year. What are their options for filing status for their prior year taxes?

102. Madeline is single and supports her 85-year-old parents who live in a senior home paid for by Madeline. Her parents have no income. What is Madeline’s filing status and why?

103. List each alternative filing status available to unmarried individual taxpayers.

104. Determine from the tax table or the tax rate schedule, whichever is appropriate, the amount of the income tax for each of the following taxpayers for 2022.

Taxpayer(s) Macintosh Hindmarsh Kinney Rosenthal Wilk

Powered by Cognero

Filing Status Single MFS MFJ H of H Single

Taxable Income $35,700 $62,000 $143,000 $91,500 $21,400

Income Tax

Page 13

105. Jessica, a 17-year-old guitarist in a successful band, earns $100,000 a year and is completely self-supporting although she lives with her parents. Can her parents claim her as a dependent? Why or why not?

106. Karl’s father, Krzysztof, is a 60-year-old Polish citizen who lived in Poland for the full year. Karl supported Krzysztof while he looked for work. Krzysztof had no income. Can Karl claim Krzysztof as a dependent?

107. Calculate the amount of the standard deduction the taxpayers should claim on their 2022 income tax returns. a. Kelly and Hideo are married with one dependent child. They file a joint return and are in good health, and both of them are under 65 years of age. They also support an aging father. b. Ivana is 24 years old, in good health, and single. c. Erik and Eriqua are married and file a joint return. Erik is 64 years old and Eriqua is 63 years old. d. Jerek is 62 years old, single, and blind. e. Daphne qualifies for head of household filing status, is 42 years old, and is in good health. f. Elizabeth is 11 years old, and her only income is $3,200 of interest on a savings account. She is claimed as a dependent on her parents’ tax return.

108. How should a taxpayer decide whether to take the standard deduction or claim itemized deductions?

109. Mike purchased stock in MDH Corporation 5 years ago for $15,500. This year, he sold it for $12,650 and then paid a $250 sales commission to his broker. He had no other capital gains or losses during the year. a. What is Mike’s amount realized? b. What is Mike’s adjusted basis? c. What is Mike’s realized gain or loss? d. What is Mike’s recognized gain or loss? e. How much of the gain or loss can Mike report on his tax return?

110. Maylin bought stock in FCM Corporation 4 years ago at a price of $18,000. She sold it this year for $22,225 and paid her broker $225 from the proceeds of the sale. a. What is Maylin’s amount realized? b. What is Maylin’s adjusted basis? c. What is Maylin’s realized gain or loss? d. What is Maylin’s recognized gain or loss? e. How much of the gain or loss should be included in her tax return?

111. Indicate with a "Yes" or a "No" whether each of the following can be found on the IRS website. a. A list of IRS forms b. A search function c. Advice on how to avoid paying taxes d. Ways to contact the IRS 112. State two reasons why a person would want to e-file a return instead of mailing it.

113. For each of the following situations, indicate the filing status of the taxpayer(s). a. The taxpayer’s spouse died last year. The taxpayer's 13-year-old dependent daughter lives with her. b. The unmarried taxpayer supports his dependent mother, who lives next door in a separate apartment. c. The taxpayer is unmarried and is living with her girlfriend. d. The taxpayer is married, but their spouse abandoned them while on vacation in March of the current year. The taxpayer has no dependents. e. After living together for 6 months, the couple married on December 31. f. The taxpayer who is unmarried legally adopted a child who lives with her.

Powered by Cognero

Page 14

114. Distinguish between reporting entities and taxable entities and give examples of each.

115. What is the difference between the standard deduction and itemized deductions?

Powered by Cognero

Page 15

Answer Key 1. False 2. False 3. True 4. False 5. True 6. True 7. True 8. True 9. False 10. False 11. True 12. False 13. True 14. False 15. False 16. False 17. False 18. False 19. False 20. False 21. False 22. True 23. True 24. True 25. False 26. True 27. True Powered by Cognero

Page 16

28. False 29. True 30. True 31. True 32. a 33. b 34. b 35. c 36. a 37. a 38. d 39. d 40. d 41. c 42. d 43. c 44. a 45. d 46. d 47. b 48. a 49. c 50. d 51. a 52. a 53. d 54. a Powered by Cognero

Page 17

55. a 56. b 57. d 58. b 59. c 60. b 61. a 62. b 63. d 64. b 65. b 66. b 67. b 68. b 69. b 70. c 71. a 72. c 73. a 74. c 75. d 76. a 77. a 78. d 79. The tax code promotes social goals, economic goals, and raising revenue.

80. a. No b. Yes c. Yes d. Yes Powered by Cognero

Page 18

e. Yes 81. a. Taxable and reporting entity b. Taxable and reporting entity c. Reporting entity 82. a. Partnership b. Individual c. Individual d. Corporation e. Individual 83. a. $0. There are no personal exemptions in 2022 b. $4,050. ($17,000 − $12,950 standard deduction) 84.

Gross Income − Deductions for Adjusted Gross Income =Adjusted Gross Income − Greater of Itemized Deductions or Standard Deduction − Qualified Business Income Deduction = Taxable income

85. a. $19,400 b. $10,000. ($29,400 − $19,400)

86.

Gross income Deductions for adjusted gross income Adjusted gross income Standard deduction

$60,500 0 $60,500 (25,900)

Taxable income Gross tax liability (from tax table) Tax withheld Refund due

$34,600 $3,744 (5,900) $(2,156)

87. a. $36,650. ($49,600 − $12,950) b. Taxpayers with income less than $100,000 must use the tax tables. c. $4,196 88. a. $168,000. ($165,000 + $1,000 + $2,000) b. $164,900. ($168,000 − $3,100) c. $41,000 d. $0 e. $123,900. ($164,900 − $41,000) f. $18,492. {$9,615 + [($123,900 − $83,550) × 22%]} Powered by Cognero

Page 19

89. a. $151,500. ($111,500 + $40,000) b. $31,000 c. $0 d. $120,500. ($151,500 − $31,000) e. $22,755.50. {tax rate schedule: $15,213.50 + [($120,500 − $89,075) × 24%]} 90.

Gross income Deductions for adjusted gross income Adjusted gross income Standard deduction Taxable income Gross tax liability (from tax table) Tax withheld Refund due

$32,260 0 $32,260 (12,950) $19,310 $2,114 (4,500) $(2,386)

91. a. $38,100. ($40,700 + $400 − $3,000) b. $12,950 c. $25,150. ($38,100 − $12,950) d. $2,816 (tax table) e. Up to $3,000 of net capital loss per year can be deducted from ordinary income; the unused portion of $7,000 is carried forward.

92. a. $30,550. ($31,100 − $550) b. $25,900 c. $4,650. ($30,550 − $25,900) 93. $36,100. ($62,000 − $25,900) 94. a. $145,600. ($150,700 − $5,100) b. $25,900 c. $119,700. ($145,600 − $25,900) 95. a. $27,650. ($25,900 + $1,750) b. $15,950. ($43,600 − $27,650) 96. a. $0 b. $27,650. ($25,900 + $1,750) c. $114,350. ($142,000 − $27,650)

97. a. No. The standard deduction of $25,900 plus 2 additional standard deductions of $1,400 each add up to $28,700, which is more than their income of $25,500. b. No. Income of $8,600 is less than the $12,950 standard deduction.

Powered by Cognero

Page 20

c. No. The income of $17,000 is less than the $25,900 standard deduction. d. Yes. Gross income is more than the larger of $1,150 or $2,400 (earned income of $2,000 plus $400). e. No. Stefanie is not required to file a tax return, but she must file if she wishes to receive a refund of the income tax withheld.

98. Yes. Monica must file a return and pay Social Security and Medicare taxes on the unreported tips.

99. a. Yes, her son qualifies as a dependent. b. No. Her son must live in the same household with Jerica in order for Jerica to be able to file as head of household.

100. a. Taxpayers with incomes of $100,000 or more must use the tax rate schedules. b. Tax liability: $18,954 = $9,615 + [($126,000 – $83,550) × 22%] 101. They may file either as married filing jointly or as married filing separately. Even though they were married on the last day of the year, they must file as if they were married for the full year.

102. Head of household. Madeline is single, and Madeline’s parents meet the tests to qualify as her dependents. Parents are the only exception to the requirement that dependents must live in the same household as the taxpayer to qualify the taxpayer for head of household status.

103. Single Head of household Surviving spouse [qualifying widow(er)] 104. Macintosh, $4,082 (tax table) Hindmarsh, $9,263 (tax table) Kinney, $22,694 {tax rate schedule: $9,615 + [($143,000 − $83,550) × 22%]} Rosenthal, $14,302 (tax table) Wilk, $2,366 (tax table) 105. Because Jessica is self-supporting, her parents may not claim her as a dependent. The self-support test is applied to both children and relatives who otherwise qualify, so Jessica is disqualified.

106. No. Krzysztof cannot be claimed as a dependent because he is not a U.S. citizen, or resident of the United States, Mexico, or Canada.

107. a. $25,900 b. $12,950 c. $25,900 d. $14,700 (an additional $1,700 is allowed due to blindness) e. $19,400 f. $ 1,150 (She is claimed as a dependent on her parents’ tax return.)

108. A taxpayer should claim the larger of the standard deduction or the total allowed itemized deductions since the amount reduces the taxpayer’s income subject to tax. However, if married filing separately, both spouses have to file the same way. So they should consider the implications of standard versus itemized for both of them before choosing.

109. a. Amount realized: $12,400 = $12,650 − $250 b. Adjusted basis: $15,500 c. Realized loss: $12,650 − $250 − $15,500 = $3,100 d. Recognized loss: $12,650 − $250 − $15,500 = $3,100 e. $3,000. Up to $3,000 of capital loss can be deducted against ordinary income each year.

Powered by Cognero

Page 21

110. a. Amount realized: $22,000 = $22,225 − $225 b. Adjusted basis: $18,000 c. Realized gain: $22,225 − $225 − $18,000 = $4,000 d. Recognized gain: $22,225 − $225 − $18,000 = $4,000 e. $4,000. There is no limit on the amount of capital gain to be included on tax returns; however, it may be taxed at preferential rates.

111. a. Yes b. Yes c. No d. Yes 112. A return that is e-filed has a smaller error rate than paper-filed returns. (Less than 1 percent versus more than 20 percent.) E-filing also offers a faster refund because the IRS is able to process the return more quickly.

113. a. Surviving spouse b. Head of household c. Single d. Married filing separately e. Married filing jointly or married filing separately f. Head of household 114. A partnership is an example of a reporting entity. It pays no tax but must report partnership income or loss and the allocation of income or loss to partners. Individuals, corporations, estates, and certain trusts are examples of taxable entities whose income is subject to federal income taxation.

115. The standard deduction is a flat amount, varying based on a taxpayer’s filing status (single, married, head of household, etc.), age, and vision, which is deducted from adjusted gross income (AGI) along with qualified business income deductions to arrive at taxable income.

Itemized deductions are personal expenses paid by a taxpayer including medical expenses, certain interest expenses, certain taxes, charitable contributions, certain casualty losses, and a small number of miscellaneous items. If the total itemized deductions are larger than the taxpayer’s standard deduction, the taxpayer should complete Schedule A, listing all itemized deductions, and use this amount instead of the standard deduction. By itemizing deductions when they are larger than the standard deduction, taxpayers may reduce their taxable income and pay less tax.

Powered by Cognero

Page 22

Name:

Class:

Date:

CH 02 Gross Income and Exclusions

Indicate whether the statement is true or false.

1. Noncash items received as income must be included in income at their fair market value. a. True b. False 2. Awards, bonuses, and prizes are all included in gross income. a. True b. False 3. Disability benefits are generally taxable to the individual receiving the amounts. a. True b. False 4. The amount in Box 1 of Form W-2 for taxable wages will always equal the amount in Box 3 of Form W-2 for Social Security wages. a. True b. False 5. Amounts received by an employee as reimbursement for medical expenses under a policy provided by the taxpayer's employer are excluded from gross income. a. True b. False 6. If an employer claims a business deduction for group health insurance premiums paid on behalf of his employees, the amount must be included in the employees' gross income. a. True b. False 7. Payments made by an employer for health insurance on behalf of an employee are considered income to the employee at the time the payments are made. a. True b. False 8. Cash allowances for meals or lodging generally must be included in the employee's income. a. True b. False 9. The value of lodging provided to a professor to enable them to live on the campus so they can have a shorter commute is excluded from gross income. a. True b. False 10. Group term life insurance premiums paid by an employer for insurance amounts less than $50,000 must be included in the employee's income. a. True Powered by Cognero

Page 1

Name:

Class:

Date:

CH 02 Gross Income and Exclusions b. False 11. A "no-additional-cost" service includes only those services in the major line of business in which the employee is employed. a. True b. False 12. The amount of excludable employee reimbursement in 2022 for parking and mass transit costs is $280 per month. a. True b. False 13. An automobile that is received as a prize should be included in the taxpayer's income at its list price rather than its fair market value. a. True b. False 14. Basketball superstar Kawhi Leonard's outstanding player award is not includible in income since the award is in recognition of his outstanding performance. a. True b. False 15. If an annuitant, whose annuity starting date was January 1, 2008, dies before recovering their investment in the annuity, any unrecovered investment is recognized as a miscellaneous itemized deduction on the annuitant's tax return for the year of death. a. True b. False 16. Payments made to a qualified retirement plan by an employer are considered part of the employee's investment in the contract for calculation of the annuity exclusion ratio. a. True b. False 17. When calculating the exclusion ratio for an annuity, the ratio should be revised when there is a significant change in the taxpayer's status or health. a. True b. False 18. If a life insurance policy is transferred to the insured's partnership for valuable consideration, the insurance proceeds are taxable when received by the partnership. a. True b. False 19. Interest income received by a cash basis taxpayer is generally reported for the tax year in which it was received. a. True b. False 20. Interest on U.S. Treasury bonds is exempt from taxes.

Powered by Cognero

Page 2

Name:

Class:

Date:

CH 02 Gross Income and Exclusions a. True b. False 21. Taxpayers must report interest income on Series EE savings bonds as the interest accrues. a. True b. False 22. A gift received from a financial institution for opening a bank account is not taxable income to the recipient. a. True b. False 23. Interest earned on bonds issued by a state government is fully taxable. a. True b. False 24. To promote business activity, the tax rules generally are very liberal in treating business gifts as tax-free income to the recipient. a. True b. False 25. The receipt of an inheritance is excluded from the taxable income of the recipients. a. True b. False 26. Dividend income arising from stock received as a gift is excluded from gross income since the dividends are considered part of the gift. a. True b. False 27. Amounts received as scholarships for books and tuition may be excluded from the recipient's taxable income. a. True b. False 28. A scholarship for room and board is fully taxable to the recipient. a. True b. False 29. Child support payments are deductible by the spouse making the payments. a. True b. False 30. If a divorce agreement executed in 2017 specifies that a portion of the amount of an alimony payment is contingent upon the status of a child, that portion is considered to be a child support payment. a. True b. False Powered by Cognero

Page 3

Name:

Class:

Date:

CH 02 Gross Income and Exclusions 31. Under a divorce agreement executed before 2018, periodic payments of either cash or property must be made at regular intervals to be deductible as alimony. a. True b. False 32. In 2022, unemployment compensation is fully taxable to the individual receiving the compensation. a. True b. False 33. In some cases, Social Security benefits may be partially taxable. a. True b. False 34. In all community property states, income from community property is community income. a. True b. False 35. New York is a community property state. a. True b. False 36. About two-thirds of the states are community property states. a. True b. False

Indicate the answer choice that best completes the statement or answers the question.

37. Which of the following must be included in the gross income of the recipient in 2022? a. Child support payments b. Welfare payments c. Gifts d. Unemployment compensation 38. Which of the following is excluded from gross income? a. Gambling winnings b. Partnership income c. Workers' compensation d. Jury duty fees 39. Which of the following amounts is included in gross income? a. Tips and gratuities b. Child support payments c. Scholarship grants for tuition d. Veterans' benefits Powered by Cognero

Page 4

Name:

Class:

Date:

CH 02 Gross Income and Exclusions 40. Which of the following is generally excluded from gross income? a. Dividends b. Rewards c. Life insurance proceeds d. Retirement pay 41. Which of the following is excluded from gross income? a. Rents b. Scholarships for books c. Hobby income d. Clergy fees 42. Which of the following is classified as nontaxable income in 2022? a. Unemployment compensation b. Dividend income c. Income from real estate rental property d. Welfare payments 43. In the tax law, the definition of gross income is all . a. cash payments received unless excluded by the tax code b. cash payments received for services performed c. income from whatever source derived d. income of any kind unless the income is earned illegally 44. Which of the following is excluded from taxable income? a. Employee bonuses b. Notary fees c. Interest d. Child support payments 45. In 2022, which of the following is excluded from taxable income to the recipient? a. Royalties b. Estate and trust income c. Salaries d. Inheritances 46. Mary received the following items during 2022: Year-end bonus from her employer $600 Birthday gift from her father 100 Unemployment compensation 35 What is the total amount of the above items that must be included in Mary's current year gross income? a. $0 b. $635 c. $735 Powered by Cognero

Page 5

Name:

Class:

Date:

CH 02 Gross Income and Exclusions d. $600 47. As a year-end thank you for being a good employee, A-One TV Repair gave 62-year-old Aneesha three shares of its stock worth $20 per share. Aneesha then received dividends of $1 per share related to the stock. How much should be included in Aneesha's gross income? a. $0 b. $3 c. $60 d. $63 48. Which of the following is nontaxable income to the recipient for tax purposes? a. Salary income b. Income from real estate rental property c. Income from tips d. Municipal bond interest 49. Box 12 of Form W-2 is used for which of the following? a. State wages, tips, etc. b. Taxpayer identification numbers for the employee's dependents c. Various amounts that may have affected Box 1 wages d. Tax withheld from wages during the year 50. Faisal works for American Motors. American Motors paid a $1,200 premium on Faisal’s health insurance in 2022.

Faisal had an operation on his foot in 2022 that cost $7,200. The insurance company paid for $6,800 of it. Which one of the following is true for 2022? a. Faisal must claim the $1,200 premium paid by his employer as income. b. Faisal must claim the $6,800 paid by the insurance company for the operation as income. c. Faisal must claim the $1,200 premium and the $6,800 insurance payment as income. d. None of these events are taxable on his 2022 return.

51. Anthony is a marine biologist who spends months living on a boat in the ocean studying the impact of runoff water a hundred miles off the coast as a part of his job. Which of the following sentences is the most accurate? a. Lodging is included in his income, but meals may be excluded. b. He may exclude meals from his income, but not the fuel used to power the boat. c. The fuel used to power the boat is excluded from his income, but his meals are included. d. His meals, lodging, and cost of fuel are all excluded from his income.

52. In which of the following cases may the employee exclude the meals and/or lodging from their taxable income? a. A taxpayer lives rent-free at the property they manage even though the owner does not require the manager to live on site. b. A headmaster at a boarding school is required to be on campus all night. c. A president of a major film studio receives a cash allowance to live in Beverly Hills. d. An employee has an option of dining in an all-expense paid employer-sponsored cafeteria or dining out of the office.

Powered by Cognero

Page 6

Name:

Class:

Date:

CH 02 Gross Income and Exclusions 53. Employer-provided spending accounts a. may be set up for tax-free vacation savings b. are not allowed for dependent care c. do not require that the employee provide receipts for the expenses incurred d. allow qualifying expenses to be treated as tax-free reductions in the employee salaries 54. Indicate which of the following statements is true. a. Dependent care plans can only be used to cover the costs of caring for a dependent child. b. Health care flexible spending accounts can be used to cover dentist fees. c. Public transportation may be covered by an employer-provided spending account, but parking cannot be covered. d. Dependent care accounts may include day care but not preschool.

55. Which of the following is correct? a. Employee discounts are always included in gross income. b. Employee discounts of up to 20 percent may be taken on personal property held for investment. c. Employee discounts are not tax-free if they exceed the employer’s gross markup for merchandise. d. Tax-free employee discounts include discounts in lines of business in which the employee does not work.

56. Which of the following fringe benefits is taxable to the employee receiving the benefit? a. A subscription to a tax journal provided by the employer to a corporation's tax accountant b. A small discount on toys granted to the salesperson for a toy store c. Incidental use of the company's copier by an office worker d. A 15 percent discount on investment real estate granted to the employee of a real estate developer 57. Which of the following is excludable as an employee fringe benefit? a. Employee deductions of $5,200 for dependent child care expenses b. Premiums for up to $75,000 of group term life insurance c. An employee discount that permits the sale of merchandise to employees for just under cost d. Public transportation costs of $1,000 per year provided by the employer 58. Abran is a 19-year-old full-time student at Claremont College and is a candidate for a bachelor's degree. During 2022, he received the following amounts: Tuition scholarship Loan from college financial aid office Cash support from parents Ordinary cash dividend Cash prize awarded from a contest What is his adjusted gross income for 2022? a. $300 b. $500 c. $2,300 d. $2,500

$2,400 1,000 2,000 200 300

59. Mariah had a good year. She received the following prizes and awards: Powered by Cognero

Page 7

Name:

Class:

Date:

CH 02 Gross Income and Exclusions An iPad from The Famous Daytime Talk Show with a fair market value of $500 Lottery winnings of $1,000 received in cash A plaque worth $25 plus $100 of Godiva chocolate in recognition for 100 days on the job without an accident A $10,000 cash prize from American Idol How much of her prizes and awards should Mariah report on her tax return? a. None, they are all excluded from income. b. $11,000; only prizes and winnings received as cash are included. c. $11,500; the award from her job is excluded. d. $11,600; the plaque may be excluded.

60. Which of the following gifts or prizes would be considered taxable income to the person receiving the gift? a. $5,000 given to the taxpayer by their friend b. A mobile home given to the taxpayer by their mother c. A ski boat won by the taxpayer on a game show d. A Mustang GT given to the taxpayer by their brother 61. Rashad, who retired on April 30, 2022, receives a monthly employee annuity benefit of $1,400 payable for life, beginning May 1, 2022. During his years of employment, Rashad contributed $29,400 to the company's plan. Rashad's age on May 1 is 66. Using the simplified method, how much of the $11,200 annuity payment received during 2022 may Rashad exclude from gross income? a. $427 b. $1,120 c. $1,680 d. $11,200 62. Sanjay died on January 15, 2014, and left his spouse, Piper, an insurance policy with a face value of $100,000. Piper elected to receive the proceeds over a 10-year period ($10,000 plus interest each year). This year, Piper receives $11,500 ($10,000 proceeds plus $1,500 interest) from the insurance company. How much income must Piper report from this payment? a. $0 b. $500 c. $1,500 d. $11,500 63. Milo named his wife, Khia, the beneficiary of a $100,000 insurance policy on his life. The policy provided that, upon his death, the proceeds would be paid at a rate of $4,000 per year plus interest over a 25-year period. Milo died June 25 of last year, and in the current year, Khia received a payment of $5,200 from the insurance company. What amount should she include in her gross income for the current year? a. $200 b. $1,200 c. $4,000 d. $5,200 64. Which of the following would result in life insurance proceeds that are taxable to the recipient? a. A life insurance policy transferred to a creditor in payment of a debt Powered by Cognero

Page 8

Name:

Class:

Date:

CH 02 Gross Income and Exclusions b. A life insurance policy in which the insured is the daughter of the taxpayer and the beneficiary is the taxpayer c. A life insurance policy transferred by a shareholder to a corporation d. A life insurance policy purchased by a taxpayer insuring their business partner 65. In 2022, Uriah received the following interest payments: Interest of $300 on an overpayment of 2012 Federal income taxes Interest of $400 from his bank certificate of deposit Interest of $1,000 on municipal bonds Interest of $1,500 on U.S. savings bonds (Series HH) What amount, if any, should Uriah report as taxable interest income on his 2022 individual income tax return? a. $400 b. $700 c. $2,200 d. $3,200 66. Ernest received the following distributions from Virginiana Mutual Fund for the calendar year 2022: Ordinary dividends $320 Capital gain distributions 145 Nontaxable distributions 95 Emma, Ernest's wife, did not own any of the Virginiana Mutual Fund shares, but she did receive $1,475 in interest on a savings account at the Moss National Bank and $175 in interest on California municipal bonds. Ernest and Emma filed a joint income tax return for 2022. What amount is reportable as taxable interest income? a. $0 b. $175 c. $1,475 d. $1,650 67. Destiny received the following distributions from Greener Mutual Fund for the calendar year 2022: Ordinary dividends (nonqualifying) $250 Capital gain distributions 170 Nontaxable distributions 80 Garrison, Destiny's husband, did not own any of the Greener Mutual Fund shares, but he did receive $1,600 in interest on a savings account at the Grassley National Bank. Garrison and Destiny filed a joint income tax return for 2022. What portion of the distributions from Greener Mutual Fund is taxable as ordinary income on their 2022 individual income tax return? a. $0 b. $250 c. $420 d. $500 68. Tao, a single taxpayer, receives $500 of qualified dividends from ExxonMobil in the current year. His taxable income before the dividends is $26,000. Tao’s tax on the dividends will be . a. $0 Powered by Cognero

Page 9

Name:

Class:

Date:

CH 02 Gross Income and Exclusions b. $25 c. $75 d. $100 69. An investor is comparing the following two bonds: a bond from ABC Corp which pays an interest rate of 9 percent per year and a municipal bond which pays an interest rate of 7.9 percent per year. The investor is in the 22 percent tax bracket. Which bond will give the investor a higher after-tax interest rate and for which reason? a. The ABC bond because it pays a 9 percent interest rate, while the municipal bond only pays 7.9 percent. b. The ABC bond because it pays an equivalent after-tax rate of 11.5 percent, while the municipal bond pays out an equivalent after-tax rate of 10.1 percent. c. The municipal bond because it pays an equivalent after-tax rate of 7.9 percent, while the ABC bond pays out an after-tax 7.02 percent interest rate. d. The municipal bond because it pays an equivalent after-tax rate of 7.9 percent, while the ABC bond pays out an equivalent after-tax rate of 2.0 percent.

70. Which taxpayer would benefit the most from a tax-free municipal bond compared to a taxable bond? a. A taxpayer whose only income is from Social Security b. A taxpayer who won a mega-million-dollar lottery c. The average low-income worker d. All taxpayers equally benefit from the tax-free municipal bond.

71. Nicole is a student at USB Law School where she receives a $52,000 scholarship. Of the $52,000, $40,000 is used for tuition, $5,000 is used for books, and $7,000 is used for room and board. How much of the scholarship is excluded from taxable income for Nicole? a. $5,000 b. $7,000 c. $45,000 d. $47,000 72. To pay for college, Harry received the following: $1,000 scholarship from the Thespian Club to pay for books $4,000 scholarship from the Elks Lodge for tuition $5,000 worth of room and board as a dorm supervisor through a work-study program How much income must Harry report on his tax return? a. $0 b. $4,000 c. $5,000 d. $6,000 73. Ivy and Taio were granted a divorce in 2016. In accordance with the decree, Taio made the following payments to Ivy in 2022: Child support payments contingent on the age of the child Indefinite periodic payments terminating on Ivy’s death How much of the payments can Taio deduct as alimony in 2022? a. $0 Powered by Cognero

$6,000 4,000

Page 10

Name:

Class:

Date:

CH 02 Gross Income and Exclusions b. $6,000 c. $10,000 d. $4,000 74. Daniel and Celia were divorced under an agreement executed on February 15, 2022. According to the agreement, Daniel must transfer his interest in a rental house, worth $250,000, to Celia. His tax basis in the house is $80,000. What is the amount of the gain that Daniel must recognize on the property transfer? After the transfer, what is Celia’s tax basis in the property? a. $170,000 and $250,000 b. $0 and $250,000 c. $170,000 and $170,000 d. $0 and $80,000 75. Ren and Mina are divorced and under the terms of their written divorce agreement signed on December 30, 2016, Ren was required to pay Mina $1,500 per month of which $600 was designated as child support. He made 12 such payments in 2022. Additionally, Ren voluntarily paid Mina $1,200 per month for 12 months of 2022, no portion of which was designated as child support. Assuming that Mina has no other income, her tax return for 2022 should show gross income of . a. $0 b. $7,200 c. $10,800 d. $18,000 76. Russell and Madalyn were divorced in 2014. Madalyn pays Russell alimony of $1,200 a month. The payment amount was agreed upon in the decree of divorce. To save money, Russell and Madalyn still live together. Are the alimony payments that Russell receives in 2022 included in his income? a. Yes, the payments meet all alimony payment requirements. b. Yes, alimony is always taxable. c. No, only some of it is tax-exempt because Madalyn pays Russell too much alimony. d. No, since Russell and Madalyn still live together, the payments are not considered alimony.

77. Zaid is required under a 2014 divorce decree to pay $500 of alimony and $200 of child support per month for 12 years. In addition, Zaid makes an additional voluntary payment of $100 per month. How much of the total monthly payment amount is deductible by Zaid? a. $0 b. $200 c. $500 d. $600 78. Brianna and Anthony were granted a divorce in 2021. In accordance with the divorce decree, Anthony made the following payments to Brianna in 2022: Child support payments contingent on the age of the child Annual cash payments, other than child support, specified as alimony in the divorce agreement How much should Brianna include in her 2022 taxable income as alimony? a. $0 Powered by Cognero

$4,000 6,000

Page 11

Name:

Class:

Date:

CH 02 Gross Income and Exclusions b. $4,000 c. $6,000 d. $10,000 79. For divorce decrees entered before 2019, which of the following statements about deductible alimony payments is correct? a. The payments must be in the form of cash, goods, or services. b. Divorced or legally separated parties can be members of the same household at the time the payments are made. c. The payment can be made directly to the creditors of the former spouse. d. The payments must not be designated in the written agreement as anything other than alimony.

80. Kacey took an $8,000 distribution from their educational savings account and used $6,000 to pay for qualified higher education expenses. The remaining balance of $2,000 was used to purchase clothes. On the date of the distribution, their educational savings account had a $25,000 balance including the $20,000 they had contributed. How much of the $8,000 distribution is tax-free? a. $0 b. $6,000 c. $7,600 d. $8,000 81. Charlie is a single taxpayer with income of $107,000 which includes $22,500 of interest income. Contributions to Coverdell educational savings accounts are phased out between $95,000 and $110,000. What is the maximum contribution Charlie can make to an educational savings account? a. $400 b. $1,600 c. $2,000 d. $2,500 82. Which of the following is correct for Qualified Tuition Programs? a. Contributions are deductible and qualified educational expense distributions are tax-free. b. Contributions are not deductible and qualified educational expense distributions are tax-free. c. Contributions are deductible and qualified educational expense distributions are taxable. d. Contributions are not deductible and qualified educational expense distributions are taxable.

83. Which of the following is true with respect to an education incentive? a. Contributions to Qualified Tuition Programs (Section 529 plans) are deductible. b. Contributions to education savings accounts (Coverdell ESAs) are deductible. c. Tuition paid by a taxpayer earning $300,000 of income is deductible. d. Married taxpayers at any income level may contribute to a Qualified Tuition Program (Section 529 plan).

84. For married taxpayers filing a joint return in 2022, at what AGI level does the phase-out limit for contributions to Qualified Tuition Programs (Section 529 plans) start? a. $190,500 b. $220,000 Powered by Cognero

Page 12

Name:

Class:

Date:

CH 02 Gross Income and Exclusions c. $400,000 d. There is no phase-out limit on Qualified Tuition Program contributions.

85. In 2022, Stefan worked as a tech supervisor for a computer company, where he earned $4,500 a month. In September of 2022, he was laid off. He was paid unemployment compensation for the rest of the year totaling $7,000. Which of the following is true? a. Stefan will have to report all $7,000 of the unemployment compensation as income. b. Stefan will have to report $6,500 of the unemployment compensation as income. c. Unemployment compensation is never taxable. d. Since the unemployment compensation payments are less than his previous salary, they are not taxable.

86. Fatima received unemployment benefits in 2022. Which of the following is true? a. All of the unemployment benefits are taxable. b. All of the unemployment benefits are nontaxable. c. Half of the unemployment benefits are taxable and half are nontaxable. d. The taxability of the unemployment benefits depends upon other income received for the year.

87. Which of the following is true regarding Social Security benefits? a. The Social Security inclusion formula is the same amount for each filing status. b. Social Security benefits are always excluded because wages are subject to Social Security tax when earned. c. Tax-exempt interest income must be included in the formula used to determine if Social Security is included in taxable income. d. Up to 100 percent of Social Security benefits received may be included in taxable income.

88. For the current year, the maximum percentage of Social Security benefits that might be included in a taxpayer's gross income is . a. 50 percent b. 65 percent c. 85 percent d. 100 percent 89. Roxanne and Zach are married and live in Texas. Roxanne earns a salary of $50,000, and Zach owns a rental property that gives him $35,000 of income. If they filed separate tax returns, what amount of income would Zach report? a. $35,000 b. $85,000 c. $42,500 d. $60,000 90. Which one of the following conditions must be satisfied in order for a married taxpayer to be taxed on only their own income if they reside in a community property state? a. The husband and wife must live apart for the entire year. b. The husband and wife must live apart for more than half the year. c. The husband and wife must be in the process of filing for a divorce. d. Only one of the spouses can be working and earning an income.

Powered by Cognero

Page 13

Name:

Class:

Date:

CH 02 Gross Income and Exclusions 91. Which of the following is a true statement regarding community property law? a. For a married couple living in Wisconsin, income derived from separate property is taxable to the owner of the property. b. For a married couple living in California, income derived from separate property produces community income. c. In all community property states, the salary of married spouses is allocated one-half to each spouse. d. Property acquired before marriage in a community property state becomes community property unless specifically opted out.

92. Lee and Pat are married taxpayers living in Louisiana. Lee earns wages of $40,000 and has $5,000 of dividend income from separate property. Lee and Pat have interest income from community property of $10,000. If Lee and Pat file separate income tax returns, what amount of income must be included on Lee's separate tax return? a. $50,000 b. $30,000 c. $27,500 d. $25,000

93. Diego, a single taxpayer, received the following items in 2022: dividends of $450, wages of $32,000, child support from his ex-spouse of $400 per month, a new television worth $1,200 from a door prize at a conference he attended, a gift of $3,000 from Diego’s parents, and $200 of interest on bonds issued by the State of Arizona. Diego put $5,000 of his wages into his employer's dependent care flexible spending account (the $5,000 has not been deducted from the $32,000 of wages listed previously). He also receives a reimbursement of $270 per month to pay for public transportation passes each month (the monthly reimbursement of $270 has not been deducted from the $32,000 of wages). Based on the above, what is Diego’s gross income in 2022?

94. Andy landscaped his friend’s yard in return for a couch set and an HD television worth $8,000. How much income must Andy report on his tax return for his services?

95. Jake is a lawyer, and Georgia is a child psychologist. Jake prepares Georgia’s estate planning at no charge and Georgia agrees to counsel Jake’s daughter six times at no charge in return for the estate planning. The value of the estate planning is $1,000, and the value of the therapy sessions is $1,000. a. How much income does Jake have? Why? b. How much income does Georgia have? Why? 96. Brady has a successful online gambling enterprise that is illegal under federal law. Is Brady required by law to report the income from his online gambling business on his tax return? Why? 97. In 2022, Bonnie receives salary income of $32,000, unemployment compensation of $7,000, and interest income of $1,200 and a gift of $4,400 in cash from her aunt. How much gross income does Bonnie have?

98. Indicate whether each item below would be included in or excluded from the income of the recipient. a. Payment for laboratory assistant position at University of California State b. A $1,000 scholarship for tuition c. College books paid for by grandma and grandpa Powered by Cognero

Page 14

Name:

Class:

Date:

CH 02 Gross Income and Exclusions d. A $1,000 college loan e. A scholarship for room and board f. A new car given to recruit a professional basketball player g. A scholarship used for supplies and equipment that are required for courses 99. Joseph is a single taxpayer. Joseph's employer pays $1,800 per year for his health insurance. During the year, Joseph had medical expenses of $2,500, and the insurance company reimbursed him for the full $2,500. How much of the above amounts, if any, must be included in Joseph's gross income? Why? 100. Marco and his family are covered by his company’s health insurance plan. The health insurance costs his company $8,500 a year. During the year, Marco’s daughter is diagnosed with a serious illness, and the health insurance pays $25,000 for treatment. How much of the insurance and treatment costs are taxable to Marco?

101. State whether each of the following is taxable or nontaxable. a. Sofia won a jackpot of $50,000 gambling at a casino. b. Sarah received a Thanksgiving turkey from her employer. c. Jonathan won a car in a supermarket raffle valued at $25,000. d. Jamir received a scholarship for tuition of $5,000. e. Eric is given lodging valued at $1,000 a month on the oil rig where he is employed since it is impossible for Eric to go home during the period of time he is assigned to work on the rig.

102. Diana is a machinist in a remote Alaskan crab-freezing plant. The plant is accessible only by boat or airplane, and there is no available lodging for rent. Diana's employer provides her with lodging at the plant and pays for all of her electricity, gas, and other utilities, valued at $700 per month. Is the value of the lodging taxable to Diana? Explain.

103. As a new benefit to employees, Acme Company is providing a dining allowance every Tuesday for use in one of the 20 restaurants that it owns around town. Should this benefit be included in the wages of the employees?

104. Trevon, a single taxpayer, works for the men's clothing division of a large corporation. During the year, Trevon received the following fringe benefits: Value 20 percent discount on men's clothing (the usual markup is 40 percent) $350 15 percent discount on toys from the toy division of the company (the usual markup is 25 percent) 100 Personal copies on the company's copier 15 A subscription to Men's Clothing Weekly 35 Use of the company's athletic facilities 50 As a result of receiving the above fringe benefits, what amount must Trevon include in his current year gross income?

105. Omar’s tax client, Tiana, is employed at a large company that offers health care flexible spending accounts to its employees. Tiana must decide at the beginning of the year whether she wants to put as much as $2,750 of her salary into the medical flexible spending account. Tiana has excellent insurance through the company and is very healthy. She does not expect to have any medical expenses during the year. Tiana does not normally itemize deductions on her tax return.

Should Omar recommend that Tiana allocate the maximum to her health care flexible spending account? Why or why not?

106. Rob is 8 years old and won a sports car valued at $30,000 in a drawing at Disneyland this year while he was vacationing with his parents. How much income, if any, must Rob report on his tax return for this year? Why? 107. Makena retired in May 2022. Her pension is $1,000 per month from a qualified retirement plan to which she Powered by Cognero

Page 15

Name:

Class:

Date:

CH 02 Gross Income and Exclusions contributed $42,000, and to which her employer contributed $12,000. Makena was 67 when the plan payments started.

During 2022, she received 8 months of payment for a total of $8,000 from the plan. a. Using the simplified method, calculate Makena's taxable income for 2022 from the retirement plan distributions. b. If Makena's contributions to the plan had been $25,200, instead of $42,000, using the simplified method, how much taxable income would she have to report in 2022 from the plan distributions?

108. Cynthia, age 64, retired in June. Starting in July, Cynthia received $2,000 per month from an annuity. She has contributed $260,000 to the annuity. How much is excluded from income using the simplified method?

109. Tobie transfers to Keith a life insurance policy with a face value of $25,000 and a cash value of $5,000 in payment of a personal debt. Keith continues to make premium payments on the policy until Tobie's death. At that time, Keith had paid $1,500 in premiums. a. b.

How much income must Keith report when he receives the $25,000 in proceeds?

Would your answer be different if Tobie and Keith were partners in a partnership? Why?

110. Amaia transfers to Arjun a life insurance policy with a face value of $40,000 and a cash value of $8,000 in payment of a personal debt. Arjun continues to make premium payments on the policy until Amaia's death. At that time, Arjun had paid $3,500 in premiums. a. b.

How much income must Arjun report when he receives the $40,000 in proceeds?

Would your answer be different if Amaia were a shareholder and CEO of a corporation to which the policy was transferred? Why?

111. Jovan is sick and tired of his job. His doctor certifies that his health may be compromised if he continues to work at his current place of employment. He sells his life insurance policy to Life Settlements, Inc. for $50,000 so he can take a break from work. He has paid $10,000 so far for the policy. How much of the $50,000 must Jovan include in his taxable income?

112. Helga receives a $300,000 life insurance payment when her boyfriend Cody dies. How much of the payment is taxable to Helga?

113. Qualified dividends are given special tax treatment. Describe how they are taxed in 2022.

114. If a taxpayer holding EE bonds makes an election with respect to the taxation of the bonds, how is the interest which accrues on the bonds, but is not paid, taxed each year?

115. In 2022, what rate would a single taxpayer pay on qualified dividend income in each of these cases? a. b.

If in the 37 percent bracket?

If in the 24 percent bracket?

116. A taxpayer in the 33 percent tax bracket invests in a New York City bond paying 5 percent interest. What taxable interest rate would provide the same after-tax return?

117. Miranda is a wealthy widow who has come to you for tax advice. She is in the 35 percent tax bracket. She has a choice between investing in a high-quality municipal bond paying 3.5 percent or a high-quality corporate bond paying 7 Powered by Cognero

Page 16

Name:

Class:

Date:

CH 02 Gross Income and Exclusions percent. From a tax standpoint, which investment would you advise her to make and why?

118. A taxpayer in the 32 percent tax bracket invests in a City of San Diego bond paying 8 percent interest. What taxable interest rate would provide the same after-tax return?

119. In June of the current year, Riley’s stepmother died and left them a stock portfolio worth $600,000. Before she died, she gave them a gift of $20,000 in cash. How much of these amounts, if any, are taxable to Riley? Why? 120. In June of the current year, an aunt gave Myah a stock portfolio worth $150,000. During the year, she collects $4,000 in dividends from this portfolio. How much of these amounts, if any, should Myah include in gross income for the current year? Why? 121. Jayden is a company president who has had a very good year at work. The owner of the company is pleased and gives him a gift of $50,000 at the end of the year. The owner writes “gift” in the memo section of the check. How much of the gift is taxable to Jayden?

122. Morgan receives a $25,000 gift from their parents for a down payment on a house. Their parents write “gift” in the memo line of the check. How much of the gift is taxable to Morgan?

123. Zion receives a rental property as an inheritance from his grandmother. The rental property is worth $500,000, and Zion collected rental income of $24,000 during the year.

For the year, how much is Zion’s gross income as a result of the inheritance?

124. Karina receives a scholarship of $10,000 to a college. She is also given a job which pays $5,000 a year to help with her expenses. $7,000 of the scholarship is earmarked for tuition and $3,000 is for room and board. How much of the money from the scholarship and the job are taxable to Karina?

125. In 2022, Kaliah earned $30,000 from JDR Co. before she was laid off. She then collected $7,000 of unemployment benefits. Finally, Kaliah received a $12,500 scholarship for tuition so she could return to college to earn a microbiology degree. How much does Kaliah need to report as income on her 2022 tax return?

126. Under a divorce agreement executed in 2015, Bo is required to pay his ex-wife, Cadence, $3,000 a month until their youngest daughter is 21 years of age. At that time, the required payments are reduced to $2,000 per month. a. b.

How much of each $3,000 payment may be deducted as alimony by Bo? How much of each $3,000 payment must be included in Cadence's taxable income?

127. Under the terms of a property settlement executed during the current year, Cindy transferred a house worth $375,000 to her ex-husband, Cameron. The property has a tax basis to Cindy of $310,000. a. b.

How much taxable gain or loss must be recognized by Cindy at the time of the transfer?

What is Cameron's tax basis in the property he received from Cindy?

128. Isaiah is required by his 2022 divorce agreement to pay alimony of $4,000 a month and child support of $6,000 a month to his ex-wife India. What is the tax treatment of these two payments?

To Isaiah?

To India?

Powered by Cognero

Page 17

Name:

Class:

Date:

CH 02 Gross Income and Exclusions 129. As part of the property settlement related to their 2022 divorce, Heather must give Javaris the house that they have been living in, while she gets 100 percent of their savings accounts. The house was purchased in Texas 15 years ago for $100,000 and is now worth $110,000. How much gain must Heather recognize on the transfer of the house to Javaris?

What is Javaris’s tax basis in the house for calculating any future sale of the house?

130. Geoffrey receives $20,000 from a qualified tuition program created by his grandmother. The program had accumulated $6,000 in earnings. He used the full $20,000 to pay for qualified higher education expenses. Calculate the amount of earnings subject to taxation.

131. Justin, a single parent, would like to contribute $1,800 to an educational savings account for his 10-year-old son.

Justin's AGI is $98,000. Calculate the amount of the contribution he can make.

132. Melinda took a $1,500 distribution from her educational savings account and used $1,200 to pay for qualified education expenses. Before the distribution, Melinda’s account balance was $4,000, of which $1,000 was earnings.

Calculate the following: a. The tax-free return of capital b. Her new adjusted basis for her savings account c. Distribution of earnings potentially subject to tax d. The excludable portion of the earnings e. The taxable portion of her earnings 133. Xavier, a single individual, was unemployed for a few months during 2022. During 2022, he received $3,600 in unemployment compensation payments. How much of his unemployment compensation payments must be included in gross income?

134. Answer the following questions regarding the taxability of Social Security payments. a. Will a taxpayer with no income other than Social Security have to include the Social Security in taxable income? b. Will a taxpayer with a large amount of municipal bond income, but no taxable income, likely have to pay tax on part of their Social Security? c. What is the maximum percentage of Social Security benefits that may be subject to tax on an individual’s tax return?

135. During the tax year, Thomas and Yolanda received $24,000 in Social Security benefits. The amount of their adjusted gross income for the year was $2,000, and they received no tax-exempt interest income.

Calculate the amount of the Social Security benefits that Thomas and Yolanda must include in their gross income for the year.

136. Anja and Clinton are married but file separate tax returns. Anja received a salary of $42,000. Clinton is unemployed but received $15,000 of dividends from a stock portfolio that is his own separate property. a.

If Anja and Clinton live in a common law state, what income should Anja show on her separate return?

Salary Dividends

b.

If they live in California (a community property state), what income should Anja show on her separate return?

Salary Dividends

Powered by Cognero

Page 18

Name:

Class:

Date:

CH 02 Gross Income and Exclusions

137. Rachel and Noah are married and living together. Their income is: Noah’s salary $120,000 Rachel’s net income from her business 130,000 Interest (Noah’s separate property investments) 4,000 Interest (Rachel’s separate property investments) 2,000 Dividends (community property) 5,000 Total income is $261,000. a. If they live in Arizona and Rachel files a separate return, how much income should she report? b. If Noah and Rachel live in Wisconsin and file separately, what should Rachel report as income?

138. Indicate whether each of the items listed below would be (a) included in gross income or (b) excluded from gross income for the 2022 tax year. a. Receipt of alimony in 2022 from a 2019 divorce b. Lottery winnings c. Life insurance proceeds received upon the death of a family member d. Child support payments e. Reimbursement of hospital expenses from a health insurance plan f. Municipal bond interest g. Unemployment compensation h. Scholarships for tuition and books i. Wages j. Farm income k. Inheritances 139. Indicate whether each of the following is included in or excluded from gross income. a. Payment for the loss of an arm b. Premiums for health insurance paid by the employer c. Reimbursement from the insurance company for a physical examination

140. Ordinarily, life insurance proceeds are excluded from gross income. Why would they be taxable if the policy had been transferred for valuable consideration, prior to the death of the insured?

141. During the current year, Margaret and John received $24,000 in Social Security benefits. The amount of their adjusted gross income for the year before any Social Security income was $140,000, and they received $19,000 in taxexempt income.

Explain the treatment of their Social Security income for tax purposes and the likely percentage of the Social Security income that will be taxable to Margaret and John.

Powered by Cognero

Page 19

Name:

Class:

Date:

CH 02 Gross Income and Exclusions Answer Key 1. True 2. True 3. False 4. False 5. True 6. False 7. False 8. True 9. False 10. False 11. True 12. True 13. False 14. False 15. True 16. False 17. False 18. False 19. True 20. False 21. False 22. False 23. False 24. False 25. True Powered by Cognero

Page 20

Name:

Class:

Date:

CH 02 Gross Income and Exclusions 26. False 27. True 28. True 29. False 30. True 31. False 32. True 33. True 34. True 35. False 36. False 37. d 38. c 39. a 40. c 41. b 42. d 43. c 44. d 45. d 46. b 47. d 48. d 49. c 50. d 51. d Powered by Cognero

Page 21

Name:

Class:

Date:

CH 02 Gross Income and Exclusions 52. b 53. d 54. b 55. c 56. d 57. d 58. b 59. c 60. c 61. b 62. c 63. b 64. a 65. c 66. c 67. b 68. a 69. c 70. b 71. c 72. c 73. d 74. d 75. c 76. d Powered by Cognero

Page 22

Name:

Class:

Date:

CH 02 Gross Income and Exclusions 77. c 78. a 79. d 80. c 81. a 82. b 83. d 84. d 85. a 86. a 87. c 88. c 89. c 90. a 91. c 92. c 93. $25,410 ItemAmountExplanation Item Amount Explanation Dividends$450Included Dividends $450 Included Wages$32,000Included Wages $32,000 Included Child support$0Excluded Child support $0 Excluded Door prize$1,200Included Door prize Powered by Cognero

Page 23

Name:

Class:

Date:

CH 02 Gross Income and Exclusions $1,200 Included Gift$0Excluded Gift $0 Excluded Municipal bond interest$0Excluded Municipal bond interest $0 Excluded Child care($5,000)Excluded up to $5,000 Child care ($5,000) Excluded up to $5,000 Public transportation($3,240)Excluded up to $280 per month Public transportation ($3,240) Excluded up to $280 per month Gross income$25,410 Gross income $25,410 94. The noncash payment of $8,000 for services performed is taxable income to Andy. The tax law states that taxable income is “all income from whatever source derived.” There is no exception in the law for noncash items received in exchange for services.

95. a. $1,000. Taxable income includes “all income from whatever source derived.” The value of the therapy for his child is income to him for the performances of services. There is no taxable income exception in the tax law for “barter income.” b. $1,000. Taxable income includes “all income from whatever source derived.” The value of the estate planning is income to her for the performances of services. There is no taxable income exception in the tax law for “barter income.”

96. Yes. Illegal income is still taxable income since there is no exception excluding it in the tax code. Unless there is an explicit exclusion in the tax law, taxable income is “all income from whatever source derived.”

97. Answer: $40,200. ($32,000 + $1,200 + $7,000) Rationale: In 2022, each of these items is taxable except for gifts.

98. a. Included b. Excluded c. Excluded d. Excluded e. Included f. Included g. Excluded 99. None. Neither the health insurance premiums paid by the employer nor the reimbursement of medical expense by the insurance company is considered income to Joseph.

Powered by Cognero

Page 24

Name:

Class:

Date:

CH 02 Gross Income and Exclusions 100. None. The cost of the family insurance as well as amounts paid by the insurance company for treatment are not taxable to Marco. These amounts are specifically excluded from taxable income under the tax law.

101. Answer: a. Taxable b. Nontaxable c. Taxable d. Nontaxable e. Nontaxable Rationale: Gambling winnings are included in gross income.

De minimis fringe benefits are excluded.

Prizes and awards are considered gross income.

Scholarships used for tuition and fees are excluded.

Working condition fringe benefits are excluded.

102. No. The lodging costs paid by the employer are not taxable to the employee because the lodging is on the business premises and must be accepted as a requirement for employment.

103. Yes. The meals are not being provided for the convenience of the employer. Therefore, the value of the meals should be included in the wages of the employees.

104. $100, the discount on toys from the toy division.

105. No. Tiana will be better off keeping her salary $2,750 higher and paying tax on the salary, since she will likely have no medical costs to reimburse from a health care spending account during the year. If Tiana has no medical expenses, she could lose all or part of the $2,750 in the account after the end of the year.

106. $30,000. Prizes are taxable income, valued at fair market value regardless of the age of the recipient.

107. a. $6,400. $42,000 ÷ 210 (factor for age 67) = $200 × 8 months = $1,600. $8,000 − $1,600 = $6,400 b. $7,040. $25,200 ÷ 210 = $120 × 8 months = $960. $8,000 − $960 = $7,040 108. $6,000 is excluded from income.

Simplified method calculation: 1. Enter total amount received this year: $12,000 2. Enter cost in plan at the annuity starting date: $260,000 3. Factor at annuity starting date: 260 4. Divide line 2 by line 3: $1,000 5. Multiply line 4 by the number of monthly payments this year: $6,000 6. Amount, if any, recovered tax free in prior years: $0 7. Subtract line 6 from line 2: $260,000 8. Enter the smaller of line 5 or 7: $6,000 9. Taxable amount this year. Subtract line 8 from line 1: $6,000 Powered by Cognero

Page 25

Name:

Class:

Date:

CH 02 Gross Income and Exclusions 109. a. $18,500. ($25,000 − $5,000 − $1,500). b. Yes. Transfers to a partner, even for valuable consideration, result in nontaxable proceeds.

110. a. $28,500. ($40,000 − $8,000 − $3,500) b. Yes. Transfers to a corporation by a shareholder and officer of a corporation, even if for valuable consideration, result in nontaxable proceeds.

111. He must pay tax on the $40,000 gain on the sale of the policy. Jovan has not met the requirement for an accelerated death benefit or a viatical settlement.

112. None of the payment is taxable. Life insurance proceeds received upon the death of the insured are generally considered to be tax-free and specifically excluded from taxable income.

113.

Qualified dividends are taxed at 0, 15, or 20 percent depending on the taxpayer’s filing status. The 0 percent rate applies to taxpayers with incomes below a certain threshold ($41,675 for single or married filing separately, $55,800 for head of household, and $83,350 for married filing jointly). The 15 percent rate applies to taxpayers with income in excess of those amounts up to the 20 percent thresholds of $459,751 (single), $258,601 (married filing separately), $517,201 (married filing jointly), and $488,501 (head of household). An additional 3.8 percent Medicare tax may apply for high-income taxpayers.

114. If an election is made, the annual increase in the redemption value of the bond (or interest accrual as it is commonly called) is included in taxable income each year.

115. a. 20 percent b. 15 percent 116. 7.46%. [5% ÷ (1 − 0.33)] 117. She should invest in the corporate bond. At the 35 percent tax bracket, the after-tax equivalent rate on the corporate bond is 4.55 percent or 7 percent times (1 − 0.35), which is greater than the 3.5 percent rate of return on the municipal bond.

118. 11.76%. [8% ÷ (1 − 0.32)] 119. $0 Inheritances and gifts are not taxable to the recipient.

120. $4,000. The gift of stock is not classified as income, but earnings on the stock are income.

121. The full $50,000 is taxable. The gift is clearly bonus income in a business setting, and as such it does not qualify for tax-free gift treatment, even if Jayden’s employer calls the payment a gift.

122. None of the gift is taxable. Gifts are excluded from the taxable income of the person receiving the gift.

123. $24,000. (the amount of the rental income) Powered by Cognero

Page 26

Name:

Class:

Date:

CH 02 Gross Income and Exclusions 124. $8,000. The $5,000 earnings from the job are taxable, as is $3,000 of the scholarship earmarked for room and board (scholarship amounts received for room and board are taxable to the recipient). $7,000 is not taxable since scholarships for tuition are specifically excluded from taxable income.

125. $37,000. ($30,000 from her employment at JDR Co. and $7,000 from unemployment benefits received. The $12,500 scholarship is excluded from income.)

126. a. $2,000 b. $2,000 The amount over the continuing alimony payment is not treated as alimony for tax purposes.

127. a. $0 b. $375,000

128. Under tax law for a post-2018 divorce: Isaiah cannot deduct the alimony or the child support.

India will not report the alimony or the child support as income.

129. No gain is taxable to Heather on the transfer of the house since it is part of a property settlement related to a divorce.

Javaris has a basis of $100,000 in the house for calculating tax on any future sale of the house.

130. $0. Both the original contributions and the earnings were used to pay for qualified higher education expenses.

131. $1,600. His contribution is limited because of his AGI. ($110,000 − $98,000) ÷ $15,000 × $2,000 is $1,600. $15,000 is the range between the upper and lower phase-out limits.

132. a. $1,125. 75 percent of the account balance before the distribution was from Melinda’s contributions; therefore, 75 percent of the amount distributed is a return of her capital. b. $1,875. $3,000 basis before distribution less tax-free return of capital of $1,125. c. $375. The total distribution of $1,500 less the $1,125 return of capital. d. $300. The potential amount subject to tax, $375, times the ratio of the amount used to pay for qualified education expenses, $1,200, to the full distribution, $1,500, equals the excludable portion. e. $75. The potential amount subject to tax, $375, times the ratio of the amount not used to pay for qualified education expenses, $300, to the full distribution, $1,500, equals the taxable portion.

133. $3,600. Unemployment compensation payments are generally fully taxable and included in gross income.

134. a. No. The taxpayer’s income is below the threshold amount used in the formula to determine whether Social Security is taxable. b. Yes. Tax-free municipal bond income is added to AGI in the formula to determine the amount of taxable Social Security. c. 85%. High-income taxpayers must include 85 percent of Social Security receipts in taxable income.

135. $0. Their modified adjusted gross income is less than the base amount required to have taxable Social Security.

Powered by Cognero

Page 27

Name:

Class:

Date:

CH 02 Gross Income and Exclusions 136. a. Salary: $42,000 Dividends: $0 b. Salary: $21,000 Dividends: $0 137. a. $129,500. 50% of Noah’s salary, $60,000, plus 50% of Rachel’s net business income, $65,000, plus 100% of Rachel’s interest income on her property, $2,000, plus 50% of the dividends on community property, $2,500, for a total of $129,500. b. $130,500. 50% of Noah’s salary, $60,000, plus 50% of Rachel’s net business income, $65,000, plus 50% of Rachel’s interest income on her property, $1,000, plus 50% of Noah’s interest income on his property, $2,000, plus 50% of the dividends on community property, $2,500, for a total of $130,500.

138. a. Excluded b. Included c. Excluded d. Excluded e. Excluded f. Excluded g. Included h. Excluded i. Included j. Included k. Excluded 139. a. Excluded b. Excluded c. Excluded 140. If a policy is transferred for valuable consideration, it takes on the nature of an investment for the new owner.

Generally, the excess of the amount realized on disposal of an investment over the cost of the investment is subject to taxation.

141. Social Security income is partially taxed based on the taxpayer’s modified adjusted gross income. Modified adjusted gross income includes adjusted gross income plus tax-exempt interest plus half of the Social Security received. For lowincome taxpayers, no Social Security income is taxable. Higher-income taxpayers must include 50 to 85 percent of the Social Security receipts in income. Given the high level of income reported by Margaret and John, it is safe to say they would have to include 85 percent of the Social Security payments in taxable income. To be certain, the IRS Social Security worksheet should be used to calculate the taxable amount.

Powered by Cognero

Page 28

Name:

Class:

Date:

CH 03 Business Income and Expenses

Indicate whether the statement is true or false.

1. A reasonable business expense must be ordinary and necessary in order to be deductible. a. True b. False 2. When a taxpayer uses the FIFO inventory valuation method, the assumption on which the method is based is that the inventory on hand at the end of the year consists of the most recently acquired items. a. True b. False 3. A taxpayer who adopts the LIFO method of inventory valuation for tax purposes may use the FIFO method for preparing financial statements. a. True b. False 4. The taxpayer must use either the FIFO or LIFO method of valuing inventory, depending upon which method reflects the actual goods the taxpayer has on hand. a. True b. False 5. Once the election to use the LIFO inventory method has been made by a taxpayer, the inventory method may be changed only with the consent of the IRS. a. True b. False 6. Once a taxpayer uses the standard mileage method to determine the deduction for automobile expenses for the tax year, the standard mileage method must be used in all subsequent years. a. True b. False 7. The standard mileage rate for automobiles in 2022 is 57.5 cents per mile. a. True b. False 8. If a taxpayer does not maintain adequate records of car expenses (i.e., gas, tires, car insurance, etc.), the standard mileage rate cannot be used. a. True b. False 9. Taxpayers who work at two or more jobs during the same day may deduct the cost of transportation from one job to the other. a. True b. False Powered by Cognero

Page 1

Name:

Class:

Date:

CH 03 Business Income and Expenses 10. If a taxpayer takes a trip within the United States which is primarily for business, the cost of travel to and from the destination need not be prorated between the business and personal portion of the trip. a. True b. False 11. If an employee is transferred to a distant location for an indefinite period of time, the new location typically will be considered the employee's new tax home. a. True b. False 12. The cost of transportation from New York to London for a trip that is for both business and pleasure may be deducted in full as a travel expense. a. True b. False 13. For an expense to qualify as a travel expense, the taxpayer must be away from home for at least 24 hours. a. True b. False 14. The IRS has approved two per diem methods to substantiate travel expenses, the standard federal rate method and the high-low method. a. True b. False 15. Taxpayers who use their country club more than 50 percent for business may deduct the total amount of their membership dues. a. True b. False 16. The expense of a sales lunch at a restaurant may be deductible (100 percent in 2022) even if no sale is made. a. True b. False 17. The expense of travel as a form of education is not deductible. a. True b. False 18. The cost of a subscription for a hospital intern to the New England Journal of Medicine is a deductible expense for the hospital. a. True b. False 19. The cost of a blue wool suit for an accountant is a deductible expense. a. True b. False 20. A business gift with a value of $35 presented to a client and the client's spouse, who is not a client, is fully deductible Powered by Cognero

Page 2

Name:

Class:

Date:

CH 03 Business Income and Expenses by the donor. a. True b. False 21. There is a limitation of $25 per donee on the deduction of gifts to employees for length of service. a. True b. False 22. A gift to a supervisor by a worker is considered business related and therefore subject to the $25 limit. a. True b. False 23. Under the specific charge-off method, a deduction for a bad debt is taken when the debt is determined to be worthless. a. True b. False 24. A deduction for a business bad debt is allowed to the extent that income related to the debt was previously included in taxable income. a. True b. False 25. Most taxpayers must use the specific charge-off method in calculating the bad debt deduction. a. True b. False 26. The home office deduction is an easy way for a taxpayer to show a loss on the taxpayer's tax return. a. True b. False 27. If a home office is used for both business and personal purposes, the home office expenses, such as rent or depreciation, should be allocated between the business and personal use and then deducted. a. True b. False

Indicate the answer choice that best completes the statement or answers the question.

28. What income tax form does a self-employed sole proprietor usually use to report business income and expense? a. Schedule A, Miscellaneous Itemized Deductions b. Schedule B c. Schedule C d. Form 2106, Employee Business Expenses 29. In the current year, Jaslyn started a profitable bookkeeping business as a sole proprietor. Jaslyn made $38,000 in her first year of operation. What two forms must Jaslyn file for her business? a. Schedules A and C Powered by Cognero

Page 3

Name:

Class:

Date:

CH 03 Business Income and Expenses b. Schedules D and E c. Schedules SE and C d. Schedules B and C 30. Maribel runs a small business out of her home. She has expenses of $2,000 per year and uses the cash basis method of accounting. Her only employee is her cousin who works for her part time. What form should she use to report her business income? a. Schedule A b. Schedule C c. Schedule F d. Schedule D 31. Generally, for an activity to be treated as a trade or business, which of the following is required? a. Always generate a profit b. No more than intermittent effort toward the activity c. Regular and continual effort designed to seek profit d. Organization as a corporation or partnership 32. Which of the following is a test for deductibility of business expenses? a. The expense must be pre-approved by the senior manager. b. The expense must have a legitimate business purpose. c. The expense must be above what an employee would reasonably be expected to pay. d. The expense must be lavish and extravagant.

33. Stone Pine Corporation, a calendar year taxpayer, has ending inventory of $150,000 on December 31, 2022. During the year 2022, the corporation purchased additional inventory of $375,000. If cost of goods sold for 2022 is $470,000, what was the beginning inventory on January 1, 2022? a. $55,000 b. $245,000 c. $255,000 d. $310,000 34. Ellie is a sole proprietor owning a small specialty store. The business records show that the cost of the store’s individual inventory items has been steadily increasing. The cost of the end of the year inventory is $125,000, and the cost of the beginning of the year inventory was $150,000. Ellie uses the LIFO method of inventory valuation. Which of the following statements is true? a. Ellie purchased more inventory during the year than she sold during the same 1-year period. b. Ellie would have a higher net income if she used the FIFO method of inventory valuation instead of the LIFO method. c. Ellie has apparently increased the volume of items in her ending inventory as compared to the number of items in her beginning inventory. d. Since the cost of the store’s inventory items is increasing, Ellie will have a smaller cost of goods sold amount on a LIFO basis than on a FIFO basis.

35. Acacia Company had inventory of $300,000 on December 31, 2022. Other information is as follows: Powered by Cognero

Page 4

Name:

Class:

Date:

CH 03 Business Income and Expenses Purchases Sales Inventory 1/1/2022

$1,500,000 1,800,000 500,000

What is the amount of Acacia’s cost of goods sold for 2022? a. $2,000,000 b. $1,600,000 c. $1,700,000 d. $1,800,000 36. Jamal owns a small retail store as a sole proprietor. The business records show that the cost of the store’s inventory items has been steadily increasing. The cost of the end of the year inventory is $200,000, and the cost of the beginning of the year inventory was $250,000. Jamal uses the FIFO method of inventory valuation. Which of the following statements is true? a. Jamal purchased more inventory during the year than he sold during the same 1-year period. b. Jamal would have a higher net income if he used the LIFO method of inventory valuation instead of the FIFO method. c. Jamal has apparently decreased the volume of items in his ending inventory as compared to the number of items in his beginning inventory. d. Since the cost of the store’s inventory items is increasing, Jamal will have a greater cost of goods sold figure under FIFO than LIFO. 37. Piper is a business owner who is trying to determine their cost of goods sold for the current year. They bought 20 units of inventory at $11, then 26 units at $10, and finally 18 units at $14. They sold 30 units at an average price of $16 per unit during the current year and used FIFO for their inventory valuation. What was their cost of goods sold in the current year, assuming that there was no inventory at the beginning of the year? a. $320 b. $330 c. $480 d. $732 38. Under the cash method, which of the following is one of the three options for treating inventory for a small business? a. Treat inventory as non-incidental materials and supplies. b. Treat inventory as a deductible expense. c. Treat inventory as a business investment. d. Treat inventory as a capitalized asset.

39. Greg, a self-employed plumber, commutes from his home to his office which is 10 miles away. At his office, he loads his truck for the day with the parts that he needs. Then he is off to see his first customer of the day, the Smiths. The Smiths are 5 miles away from the office. After the job at the Smiths’, Greg goes to his next plumbing client, Happy Dry Cleaning, which is 21 miles away from the Smiths' home. Greg spends the rest of the day at Happy Dry Cleaning. From Happy Dry Cleaning, Greg goes home which is now only 7 miles away. How much can Greg count as deductible transportation miles? a. None of it b. 21 miles c. 26 miles Powered by Cognero

Page 5

Name:

Class:

Date:

CH 03 Business Income and Expenses d. 43 miles 40. Which of the following is true regarding deductible transportation expenses? a. They include meals and lodging. b. They include only costs incurred while out of town. c. They do not include the normal costs of commuting. d. They do not include transportation between the taxpayer’s home and temporary work location.

41. Which of the following taxpayers should use a method other than the standard mileage method of calculating transportation costs? a. A self-employed handyman who drives a truck with equipment to visit clients b. A taxpayer who has a fleet of four business automobiles c. A financial manager who rents a $70,000 Mercedes to meet with clients d. An attorney who uses his Tesla for calling on clients 42. Binh is a self-employed attorney who travels to New York on a business trip during 2022. Binh's expenses were as follows: Airfare $550 Taxis 40 Restaurant meals 150 Lodging 350 How much may Binh deduct as travel expenses for the trip? a. $0 b. $1,015 c. $940 d. $1,090 43. Which of the following is accurate if an employer chooses a per diem method of substantiation for travel expenses? a. The regular federal rate method allows employees the same per diem rate no matter where they travel in the United States. b. The high-low method averages the high-cost locality and low-cost locality per diem rates to arrive at an average rate. c. Any per diem method still requires the taxpayer to provide actual cost records for lodging expenses. d. The employer does not need to use an accountable plan for reimbursing employees for travel expenses.

44. During 2022, Harry, a self-employed accountant, travels from Kansas City to Miami for a 7-day business trip. While in Miami, Harry decides to stay for an additional 5 days of vacation. Harry pays $600 for airfare, $200 for restaurant meals, and $500 for lodging while on business. The cost of meals and lodging while on vacation was $300 and $500, respectively. How much may Harry deduct as travel expenses for the trip? a. $600 b. $1,100 c. $1,200 d. $1,300 45. Which of the following items incurred while on travel is not considered a travel expense?

Powered by Cognero

Page 6

Name:

Class:

Date:

CH 03 Business Income and Expenses a. The cost of meals b. The cost of lodging c. Transportation costs d. Cost of entertaining clients 46. Which of the following is true for taxpayers who make a combined business and pleasure trip? a. They must allocate the travel cost between the business and pleasure parts of the trip if the travel is within the United States. b. They must allocate the travel cost between the business and pleasure parts of the trip if the travel is outside the United States. c. They can deduct the cost of meals, lodging, local transportation, and incidental expenses in full if the travel is within the United States. d. They can deduct the cost of meals, lodging, local transportation, and incidental expenses in full if the travel is outside the United States.

47. Which of the following expenses, incurred while on travel, does not qualify as a travel expense? a. Tips b. Dry cleaning of suit c. Dinner at a steak house d. Gift purchased for a prospective customer ($20) 48. Mike is a self-employed computer game software designer. He takes a week-long trip to Maui, primarily for business.

He takes 2 personal days at the beach. How should he treat the expenses related to this trip? a. None of the expenses are deductible since there was an element of personal enjoyment in the trip. b. 100 percent of the trip should be deducted as a business expense since the trip was primarily for business. c. 50 percent of the trip should be deducted as a business expense. d. The cost of all of the airfare and the expenses related to the business days should be deducted, while the expenses related to the personal days are not deductible.

49. If a per diem method is not used, which of the following items is required as substantiation for the deduction of a travel expense? a. Accumulated expenditure for airfare and lodging b. Classification of the destination as high- or low-cost c. Names of all clients met with d. Departure and return dates 50. In 2022, Matteo drove from his home in Los Angeles to Oregon to consult with a client. He worked for 1 day and spent 3 days enjoying Oregon since the consultation was right before a 3-day weekend. Matteo's expenses were $175 to drive to Oregon and back, $600 for lodging, $50 for food from a convenience store on the day that he worked, and $125 for restaurant food on the other 3 days. How much of his travel expenses are deductible? a. $175 b. $200 c. $350 d. $800 51. Kyle is a self-employed accountant who pays $2,000 for business meals provided by a restaurant. How much of a Powered by Cognero

Page 7

Name:

Class:

Date:

CH 03 Business Income and Expenses deduction can he claim for the meals, and where should the deduction be claimed? a. 50 percent, miscellaneous itemized deduction b. 50 percent, Schedule C deduction c. 100 percent, miscellaneous itemized deduction d. 100 percent, Schedule C deduction 52. In 2022, Jason is a lawyer who is a member at Ocean Spray Country Club where he spends $7,200 in dues, $4,000 in business meals at the dining room and golf course bar, and $2,000 in green fees to entertain clients. He has separate invoices for the meals. He is also a member of the local Rotary club where he meets potential clients. The dues for the Rotary club are $1,200 a year. How much of the above expenses can Jason deduct as business expenses? a. $4,000 b. $3,200 c. $5,200 d. $14,400 53. Lina is self-employed and spends $600 for business meals at restaurants and $900 for business entertainment in the current year. What is Lina allowed to deduct in the current year for these expenses? a. $300 b. $600 c. $750 d. $1,500 54. Which of the following statements is correct regarding deductions? a. If a taxpayer does a lot of business travel, the taxpayer may deduct the amount paid for an airline club membership. b. Membership dues to a golf club are deductible as long as there is a business purpose. c. In order to be deductible, dues and subscriptions must be related to the taxpayer’s occupation. d. If a financial planner becomes certified, Certified Financial Planner (CFP) dues are not deductible because it is not necessary to be certified in order to engage in the business of being a financial planner.

55. In which of the following situations may the taxpayer take an education expense on Schedule C? a. Brianna, a plumber by trade, is taking classes to qualify as an electrician so she may expand her business to take on more complex contractor jobs. b. Ivan, a self-employed administrative assistant, is taking an advanced computer skills class through an adult education program. c. Cari, a salesperson, is flying on numerous commercial airplanes in order to observe the flight attendants so that she may improve her public relations skills. d. Harrison, a host at a restaurant, is taking a review course in order to pass the certified financial planner examination.

56. Which of the following is correct regarding deductible expenses? a. Education expenses are deductible on Schedule C even if the education qualifies the taxpayer for a new trade or business. b. Expenses required for education to maintain skills for the taxpayer’s current business are not deductible. c. The cost of a CPA exam review course is deductible by a bookkeeper on their Schedule C. d. Expenses for travel as a form of education are not deductible.

Powered by Cognero

Page 8

Name:

Class:

Date:

CH 03 Business Income and Expenses 57. Which of the following is deductible as dues, subscriptions, or publications? a. Dues to a health club for a doctor b. Subscription to Vogue magazine for a corporate president c. Dues to the drama club for a student d. Subscription to the Journal of Taxation for a tax attorney 58. Which of the following would not result in a business expense deduction for a self-employed taxpayer's uniforms or special clothing? a. A traveling salesperson buys a new coat. b. A mascot buys their costume. c. A clown buys their costume. d. A scientist buys their hazmat suit.

59. For the cost of special work clothing or uniforms to be deductible, . a. it must not be suitable for everyday use and must be required as a condition of the job b. it must be required as a condition of the job, but can also be suitable for everyday use c. it need not be required as a condition of the job, but must not be suitable for everyday use d. it need not be required as a condition of the job, but must be suitable for the job 60. Sera is a small business owner who often gives gifts to clients. She gives a $40 gift to a client and their spouse. Sera spent $6 to wrap the gift. She also gave out 400 calendars with her company name on them. Each calendar cost $1. Sera also gave her secretary a $370 watch for their 10 years of service. How much of the above expenses may she deduct? a. $816 b. $446 c. $795 d. $801 61. Nia owns a small dress store. During the year, Nia gave business gifts to the following individuals, with the costs as indicated: Ms. Green (a customer) $37 plus $3 shipping Mr. Green (nonclient husband of Ms. Green) $10 Ms. Brown (a customer) $22 What is the amount of Nia's deduction for business gifts? a. $0 b. $50 c. $53 d. $62 62. During the current year holiday season, Bob, a barber, gave business gifts to 34 customers. The values of the gifts, which were not of a promotional nature, were as follows: 10 at $10 each 8 at $25 each 8 at $50 each 8 at $100 each Powered by Cognero

Page 9

Name:

Class:

Date:

CH 03 Business Income and Expenses For the current year, what is the amount of Bob's business gift deduction? a. $0 b. $700 c. $850 d. $1,500 63. Jasmin loans Nikki $45,000 to start a hair salon. Unfortunately, the business fails in 2022 and she is unable to pay back Jasmin. In 2022, Jasmin also had $20,000 of income from her part-time job and $15,000 of capital gain from the sale of stock. How much of the $45,000 bad debt can Jasmin claim as a capital loss in 2022? a. $12,000, with $33,000 carried forward to 2023 b. $18,000, with $27,000 carried forward to 2023 c. $35,000 d. $15,000, with $30,000 carried forward to 2023 64. Splashy Fish allows qualified customers to purchase items on credit. During the current year, Sydney, the owner of the store, determines that $3,500 of accounts receivable are not collectible. Which of the following statements is true with respect to Splashy Fish’s deduction for the uncollectible accounts receivable? a. Splashy Fish is not allowed a deduction for the uncollectible accounts if the income arising from the accounts has not been previously included in taxable income. b. Any deduction for the uncollectible accounts receivable will be treated as a short-term capital loss. c. Only $3,000 of the uncollectible accounts receivable may be deducted in the current year. d. None of the debit is deductible since Splashy Fish is not in the business of making loans, and this is considered a cost of doing business.

65. Which of the following would be a business bad debt if it were uncollectible? a. A taxpayer loans the taxpayer's parent $1,000 to start a business. b. A taxpayer loans the taxpayer's child $10,000 to purchase a rental house. c. A dentist, using the accrual basis of accounting, records income when it is earned and extends credit to a patient for services provided. d. A taxpayer loans the taxpayer's sibling $3,000 to purchase a truck for use in the sibling’s business.

66. Zachary loaned a friend $4,000 to buy a used car. In the current year, Zachary’s friend declares bankruptcy, and the debt is considered totally worthless. What amount may Zachary deduct on his individual income tax return for the current year as a result of the worthless debt, assuming he has no other capital gains or losses for the year? a. $4,000 ordinary loss b. $4,000 short-term capital loss c. $2,000 short-term capital loss d. $3,000 short-term capital loss 67. Amir has a home office for his business as a literary agent. The business shows a loss of $2,000 before home office expenses. How should the home office expenses be treated? a. Because of the business loss, home office expenses cannot be deducted and are lost forever. b. Because of the business loss, home office expenses (other than mortgage interest and property taxes allocated to the office) cannot be deducted in the current year but can be carried forward to the next year. c. The home office expenses increase the business loss in the year they are incurred and are fully deductible in that year.

Powered by Cognero

Page 10

Name:

Class:

Date:

CH 03 Business Income and Expenses d. The home office expenses increase the business loss in the year they are incurred and are 50 percent deductible in that year.

68. Ben operates a dental office in his home. The office occupies 250 square feet of his residence, which is a total of 1,500 square feet. During 2022, Ben pays rent for his home of $12,000, utilities of $4,800, and maintenance expenses of $1,200.

What amount of the total expenses should be allocated to the home office? a. $0 b. $2,000 c. $2,500 d. $3,000 69. Blair is a self-employed taxpayer working from his home. His net business profit is $7,000 before home office expenses. His allocable home office expenses are $8,000 in total. How are the home office expenses treated on his current year tax return? a. All home office expenses can be deducted and will result in a $1,000 business loss. b. Only $7,000 of the office expenses can be deducted, the remaining $1,000 cannot be carried forward or deducted. c. None of the home office expenses can be deducted because Blair’s income is too high. d. Only $7,000 of the office expenses can be deducted; the remaining $1,000 can be carried forward to future tax years.

70. Edgar is a mental health counselor who uses a portion of his home as his office. His home is 2,500 square feet, and his office space occupies 1,500 square feet. Rent expense is $18,000 a year; utilities expense is $2,000 a year; and maintenance expense is $3,000 a year. What is the total amount of these expenses that can be allocated to his home office? a. $5,800 b. $9,200 c. $9,280 d. $13,800 71. Sienna is a self-employed taxpayer working exclusively from her home office. Before the home office deduction, Sienna has $6,000 of net income. Her allocable home expenses are $10,000 in total. How are the home office expenses treated on her current year tax return? a. Only $6,000 home office expenses may be deducted, resulting in net business income of zero. The remaining $4,000 of home office expenses may be carried forward and deducted in a future year against business income. b. Only $3,000 a year of the home office expenses may be deducted. c. All home office expenses may be deducted, resulting in a business loss of $4,000. d. Only $6,000 of home office expenses may be deducted, resulting in a net business income of zero. None of the remaining $4,000 of home office expenses may be carried forward or deducted.

72. Richard operates a hair styling boutique out of his home. The boutique occupies 420 of the home’s 1,200 square feet of floor space. Other information is as follows: Gross income from the boutique $10,000 Supplies for the boutique 2,400 Depreciation on total residence 12,000 Utilities for total residence 6,000 What amount of income or loss from the boutique should Richard show on his return?

Powered by Cognero

Page 11

Name:

Class:

Date:

CH 03 Business Income and Expenses a. $0 income or loss b. $10,400 loss c. $3,500 income d. $1,300 income 73. In determining whether an activity should be classified as a hobby, the tax law provides a rebuttable presumption with regard to the profits or losses of an activity. Which of the following statements describes the profit/loss test which must be satisfied in order to meet the presumption that the activity was engaged in for profit (as opposed to just considered a hobby)? a. The activity shows a profit for 3 of the 5 previous years. b. The activity shows a loss for 3 of the 5 previous years. c. The activity shows a profit for 3 of the 7 previous years. d. The activity shows a loss for 3 of the 7 previous years.

74. Which of the following is a factor that would inform the IRS that a loss is from a business, rather than a hobby? a. The activity is owned and run by the taxpayer alone. b. The activity makes a profit in some years. c. The losses could have been controlled by the taxpayer. d. The activity is not expected to make a future profit.

75. Which of the following factors would indicate to the IRS that an activity is a hobby rather than a business? a. The taxpayer depends on the activity for a livelihood. b. The taxpayer invests time and effort with an intent to make a profit. c. The taxpayer has the knowledge to conduct the activity as a business. d. The taxpayer has pursued the activity for many years and never made a profit.

76. In his spare time, Logan likes to restore old furniture and sell it to his friends. He is a lawyer by trade. During 2022, he sells $7,500 worth of furniture and has $21,000 worth of marketing and equipment rental expenses. Which one of the following is true? a. Logan may deduct all $21,000 of his expenses because Logan is engaged in a hobby. b. Logan may deduct all $21,000 of his expenses because Logan is engaged in a trade or business. c. Logan cannot deduct any of the expenses because he is engaged in a hobby. d. Logan’s deductions are limited to the income from selling furniture because he is engaged in a hobby.

77. Brandi operates a small business and employs three staff members, all of whom perform the same tasks with more or less the same level of skill. Two of the staff members are paid wages of $10 per hour; however, the third staff member, Laila, is Brandi's sister and earns $17 per hour. What amount per hour can Brandi deduct for wages paid to Laila?

78. Aneth is a single taxpayer and an elementary school teacher. She also tutors students in her home as a small business.

During 2022, Aneth purchased $400 in supplies and materials for her tutoring business. She uses a 200-square-feet spare bedroom in her house to tutor her clients. Her mother also stays in that room during certain holidays. If Aneth elects to use the simplified method for her home office, what deductions may she claim on her tax return based on the information provided (ignore any income limitations), and where can she claim these deductions?

Powered by Cognero

Page 12

Name:

Class:

Date:

CH 03 Business Income and Expenses 79. Lewis started a business writing a popular syndicated Japanese gardening column in the current year and will report a profit for his first year. His results of operations are as follows: Gross income $40,000 Travel expense 4,000 Business suits, to visit magazine editors 1,000 Transportation, 425 miles (Jan.–June) 425 miles (July–Dec.) 514 Entertainment 800 Subscription to bonsai and Japanese gardening magazines 500 Gifts: 7 at $100 each; 2 at $20 each 740 Rent and utilities for apartment, in total 8,000 (15 percent is used for a home office) What is the net income Lewis should show on his Schedule C? Show the calculation of his taxable income.

Gross income Expenses (describe each)

$

Taxable income

$

80. Patrick is a self-employed attorney. He gives the following information about his business to his CPA for use in preparing his 2022 tax return: Income Fees from law practice

$152,000

Expenses Malpractice insurance $ 8,000 Office rent 12,500 Office supplies 5,600 Travel expense 2,000 Restaurant meals 4,000 Entertainment 4,000 Paralegal wages 25,500 Country club dues (Patrick uses the club for business entertainment.)

2,500 Patrick also drove his car 5,850 miles ratably for business and used the standard mileage method for computing transportation costs. How much will Patrick show on his Schedule C for 2022 for: a. b. c.

Gross receipts Tax-deductible expenses Taxable income

Powered by Cognero

Page 13

Name:

Class:

Date:

CH 03 Business Income and Expenses 81. Wyatt has a small retail store and sells one product. His beginning inventory consisted of 1,000 products at $4 each for a total of $4,000. During the year, Wyatt made the following purchases of the product: March 1 5,000 products at $5 each = $25,000 August 1 1,000 products at $6 each = $6,000 Wyatt uses the FIFO method of inventory valuation, and he sells 5,000 products during the current year. a. Calculate the total cost of goods available for sale. b. Calculate the cost of the ending inventory. c. Calculate the cost of goods sold.

82. Victor runs a small business and sells one product. His beginning inventory consisted of 2,000 units at $6 each for a total of $12,000. During the year, Victor made the following purchases of the product: April 1 2,000 units at $6 each = $12,000 June 1 3,000 units at $6 each = $18,000 September 1 1,000 units at $7 each = $7,000 Victor uses the LIFO method of inventory valuation, and he sells 6,000 units during the current year. a. Calculate the total cost of goods available for sale. b. Calculate the cost of the ending inventory. c. Calculate the cost of goods sold.

83. Juanita operates a small business that sells microgreens over the Internet with annual sales of about $2 million. The purchase and sale of inventory is an income-producing factor for this business. Juanita's business does not have audited financial statements. Describe Juanita's alternatives for determining her inventory.

84. Rashad is a business adviser who lives in Escondido, California, and works in San Diego. He makes a 70-mile round trip commute to his job every workday, for a total of 14,000 miles a year. In addition, he drives 100 miles a month for a total of 1,200 miles to visit clients from his office in San Diego. If Rashad uses the standard mileage method for computing automobile expenses, what is his automobile expense deduction for 2022?

85. Christine is a self-employed tax accountant who drives her car to visit clients occasionally throughout the year. She drives her car 2,000 miles for business, 5,000 miles for commuting, and 5,000 miles for personal use. Half of those miles are driven through June 30, and half after. Assuming that Christine uses the standard mileage method, how much is her auto expense for 2022? Where in her tax return should Christine claim this deduction?

86. Corey is self-employed as a real estate salesman and drives his car frequently to take clients to see homes for sale.

Corey drove his car 20,000 miles for business purposes and 25,000 miles in total. His actual expenses for operating the auto including depreciation are $10,000 since he drove it so much during the year. Corey has used the actual cost method since he started his business in 2016. How much is Corey’s deductible auto expense for the year?

87. Paul is a self-employed investment adviser who uses his automobile for business. Paul drove his automobile a total of 25,000 miles during 2022; 80 percent was business mileage and was distributed evenly throughout the year. The actual cost of gasoline, oil, depreciation, repairs, and insurance for the year was $6,200. a. b. c. d.

How much is Paul's transportation deduction based on the standard mileage method?

How much is Paul's transportation deduction based on the actual cost method?

Which method should Paul use to calculate his transportation deduction, assuming he used the standard mileage method in the prior tax year? Why? Where should he deduct the transportation expense on his current year tax return?

Powered by Cognero

Page 14

Name:

Class:

Date:

CH 03 Business Income and Expenses 88. Christopher opens a chiropractic office in Houston on January 1, 2022. In 2022, Christopher drives a total of 4,200 miles from his office to clients’ homes to do chiropractic adjustments, evenly distributed throughout the year. In addition, he drives a total of 3,000 miles for commuting between his home and his office in 2022. He elects to use the standard mileage method. On January 1, 2022, Christopher purchases an annual subscription to a chiropractic journal for $200 and a 1-year medical reference service for $500. Calculate Christopher's deduction for the above items for the 2022 tax year.

89. Sofia and Tara are tax accountant partners operating a tax firm in San Diego. In 2022, they attend the Tax Planning Forum in Las Vegas featuring nationally renowned tax experts. The Forum lasts for 2 days. One evening, Sofia and Tara attend a show and another evening they lose $10 gambling on the nickel slot machines. Their expenses are as follows: Airfare Hotels Restaurant meals Forum registration Tickets to show Gambling loss

$ 400 300 180 1,000 100 10 $1,990

Calculate the firm's deduction for attending this event.

90. Priya is a self-employed surgeon and is required to take a week of continuing medical education every year to keep her license. In 2022, she paid $2,000 in course fees for her continuing medical education in Honolulu. She also paid $1,500 for airfare and a hotel room and $400 for restaurant meals. What is the total amount she can deduct on her Schedule C related to these expenses?

91. Kevin, the owner of K Co., incurs the following expenses while away from home on a 3-week business trip during 2022: Airfare from Chicago to Boston $ 800 Hotel charges 1,800 Restaurant meal charges 740 Dry cleaning and laundry 100 Local transportation 40 Business entertainment 150 Business gift to Boston customer 45 In addition to the above expenses, Kevin incurred the following expenses for a weekend sightseeing trip to Washington, D.C.: Transportation to Washington, D.C. Hotel charges Restaurant meal charges Calculate the amount Kevin may deduct for 2022 as travel expenses for the trip.

$200 125 95

Calculate the amount Kevin may deduct for 2022 as entertainment.

Calculate the amount Kevin may deduct for 2022 as business gifts.

92. Mary is an insurance salesperson and a member of the Country Club. During the current year, Mary used the club 40 percent for entertaining clients and 60 percent for pleasure. She incurred the following expenses at the Country Club: Annual dues $8,000 Business meals 1,800 Powered by Cognero

Page 15

Name:

Class:

Date:

CH 03 Business Income and Expenses Personal meals Tennis fees (business use) Calculate the amount that Mary is allowed to deduct.

2,000 600

93. Nicholas is a self-employed marketing consultant who spends significant time entertaining potential customers. He keeps all the appropriate records to substantiate his entertainment. He has the following business-related expenses in 2022.

Business meals provided by restaurants $7,000 Tickets to baseball games 500 Tickets to football games 500 Yacht maintenance (the yacht is all business use) 6,000 What is the tax-deductible meals and entertainment expense Nicholas may claim in 2022? On which tax form should he claim the deduction?

94. David purchases a yacht solely for the purpose of entertaining real estate clients. He wishes to position himself as a high-end real estate salesperson specializing in very expensive residences and uses the yacht only for business entertainment. During 2022, his expenses for maintaining and operating the yacht, including depreciation, were $28,000.

In addition, he incurred $9,000 of catering expenses for meals he provided to business clients on the yacht. What is David's tax deduction in 2022?

Explain.

95. Ebony is a self-employed private language tutor. In 2022, she obtained her teaching credentials, hoping to receive a job as a public school English teacher. She had the following education expenses for the year: Tuition to finish her credentials program Review course for the Teacher Certification Exam

$5,000 1,000

Ebony also attended a seminar in Washington, D.C., titled “The Motivated Student.” Her expenses for the trip are as follows: Fee for the course Airplane ticket Hotel Restaurant meals

$ 700 500 1,000 400

Determine how much of the above expenses are deductible on her Schedule C. 96. Michael has a very successful business as a financial consultant. Michael attends the following seminars: “Zen Your Way to Riches” $ 800 “Backyard Gardening” 50 “Computer Marketing Tools” 200 “Passing the Legal Bar Exam” 500 “Beating the Market” 300 How much can Michael deduct as business education expenses?

97. Pranav is a general contractor. How much of the following expenses may Pranav deduct?

Dues paid to the Associated Builders Society Powered by Cognero

$250 Page 16

Name:

Class:

Date:

CH 03 Business Income and Expenses Dues paid to the Masonry Society Dues paid to the Wine of the Month Club Subscription to Dwell, a home design magazine Subscription to Sports Illustrated magazine

325 200 25 40

98. Indicate which of the following dues, subscriptions, and publications are deductible and which are not deductible for self-employed taxpayers: 1. Subscription to The New England Journal of Medicine for an electrician 2. Ford truck shop manual for an auto mechanic 3. Subscription to Shape magazine for an aerobics teacher 4. Dues for a hairstyle video club for a hairdresser 5. Movie of the Month club for an appraiser 99. Taio is a police officer employed by the city. He must purchase and maintain his uniforms. The total cost of purchasing and maintaining uniforms is $1,000 for the current year. How much may he deduct, why, and where on his tax return?

100. Neva, a CPA, is always required by her employer to wear to work either a gray or a blue business suit with matching shoes. Neva would never consider wearing her gray or blue suits and matching shoes anywhere other than work since she considers them uncomfortable as well as unattractive. Can Neva deduct the cost of the suits and shoes as special work clothing or uniforms? Explain 101. Claudio makes the following business gifts during the year: Ms. Yun (a potential client) $30 Mr. and Mrs. Whitcomb (both are clients) 40 Mr. Perez (a client) 18 Dr. Perez (the nonclient spouse of Mr. Perez) 12 Carter Green (Claudio’s boss) 27 Claudio also spent $15 on wrapping paper and a card for the above gift to the Whitcombs.

Calculate Claudio’s total allowed deduction for gifts.

102. Apex Corporation had the following expenses: 1. 1,000 pads of paper embossed with the company logo to hand out at the Big Time Convention 2. Display racks to use at the convention center 3. An all-expense vacation for Aniyah’s 25 years of service awarded under a qualified plan 4. A golden cone to recognize Khalid’s on the job safety record Apex has a qualified plan for the job awards. Calculate Apex’s total deductions for the above expenses.

$ 700 200 2,500 320

103. Jin, a cash basis dentist, had $7,000 of uncollectible accounts receivable in 2022. Because Jin had always been a cash basis taxpayer, he had not reported the $7,000 in taxable income when the services were performed.

How much of the $7,000 bad debt can Jin take as a bad debt deduction on his 2022 tax return? Explain.

104. Keisha is a tax accountant. She prepared a large corporate tax return 2 years ago and billed $5,000 to her client. After 2 years of attempting to collect the money, it is clear that she will not be able to collect anything since the business has gone bankrupt. She reports income on her tax return on the accrual basis as she bills it, so the $5,000 was included in her taxable income 2 years ago. Can she claim a bad debt deduction for the $5,000? Explain.

Powered by Cognero

Page 17

Name:

Class:

Date:

CH 03 Business Income and Expenses 105. Sage loaned their friend $7,000 to buy a used car. They had their friend sign a note with repayment terms and set a reasonable interest rate on the note because they wanted their friend to understand that this was purely a loan and not a gift. Their friend is now on disability and has made it clear that the loan will not be repaid. How should Sage treat the bad loan for tax purposes?

106. Hannah, a teacher, loaned Jordan, a friend, $10,000 to invest in real estate. Jordan declared bankruptcy in 2022 and cannot repay the $10,000. a. What is the nature of Hannah’s loss? b. Assuming Hannah has no other capital transactions, is there a limit on the amount she may deduct for 2022? Explain. c. What amount of the loss may Hannah deduct in 2022?

107. Angel is a self-employed manicurist who operates a salon in her home. The property taxes and interest allocated to the business amount to $5,000, maintenance and utilities allocated to the business total $2,100, and depreciation allocated to the business use of the home equals $3,100 for the current tax year. a. b.

If Angel's gross revenue after deducting supplies for her business is $5,900 for the current tax year, calculate his allowable deductions for the home office.

If Angel's gross revenue after deducting supplies for her business is $13,800, calculate his allowable deductions for the home office.

108. Will qualifies for a home office deduction. The amount of space devoted to the business is 500 square feet of the total 2,000 square feet of the home. Will's total rent on the house is $14,000, and he pays utilities (other than telephone) of $4,500 for the year. Calculate Will's deductions for home office expenses before the gross income limitation.

Rent expense Utilities Total home office expenses 109. Candice uses an office in her home exclusively for her business. The business use of the home is 100 square feet out of 2,000 square feet for the entire home. The total expenses to allocate are $3,000. Candice wishes to maximize her deduction in the current year. What is the amount of her home office deduction before any income limitations?

110. Haidy is a self-employed newspaper columnist who does her work exclusively from a home office. Haidy had a bad year, and her taxable income from her business is only $2,000 before the home office expenses this year. Her office takes up 250 square feet of her 1,000-square foot apartment. The total expenses for her apartment are $8,000 for rent, $1,000 for utilities, $200 of renter’s insurance, and $800 for pest control and other maintenance. What is Haidy’s home office deduction? Please show your calculations.

111. Katie operates a ceramics studio from her garage. She incurs the following expenses: Clay and paints Painting technique seminars Pottery wheel Utilities for the ceramic studio Personal property taxes on ceramic equipment Katie’s gross receipts from her business were $2,000.

$3,500 400 75 375 50

a. If the studio is deemed to be a hobby, then calculate the amount of expenses Katie may deduct, and describe how she may report the income and expenses on her tax return.

Powered by Cognero

Page 18

Name:

Class:

Date:

CH 03 Business Income and Expenses b. If the studio is not a hobby, then calculate the amount of expenses Katie may deduct, and describe how she may report the income and expenses on her tax return.

112. Dalton is a practicing attorney who decides to become an agent for musical groups on the side. Dalton engages in the activity and has the following revenue and expenses: Agent fees from clients Travel to concert sites around the country Business entertainment Depreciation on video and TV equipment used to showcase clients

$ 500 6,500 5,000 3,000

a. What are four of the factors the IRS will consider when evaluating whether Dalton's activity is a hobby? b. If the activity is deemed to be a regular business, what is the amount of Dalton’s net income or loss from the activity? c. If the activity is deemed to be a hobby, what is the amount (if any) of Dalton’s expenses from the activity that may be deducted?

113. What is the purpose of Schedule C?

Powered by Cognero

Page 19

Name:

Class:

Date:

CH 03 Business Income and Expenses Answer Key 1. True 2. True 3. False 4. False 5. True 6. False 7. False 8. False 9. True 10. True 11. True 12. False 13. False 14. True 15. False 16. True 17. True 18. True 19. False 20. False 21. False 22. False 23. True 24. True 25. True Powered by Cognero

Page 20

Name:

Class:

Date:

CH 03 Business Income and Expenses 26. False 27. False 28. c 29. c 30. b 31. c 32. b 33. b 34. b 35. c 36. b 37. a 38. a 39. c 40. c 41. c 42. d 43. c 44. d 45. d 46. b 47. d 48. d 49. d 50. a 51. d Powered by Cognero

Page 21

Name:

Class:

Date:

CH 03 Business Income and Expenses 52. c 53. b 54. c 55. b 56. d 57. d 58. a 59. a 60. d 61. b 62. b 63. b 64. a 65. c 66. d 67. b 68. d 69. d 70. d 71. a 72. d 73. a 74. b 75. d 76. c Powered by Cognero

Page 22

Name:

Class:

Date:

CH 03 Business Income and Expenses 77. Brandi will only be able to deduct $10 per hour as that appears to be the reasonable wage rate for an employee in that position.

78. $400. Aneth may deduct the $400 of supplies as a business expense on her Schedule C. Aneth is not eligible for a home office deduction because she does not use the space exclusively for her business.

79.

Gross income Expenses Travel Transportation-mileage Entertainment (nondeductible) Subscriptions Gifts, 7 at $25, 2 at $20 Rent and utilities allocated to home office (15% × $8,000) Total expenses Taxable income

80. a. Gross receipts b.

c.

Tax-deductible expenses Malpractice insurance Office rent Office supplies Travel expense Restaurant meals Entertainment Paralegal wages Mileage: (2,925 miles × $0.585) + (2,925 miles × $0.625)

$ 4,000 514 0 500 215 1,200 $ 6,429 $33,571

$152,000 $ 8,000 12,500 5,600 2,000 4,000 0 25,500 3,539.25

Total expenses

$61,139.25

Taxable income

$90,860.75

81. a. Beginning inventory Add: Purchases ($25,000 + $6,000) Cost of goods available for sale b.

$40,000

$4,000 31,000 $35,000

Ending inventory is equal to 2,000 units (7,000 units available for sale less 5,000 units sold), consisting of: 1,000 units at $6 $6,000

Powered by Cognero

Page 23

Name:

Class:

Date:

CH 03 Business Income and Expenses

c.

1,000 units at $5 Cost of ending inventory

5,000 $11,000

Cost of goods available for sale Less: Ending inventory Cost of goods sold

$35,000 (11,000) $24,000

82. a.

Beginning inventory Add: Purchases ($12,000 + $18,000 + $7,000) Cost of goods available for sale b.

c.

$12,000 37,000 $49,000

Ending inventory is equal to 2,000 units (8,000 units available for sale less 6,000 units sold), consisting of: 1,000 units at $7 $7,000 1,000 units at $6 6,000 Cost of ending inventory $13,000 Cost of goods available for sale Less: Ending inventory Cost of goods sold

$49,000 (13,000) $36,000

83. When inventory is an income-producing factor, the default rule is that ending inventories must be taken to determine cost of goods sold. However, small businesses (less than $27 million in average gross receipts) may elect to use the cash method which provides two options to Juanita (she has no applicable financial statements): 1. Treat inventory as non-incidental materials and supplies, which is not all that different from accrual-based inventory accounting, or 2. Treat inventory the same as she does on the books and records of the business.

84. $726. [(600 miles × $0.585) + (600 miles × $0.625)]. Costs of commuting are not deductible.

85. The business auto expense is $1,210 [(1,000 miles × $0.585) + (1,000 miles × $0.625)]. Commuting and personal use miles are not tax- deductible expenses. The deductible expense should be reported on Christine’s Schedule C. 86. $8,000 (20,000 ÷ 25,000 miles × $10,000). Since Corey has used the actual cost method in the year the car was first placed in service, he is not entitled to use the standard mileage method.

87. a. $12,100. 25,000 miles × 80% = 20,000 miles. [(10,000 miles × $0.585) + (10,000 miles × $0.625) = $12,100] b. $4,960. ($6,200 × 80%) c. The standard mileage method; it results in the larger deduction. d. On his Schedule C. 88.

Mileage: (2,100 miles × $0.585) + (2,100 miles × $0.625) Annual subscription One-year medical reference service Total deduction for business expense Powered by Cognero

$2,541 200 500 $3,241 Page 24

Name:

Class:

Date:

CH 03 Business Income and Expenses

89. $1,880. ($400 + $300 + $180 + $1,000) 90. Priya may deduct 100 percent of the medical education fees, travel, and restaurant meals, a total of $3,900.

91.

Airfare from Chicago to Boston Hotel charges Restaurant meal charges (100% deductible in 2022) Dry cleaning and laundry Local transportation Total travel expense deduction

$ 800 1,800 740 100 40 $3,480

Entertainment (0% × $150)

$0

Business gift (limited to $25 per gift)

$25

92. $1,800. (100% × $1,800 for restaurant meals) 93. $7,000. Nicholas may deduct 100 percent of the restaurant meals. Entertainment, including the yacht maintenance, is nondeductible. The deduction is claimed on Schedule C. 94. $4,500. ($9,000 × 50%). The meals were not provided by a restaurant, so they are only 50 percent deductible. Costs relating to the yacht are not tax deductible.

95. The travel expenses are deductible on her Schedule C as they directly relate to her tutoring business. However, the tuition and the review course were expenses to meet the minimum education requirement for teaching at a public school and therefore are not deductible.

Fee for the course $ 700 Airplane ticket 500 Hotel 1,000 Meals (100%) 400 Total $2,600

96.

“Zen Your Way to Riches” “Computer Marketing Tools” “Beating the Market” Total education expenses Powered by Cognero

$800 200 300 $1,300 Page 25

Name:

Class:

Date:

CH 03 Business Income and Expenses The “Backyard Gardening” seminar is a personal expense, and the “Passing the Legal Bar Exam” seminar prepares Michael for a new career. Therefore, the cost of these seminars is not deductible.

97. Pranav may deduct: Dues paid to the Associated Builders Society Dues paid to the Masonry Society Subscription to Dwell, a home design magazine

$250 325 25 $600 The Wine of the Month Club and the subscription to Sports Illustrated are personal in nature and are not deductible.

98. 1. Not deductible 2. Deductible 3. Deductible 4. Deductible 5. Not deductible 99. Taio’s uniform cost is a business expense; however, the deduction for unreimbursed employee expenses subject to the 2 percent of AGI has been suspended. Therefore, he has no deduction.

100. No. The suits and shoes can be worn as ordinary dress clothes; there is nothing special about them that would classify these items as part of a uniform.

101.

Ms. Yun Mr. and Mrs. Whitcomb Mr. and Dr. Perez Wrapping paper and card Total

$ 25 limitation 40 25 limitation 15 $105

102.

1. Pads of paper 2. Display racks 3. Aniyah's service award 4. Khalid’s safety award Total

$ 700 200 1,600 limitation 320 $2,820

103. $0. Because the income from the services provided had never been taxed, the write-off of the bad debt (unrealized income) cannot be used as a tax deduction.

104. Yes. A business bad debt deduction for services is allowed as an ordinary deduction to the extent the amount was previously included in income.

105. This is a nonbusiness bad debt. Sage may deduct a $3,000 short-term capital loss in the current year, $3,000 in the next year, and $1,000 in the following year, assuming they have no capital gains to offset the capital loss.

106. a. Nonbusiness bad debt, short-term capital loss. b. Yes, an individual taxpayer may deduct only a limited amount of capital losses against ordinary income.

Powered by Cognero

Page 26

Name:

Class:

Date:

CH 03 Business Income and Expenses c. $3,000 (annual limitation).

107. a. $5,900. ($5,000 taxes and interest and $900 for maintenance and utilities). None of the depreciation expense may be deducted in the current year. Home office deductions of $4,300 ($2,100 + $3,100 – $900) are carried forward to the following tax year. b. $10,200. ($5,000 + $2,100 + $3,100).

108.

Rent expense ($14,000 × 500 sq. ft. ÷ 2,000 sq. ft.)

Utilities ($4,500 × 500 sq. ft. ÷ 2,000 sq. ft.)

Total home office expenses

$3,500 1,125 $4,625

109. $500. If Candice allocates the costs of the home, her deduction is $3,000 × (100 sq. ft. ÷ 2,000 sq. ft.) = $150.

Alternatively, Candice can use the simplified method as 100 sq. ft. × $5 = $500.

110. $2,000. The total costs of her apartment ($8,000 + $1,000 + $200 + $800) are multiplied by the 25 percent (250 ÷ 1,000 square feet) home office allocation to arrive at a $2,500 deduction for home office expenses. The expenses allowed are limited to her taxable income from the business, or $2,000. The remaining $500 of home office expenses are carried forward to the following tax year.

111. a. If the business is deemed to be a hobby, then Katie may only deduct expenses up to the amount of income but only if the expenses would be deductible otherwise. For example, Katie can deduct the clay and paints cost if they represent cost of goods sold (which seems likely). She can also deduct the personal property taxes if they would be deductible as an itemized deduction. Her other expenses are not deductible. Katie needs to report the $2,000 gross receipts as miscellaneous income net of any cost of goods sold. b. If the business is deemed not to be a hobby, then Katie may deduct all of the $4,400 ($3,500 + $400 + $75 + $375 + $50) of expenses. She should report both the income and expenses on a Schedule C. 112. a. Any four of the following factors are acceptable as answers: 1. Carrying on the activity in a businesslike manner 2. The time and effort put into the activity indicate an intent to make it profitable 3. Dependence on the income for the taxpayer’s livelihood 4. Whether the losses are due to circumstances beyond the taxpayer’s control (or are normal in the startup phase of this type of business) 5. Attempts to change methods of operation to improve profitability 6. The taxpayer or advisors have the knowledge needed to carry on the activity as a successful business 7. Success in making a profit in similar activities in the past 8. The activity makes a profit in some years 9. The activity is expected to make a future profit from the appreciation of the assets used in the activity

b. A loss of $9,000. ($500 − $6,500 − $3,000) c. $0. None of these expenses appears to be deductible otherwise.

113. Schedule C is used by self-employed taxpayers to report the income or loss from a trade or business. Taxpayers who use Schedule C include self-employed accountants, attorneys, plumbers, gardeners, manufacturers, restaurant owners, and hundreds of other businesses owned by individuals as sole proprietorships. The type of business and the address where the business is operated are shown on Schedule C. Schedule C reports gross income from the business and expenses, which Powered by Cognero

Page 27

Name:

Class:

Date:

CH 03 Business Income and Expenses must be broken down by category. If the business holds inventory, information related to the beginning and ending inventory, as well as cost of goods sold, must also be reported. If the business requires the use of the owner’s automobile, additional information related to the auto must be reported as well.

Powered by Cognero

Page 28

Name:

Class:

Date:

CH 04 Additional Income and the Qualified Business Income Deduction

Indicate whether the statement is true or false.

1. An artist's painting is excluded as a capital asset when held by the artist. a. True b. False 2. A taxpayer's SUV for personal use is considered a capital asset. a. True b. False 3. Accounts receivable are considered capital assets. a. True b. False 4. If a capital asset is acquired on August 31, 2021, the first day it may be sold for a long-term capital gain or loss treatment is September 1, 2022. a. True b. False 5. If a capital asset acquired on October 27, 2020, is sold on April 30, 2022, for a gain, the gain is considered long-term. a. True b. False 6. If a capital asset acquired August 5, 2021, is sold on February 6, 2022, any gain is considered short-term. a. True b. False 7. The basis of property received as an inheritance is generally equal to the fair market value at the decedent's date of death. a. True b. False 8. If property is received from a decedent, the taxpayer who inherits the property has the same basis in the property as the decedent. a. True b. False 9. If a taxpayer is relieved of a liability on the disposition of property, the amount of the liability should be included in the amount realized on the sale or other disposition. a. True b. False 10. Net short-term capital gains may be offset by net long-term capital losses. a. True b. False Powered by Cognero

Page 1

Name:

Class:

Date:

CH 04 Additional Income and the Qualified Business Income Deduction 11. Currently, long-term capital gains are afforded preferential tax treatment to individuals. a. True b. False 12. Taxpayers are required to offset net short-term capital losses with net long-term capital gains. a. True b. False 13. There is no limit on the amount of capital losses that an individual may deduct against ordinary income. a. True b. False 14. The exclusion of gain on the sale of a personal residence may be elected only by a taxpayer who has owned three or more residences. a. True b. False 15. If not entirely used in one sale, the unused portion of the $250,000 exclusion on the sale of a single taxpayer's principal residence may be used to reduce the recognized gain on the sale of the taxpayer's next residence. a. True b. False 16. In 2022, the basis of a taxpayer's new residence is equal to the cost of the new residence less the gain which was deferred on the sale of the old residence. a. True b. False 17. If a taxpayer sells their personal residence and purchases a new residence, all or part of the realized gain may be recognized. a. True b. False 18. If a residence is rented for 15 days or more and is used for personal purposes for not more than 14 days or 10 percent of the days rented, whichever is greater, no allocation of expenses is required and the taxpayer may claim a deduction for the full amount of the expenses. a. True b. False 19. Net losses on the rental of vacation homes are limited to 15 percent of total gross income. a. True b. False 20. In most cases, an individual taxpayer reports rental income and the related expenses on Schedule E. a. True b. False 21. When a residence is rented for less than 15 days during the year, the rental income is excluded from gross income.

Powered by Cognero

Page 2

Name:

Class:

Date:

CH 04 Additional Income and the Qualified Business Income Deduction a. True b. False 22. Under the passive loss rules, real estate rental activities are specifically defined as passive, even if the taxpayer actively manages the property. a. True b. False 23. Passive losses of one activity may not be used to offset passive income from another activity. a. True b. False 24. Passive losses are fully deductible as long as they do not exceed $50,000 during the year. a. True b. False 25. Regardless of a taxpayer's involvement in the management of their rental property, individual taxpayers may deduct up to $25,000 of rental real estate losses against other income, provided their income does not exceed certain limits. a. True b. False 26. Dividend income is considered "passive income." a. True b. False 27. Wages are considered "active income." a. True b. False 28. Net operating losses generated in 2022 may be carried forward indefinitely. a. True b. False 29. The qualified business income deduction is a percentage of wages earned by an employee. a. True b. False 30. The qualified business income deduction is limited to 20 percent of taxable income not including long-term capital gains and qualified dividends. a. True b. False

Indicate the answer choice that best completes the statement or answers the question.

31. Which of the following is true about capital assets?

Powered by Cognero

Page 3

Name:

Class:

Date:

CH 04 Additional Income and the Qualified Business Income Deduction a. Real property used in a trade or business is a capital asset. b. Capital losses may be carried back for 3 years by individuals to offset capital gains in those years. c. Net short-term capital gains are granted preferential tax treatment. d. Individual taxpayers may deduct net capital losses of up to $3,000 per year.

32. Which of the following would be considered a capital asset? a. A literary work held by the author b. Real estate held by a developer c. A taxpayer's principal residence d. A truck used in a taxpayer's business 33. Which of the following is considered a capital asset? a. Inventory held by a manufacturer b. Accounts receivable held by a dentist c. A townhouse owned by a taxpayer as a primary residence d. Depreciable property and real estate used in a trade or business 34. Which one of the following is considered a capital asset? a. Depreciable property used in a business b. Copyright held by the author c. Securities held for investment d. An invention patented by the inventor 35. Sol purchased land as an investment on January 12, 2019, for $85,000. On January 31, 2022 Sol sold the land for $90,000 cash. What is the nature of the gain or loss? a. Long-term capital loss b. Long-term capital gain c. Short-term capital gain d. Short-term capital loss 36. Angel purchased property as an investment on May 11, 2021, for $63,000. On April 26, 2022, Angel sold the land for $97,000 cash. What is the nature of the gain or loss? a. Long-term capital loss b. Long-term capital gain c. Short-term capital gain d. Short-term capital loss 37. Which of the following sales results in a short-term gain/loss? a. A capital asset bought on May 30, 2021, and sold May 20, 2022 b. A capital asset bought on April 25, 2021, and sold August 19, 2022 c. A capital asset bought on September 12, 2015, and sold August 19, 2022 d. A capital asset bought on August 15, 2021, and sold August 16, 2022 38. Which of the following is true if property is inherited by a taxpayer?

Powered by Cognero

Page 4

Name:

Class:

Date:

CH 04 Additional Income and the Qualified Business Income Deduction a. To the recipient, the basis for the property is the same as the basis to the decedent. b. At sale date, the basis of the property to the recipient differs depending on whether the property was sold at a gain or a loss. c. At sale date, the recipient will not have a gain or loss even if the recipient has held the property for more than a year. d. In general, the basis to the recipient is the fair market value at the decedent’s date of death.

39. Jessie purchased land as an investment on January 12, 2017, for $80,000. On January 31, 2022, Jessie sold the land for $33,000 cash. In addition, the purchaser assumed the mortgage of $70,000 on the land. What is the amount of the realized gain or loss on the sale? a. $47,000 loss b. $15,000 gain c. $23,000 gain d. $10,000 loss 40. An asset has an original basis of $45,000, and depreciation has been claimed for the asset in the amount of $20,000. If the asset's adjusted basis is $40,000, what is the amount of capital improvements that have been made to the asset? a. $5,000 b. $10,000 c. $15,000 d. $20,000 41. Carlos bought a building for $110,000 in 2018. He added an addition to the building for $26,000 in 2019. In 2022, he sold it for $209,000. What was his long-term capital gain (ignoring depreciation)? a. $0 b. $26,000 c. $73,000 d. $99,000 42. How is an asset's adjusted basis computed? a. Original basis + capital improvements − accumulated depreciation b. Original basis − capital improvements + accumulated depreciation c. Original basis + capital improvements + accumulated depreciation d. Original basis + capital improvements + gain or loss realized 43. Which of the following is among the fees and costs included in the basis of real property? a. Casualty insurance premiums b. Rent for occupancy of the property prior to closing c. Loan assumption fees d. Owner's title insurance 44. Bennett purchased a tract of land for $20,000 in 2016 when he heard that a new highway was going to be constructed through the property and the land would soon be worth $200,000. The highway project was abandoned in 2022, and the value of the land fell to $15,000. Bennett can claim a loss in 2022 of how much? a. $0 Powered by Cognero

Page 5

Name:

Class:

Date:

CH 04 Additional Income and the Qualified Business Income Deduction b. $5,000 c. $165,000 d. $180,000 45. Caleb purchased land as an investment on January 12, 2019, for $80,000. On January 31, 2022, Caleb sold the land for $33,000 cash. In addition, the purchaser assumed the mortgage of $62,000 on the land. What is the amount realized (not gain realized) on the sale of the land? a. $10,000 b. $23,000 c. $95,000 d. $103,000 46. Which of the following is true when determining the adjusted basis of a capital asset at the time of its sale? a. Capital improvements are added to the basis. b. Ordinary repairs reduce the adjusted basis. c. Accumulated depreciation is added to the basis. d. The basis does not include the owner's title insurance related to the purchase.

47. Anthony purchased a tract of land for $35,000 in 2018 when he heard that a new shopping mall was going to be developed in the area and the land was projected to be worth $250,000. Anthony had been misinformed, as a mall was never planned for that location. In 2022, Anthony sells the land for $15,000. Ignoring any limitations, Anthony can claim what loss in 2022? a. $0 b. $20,000 c. $200,000 d. $215,000 48. Which of the following is true about capital gains? a. Short-term capital gains are offset first by short-term capital losses. b. Short-term capital gains are subject to special tax treatment. c. Long-term capital gains are never taxed. d. Net long-term capital gains are offset by short-term capital gains.

49. For the current year, Sabrina had salary income of $20,000. In addition, she reported the following capital transactions during the year: Long-term capital gain $ 7,000 Short-term capital gain 3,000 Long-term capital loss (2,000) Short-term capital loss (5,000) There were no other items includable in her gross income. What is the amount of her adjusted gross income for the current year? a. $19,000 b. $23,000 c. $24,000 d. $25,000 Powered by Cognero

Page 6

Name:

Class:

Date:

CH 04 Additional Income and the Qualified Business Income Deduction 50. Demarcus and Becca file jointly. They have taxable income of $69,000 in 2022 (before considering any capital gains or losses). They have a long-term capital gain of $28,000 and a long-term capital loss of $17,000 on sales of stock during the current year. What will their capital gains tax be for the current year? a. $0 b. $1,650 c. $2,200 d. $4,200 51. In December 2022, Benjamin and Laila (married filing jointly) have a long-term capital gain of $55,000 on the sale of stock held for 4 years. They have no other capital gains and losses for the year. After the standard deduction, their ordinary income for the year, before the capital gain, is $70,000, making their total income for the year $125,000. In 2022, married taxpayers who file jointly pay tax of $7,992 on the first $70,000 of ordinary taxable income and 15 percent on long-term capital gains above $83,350. What is their total tax liability? a. $16,242.00 b. $14,239.50 c. $9,190.80 d. $20,494.50 52. Makena has a net capital loss of $17,000 and other ordinary taxable income of $45,000 for the current year. What is the amount of Makena's capital loss carryforward? a. $0 b. $10,000 c. $14,000 d. $17,000 53. In 2022, Paul, a single taxpayer, has taxable income of $30,000 exclusive of capital gains and losses. Paul incurred a $1,000 short-term capital loss and a $5,000 long-term capital loss. What is the amount of his long-term capital loss carryover to 2023? a. $0 b. $2,000 c. $3,000 d. $5,000 54. For the current tax year, Morgan had $25,000 of ordinary income. In addition, they had a $1,700 long-term capital loss and a $1,600 short-term capital loss. What will be the amount of Morgan's capital loss carryforward to the next year? a. $0 b. $300 c. $1,700 d. $3,300 55. Haidy has a net capital loss of $20,000 and other ordinary taxable income of $48,000 for the current tax year. What is the amount of Haidy's taxable income after deducting the allowed capital loss? a. $28,000 b. $38,000 c. $42,000 Powered by Cognero

Page 7

Name:

Class:

Date:

CH 04 Additional Income and the Qualified Business Income Deduction d. $45,000 56. In the current year, Marc, a single taxpayer, has ordinary income of $35,000. In addition, he has $3,000 in short-term capital gains, short-term capital losses of $8,000, and long-term capital gains of $1,000. What is Marc's adjusted gross income (AGI) for the current year? a. $32,000 b. $39,000 c. $36,000 d. $34,000 57. Debbie bought her home 15 years ago for $60,000. Three years ago, Debbie married Nia, and she moved into the same house and has lived there since. If they sell their house in the current year for $340,000, what is their taxable gain on a joint tax return? a. $0 b. $280,000 c. $155,000 d. $30,000 58. On August 8, 2022, Sam, single, age 62, sold for $210,000 his principal residence, which he has lived in for 10 years, and which had an adjusted basis of $60,000. On November 1, 2022, he purchased a new residence for $80,000. For 2022, how much gain should Sam recognize on the sale of his residence? a. $0 b. $25,000 c. $50,000 d. $130,000 59. Which of the following statements regarding the sale of a personal residence is true? a. A taxpayer's personal residence qualifies for a like-kind exchange. b. A taxpayer who sells a personal residence may always exclude the realized gain from taxable income. c. A one-time election is available to taxpayers 55 years of age or older which allows them to sell their personal residences and to exclude all of the realized gain. d. The exclusion amount for married taxpayers applies to spouses who sell their residence within 2 year of their spouse's death.

60. Simone, a single taxpayer, bought her home in Orlando 25 years ago for $55,000. She has lived continuously in the home since she purchased it. In the current year, she sells her home for $405,000. What is Simone's taxable gain on the sale? a. $0 b. $90,000 c. $100,000 d. $350,000 61. Lester rents his vacation home for 6 months and lives in the home during the other 6 months of 2022. The gross rental income from the home is $43,500. For the entire year, real estate taxes are $2,200, interest is $3,000, and utilities and maintenance expenses are $2,500. What is Lester's allowable net loss from renting his vacation home? a. $4,200 loss Powered by Cognero

Page 8

Name:

Class:

Date:

CH 04 Additional Income and the Qualified Business Income Deduction b. $3,850 loss c. $350 loss d. $0 loss 62. Hassan is the owner of a house with two identical apartments. He resides in one apartment and rents the other apartment to a tenant. The tenant made timely monthly rental payments of $550 per month for the months of January through December 2022. The following expenses were incurred on the entire building: Utilities $3,600 Maintenance and repairs 900 Insurance 500 In addition, depreciation allocable to the rented apartment is $1,500. What amount should Hassan report as net rental income for 2022? a. $0 b. $100 c. $1,400 d. $2,600 63. Mort is the owner of an apartment building containing 10 identical apartments. Mort resides in one apartment and rents out the remaining units. For 2022, the following information is available: Gross rents $110,600 Utilities for total building 25,000 Maintenance and repairs (rental apartments only) 10,500 Advertising for vacant apartments 3,000 Depreciation of building (all 10 units) 40,000 What amount should Mort report as net rental income for 2022? a. $32,100 b. $35,000 c. $38,600 d. $39,950 64. Daniel owns a two-family home. He rents out the second floor and resides on the first floor. Daniel had the following expenses for the building for the year ended December 31, 2022: Real estate taxes $1,800 Mortgage interest 1,600 Utilities 1,200 Repairs (second floor) 1,400 Painting (first floor) 400 In addition, the depreciation attributable to the entire building would be $2,000. What is the total amount of the expenses that Daniel can deduct on Schedule E of Form 1040 (before any limitations)? a. $3,300 b. $3,850 c. $4,000 d. $4,700 65. The expenses associated with the rental of a residence used for both personal and rental purposes are subject to three possible tax treatments. Which of the following is not included as one of the three? a. If a residence is rented for fewer than 15 days during the year, the rental period is disregarded and the residence is regarded as a personal residence for tax purposes.

Powered by Cognero

Page 9

Name:

Class:

Date:

CH 04 Additional Income and the Qualified Business Income Deduction b. If the residence is rented for 15 days or more and is used for personal purposes for not more than 14 days or 10 percent of the days rented, whichever is greater, the residence is treated as rental property. c. If the residence is rented for 15 days or more and is used for personal purposes for not more than 14 days or 10 percent of the days rented, whichever is greater, the residence is treated as a personal residence for tax purposes. d. If the residence is rented for 15 days or more and is used for personal purposes for more than 14 days or 10 percent of the days rented, whichever is greater, allocable rental expenses are allowed only to the extent of rental income.

66. Kayla owns a home on the beach in Daytona. She lives in the house for most of the year but leaves town during the popular motor sports race that comes through every year. During that time, she rents her home out for 14 days to race fans for $5,000. Which of the following is true? a. Because Kayla rents the house for such a short period of time, the rental income is not taxable and she may not deduct a percentage of expenses such as utilities and depreciation on the home. b. Kayla did not rent the house for a long enough period of time to deduct a percentage of expenses such as utilities and depreciation on the home. The rental income she receives is taxable. c. Because Kayla rented the home for more than 10 days, she must report the income. She is also allowed to deduct a percentage of expenses such as utilities and depreciation to the extent of the income. d. The house is designated as being used for rental/personal use, and Kayla can deduct allocable rental expenses up to the amount of rental income.

67. Selma owns a beach cottage that she rents to tourists. In the current year, she rented the cottage for 90 days. What is the maximum number of days Selma can use the cottage before her expense deduction will be limited to her gross rental income? a. 0 days b. 9 days c. 14 days d. 18 days 68. Tiana owns a condo by the lake that she rents to tourists. In the current year, she rented the condo for 180 days. What is the maximum number of days Tiana can use the condo before her expense deduction will be limited to her gross rental income? a. 0 days b. 9 days c. 14 days d. 18 days 69. Nancy has active modified adjusted gross income before passive losses of $120,000. She has a loss of $15,000 on a rental property she actively manages. How much of the loss is she allowed to deduct against the $120,000 of other income? a. None b. $2,500 c. $5,000 d. $10,000 70. Ned has active modified adjusted gross income before passive losses of $160,000. He has a loss of $15,000 on rental property he actively manages. How much of the loss is he allowed to deduct against his other income?

Powered by Cognero

Page 10

Name:

Class:

Date:

CH 04 Additional Income and the Qualified Business Income Deduction a. None b. $10,000 c. $15,000 d. $5,000 71. Norm is a real estate professional with a real estate trade or business as defined in the tax law. He has $150,000 of business income and $50,000 of losses from actively managed real estate rentals. How much of the $50,000 in losses is he allowed to claim on his tax return? a. $25,000 b. None c. $50,000 d. $20,000 72. Arnold purchased interests in two limited partnerships 6 years ago. During 2022, Arnold had income of $22,000 from one of the partnerships. He had a loss from the other partnership of $32,000, salary income of $35,000, and dividend income of $2,000. What is the amount of net passive losses that Arnold may deduct for 2022? a. $0 b. $2,000 c. $8,000 d. $10,000 73. Thelma works at a retail store in 2022 and makes $44,000. She also has dividend income of $12,000 and interest income of $1,000. She owns a beach house that gives her $11,000 in net rental income, and she owns a stake in a limited partnership that generates a $15,000 loss. What is her adjusted gross income in 2022? a. $58,000 b. $45,000 c. $69,000 d. $57,000 74. Warren invested in a limited partnership in 2015. During 2022, his losses from the partnership amount to $100,000. If Warren has no passive income, what is the amount of Warren's deduction for passive losses for 2022? a. $0 b. $10,000 c. $20,000 d. $40,000 75. Carey, a single taxpayer, purchased a rental house in 2022, which she actively manages. During 2022, Carey had a loss of $14,000 from the rental house. If Carey's adjusted gross income for 2022 is $138,000 before the rental loss, what is the amount of Carey's allowable deduction for the rental activity for 2022? a. $0 b. $3,000 c. $6,000 d. $12,000 76. Hannah purchased two rental properties 6 years ago. She actively participates in their management. During 2022, Hannah had income of $22,000 from one of the rentals. She had a loss from the other rental of $32,000, as well as salary Powered by Cognero

Page 11

Name:

Class:

Date:

CH 04 Additional Income and the Qualified Business Income Deduction income of $35,000, and dividend income of $2,000. What is Hannah's net passive income or loss deduction? a. $8,000 net loss b. $10,000 net loss c. $22,000 net loss d. $32,000 net loss 77. Which of the following is true regarding passive losses? a. They may not be used to offset passive income. b. They may be used to offset portfolio income. c. They often result from the rental of real estate. d. They are lost forever if not used in the year incurred.

78. Which of the following can be used to offset a passive loss? a. Active income such as wages b. Passive income such as income from a limited partnership c. Dividend income from stock held as an investment d. Pension income 79. Savion has a business net operating loss of $70,000 in 2022. Savion’s business started in 2020 and generated significant taxable profits in 2020 and in 2021. Which of the following is true? a. Savion must carry forward the net operating loss (no carryback is available). b. Savion may use the net operating loss to offset income from any year he chooses. c. Net operating losses can offset 100 percent of the income in future years. d. Savion may elect to offset the income he generated in 2020 and 2021 with 2022’s net operating loss, with the remainder used to offset future annual taxable income.

80. Maylin has a net operating loss in 2022. What is the earliest year to which Maylin can carry back or carry forward the net operating loss? a. 2017 b. 2018 c. 2023 d. 2024 81. The net operating loss (NOL) provisions of the Internal Revenue Code were designed to do what? a. Ease tax burdens on individuals with unexpected losses b. Allow taxpayers to carry losses forward and backwards indefinitely c. Provide relief for trade or business losses d. Encourage home purchase by allowing a deduction for home mortgage interest 82. Gary has qualified business income of $40,000 in 2022. His taxable income without net capital gains is $28,000.What is Gary’s QBI deduction for 2022? a. $0 b. $5,600 c. $8,000 d. $13,600 Powered by Cognero

Page 12

Name:

Class:

Date:

CH 04 Additional Income and the Qualified Business Income Deduction 83. Alyssa's 2022 taxable income exceeds $170,050 and thus she is required to phase out her QBI deduction. What is the phase-out calculation? a. The greater of 50 percent of business wages or 25 percent of wages plus 2.5 percent of the unadjusted basis of qualifying property b. The lesser of 50 percent of business wages or 25 percent of wages plus 2.5 percent of the unadjusted basis of qualifying property c. 50 percent of taxable income without the QBI deduction d. 50 percent of the amount over $170,050

Indicate one or more answer choices that best complete the statement or answer the question.

84. Which of the following items may be subject to the self-employment tax? a. A partner's distributive share of partnership income b. Dividend income from stock c. Gain on sale of real estate d. Interest on a savings account 85. Which of the following is true about self-employment taxes? a. They consist of Medicare tax and Social Security tax. b. They are not affected by wages the taxpayer earns as an employee. c. They apply to taxpayers with over $150 in self-employment earnings. d. They are calculated based on both earned and unearned income.

86. If the following are capital assets, mark with a “Yes.” If they are not capital assets, mark with a “No.” a. A taxpayer’s personal jet ski b. Big Engine Motor Credit Company bond held by an investor c. A baseball for sale at Sports.com d. Stephen King’s personal copy of his original manuscript of The Shining e. An antique grandfather clock inherited from the taxpayer’s aunt 87. The following are owned by Dalia. Indicate which are considered capital assets. a. Rental property at 123 Main Street b. Tables and chairs sold in her furniture business c. The cash register used in her furniture business d. A 1972 Porsche 916 e. The rights to Taylor Swift’s song, “Blank Space” 88. Emily sold the following investments during the year: Stock Date Purchased Date Sold a. 1,000 shares Dot Com Co. 03-21-2011 02-04-2022 b. 500 shares Big Box Store 05-19-2021 01-22-2022 c. 300 shares Lotta Fun, Inc. 10-02-2021 09-21-2022 d. 700 shares Local Gas Co. 06-17-2021 11-11-2022 For each stock, calculate the amount and the nature of the gain or loss.

Powered by Cognero

Sales Price $20,000 $8,200 $3,000 $14,000

Cost Basis $5,000 $7,500 $4,500 $17,000

Page 13

Name:

Class:

Date:

CH 04 Additional Income and the Qualified Business Income Deduction

89. Indicate whether a gain or loss realized in each of the following situations would be long- or short-term by putting an “X” on the appropriate blank line: Date Acquired Date Sold Long-Term Short-Term a. June 6, 2017 January 20, 2022 b. April 18, 2022 July 13, 2022 c. May 14, 2021 May 9, 2022 d. July 12, 2021 August 15, 2022 e. January 6, 2020 June 20, 2022

90. Nick received a gift of stock from his father. Nick's father had purchased the stock 2 years earlier, and his father's basis in the stock was $30,000. On the date of the gift, the stock had a fair market value of $25,000. a. b. c.

If Nick sells the stock for $33,000, calculate the amount of Nick's gain or loss on the transaction.

If Nick sells the stock for $22,000, calculate the amount of Nick's gain or loss on the transaction.

If Nick sells the stock for $27,000, calculate the amount of Nick's gain or loss on the transaction.

91. Bev owns an apartment complex she purchased 10 years ago for $480,000 with an $80,000 cash down payment accompanied by a $400,000 loan. Bev has made $70,000 of capital improvements on the complex, and her depreciation claimed on the building to date is $100,000. Calculate Bev's adjusted basis in the building.

92. Karen received a stock portfolio upon the death of her grandmother. The stock originally cost her grandmother $32,000 but was worth $250,000 when she died. What is Karen's tax basis in the stock portfolio? Explain.

93. At the end of the current year, Falstaff, a single taxpayer, sold for $4,800 General Martin stock that was purchased 5 months ago for $4,000. He also sold Cedar stock for $6,000 at the same time. The Cedar stock cost $4,000, 2 years ago. In addition, Falstaff has a short-term capital loss of $500 on the sale of silver. a. Calculate the amount of Falstaff's net short-term and net long-term capital gain or loss. b. If Falstaff has a net capital gain, what is the maximum rate at which the gain will be taxed?

94. In October of 2022, Matthew sold a share of Berkshire-Hathaway for $433,000. He had acquired it several years ago at a cost of $391,000. He also sold Microsoft stock he had held for 3 years at a gain of $17,000. He had a short-term $2,000 loss on the sale of stock of a start-up technology company. He has $85,000 in taxable income before capital transactions are taken into account.

Assuming Matthew is single with no dependents, what is the amount of Matthew’s tax on the capital transactions?

95. In the current year, Estes has net short-term capital losses of $3,000, a net long-term capital loss of $45,000, and taxable income from wages of $35,000. a. Calculate the amount of Estes' deduction for capital losses for the current year. b. Calculate the amount and nature (short- or long-term) of Estes's capital loss carryforward. c. For how many years may Estes carry the unused loss forward?

96. During 2022, William sold the following capital assets: Description Date Purchased ABC Stock 05-04-2018 123 Bond Fund 11-08-2021 Dune buggy 06-12-2017 Powered by Cognero

Date Sold 08-03-2022 02-25-2022 09-29-2022

Sales Price $500 $2,000 $2,400

Cost Basis $8,000 $7,000 $4,600 Page 14

Name:

Class:

Date:

CH 04 Additional Income and the Qualified Business Income Deduction Land held as an investment 10-09-2009 04-21-2022 $4,000 $3,000 Calculate the following: a. Total short-term capital gain/loss realized for tax purposes b. Total long-term capital gain/loss realized for tax purposes c. Deductible capital gain/loss d. The amount and nature (short- or long-term) of his capital loss carryforward e. Assuming that William has no capital gain or loss for 2023, how much can he deduct in 2023, and what is the amount and nature of any carryforward to 2024?

97. Russell purchased a home 1 year ago for $150,000 and, due to an employment-related move, sold the house this year for $190,000. What is Russell's taxable gain?

98. Stewart sells his personal residence of 4 years on June 14, 2022, for $190,000. The expenses related to the sale are $15,000, and he has paid for capital improvements of $3,000. Stewart purchased the residence for $100,000. On February 2, 2023, Stewart purchases and occupies a new residence at a cost of $200,000. a. Calculate the gain realized on the sale of Stewart's residence. b. How much gain must be recognized on the sale of Stewart's residence? c. Calculate Stewart's basis in the new residence.

99. In the current year, Jeanette sells her personal residence of the last 40 years for $365,000. Jeanette's basis in her residence is $70,000. The expenses associated with the sale of her home total $20,000. Jeanette decides to move in with her daughter rather than purchase a new residence. Calculate Jeanette's realized gain and recognized gain on the sale of her residence. a. Realized gain b. Recognized gain 100. Carmen owns a house that she rents out for the entire year for $600 per month. Her expenses for the 2022 tax year are as follows: Real estate taxes $ 900 Mortgage interest 4,000 Insurance 300 General repairs 320 Carmen bought the property in March of 2008, and her basis for depreciation on the house is $110,000. She uses straightline depreciation with a 27.5-year life, so the depreciation on the house is $4,000. Calculate Carmen’s net income or loss from renting the house if her gross rental income is $7,200 ($600 × 12 months).

101. Omar rents out his vacation home for 9 months and lives in his vacation home for the remainder of the year. His gross rental income for 2022 is $7,200. The expenses attributable to the vacation home for the entire year are as follows: Real estate taxes $2,000 Interest on mortgage loan 4,000 Utilities 1,200 Repairs/maintenance 600 What amount would Omar report as net income or loss from the rental of the vacation home?

102. Walt and Jack rent out their residence in San Diego to friends for 10 days while they vacation in Europe. They collect $1,000 of rental income. How is the rental income treated on their tax return? Explain.

103. Christian, a single taxpayer, acquired a rental house in 2009. The rental house, which Christian actively manages, generated a $15,000 loss in 2022. In addition, Christian owns a limited partnership interest which he acquired in 2014. His share of the partnership loss for 2022 is $10,000. Christian has modified adjusted gross income, before the rental loss and Powered by Cognero

Page 15

Name:

Class:

Date:

CH 04 Additional Income and the Qualified Business Income Deduction partnership loss, of $134,000.

What is the amount of these losses that Christian may deduct in 2022?

104. For the current year, Robert, a single taxpayer, earned wages of $235,000 from Big Shot Corporation. He also received interest income of $1,000 from Little Credit Union. Robert had a $9,000 loss from his rental property which he actively manages. $2,000 of income was also reported on his Schedule K-1 from ABC Limited Partnership. Neither the rental property nor the partnership investment has passive losses carried over from prior years. Since Robert is not an active participant in a retirement plan, he decides to contribute $6,000 to his IRA. a. Calculate Robert’s adjusted gross income using the above information. b. How much is Robert’s unallowed loss from his passive investments? c. What happens to the unallowed passive loss? d. Calculate Robert’s adjusted gross income assuming his wages were only $35,000.

105. Karim owns a house that he rents out for $1,000 per month. His expenses for the 2022 tax year are as follows: Real estate taxes $1,300 Mortgage interest 4,400 Insurance 600 General repairs 640 Karim bought the property in September of 2013, and his basis for depreciation on the house is $137,500. He uses straight-line depreciation with a 27.5-year life, so the depreciation on the house is $5,000. Karim does not use a property manager and handles all aspects of the rental activity himself. a. Calculate Karim's net income or loss from renting the house if his gross rental income is $12,000 ($1,000 × 12 months). b. Is the income or loss on Karim’s rental considered to be active, passive, or portfolio income?

106. Jess has had a couple of good years in his new business and generated large amounts of taxable income in previous years. In 2022, however, he has a net operating loss of $8,000. He is uncertain about the future of the business and has a serious cash flow problem. As his tax accountant, how would you recommend Jess treat his net operating loss?

107. Nevaeh was ill for most of the current year. She received tax-free disability income that covered most of her expenses. She paid the deductible expense of owning her home, interest on the mortgage, and property taxes out of this income. Her tax return shows negative taxable income of $25,000. Can this loss be carried forward to future years? Why or why not?

108. In 2022, Keri has wages of $20,000, a Schedule C business loss of $30,000, and nonbusiness capital gains of $4,000.

She deducts the standard deduction of $12,950 for a taxable loss of $18,950. Compute Keri’s NOL to carry forward to 2022.

109. In 2022, Kelly has qualified business income from her Schedule C small business of $178,000. She files jointly with her spouse, and their taxable income is $214,000. They have no capital gains or qualified dividends in 2022. If Kelly’s business is a service business (e.g., accounting), what is Kelly’s 2022 QBI deduction?

110. Candice is a self-employed attorney. a. Assuming that Candice earns $20,000 from her practice, calculate the total amount of her self-employment tax liability for 2022. b. Assuming that Candice earns $185,000 from her practice, calculate the total amount of her self-employment tax liability for 2022.

111. In 2022, Tom had net earnings of $80,000 from the plant nursery he owns. What is his liability for self-employment taxes on his earnings?

Powered by Cognero

Page 16

Name:

Class:

Date:

CH 04 Additional Income and the Qualified Business Income Deduction 112. Lucinda is a self-employed veterinarian in 2022. Her Schedule C net earnings are $225,000 for the year. Calculate the total amount of Lucinda's self-employment tax liability for 2022.

113. What is a capital asset?

114. For purposes of the passive loss rules, income is classified into three separate categories. What are the three categories of individual income? Give an example of each.

(1) (2) (3) 115. If Betty generates an NOL in 2022 of $16,000 and taxable income of $18,000 in 2023, what is Betty’s NOL deduction in 2023?

Powered by Cognero

Page 17

Name:

Class:

Date:

CH 04 Additional Income and the Qualified Business Income Deduction Answer Key 1. True 2. True 3. False 4. True 5. True 6. True 7. True 8. False 9. True 10. True 11. True 12. True 13. False 14. False 15. False 16. False 17. True 18. False 19. False 20. True 21. True 22. True 23. False 24. False 25. False Powered by Cognero

Page 18

Name:

Class:

Date:

CH 04 Additional Income and the Qualified Business Income Deduction 26. False 27. True 28. True 29. False 30. True 31. b 32. c 33. c 34. c 35. b 36. c 37. a 38. d 39. c 40. c 41. c 42. a 43. d 44. a 45. c 46. a 47. b 48. a 49. b 50. a 51. b Powered by Cognero

Page 19

Name:

Class:

Date:

CH 04 Additional Income and the Qualified Business Income Deduction 52. c 53. c 54. b 55. d 56. a 57. a 58. a 59. d 60. c 61. d 62. d 63. c 64. d 65. c 66. a 67. c 68. d 69. d 70. a 71. c 72. a 73. d 74. a 75. c 76. b Powered by Cognero

Page 20

Name:

Class:

Date:

CH 04 Additional Income and the Qualified Business Income Deduction 77. c 78. b 79. a 80. c 81. c 82. b 83. a 84. a 85. a 86. a. Yes b. Yes c. No d. No e. Yes 87. d. A 1972 Porsche 916 e. The rights to Taylor Swift’s song, “Blank Space” The rental property and the cash register are both categorized as trade or business property and thus not considered capital assets. The tables and chairs are inventory and not considered capital assets.

88. a. $15,000 long-term gain b. $700 short-term gain c. $1,500 short-term loss d. $3,000 long-term loss 89. a. Long-term b. Short-term c. Short-term d. Long-term e. Long-term 90. a. $3,000 gain. ($33,000 − $30,000) b. $3,000 loss. ($22,000 − $25,000) c. $0. No gain or loss is recognized since the property is sold at a price that falls between the donor's basis for gain and basis for loss.

91. $450,000. ($480,000 + $70,000 − $100,000) Powered by Cognero

Page 21

Name:

Class:

Date:

CH 04 Additional Income and the Qualified Business Income Deduction 92. $250,000. If property is received from a decedent, the basis to the recipient is usually the fair market value at the decedent's date of death.

93. a. Net short-term capital gain of $300 and a net long-term capital gain of $2,000. b. Net long-term capital gains (net long-term capital gains in excess of net short-term capital losses) are subject to tax rates up to 28 percent, depending on the nature of the asset sold. In this instance, the sale of stock is subject to a maximum capital gains rate of 20 percent (0 percent if Falstaff's income is less than $41,675; 15 percent if Falstaff's income is less than $459,750; or 20 percent if Falstaff's income is above $459,750). The net short-term capital gain will be taxed at ordinary income rates, which range up to 37 percent. High-income taxpayers also incur the 3.8 percent Medicare tax on net investment income.

94. Based on his other taxable income, Matthew has a capital gains tax rate of 15 percent. $57,000 of net capital gains ($42,000 + $17,000 − $2,000), taxed at 15 percent results in $8,550 of tax.

95. a. $3,000 b. $45,000 net long-term capital loss. Short-term capital losses are deducted first. c. Unused capital losses may be carried forward indefinitely 96. a. $5,000 short-term loss ($2,000 − $7,000). b. $6,500 long-term loss ($500 − $8,000) + ($4,000 − $3,000). Since the dune buggy is a personal asset, the loss is not allowed for tax purposes. c. $3,000 deductible capital loss. $5,000 + $6,500 = $11,500, limited to $3,000. d. $2,000 short-term capital loss carryforward ($5,000 − $3,000). $6,500 long-term capital loss carryforward. e. $3,000 capital loss may be deducted on William’s 2023 tax return, and he has a $5,500 long-term capital loss carryforward to 2024.

97. $0. The $250,000 exclusion is pro-rated in the case of the employment-related move. $125,000 exclusion = (1 year ÷ 2 years × $250,000) 98. a. $72,000. ($190,000 − $15,000 − $3,000 − $100,000) b. $0. Up to $250,000 of the gain is excluded from taxable income. c. $200,000.

99. a. $275,000. ($365,000 − $70,000 − $20,000) b. $25,000. ($275,000 − $250,000 exclusion)

100. $2,320 loss. ($7,200 − $900 − $4,000 − $300 − $320 − $4,000) 101. $1,350. $7,200 (rent income) − (9/12 × $6,000, interest and taxes) − (9/12 × $1,800, utilities, repairs/maintenance) 102. Since the residence was rented for less than 15 days, it is treated as a personal residence for tax purposes, and the rental income is not taxable.

Powered by Cognero

Page 22

Name:

Class:

Date:

CH 04 Additional Income and the Qualified Business Income Deduction 103. $8,000. $25,000 − [($134,000 − $100,000) × 50%]. None of the loss from the limited partnership can be deducted in 2022.

104. a. $230,000. ($235,000 + $1,000 − $6,000). The $2,000 of income from the Form K-1 is offset by the rental property loss. Since Robert’s modified gross income is greater than $150,000, the loss from the rental real estate is not allowed and must be carried forward. b. $7,000. Robert may offset the $2,000 of partnership income against the $9,000 of rental loss. c. The $7,000 of unallowed rental loss will be carried forward to future years subject to the passive loss rules. d. $23,000. ($35,000 + $1,000 − $9,000 + $2,000 − $6,000). Since his modified gross income is less than $100,000, Robert may deduct the full rental loss.

105. a. $60 profit. ($12,000 − $1,300 − $4,400 − $600 − $640 − $5,000) b. Actively managed real estate is considered a passive source of income.

106. There is no carryback provision for NOLs in 2022. He may carry the loss forward and is able to offset no more than 80 percent of the income in any future year (2022 and after) with his NOL. 107. Nevaeh’s loss may not be carried to future years. Only losses from the operation of a trade or business, casualty and theft losses, and confiscation losses can generate a net operating loss for an individual taxpayer. Therefore, individual taxpayers with only wages and itemized deductions (other than casualty losses) do not get net operating loss treatment for negative income.

108. $10,000. The business loss is $20,000 of wages less the $30,000 business loss. The $4,000 of nonbusiness capital gains can be offset by the nonbusiness standard deduction, but the excess standard deduction does not figure into the NOL. 109. $35,600. ($178,000 × 20%). Kelly and her spouse’s income do not exceed the married filing jointly threshold of $340,100 where the phase-out of a service business would begin. Since their taxable income is greater than her-pass through income, the QBI deduction is 20 percent of her qualified business income.

110. a. $2,825.91. ($20,000 × 0.9235 × 15.3%) b. $23,182.58. [$147,000 (maximum) × 12.4%] + [($185,000 × 0.9235) × 2.9%] 111. $11,303.64. [($80,000 × 0.9235) × 15.3%] 112. $24,253.84. [$147,000 (maximum) × 12.4%] + [($225,000 × 0.9235) × 2.9%] 113. A capital asset is any property whether used in a trade or business or not, with the exception of assets specifically excluded by tax law. Examples of excluded assets are inventory, depreciable property used in a trade or business, patented or copyrighted property created by the taxpayer, and accounts or notes receivable.

114. (The three categories may be listed in any order).

(1) Active income, e.g., wages, self-employment income, and salaries.

(2) Portfolio income, e.g., dividends and interest.

(3) Passive income, e.g., income from limited partnership investments and rental real estate investments.

115. $14,400. Only 80 percent of future income can be offset with an NOL (2023 income of $18,000 × 80% = $14,400).

The remaining $1,600 of NOL can be carried forward into 2024.

Powered by Cognero

Page 23

Name:

Class:

Date:

CH 04 Additional Income and the Qualified Business Income Deduction

Powered by Cognero

Page 24

Name:

Class:

Date:

CH 05 Deductions For and From AGI

Indicate whether the statement is true or false.

1. In 2022, a taxpayer who is under 50 years of age and not an active participant in a retirement plan may deduct a contribution of up to $6,000 to a traditional IRA, subject to the earned income limitation. a. True b. False 2. Earnings on nondeductible IRA contributions are allowed to accumulate tax-free until they are withdrawn. a. True b. False 3. Since a contribution to an IRA is a voluntary action, a taxpayer may withdraw amounts from an IRA at any time without penalty. a. True b. False 4. In 2022, all taxpayers may make a deductible or nondeductible contribution to an IRA. a. True b. False 5. If a taxpayer receives an early distribution from an IRA because of a disability, the taxpayer will not be subject to a penalty. a. True b. False 6. Contributions to a traditional IRA made between January 1 and April 15 may generally be deducted in the previous tax year. a. True b. False 7. Subject to the annual dollar limitation and the earned income limitation, deductible IRA contributions are allowed for all taxpayers who do not participate in a qualified retirement plan. a. True b. False 8. A taxpayer must make contributions to a regular or Roth IRA prior to the end of the year in order to claim the deduction for that year. a. True b. False 9. In 2022, a taxpayer who is under 50 years of age and not an active participant in a retirement plan may contribute no more than $6,000 to a traditional IRA, subject to the earned income limitation. a. True b. False 10. If a Section 401(k) plan allows an employee to choose between a direct payment of compensation in cash or a contribution to the retirement plan, the plan is not a "qualified" plan.

Powered by Cognero

Page 1

Name:

Class:

Date:

CH 05 Deductions For and From AGI a. True b. False 11. If an employer makes a contribution to a qualified retirement plan on behalf of an employee, the amount is currently deductible by the employer, and the employee must include the amount in gross income at the time the contribution is made. a. True b. False 12. Jim is a high school chemistry teacher. In 2022, his chemistry lab is short supplies and so he spends $350 of his own money purchasing missing items needed for the upcoming labs. Jim may deduct the entire $350. a. True b. False 13. Unreimbursed qualifying moving expenses are an itemized deduction for 2022. a. True b. False 14. In 2022, medical expenses must exceed 10 percent of a taxpayer's AGI to be deductible as an itemized deduction. a. True b. False 15. Premiums paid for life insurance policies are deductible as medical expenses. a. True b. False 16. The cost of a chiropractor's services qualifies as a medical deduction. a. True b. False 17. The cost of over-the-counter aspirin and decongestants is a deductible medical expense even though they are nonprescription drugs. a. True b. False 18. Glenda heard from a friend that prescription drugs were considerably cheaper overseas and began purchasing her regular prescription over the Internet from a foreign company for $500. Though technically illegal, Glenda saves quite a bit and is pretty sure "everyone is doing it." Glenda can include the $500 cost of the prescription as a deductible medical expense. a. True b. False 19. If a taxpayer installs special equipment in their home for physician-ordered medical reasons, some or all of the cost can be included as a deductible medical expense. a. True b. False Powered by Cognero

Page 2

Name:

Class:

Date:

CH 05 Deductions For and From AGI 20. The 2022 standard mileage rate for taxpayer use of a personal auto for transportation for medical care is $0.175 per mile. a. True b. False 21. Lodging for a trip associated with medical care from a licensed hospital is not deductible. a. True b. False 22. If real property is sold during the year, the property taxes must be allocated between the buyer and seller based on the number of days the property was held by each party. a. True b. False 23. The amount of a special assessment charged to residents for the installation of sidewalks on their street is not deductible on Schedule A as property taxes. a. True b. False 24. To calculate the amount of state and local income taxes that may be deducted as an itemized deduction, state income taxes paid during the year must be reduced by state income tax refunds received during the year. a. True b. False 25. In 2022, the itemized deduction for taxes is limited to 10 percent of adjusted gross income. a. True b. False 26. State income taxes or state and local sales taxes, whichever is larger, may be deducted as an itemized deduction on Schedule A. a. True b. False 27. Taxpayers are permitted an itemized deduction for the lesser of state income taxes paid or state sales taxes paid. a. True b. False 28. Foreign income taxes paid are deductible. a. True b. False 29. State sales taxes can be deducted in lieu of state income taxes. a. True b. False 30. Brittany determined that she paid $450 in gasoline excise taxes during the year when she bought gas for her commute to and from work. Brittany's gas excise taxes are deductible as an itemized deduction.

Powered by Cognero

Page 3

Name:

Class:

Date:

CH 05 Deductions For and From AGI a. True b. False 31. Charu is charged $70 by the state she lives in related to vehicle registration based on the weight of her personal auto.

Charu can deduct the $70 as an itemized deduction. a. True b. False 32. Mortgage interest on a taxpayer's personal residence is a type of interest that is not deductible on Schedule A. a. True b. False 33. To deduct interest paid with respect to indebtedness, the taxpayer must be legally liable for the debt. a. True b. False 34. The interest paid on a loan used to acquire municipal bonds is not deductible. a. True b. False 35. The investment interest expense deduction is limited to the taxpayer's net investment income. a. True b. False 36. For an individual taxpayer with AGI of $65,000, private mortgage insurance (PMI) is deductible in 2022. a. True b. False 37. Piper purchases a new personal auto and finances the purchase through the dealer. The interest of $760 they pay on the car loan during the current tax year is deductible. a. True b. False 38. Don uses his holiday bonus to pay his January 2023 mortgage payment in December 2022. The payment would normally be due January 31. Don may deduct the interest paid as part of the early mortgage payment. a. True b. False 39. In 2022, Richie purchases a new $4.3 million qualified principal residence using a mortgage loan of $3 million. Richie's mortgage interest deduction may be limited. a. True b. False 40. Perry, a single taxpayer, graduated from law school last year with quite a bit of qualified student loan debt and ends up paying $4,300 in interest on the loan in the current tax year. Fortunately, Perry is well compensated and earns adjusted gross income of $90,000 during the current year. Perry may deduct his student loan interest in the current year.

Powered by Cognero

Page 4

Name:

Class:

Date:

CH 05 Deductions For and From AGI a. True b. False 41. A taxpayer may donate the free use of property to a charitable organization and deduct the value as an itemized deduction. a. True b. False 42. For 2022, taxpayers must itemize their deductions to be allowed a charitable contribution deduction. a. True b. False 43. Individual taxpayers may carry forward indefinitely charitable contributions that are not allowed as a deduction in the current year due to the adjusted gross income limitation. a. True b. False 44. Tao was so entertained by the Paris Symphony on his visit to France that he mailed them a donation of $100 to support their organization as soon as he returned home to Seattle. Tao may deduct the charitable contribution to the Paris Symphony on his U.S. tax return. a. True b. False 45. Agnes is retired and has only a $12,000 annual pension as income. In 2022, Agnes' aunt dies and leaves her land worth $1.2 million. Agnes sees no need for the land and donates it immediately to a qualified public charity. Agnes may deduct a $1.2 million charitable contribution on her 2022 tax return. a. True b. False 46. Dr. Wheeler donates her time and services to Doctors with No Limits, a qualified charity. Dr. Wheeler can take a tax deduction for the $3,400 market value of her time donated. a. True b. False 47. Self-employed taxpayers can deduct the cost of uniforms, but employees cannot. a. True b. False

Indicate the answer choice that best completes the statement or answers the question.

48. Which of the following statements about health savings accounts (HSAs) is true? a. There is no restriction on the kind of health insurance taxpayers must carry in order to qualify for an HSA. b. Contributions to HSAs are not deductible for adjusted gross income (AGI) but are treated as an itemized deduction. c. Individuals taking distributions from HSAs which are not for medical expenses are subject to a 50 percent penalty.

Powered by Cognero

Page 5

Name:

Class:

Date:

CH 05 Deductions For and From AGI d. Distributions from HSAs are tax and penalty free when used for qualified medical expenses.

49. Which of the following statements about health savings accounts (HSAs) is false? a. HSAs must be paired with qualifying high-deductible health insurance. b. Taxpayers qualifying for Medicare do not qualify to make HSA contributions. c. Deductible contributions to HSAs are unlimited. d. Distributions from HSAs which are used for qualifying medical expenses are not subject to tax or penalty.

50. Ellen supports her family as a self-employed attorney. She reports $90,000 of income on her Schedule C and pays $8,000 for health insurance for her family, $2,500 for dental insurance, $4,000 for health insurance for her 23-year-old daughter who is no longer a dependent, and $3,000 for disability insurance for herself. What is Ellen’s self-employed health insurance deduction? a. $8,000 b. $10,500 c. $12,000 d. $14,500 51. What percentage of medical insurance payments can self-employed taxpayers deduct for adjusted gross income on their 2022 tax returns, assuming their self-employment income exceeds their medical insurance payments? a. 50 percent b. 75 percent c. 90 percent d. 100 percent 52. Which of the following is true about the self-employed health insurance deduction? a. Dental insurance is not part of the allowable deduction. b. Medical insurance is allowed as a deduction, subject to a dollar limitation. c. Life insurance is allowed as a deduction. d. Long-term care insurance is allowed as a deduction, subject to a dollar limitation.

53. Over the years, Monica contributed $15,000 to a Roth IRA opened 10 years ago. The Roth IRA has a current value of $37,500. She is 54 years old and takes a distribution of $25,000. How much of the distribution will be taxable to Monica? a. $0 b. $10,000 c. $15,000 d. $25,000 54. A 42-year-old single taxpayer with AGI of $149,000 a year can make which of the following IRA contributions if they are not covered by a plan at work? a. $6,000 to either a traditional IRA, a Roth IRA, or a nondeductible IRA b. $7,000 to either a traditional IRA, a Roth IRA, or a nondeductible IRA c. $6,000 to a Roth IRA only d. $6,000 to either a traditional IRA or a nondeductible IRA 55. Jim wants to make a contribution to an IRA, but he doesn’t have the cash available to contribute yet. What is Jim‘s Powered by Cognero

Page 6

Name:

Class:

Date:

CH 05 Deductions For and From AGI deadline for making a contribution to a traditional IRA or a Roth IRA for 2022? a. April 18, 2022 b. December 31, 2022 c. April 18, 2023 d. October 15, 2023 56. Jody is a physician's assistant (not covered by a retirement plan) with a salary of $40,000 from the hospital where she is employed. She supports her husband, Andre, who is an artist but has no earned income for the year. They have no other sources of income. Both are in their twenties. What is the maximum total amount that Jody and Andre may contribute to their traditional IRAs and deduct for the 2022 tax year? a. $5,500 b. $6,000 c. $12,000 d. $11,000 57. Which of the following taxpayers qualifies for the maximum traditional individual retirement account deduction for 2022? a. Married taxpayers, neither of whom is covered by a qualified retirement plan, with total adjusted gross income, all earned, of $85,000 b. A single taxpayer, who is covered by a qualified retirement plan, with adjusted gross income of $90,000 c. A single taxpayer, who is not covered by a qualified retirement plan, with no earned income but with unearned income of $12,000 d. Married taxpayers, only one of whom is covered by a qualified retirement plan, with total adjusted gross income of $208,000 58. Stefan is 27 years old and has a total AGI of $110,000 in 2022. He contracts an illness in 2022 and incurs an unreimbursed medical bill that totals $7,500. He withdraws $7,500 from his traditional IRA to pay the bill. Which of the following is true? a. He is not subject to penalties on the IRA withdrawal because it was for medical expenses. b. He is not subject to penalties on the IRA withdrawal because he was disabled by an illness for two weeks. c. He is subject to penalties on the IRA withdrawal because a person may not take a withdrawal from a traditional IRA until they are 59½ years old. d. He is subject to penalties on the IRA withdrawal because the withdrawal did not cover a portion of medical bills that exceeded 7.5 percent of his AGI. 59. Which of the following is an exception to the 10 percent early withdrawal penalty of a traditional IRA? a. Paying the costs of higher education, including tuition, fees, books, and room and board for a dependent child b. Withdrawing up to $30,000 for first-time home-buying expenses c. Using the withdrawals for medical expenses up to 7.5 percent of their AGI, for persons younger than 59½ years old d. The recipient has received six weeks of unemployment compensation and must pay medical insurance premiums for dependents.

60. Cameron, a 40-year-old married taxpayer, has a salary of $55,000 and interest income of $6,000. He is an active participant in his employer’s pension plan. What is the maximum amount Cameron can contribute to a Roth IRA in 2022? a. $550 Powered by Cognero

Page 7

Name:

Class:

Date:

CH 05 Deductions For and From AGI b. $1,220 c. $3,000 d. $6,000 61. Which of the following is a for AGI deduction? a. Medical expenses b. Educator's expense c. Personal property taxes d. Home mortgage interest 62. In 2022, which of the following early (before age 59½) withdrawals from an IRA may be made without penalty? a. For job-related moving expenses b. For a second home (up to $10,000) c. For home improvement expenses d. For adoption expenses (up to $5,000) 63. Madalyn contributed $30,000 to a Roth IRA over 15 years. The IRA has a current value of $67,500. She is 64 years old and takes a distribution of $38,000. How much of the distribution will be taxable to Madalyn? a. $0 b. $8,000 c. $30,000 d. $38,000 64. Ashlyn is a physician (not covered by a retirement plan) with a salary of $140,000 from the medical clinic where she works. She supports her husband, Ethan, who stays home with their two children and has no earned income. Both are in their thirties, and they have no other sources of income. What is the maximum amount that Ashlyn and Ethan combined may contribute to their traditional IRAs and deduct for the 2022 tax year? a. $5,500 b. $6,000 c. $12,000 d. $14,000 65. Cadence is an engineer with a salary of $165,000 from the firm where she works. She is covered by a retirement plan.

Her husband, Oakley, is a writer with no earned income. They have no other sources of income. Cadence and Oakley are in their twenties. What is the maximum total amount that they may contribute to their traditional IRAs and deduct for the 2022 tax year? a. $5,500 b. $6,000 c. $12,000 d. $14,000 66. Under the SEP plan provisions, deductible contributions to a qualified retirement plan on behalf of an employee whose net earned income is $16,000 are limited to how much? a. $1,500 b. $2,000 Powered by Cognero

Page 8

Name:

Class:

Date:

CH 05 Deductions For and From AGI c. $4,000 d. $5,000 67. Contributions by a self-employed individual to a SEP plan for 2022 are limited to the lesser of a percent of net earned income or what amount? a. $19,500 b. $7,000 c. $57,000 d. $61,000 68. Which of the following statements is correct? a. Contributions to SEP plans by self-employed taxpayers are generally limited to the lesser of 15 percent of their net earned income (before the SEP deduction) or $45,000. b. The contribution limits for SEPs are the lesser of 25 percent of net self-employment income after the deduction for the contribution to the SEP or $61,000 for a self-employed taxpayer. c. Employees may elect to make annual contributions to 401(k) plans up to the lesser of 15 percent of their net earned income [before the 401(k) deduction] or $61,000. d. The contribution limits for SEPs are a maximum of $20,500 ($26,500 for taxpayers 50 or older).

69. Nan’s salary in 2022 is $40,000. Nan elects to defer 5 percent of her salary into her employer’s 401(k) plan. Her employer provides a matching contribution on the first 4 percent contributed. What is the net impact on Nan's 2022 taxable income from these items? a. $40,000 b. $41,600 c. $38,000 d. $39,600 70. Gail is an elementary school teacher. She buys the following items for use in her classroom in 2022: Construction paper and tissues Materials for decorating the classroom bulletin boards Artist’s smock used for in-class finger painting 12 dozen erasers What amount can Gail deduct either as a for or from AGI deduction in 2022?

$ 65 200 45 15

a. $300 as a for AGI deduction and $25 as a from AGI deduction (subject to 2 percent of AGI) b. $300 as a for AGI deduction and $0 as a from AGI deduction c. $325 as a for AGI deduction and $0 as a from AGI deduction d. $250 as a for AGI deduction and $75 as a from AGI deduction 71. Which of the following professions is not eligible for a for AGI deduction related to certain unreimbursed business expenses? a. K-12 educator b. Performing artist c. National guard or reservist Powered by Cognero

Page 9

Name:

Class:

Date:

CH 05 Deductions For and From AGI d. Federal Appeals Court judge 72. Brett and Lisa file taxes under the married filing jointly status. Lisa is a sales manager for an auto parts company, and Brett takes care of their three children. In 2022, Lisa receives a promotion associated with a move to a new division located over 500 miles from their existing home. The cost to move their household items is $8,700. Lisa’s employer reimburses her for $3,000 of those costs and also pays $2,100 for airfare for the entire family to fly to the new destination.

What is Lisa’s moving expenses deduction for 2022? a. $0 b. $8,700 c. $5,700 d. $3,600 73. Jon, age 45, had adjusted gross income of $26,000 in 2022. During the year, he incurred and paid the following medical expenses: Drugs and medicines prescribed by doctors $ 300 Health insurance premiums 750 Doctors' fees 2,650 Eyeglasses 75 Jon received $900 in 2022 as a reimbursement for a portion of the doctors' fees. If Jon were to itemize his deductions, what would be his allowable medical expense deduction after the adjusted gross income limitation is taken into account? a. $0 b. $275 c. $925 d. $2,875 74. During the current year, Keisha paid the following expenses: Prescription drugs $490 Aspirin and over-the-counter cold capsules 130 Hospital and doctors 700 Life insurance 260 What is the total amount of medical expenses (before considering the limitation based on adjusted gross income) that would enter into the calculation of itemized deductions on Keisha's current year income tax return? a. $700 b. $1,190 c. $1,450 d. $1,580 75. In 2022, David, age 66, had adjusted gross income of $32,000. During the year, he paid the following medical expenses: Prescription medicines Doctors Medical care insurance Over-the-counter hair growth tonic

$ 200 2,500 1,400 250

What amount can David deduct as medical expenses (after the adjusted gross income limitation) in calculating his itemized deductions for 2022?

Powered by Cognero

Page 10

Name:

Class:

Date:

CH 05 Deductions For and From AGI a. $0 b. $900 c. $1,700 d. $4,100 76. Randy is advised by his physician to install an elevator in his residence, since he is afflicted with heart disease. The cost of installing the elevator is $10,000, and it has an estimated useful life of 10 years. He installs the elevator in January of the current year, and it increases the value of his residence by $8,000. Disregarding the limitation based on adjusted gross income, how much of the cost of the elevator may Randy take into account in determining his medical expense deduction for the current year? a. $0 b. $1,000 c. $2,000 d. $10,000 77. Which of the following is deductible as a medical expense on Schedule A? a. Payments to a nurse b. Payments for marriage counseling c. Payments for teeth whitening products d. Payments for over-the-counter weight loss pills 78. Which of the following is considered a deductible medical expense? a. A facelift b. An eye exam c. A knee brace bought at the pharmacy d. A payment for exercise classes 79. Jelani, age 50, has AGI of $110,000 for 2022. He has medical expenses of $13,200. How much of the medical expenses can Jelani deduct on his Schedule A for 2022? a. $0 b. $4,950 c. $11,000 d. $13,200 80. During the current year, the Wests paid the following taxes: Property taxes on residence $1,900 Special assessment for installation of a sewer system in their neighborhood 1,200 State personal property tax on their automobile (based on value) 400 Property taxes on land held for long-term appreciation 600 What amount can the Wests deduct as property taxes in calculating itemized deductions for the current year? a. $0 b. $2,300 c. $4,100 d. $2,900 Powered by Cognero

Page 11

Name:

Class:

Date:

CH 05 Deductions For and From AGI 81. Margo has $2,200 withheld from her wages for state income taxes during 2022. In March of 2022, she paid $300 in additional taxes for her 2021 state tax return. Her state income tax liability for 2022 is $2,700, and she pays the additional $500 when she files her 2022 state tax return in April of 2023. What amount should Margo deduct as an itemized deduction for state income taxes on her 2022 federal income tax return, assuming she deducts state and local income taxes? a. $2,200 b. $2,500 c. $2,600 d. $2,700 82. During the current year, Seth, a self-employed individual, paid the following taxes: Federal income tax $15,000 State income tax 6,500 Real estate taxes on land in South America (held as an investment) 700 State sales taxes 300 Personal property taxes based upon value 1,600 Federal self-employment tax 800 What amount can Seth claim as an itemized deduction for taxes paid during the current year? a. $9,100 b. $9,900 c. $8,800 d. $10,000 83. During the current year, Xavier, a salaried taxpayer, paid the following taxes which were not incurred in connection with a trade or business: Federal income tax (withheld by employer) $1,500 State income tax (withheld by employer) 1,100 FICA tax (withheld by employer) 700 Real property taxes 300 Federal auto gasoline taxes 200 Federal excise tax on telephone bills 50 What amount can Xavier claim for the current year as an itemized deduction for the taxes paid, assuming he deducts state and local income taxes? a. $1,100 b. $1,150 c. $1,400 d. $2,000 84. Which of the following taxes is deductible as an itemized deduction? a. Property tax on second residence b. Employee portion of Social Security tax c. Federal income tax d. Inheritance tax 85. Frank is a resident of a state that imposes a tax on income. The following information pertaining to Frank's state income taxes is available: Powered by Cognero

Page 12

Name:

Class:

Date:

CH 05 Deductions For and From AGI State income taxes withheld in 2022 $3,500 Refund of 2020 tax received in 2022 400 Deficiency assessed and paid in 2022 for 2020: State tax 600 Interest 100 What amount should Frank use as state and local income taxes in calculating itemized deductions for his 2022 Federal tax return, assuming he deducts state and local income taxes? a. $3,500 b. $3,700 c. $4,100 d. $4,200 86. Which one of the following is not tax deductible? a. Real estate tax b. Property tax c. Local income tax d. Gift tax 87. Weber resides in a state that imposes a tax on income. The following information relating to Weber's state income taxes is available: State income taxes withheld in 2022 $3,000 State sales taxes paid 650 Refund received in 2022 for 2021 tax 300 Assessment paid in 2022 for 2020 state income tax 800 What amount should Weber use as state and local income taxes in calculating itemized deductions for his 2022 Federal income tax return? a. $2,700 b. $3,000 c. $3,500 d. $3,800 88. Harvey itemized deductions on his 2021 income tax return and was able to deduct all state and local income taxes paid. Harvey plans to itemize deductions again in 2022 and the following information is available regarding state and local income taxes: Taxes withheld in 2022 $12,500 Refund received in 2022 for 2021 tax 500 Assessment paid in 2022 for 2020 tax 300 Assuming he deducts state and local income taxes, how should this information be reported by Harvey on his 2022 tax return? a. Itemized deduction for state and local income taxes of $12,500, and income from state and local tax refund of $200 b. Itemized deduction for state and local income taxes of $12,300 c. Itemized deduction for state and local income taxes of $12,800 d. Itemized deduction for state and local income taxes of $10,000 and income from state and local tax refund of $500 Powered by Cognero

Page 13

Name:

Class:

Date:

CH 05 Deductions For and From AGI 89. Which of the following is not deductible as an itemized deduction? a. State and local income taxes b. Personal property taxes c. Donation of a car to a charitable organization d. The value of use of taxpayer's property by a nonprofit 90. Stan, a single taxpayer, has $1,700 of state income taxes withheld from his wages in the current year. In the current year, he also received a $320 refund on his prior year state income tax. Stan did not itemize last year but he intends to do so this year. Stan used the sales tax estimate tables and determined his sales tax deduction amount is $1,600. What amount should Stan deduct for state taxes? a. $0 b. $1,380 c. $1,600 d. $1,700 91. Kevin and Ann paid the following amounts during the current year: Interest on automobile loan $1,500 Interest on bank loan (proceeds were used to purchase municipal bonds) 5,000 Qualified home mortgage interest 3,150 What is the maximum amount they can use as interest expense in calculating itemized deductions for the current year? a. $6,500 b. $3,150 c. $4,650 d. $8,150 92. Nathan purchases a new principal residence in the current year and pays points of $2,000 to obtain a mortgage loan.

What is the proper tax treatment for the points paid? a. The points are a nondeductible personal expense. b. The points must be amortized over the life of the loan. c. The points are fully deductible in the current year. d. The points must be capitalized into the cost of the residence.

93. Shellie, a single individual, received her Bachelor’s degree in 2021, and took a job with a salary of $45,000 per year.

In 2022, she paid $1,500 of interest on qualified education loans. Which of the following statements is correct? a. The full $1,500 is deductible in arriving at adjusted gross income (AGI). b. If her payment had been $3,000, only $2,000 would have been deductible in arriving at AGI and the $1,000 excess would have been treated as nondeductible consumer interest. c. If her income had been $65,000, the deductible amount would have been phased out. d. She is not allowed a deduction for education loan interest in 2022.

94. For the current tax year, Justin, a married taxpayer filing a joint return, reported the following: Investment income from interest Investment expenses other than interest Interest expense on funds borrowed 10 years ago to purchase investment Powered by Cognero

$24,000 3,000 70,000 Page 14

Name:

Class:

Date:

CH 05 Deductions For and From AGI property What is the maximum amount that Justin can deduct in the current year as investment interest expense? a. $7,000 b. $20,000 c. $21,000 d. $24,000 95. Amy paid the following interest expense during the current year: Qualified home mortgage interest $5,000 Credit card interest 1,000 Private mortgage insurance payments 3,000 What is the amount of Amy's interest deduction for the current year? a. $8,000 b. $3,000 c. $4,000 d. $5,000 96. Which of the following interest expense amounts is not deductible in 2022? a. Education loan interest of $2,000, assuming the taxpayer is single and has income of $67,000. b. Home equity loan interest of $9,000 on a loan of $100,000, the proceeds of which were used to purchase an addition to the taxpayer’s primary residence. c. The interest a taxpayer pays on a sibling's home mortgage payment. d. Points of $2,000 paid on a mortgage loan for the purchase of a new principal residence.

97. During 2022, Cary and Parker incurred acquisition debt on their residence of $1,300,000. They also borrowed $200,000 on a home equity line to pay college tuitions for their children. On a joint tax return, what is the amount of their qualified acquisition debt? a. $1,000,000 b. $1,300,000 c. $750,000 d. $1,500,000 98. What is the maximum amount of home equity debt (not acquisition debt) on which interest is fully deductible? a. $0 b. $50,000 c. $100,000 d. $200,000 99. Tyler has a mortgage loan on his personal residence. He decides to pay 18 months of interest ($2,000 per month or $36,000 total) in advance on October 1, 2022. How much of the advance interest payment can he deduct in 2022? a. $6,000 b. $12,000 c. $24,000 d. $36,000 Powered by Cognero

Page 15

Name:

Class:

Date:

CH 05 Deductions For and From AGI 100. Which of the following is deductible as interest expense on Schedule A? a. Loan fee charged for appraisal service b. Interest on single premium life insurance c. Interest on a car loan d. Home mortgage prepayment penalties 101. Which of the following types of interest is not deductible? a. Qualified mortgage interest on residence b. Qualified mortgage interest on second residence c. Credit card interest d. Investment interest 102. Which of the following types of interest are likely to be deductible in 2022? a. Interest on personal credit cards b. Interest on a $40,000 home equity line used to buy a car c. Interest on a $150,000 mortgage on a principal residence d. Interest on a $90,000 home equity line used to pay college tuition 103. Ciara saw a television advertisement asking for donations of used vehicles to a charitable foundation and decided to donate her old car. Which of the following statements is true? a. She can take a tax deduction large enough on an after-tax basis to equal the amount she would have received if she sold the car directly. b. She can take a deduction greater than the amount for which the charity actually sells the vehicle. c. She can claim an estimated value for the auto if the charity uses it rather than selling it. d. The charity is not required to provide her with any information about what they do with the auto.

104. Which of the following charitable contributions is not tax deductible? a. Cash donated to a qualified religious organization b. Clothing donated to a qualified veterans’ organization c. Time donated to a qualified veterans’ organization d. Donation of a car to a qualified nonprofit organization 105. For 2022, Eugene and Linda had adjusted gross income of $30,000. Additional information for 2022 is as follows: Cash contribution to American Heart Association $1,300 Tuition paid to a parochial school $1,200 Cash contribution to a qualified charity $400 Cash contribution to a needy family $100 What is the maximum amount they can deduct for charitable contributions in 2022? a. $500 b. $1,600 c. $1,700 d. $2,000 106. Shemar had adjusted gross income of $22,000 in 2022. During the year, he made the following contributions to Powered by Cognero

Page 16

Name:

Class:

Date:

CH 05 Deductions For and From AGI qualified charities: - $7,000 cash - 1,000 shares of Able Corporation common stock, acquired in 2012 (fair market value of $7,000, cost of $1,000) Considering the charitable contribution deduction limitation, what amount can Shemar claim as a deduction for charitable contributions in 2022? a. $5,000 b. $7,000 c. $11,000 d. $13,600 107. Gabrielle, a single taxpayer, donates $500 cash to the American Red Cross in 2022. If Gabrielle has AGI of $46,000 in 2022 but does not itemize deductions, how much can she deduct for her charitable contribution in 2022? a. $0 b. $300 c. $500 d. $46,000 108. In 2022, which of the following miscellaneous deductions are not subject to the 2 percent of AGI floor and remain deductible? a. Unreimbursed employee business expenses b. Investment expenses c. Unrecovered annuity costs at death d. Union dues

109. What is the amount of the deductible HSA contribution for each of the following taxpayers? a. Amelia and Albert, both age 43, have a qualifying high-deductible insurance plan. They contribute $6,700 to a family HSA. b. Betsy, who is single, 72 years old, and covered by Medicare, wants to contribute the maximum amount to an HSA. c. Carlo has health insurance through his employer which has low-deductible amounts. He is 34 years old and is married.

Carlo wants to contribute the maximum to an HSA. d. Diane is 57 years old. She has a qualifying high-deductible insurance plan. She has contributed $5,350 to her HSA. 110. Miki, who is single and 57 years old, has a qualifying high-deductible insurance plan. She had the following transactions with her HSA during 2022: Contributions to her HSA $3,700 Interest income earned on her HSA 9 Medical expenses paid from her HSA 5,739 HSA distribution to pay for her daughter’s wedding 7,650 a. How much may Miki claim as a deduction for adjusted gross income? b. What is the amount that Miki must report on her federal income tax return as income from her HSA? c. How much is subject to a penalty? What is the penalty percentage?

111. Kerem and Rose are married and file jointly. Kerem earns $45,000 from wages and Rose reports $450 of net profits (after self-employment taxes) from her Schedule C business as an artist. Since Kerem’s work does not offer health Powered by Cognero

Page 17

Name:

Class:

Date:

CH 05 Deductions For and From AGI insurance, Rose pays the following health insurance premiums from her business account: Family health insurance $9,500 Family dental insurance 1,000 How much can Kerem and Rose deduct as self-employed health insurance?

112. Moe has a law practice and earns $322,000 which he reports on his Schedule C. His wife, Mindy, works part-time at Wal-Mart and earns $8,300. Mindy does not receive any medical benefits through Wal-Mart. Their 29-year-old daughter, Michelle, who is not a dependent, is working toward earning her Master’s degree.

Moe and Mindy pay the following amounts: Health insurance for Moe and Mindy $8,100 Dental insurance for Moe and Mindy 600 Vision care insurance for Moe and Mindy 425 Health insurance for their daughter 3,620 Long-term care insurance for Moe who is 54 years old 2,000 How much may Moe and Mindy claim on their tax return as a self-employed health insurance deduction?

113. Wilson and Joan, both in their 30s, file a joint income tax return for 2022. Wilson's wages are $18,000, and Joan's wages are $23,000 for the year. Their total adjusted gross income is $41,000, and Joan is covered by a qualified pension plan at work but Wilson is not. a. b.

What is the maximum amount that Wilson and Joan may each deduct for contributions to their traditional individual retirement accounts in 2022?

If Joan's wages are $95,000 for 2022, instead of $23,000, and their adjusted gross income is $114,000, what is the maximum amount that Wilson and Joan may each deduct for contributions to their traditional individual retirement accounts?

114. Jeremy, age 38, has $25,000 in a traditional IRA account and is considering taking the money out to buy himself a new car. What will be the tax consequences to Jeremy if he withdraws the $25,000 from his IRA in 2022 for this purpose?

Explain.

115. Rob and Julie, both in their 30s, file a joint income tax return for 2022. Rob's wages are $25,000, and Julie's wages are $35,000 for the year. Their total adjusted gross income is $60,000, and Julie is covered by a qualified pension plan at work but Rob is not. a. b.

What is the maximum amount that Rob and Julie may each contribute to their Roth IRAs? If Julie's wages are $110,000 for 2022, instead of $35,000, and their adjusted gross income is $135,000, (1) what is the maximum amount that Rob and Julie may each deduct for contributions to their traditional individual retirement accounts, and (2) what is the maximum amount they could each contribute to Roth IRAs instead?

116. What is the maximum amount a 30-year-old taxpayer and a 35-year-old spouse can contribute to a traditional or Roth IRA for 2022, assuming they earn $50,000 in total and are not covered by pension plans?

117. What is the maximum amount a 55-year-old taxpayer and a 48-year-old spouse can deduct for a contribution to a Powered by Cognero

Page 18

Name:

Class:

Date:

CH 05 Deductions For and From AGI traditional or Roth IRA for 2022, assuming they earn $85,000 in total and are not participants in pension plans?

118. Morgan is a 19-year-old single software inventor earning $200,000 a year and is not covered by a pension plan at work. How much can they contribute to a Roth IRA in 2022?; How much of that amount, if any, can they deduct?

119. Zaid is a single 40-year-old landscape architect earning $125,000 a year and is not covered by a pension plan at work. How much can he deduct for a contribution to a traditional IRA in 2022?

120. Hailey is 63 years old and retired in 2019. She receives Social Security payments of $12,000 a year and interest income of $30,000. She wishes to contribute the maximum allowed into an IRA. How much can she contribute to her IRA? 121. Sanjay, age 38, has $25,000 in a traditional IRA account and in 2020 suffered adverse financial consequences due to COVID-19. What will be the tax consequences to Sanjay if he withdrew the $25,000 from his IRA in 2020 for this purpose? Explain.

122. Christine is a self-employed graphic artist who has net earned income of $120,000 from her business. Christine has a defined contribution SEP plan and plans to contribute the amount that provides the maximum deduction allowable. How much can Christine contribute?

123. Barrett is a 45-year-old political commentator who has self-employed net earned income of $310,000 in 2022. What is the maximum amount he can deduct for contributions to his simplified employee pension (SEP) for the year?

124. During 2022, Sarah, age 29, had adjusted gross income of $12,000 and paid the following amounts for medical expenses: Medical insurance $400 Prescription medications 160 Hospital bills 575 Doctors' bills 310 Dental bills 180 In the first half of 2022, Sarah drove 125 miles for medical transportation in her personal automobile, and she uses the standard mileage allowance. Her insurance company reimbursed Sarah $300 during the year for the above medical expenses. Using the schedule below, calculate the amount of Sarah's deduction for medical and dental expenses for the 2022 tax year. $

Total Less 7.5% of adjusted gross income Medical deduction

Powered by Cognero

$ $

Page 19

Name:

Class:

Date:

CH 05 Deductions For and From AGI

125. For 2022, Nylah and Bob, ages 62 and 68, respectively, are married taxpayers who file a joint tax return with AGI of $50,000. During the year they incurred the following expenses: Medical insurance premiums Hospital bills (knee replacement for Bob) Hospital bills (cosmetic surgery for Nylah) Doctor bills Dentist bills Prescription eyeglasses Acupuncture treatments (for Bob's knee pain prior to his operation)

$3,200 4,400 2,600 750 250 380 300

In addition, their insurance company reimbursed them $3,100 for the above expenses.

Using the format below, calculate Nylah and Bob's deduction for medical and dental expenses for 2022. $

Total Less 7.5% of adjusted gross income Medical deduction

$ $

126. Jake developed serious health problems and had his bathroom remodeled so it is wheelchair-accessible and had a handicapped shower installed, based on a written prescription by his doctor. The cost of the remodel is $15,000 and is deemed to add no value to his house by a real estate appraiser. How is the cost of the remodel treated on Jake’s tax return?

127. Sherry had $5,600 withheld from her wages for state income taxes during 2022. In May of 2022, she received a $450 refund for her prior year state tax return. The amount of Sherry's state income tax on her 2022 state income tax return is $6,100, and she pays the additional tax of $500 ($6,100 − $5,600) when she files her state income tax return in April of 2023. a. b.

Assuming she deducts state income tax, how much state income taxes should Sherry deduct on Schedule A of Form 1040 of her 2022 federal income tax return?

How should Sherry report the $450 refund if she itemized deductions in 2021? If she took the standard deduction in 2021?

Powered by Cognero

Page 20

Name:

Class:

Date:

CH 05 Deductions For and From AGI 128. Diego lives in a state that charges a vehicle registration fee of $50 plus $20 for every $1,000 of value.

During the current year, Diego paid $170 for registration of his automobile.

How much of the vehicle registration fee is deductible as a personal property tax on a.

Schedule A of Diego's Form 1040? b. Explain your answer.

129. Newt is a single taxpayer with adjusted gross income for the 2022 tax year of $43,050. Newt's employer withheld $3,700 in state income tax from his salary. In April of 2022, he paid $300 in additional state taxes for his prior year's return. The real estate taxes on his home are $1,800 for 2022, and his personal property tax based on the value of his automobile is $75. Also, he paid $210 for state gasoline taxes for the year. The IRS estimate of general sales tax for Newt is $1,250 for 2022.

How much should Newt deduct on Schedule A of Form 1040 of his 2022 tax return for taxes paid?

130. Meade paid $5,000 of state income taxes in 2022. The total actual sales taxes paid during 2022 was $4,500, which did not include $3,000 for the sales taxes paid in 2022 on Meade's new boat. How should Meade treat the taxes paid on his 2022 tax return?

131. Fran paid the following amounts of interest during 2022: Qualified home mortgage interest Automobile loan interest Qualified interest on second residence Credit card interest Calculate the amount of Fran's interest deduction for 2022.

$7,000 500 5,000 300

132. Douglas and Dena paid the following amounts of interest during the current year: Qualified home mortgage interest Other consumer interest Investment interest expense Net investment income a. b.

$14,000 5,000 10,000 2,000

Calculate the amount of their allowable deduction for investment interest for the current year.

Calculate the amount of Douglas and Dena's total allowable deduction for interest for the current year.

133. Amira and Malik purchased their personal residence in Santa Barbara 20 years ago for $150,000. The home has a fair market value today of $1,000,000. For the current year, they have a $10,000 first mortgage on their home, on which they paid $1,000 in interest. They also have a home equity loan secured by their home with a balance throughout the year of $110,000. The proceeds of the home equity loan were used to send their two children to college. They paid interest on the home equity loan of $5,500 for the year.

Calculate the amount of their deduction for interest paid on qualified residence acquisition debt and qualified home equity debt for the current year.

Powered by Cognero

Page 21

Name:

Class:

Date:

CH 05 Deductions For and From AGI

134. Adrian borrows $20,000 to invest in bonds. During the current year, his interest on the loan is $2,000. Adrian's interest income from the bonds is $400, and his investment expenses are $300. a. b.

Calculate Adrian's itemized deduction for investment interest for this year.

Is Adrian entitled to a deduction in future years?

135. Melvin owns his home and has a $200,000 mortgage related to his purchase of the residence. In the fall of the current year, he borrows $40,000 on credit cards for college costs for his two sons. The interest expense on the mortgage is $15,000, and the interest expense on the credit cards is $6,000. How much of the interest is deductible as an itemized deduction and why?

136. Gwen has written acknowledgments for each of the following charitable contributions during the current year: Cash contributions to her church Contribution of used clothes and household items in good condition to AMVETS, valued at thrift shop prices (original cost, $1,000) Gwen's estimate of the value of her time donated to a local soup kitchen Cash donated to homeless people asking for money for food What is Gwen's charitable contribution deduction for the current year?

$1,250 200 800 75

137. During the current year, Hon donates a sculpture that cost $1,000 to a museum for exhibition. The sculpture's fair market value was $1,700 on the date of the donation, and Hon's adjusted gross income is $40,000. a. b.

Assume Hon held the sculpture for 4 months and the $700 ($1,700 − $1,000) of appreciation is a short-term capital gain. Calculate the amount of his itemized deduction for the contribution.

Assume Hon held the sculpture for 2 years and the $700 appreciation is a long-term capital gain. Calculate the amount of his itemized deduction for the contribution.

138. Ronald donates publicly traded Microsystems stock with a basis of $2,000 and a fair market value of $20,000 to the local library, which is considered a public charity. Ronald has $30,000 of adjusted gross income, and he purchased the stock 15 years ago. How is this contribution treated on Ronald’s tax return?

139. During 2022, Tanisha, a nurse at Dr. Pan’s office, incurred the following expenses: Brokerage account custodial fee $ 40 Professional subscriptions to nursing magazines 110 Tax return preparation fee 240 Tax advice related to a prior year tax return IRS audit 310 Nursing uniform expenses 200 If Tanisha's adjusted gross income is $29,000, calculate her net miscellaneous deductions after the adjusted gross income percentage limitation.

Powered by Cognero

Page 22

Name:

Class:

Date:

CH 05 Deductions For and From AGI 140. Kat owns a small bungalow which is destroyed in a federally declared disaster in 2022. Kat is not insured for hurricane damage. The bungalow originally cost $22,000, but was worth $45,000 before the hurricane. Kat has $30,000 of adjusted gross income. How much can Kat claim as a casualty loss on her tax return? Explain.

141. What is the difference between the tax treatment of contributions and distributions from a traditional IRA and a Roth IRA? 142. Don donates his old car to a qualified charity. The charity then sells the car at an auction. Describe the tax treatment of the donation.

Powered by Cognero

Page 23

Name:

Class:

Date:

CH 05 Deductions For and From AGI Answer Key 1. True 2. True 3. False 4. False 5. True 6. True 7. True 8. False 9. True 10. False 11. False 12. False 13. False 14. False 15. False 16. True 17. False 18. False 19. True 20. False 21. False 22. True 23. True 24. False 25. False Powered by Cognero

Page 24

Name:

Class:

Date:

CH 05 Deductions For and From AGI 26. True 27. False 28. True 29. True 30. False 31. False 32. False 33. True 34. True 35. True 36. False 37. False 38. False 39. True 40. False 41. False 42. True 43. False 44. False 45. False 46. False 47. True 48. d 49. c 50. d 51. d Powered by Cognero

Page 25

Name:

Class:

Date:

CH 05 Deductions For and From AGI 52. d 53. b 54. d 55. c 56. c 57. a 58. d 59. a 60. d 61. b 62. d 63. a 64. c 65. b 66. c 67. d 68. b 69. c 70. b 71. d 72. a 73. c 74. b 75. c 76. c Powered by Cognero

Page 26

Name:

Class:

Date:

CH 05 Deductions For and From AGI 77. a 78. b 79. b 80. d 81. b 82. c 83. c 84. a 85. c 86. d 87. d 88. d 89. d 90. d 91. b 92. c 93. a 94. c 95. d 96. c 97. c 98. a 99. a 100. d 101. c 102. c Powered by Cognero

Page 27

Name:

Class:

Date:

CH 05 Deductions For and From AGI 103. c 104. c 105. c 106. d 107. a 108. c 109. a. $6,700. Deductible HSA is limited to the smaller of the amount contributed or the contribution limit ($7,300 for a family plan in 2022). b. $0. Individuals are not allowed to make contributions to HSAs once they attain the age for Medicare coverage. c. $0. Carlo does not carry qualifying high-deductible medical insurance. d. $4,650. Since Diane is 57 years old, she may contribute $3,650, the maximum as a self-only contribution, plus an additional $1,000 as a catch-up contribution. Diane may wish to reduce the excess contribution as it would be subject to a 6 percent excise tax.

110. a. $3,700. The limit including a catch-up amount is $4,650. b. $7,650. The distribution from the HSA to pay for the wedding is taxable. The interest income and the distribution for medical expenses are not taxable on the federal tax return. c. $7,650. The distribution from the HSA to pay for the wedding is subject to a 20 percent penalty.

111. $450. The deduction for self-employed health insurance is only allowed to the extent of the self-employed earnings.

The remainder can be treated as an itemized medical deduction.

112. $10,815, calculated as $8,100 + $600 + $425 + $1,690 limitation on long-term care insurance. The health insurance for their daughter is not deductible because she is not under the age of 27.

113. a.

Wilson Joan b.

Wilson Joan

$6,000. $6,000. $6,000, since AGI is less than $204,000. $4,500 = [$6,000 × ($129,000 − $114,000) ÷ $20,000].

114. Since Jeremy is under the age of 59½, withdrawal of funds from his IRA would subject him to taxes on the amount withdrawn plus a 10 percent penalty for early withdrawal. The default withholding on the withdrawal is 10 percent (may be waived or increased at the election of the taxpayer), and any additional taxes would be due with his 2022 tax return.

115. a.

Rob Julie

$6,000. $6,000.

b1

$6,000, since AGI is less than $204,000.

Rob

Powered by Cognero

Page 28

Name:

Class:

Date:

CH 05 Deductions For and From AGI b2

Julie Rob Julie

$0. She is covered by a plan and AGI is more than $129,000. $6,000. $6,000.

116. $12,000. $6,000 for each spouse, either to traditional or Roth IRAs. A non-deductible contribution can be made to a traditional IRA regardless of income limits and the income is below the Roth IRA threshold.

117. $13,000. $7,000 for the over-age-50 spouse and $6,000 for the under-age-50 spouse, either to traditional or Roth IRAs. 118. $0. They are over the income limitation for contributing to a Roth IRA and Roth IRA contributions are not deductible.

119. $6,000. He is not covered by a plan, so he is subject to only the annual and earned income limitations on the maximum amount he can deduct for contributions to a traditional IRA. 120. $0. She must have earned income to contribute to an IRA. 121. Since Sanjay is under age 59½, withdrawal of funds from his IRA would subject him to taxes on the amount withdrawn plus a 10 percent penalty for early withdrawal; however, temporary COVID-related relief from the 10 percent penalty was available for distributions between March 27 and December 31, 2020. The default withholding on the withdrawal is 10 percent (may be waived or increased at the election of the taxpayer). Sanjay would owe any income tax but the 10 percent penalty would be waived. In addition, Sanjay may include the $25,000 in his income over 3 years starting with 2020. Lastly, if Sanjay contributes the $25,000 back to the IRA before December 31, 2023, none of the distribution would be subject to tax.

122. $24,000. (The lesser of 20 percent of $120,000 or the maximum of $61,000) 123. $61,000. (The lesser of 20 percent of $310,000 or the maximum of $61,000) 124.

Medical insurance Prescription medications Payments to hospitals Payments to doctors Dental bills Transportation (125 × $0.22) Less insurance reimbursement Total Powered by Cognero

$ 400.00 160.00 575.00 310.00 180.00 27.50 (300.00) $1,352.50 Page 29

Name:

Class:

Date:

CH 05 Deductions For and From AGI Less 7.5% of $12,000 AGI Medical deduction

125.

Medical insurance premiums Hospital bills (Bob) Doctor bills Dentist bills Prescription eyeglasses Acupuncture (Bob) Total qualifying expenses Less reimbursement Deductible expenses Less 7.5% of $50,000 AGI Medical deduction

(900.00) $ 452.50

$3,200 4,400 750 250 380 300 $9,280 (3,100) $6,180 (3,750) $2,430

126. This medical expense of $15,000 is reported on Schedule A, subject to the 7.5 percent AGI limitation. There was no corresponding increase in the value of the property, and such capital expenses are not required to be depreciated, so the full $15,000 is reported on Schedule A. 127. a. $5,600, the amount of state income taxes withheld during 2022.

The $450 refund should be reported as income on Sherry's 2022 income tax return, if she b. itemized deductions on her 2021 tax return and was able to benefit from the state income tax deduction. If she took the standard deduction, there will be no 2022 income reported from the refund.

128. a. $120. ($170 − $50) b. Diego may deduct the portion of the registration fee that is based on the value of the automobile.

129.

State tax withheld (income taxes are greater than sales taxes) Payment for prior year’s state taxes Powered by Cognero

$3,700 300 Page 30

Name:

Class:

Date:

CH 05 Deductions For and From AGI Real estate taxes Personal property tax Total taxes

1,800 75 $5,875

130. Meade can deduct the greater of the sales taxes paid or the state income taxes paid, assuming he itemizes deductions.

In this case, since his sales taxes of $7,500, including the sales tax on the boat, are more than state income taxes of $5,000, he should elect to deduct the $7,500 in state sales tax on his 2022 Schedule A. 131. $12,000. ($7,000 + $5,000) 132. a. $2,000, investment interest is deductible only to the extent of net investment income. b. $16,000, the qualified residence interest plus investment interest.

133.

Qualified residence acquisition debt interest Home equity debt interest Maximum allowable:

$1,000

$0

134. a. $100. ($400 income less $300 expense). b. The remaining $1,900 disallowed interest expense is carried over and may be deducted in succeeding years subject to the investment interest limitation each year.

135. Melvin’s total interest deduction on Schedule A is $15,000. The acquisition debt interest of $15,000 is fully deductible. It is related to debt used to purchase the residence, and the debt is less than $750,000 (or $1 million if incurred on or before December 15, 2017) in total. The interest on the credit card debt is not deductible at all because it is personal consumer debt.

136. $1,450. ($1,250 + $200). Note that the list of qualified recipients does not include homeless people or any other individual donee. Also, contributions of time, services, blood, or use of property are not deductible.

137. a. $1,000. $1,700 (fair market value) − $700 (potential short-term capital gain) b. $1,700, the fair market value of the contribution.

138. Ronald can deduct $9,000 on his Schedule A in the current year. The total deduction is $20,000, even though Ronald only paid $2,000 for the stock, but the deduction in the current year is limited to 30 percent of adjusted gross income, or $9,000, because it is a contribution of long-term capital gain property. The $11,000 which is not allowed due to the adjusted gross income limitation is carried forward for up to 5 years until there is sufficient income to claim the deduction.

Ronald also has the option to elect to deduct only the $2,000 basis of the stock and then use the 50 percent of AGI limitation, but this is a far less advantageous treatment for him.

Powered by Cognero

Page 31

Name:

Class:

Date:

CH 05 Deductions For and From AGI 139. $0. Miscellaneous expenses subject to the 2 percent of AGI floor are not deductible in 2022 (suspended through 2025).

140. Kat can claim a casualty loss since the event was declared a federal disaster. The basis of the house forms the loss amount since it is lower than the fair market value of the house. The $22,000 basis must be reduced by 10 percent of Kat’s adjusted gross income plus a $100 floor, for a total of $3,100. Therefore, $18,900 is allowed as a deduction on Kat’s Schedule A. 141. Money contributed to a traditional IRA is tax deductible, assuming that the taxpayer is not subject to the phase-out rules for a tax deduction. Generally, distributions are taxable when money is taken out of the traditional IRA. On the other hand, there is no tax deduction when money is contributed to a Roth IRA. Distributions from a Roth IRA are tax-free, assuming the taxpayer has held the money in the Roth IRA for the appropriate length of time and the taxpayer has reached the age of 59½.

142. Don is allowed to deduct the amount the charity is able to sell the vehicle for. The charity is required to give Don a Form 1098-C, informing him of the resale information for use in his tax return. This treatment was added to the law to prevent taxpayers from claiming inflated deductions for the value of old cars.

Powered by Cognero

Page 32

Name:

Class:

Date:

CH 06 Accounting Periods and Other Taxes

Indicate whether the statement is true or false.

1. "Annualizing" is a method by which the taxpayer can usually decrease the amount of tax paid. a. True b. False 2. Most partnerships, S corporations, and personal service corporations owned by individuals choose a September 30 yearend so that they may defer 3 months of income. a. True b. False 3. The hybrid method of accounting involves the use of both the accrual and cash methods of accounting. a. True b. False 4. In general, accrual basis taxpayers recognize income when it is earned, regardless of when it is received. a. True b. False 5. Generally, cash basis taxpayers must deduct payments of prepaid interest using the accrual method. a. True b. False 6. Under the cash basis of accounting, most expenses are generally deducted in the year they are paid. a. True b. False 7. All S corporations must use the accrual basis of accounting. a. True b. False 8. Recognition of sales of property at a gain may be disallowed under the related party rules of the Internal Revenue Code. a. True b. False 9. Accrual-based taxpayers will recognize income when received. a. True b. False 10. Salary earned by minors may be included on the parents' tax return. a. True b. False 11. Sophia is nine years old and has $3,200 of interest income from a savings account in 2022. Sophia's parent claims her as a dependent and makes no special elections with respect to Sophia's income. Sophia's income will be taxed at her parent's tax rate.

Powered by Cognero

Page 1

Name:

Class:

Date:

CH 06 Accounting Periods and Other Taxes a. True b. False 12. In 2022, the unearned income of a 16-year-old child is taxed at trust and estate rates. a. True b. False 13. If the net unearned income of a minor child is to be taxed at the parent's tax rates, the parent may elect, under certain conditions, to include the child's gross income on the parent's tax return. a. True b. False 14. In 2022, household employers are not required to pay FICA taxes on cash payments of less than $2,400 paid to any household employee in a calendar year. a. True b. False 15. Household employers are not required to pay FICA taxes on part-time household employees. a. True b. False 16. For purposes of the additional 0.9 percent Medicare tax on earned income, a single taxpayer having earned income of more than $200,000 is generally subject to the tax. a. True b. False 17. There is a Medicare tax of 3.8 percent on the net investment income of high-income taxpayers. a. True b. False

Indicate the answer choice that best completes the statement or answers the question.

18. Which of the following statements regarding accounting periods is true? a. Books and records may be kept on a different year-end basis than the year-end used for tax purposes. b. The choice to file on a year-end basis must be made with an initial tax return. c. Almost all individuals file tax returns using a fiscal year basis. d. An individual may request IRS approval to change to a fiscal year basis if certain conditions are met.

19. Dot Corporation has changed its year-end from a calendar year-end to August 31. The income for its short period from January 1 to August 31 is $54,000. How much is the tax for this short period? a. $2,040 b. $6,250 c. $8,667 d. $11,340 20. On November 1, 2022, Dontrell entered into a lease on a building for use in his business for $1,000 per month. Under Powered by Cognero

Page 2

Name:

Class:

Date:

CH 06 Accounting Periods and Other Taxes the lease terms, Dontrell pays 24 months' rent ($24,000) in advance on November 1. How much can Dontrell deduct for rent in 2022? a. $2,000 b. $12,000 c. $24,000 d. $18,000 21. On October 1, 2022 Jeremiah entered into a lease on a building for use in his business for $1,500 per month. Under the lease terms, Jeremiah pays 12 months' rent ($27,000) in advance on December 1. How much can Jeremiah deduct for rent in 2022? a. $1,500 b. $12,000 c. $27,000 d. $13,500 22. Which of the following reflects cash basis accounting for tax purposes? a. Income is recognized when it is actually or constructively received and expenses are recognized when they are actually or constructively incurred, regardless of when paid. b. Income is recognized when it is earned regardless of when received and expenses are recognized when they are actually or constructively incurred. c. Income is generally recognized when it is actually or constructively received and expenses are generally recognized when they are paid. d. Income can be recognized either when it is earned or when it is received and expenses are generally recognized when they are incurred.

23. Thom, a cash basis sole proprietor, provides the following information: Gross receipts Dividend income (on personal investments) Cost of sales Other operating expenses State business taxes paid What amount should Thom report as net profits from his business? a. $10,900 b. $11,300 c. $11,400 d. $14,400

$30,000 200 15,400 3,000 300

24. Vernon is a cash basis taxpayer with a calendar tax year. On October 1, 2022, Vernon entered into a lease to rent a building for use in his business at $3,000 a month. On that day, Vernon paid 18 months’ rent on the building, a total of $54,000 ($3,000 × 18 months). How much may Vernon deduct for rent expense on his 2022 tax return? a. $9,000 b. $12,000 c. $36,000 d. $54,000 25. Aaliyah is a calendar year taxpayer reporting on the cash basis. Indicate which of the following income or expense Powered by Cognero

Page 3

Name:

Class:

Date:

CH 06 Accounting Periods and Other Taxes items should not be included in her 2022 tax return. a. On April 15, 2022, she makes a deductible contribution to her IRA for 2022. b. She prepays half a year of interest in advance on her mortgage on the last day of 2022. c. She pays all her outstanding invoices for standard business expenses in the last week of December 2022. d. She receives payment in February 2022 for work done in December 2021.

26. Omer, a cash basis sole proprietor, had the following receipts and disbursements for the current year: Gross receipts $50,000 Cost of sales 30,000 Other operating expenses 5,000 Personal medical expenses 600 For the current year, what amount should Omer report as net profits from his business? a. $13,400 b. $14,000 c. $15,000 d. $20,000 27. A taxpayer recognizes income at the time it is actually received, and recognizes the cost of products sold at the time those costs are incurred, even if not paid until later. Which of the following is true regarding this accounting under the tax law? a. The taxpayer is using the accrual method. b. The taxpayer is using the cash method. c. The taxpayer is using the hybrid method. d. The taxpayer is using an illegal method.

28. Which one of the following entities cannot use the cash method for tax purposes in 2022? a. A large almond farm with $40 million in average annual gross receipts b. A corporation with $28 million in average annual gross receipts and 200 employees c. A law firm operating as a personal service corporation with $5.4 million in average annual gross receipts d. A small sole proprietorship with $150,000 in average annual gross receipts 29. Kate is an accrual basis, calendar year taxpayer. On November 1, 2022, Kate leased out a building for $4,500 a month.

On that day Kate received 7 months of rental income on the building, a total of $31,500 ($4,500 × 7 months). How much income must Kate include on her 2022 tax return as a result of this transaction? a. $4,500 b. $9,000 c. $31,500 d. $54,000 30. Becky is a cash basis taxpayer with the following transactions during her calendar tax year: Cash basis revenue Cash basis expenses, except rent Rent expense (paid on December 1) for use of a building for 24 months What is the amount of Becky's taxable income from her business for this tax year?

Powered by Cognero

$54,000 25,000 24,000

Page 4

Name:

Class:

Date:

CH 06 Accounting Periods and Other Taxes a. $5,000 b. $11,000 c. $27,500 d. $28,000 31. Which of the following is true with respect to the related party rules? a. Kofi sells stock to his sister for a $3,000 loss. Kofi can deduct the loss on his tax return. b. A taxpayer's uncle is a related party for purposes of Section 267. c. A disallowed loss on a related party transaction can be used to offset any future gain when the property is sold to an unrelated party. d. Under the constructive ownership rules of Section 267, a shareholder owns 10 percent of the stock owned by a corporation in which they are a shareholder.

32. Alivia sells to her father, Josiah, her shares in AA Corp for $55,000. The shares cost Alivia $80,000. How much loss may Alivia deduct from the sale? a. $0 b. $25,000 c. $55,000 d. $80,000 33. Serena and Jada are sisters. Jada sold stock to Serena for $5,000, its fair market value. The stock cost Jada $10,000 5 years ago. Also, Jada sold Carol (an unrelated party) stock for $2,000 that cost $10,000 3 years ago. What is Jada's recognized loss before the $3,000 capital loss limitation? a. $0 b. $8,000 c. $5,000 d. $13,000 34. If a loss from sale or exchange of property between related parties is disallowed and the property is subsequently sold to an unrelated party, what happens? a. An amended return may be filed to claim the loss previously disallowed. b. The unrelated party may claim the loss previously disallowed. c. The disallowed loss may be used to offset gain on the subsequent sale. d. The disallowed loss may be used if there is a further loss on the subsequent sale.

35. A parent may elect to include a child’s income on the parent’s return if which of the following conditions is met? a. The child is subject to backup withholding. b. The child has both earned and unearned income. c. The child’s gross income is more than $1,100 and less than $10,500. d. No estimated tax has been paid in the name of the child.

36. In 2022, which of the following children would have income taxed at the parent's rates? a. A 13-year-old child with salary income of $12,000 b. A 12-year-old child with net unearned income of $3,200 c. A nonstudent, 19-year-old child with net unearned income of $12,000 Powered by Cognero

Page 5

Name:

Class:

Date:

CH 06 Accounting Periods and Other Taxes d. An 11-year-old child with salary income of $1,000 37. Jaylen, age 13, is claimed as a dependent by his parents whose tax rate is 35 percent. Jaylen has unearned income of $3,400 and $300 of income from mowing lawns in the neighborhood. If the rate on Jaylen's portion of income is 10 percent, what is Jaylen’s 2022 income tax liability? a. $115 b. $385 c. $500 d. $1,295 38. Nia is 12 years old, and her only income is $5,500 of interest income from a bank account with money her parents have given her to save for college. If Nia's parent's tax rate is 35 percent, and Nia's portion of income is taxed at 10 percent, what is Nia's income tax liability? a. $550 b. $1,235 c. $1,650 d. $1,925 39. Which of the following types of income is subject to the “kiddie tax”? a. Money earned from shoveling the neighbors' sidewalks b. Tips received at a job waiting tables c. Salary for stocking shelves at a grocery store d. Capital gains on stock sales 40. Which of the following is not an adjustment or tax preference item for 2022 for purposes of the individual alternative minimum tax (AMT)? a. State income tax refunds b. Certain passive losses c. Interest from private activity bonds d. Cash charitable contributions 41. Which of the following itemized deductions may not be deducted in computing the individual alternative minimum tax? a. Qualified home mortgage interest b. Property taxes c. Medical expenses (limited to 7.5 percent of AGI) d. Charitable deductions 42. Which of the common deductions below are allowed for both regular tax purposes and for AMT purposes in 2022? a. The standard deduction b. All taxes allowed on Schedule A as itemized deductions c. State income taxes and property taxes d. Mortgage interest from the acquisition of a residence 43. A taxpayer would be required to pay FICA taxes for someone working in their home in which of the following Powered by Cognero

Page 6

Name:

Class:

Date:

CH 06 Accounting Periods and Other Taxes situations? a. A parent who earns $12,000 a year to take care of the grandchildren b. A babysitter who earns $1,300 a year c. A cook who is paid $35,000 a year d. A housekeeper who is paid $8,000 a year through a cleaning service 44. Melody and Todd are married and have employee wages of $250,000 each in 2022. They have no other income. How much additional 0.9 percent Medicare tax will Melody and Todd have to pay or receive as a refund when they file their 2022 income tax return? a. $1,350 will be due with their return in addition to amounts withheld. b. $1,350 will be refunded with their return. c. $900 will be refunded with their return. d. $3,600 will be due with their return in addition to amounts withheld.

45. Brandon and Sabrina are married and Sabrina has self-employment income of $240,000. Brandon is retired. How much additional 0.9 percent Medicare tax will Brandon and Sabrina owe with their 2022 income tax return? a. $360 b. $2,160 c. $0 d. They will receive a $90 refund.

46. The 3.8 percent Medicare tax does not apply to which of the following? a. Interest b. Dividends c. Capital gains d. Wages 47. The 0.9 percent Medicare tax applies to which of the following? a. Earned income b. Tax-exempt income c. Gain on the sale of a principal residence d. IRA distributions 48. Hakeem used the information from the W-2 provided by his employer when he filed his tax return. Then he realized that he forgot to include his self-employment income. What should he do now? a. File an amended Form 1040-X b. File a Form 4852 c. Wait for the IRS to contact him with a correction notice d. Carry over the income to the next calendar year 49. Len and Marilyn got a divorce. Marilyn has $150,000 in a 401(k), all pre-tax contributions, and the court issued a QRDO stating that half of that balance be transferred to Len. Len puts the money into a rollover IRA. What are the tax implications for Len? a. Len will be taxed on the $75,000 as ordinary income. b. Len will be taxed on the $75,000 as a capital gain.

Powered by Cognero

Page 7

Name:

Class:

Date:

CH 06 Accounting Periods and Other Taxes c. Len will pay 10 percent that is automatically withheld on the transferred amount. d. Len will not be taxed until he starts taking distributions.

50. Kit and Kat are married taxpayers filing jointly. They hold a significant amount of foreign assets. Under which of these conditions would they have to file Form 8938? a. They live in the United States and have $120,000 in foreign assets during the year. b. They live in the United States and have $50,000 in foreign assets at the end of the year. c. They live outside the United States and have $525,000 in foreign assets during the year. d. They live outside the United States and have $475,000 in foreign assets at the end of the year.

51. Which tax provision for farmers may need to be capitalized? a. Breeding fees b. Qualified farm debt c. Feed assistance d. Prepaid farm supplies

52. Polly is a cash basis taxpayer with the following transactions during the year: Cash received from sales of products Cash paid for expenses (except rent and interest) Rent paid on a leased building for 24 months beginning December 1 Prepaid interest on a bank loan, paid on December 1, for the next 3 months Four months' rent received on a leased building, on October 1 Calculate Polly's income from her business for this calendar year.

Sales income Rental income Total income Expenses other than rent and interest Rent Interest Total expenses Net income

$90,000 30,000 54,000 6,000 8,000

$ $

$

53. Countryside Acres Apartment Complex had the following transactions during the year: Rental income collected for Apartments A–F 12 months prepaid rental income from new tenant in Apt G who moved in on November 1 Operating expenses (except for interest) Prepaid interest expense on bank loan, paid in December, for 6 months (including December) Using the accrual method, calculate the net income:

$216,000 36,000 24,000 10,200

Rental income for Apartments A–F Rental income from new tenant Powered by Cognero

Page 8

Name:

Class:

Date:

CH 06 Accounting Periods and Other Taxes Total income Operating expenses (except for interest) Prepaid interest expense Total expenses Total net income

54. BOND Corporation is owned 25 percent by Brian, 30 percent by Orville, 20 percent by Nate, and 25 percent by Dart Corporation. Dart Corporation is owned 80 percent by Brian and 20 percent by Nate. Brian and Orville are brothers.

Answer each of the following questions about BOND Corporation under the constructive ownership rules of Section 267. a. b.

What is Brian's constructive ownership percentage for Section 267 purposes?

If Nate sells property to BOND Corporation for a $7,500 loss, what amount of that loss can be recognized for tax purposes (before any annual limitations)?

55. ABC Corporation is owned 30 percent by Andy, 30 percent by Barry, 20 percent by Charlie, and 20 percent by Uptown Corporation. Uptown Corporation is owned 90 percent by Charlie and 10 percent by an unrelated party. Barry and Charlie are brothers. Answer each of the following questions about ABC under the constructive ownership rules of Section 267. a. What is Andy's constructive ownership percentage of ABC under Section 267? b. What is Barry's constructive ownership percentage of ABC under Section 267? c. What is Charlie's constructive ownership percentage of ABC under Section 267? d. If Andy sells property to ABC for a $6,000 loss, what amount of that loss can be recognized for tax purposes (before any annual limitations)?

56. Beverly is the sole owner of Bev & Associates, an accrual basis corporation. In 2022, Bev & Associates has an unprofitable year, and Beverly lends the corporation $50,000 to meet expenses. The corporation accrues interest expense of $5,000 on the loan from Beverly but does not pay the interest to her in cash.

How much of the $5,000 in accrued interest expense can Bev & Associates deduct on its 2022 corporate tax return?

Explain.

57. Alan’s parents make gifts of $10,000 to him every year starting at age one, Alan’s parents are in the 35 percent income tax bracket, and Alan is now 15 years old and has $11,700 of interest income for 2022. a. Calculate the tax on Alan’s interest income. b. Explain why the “kiddie tax” rules are in the law.

58. What was the original purpose of the alternative minimum tax?

59. Dan and Maureen file a joint income tax return for 2022. They have two dependent children, ages seven and nine.

Together they earn wages of $830,000. They also receive taxable interest income of $8,000 and interest on City of Los Angeles bonds of $78,000. During 2022, they received a state income tax refund of $3,000 relating to their 2021 state income tax return on which they itemized deductions. Their expenses for the year consist of the following: Home mortgage interest (on acquisition debt) Interest on credit cards Powered by Cognero

$19,000 2,000 Page 9

Name:

Class:

Date:

CH 06 Accounting Periods and Other Taxes Real property taxes Cash charitable contributions

8,300 75,000

State income taxes withheld 48,000 Calculate Dan and Maureen's tentative minimum tax liability assuming an AMT exemption amount of $118,100, before any phase-outs. Show your calculations.

60. List at least two AMT preferences and/or adjustments and show the simplified formula for calculating AMT. Do not include dollar exemption amounts or the tax rate schedule.

61. Mitch and Sydney file a joint income tax return for 2022. They have two dependent children, students, ages 19 and 20.

Mitch earns wages of $908,000, and Mitch and Sydney have interest income of $102,000. In 2022, they settle a state tax audit and pay $50,000 for back state taxes due to an overly aggressive tax-sheltered investment. Their other expenses for the year include: Mortgage interest Real estate taxes State taxes withheld Cash charitable contributions CPA fees for assistance with the state audit

$23,000 12,000 33,500 56,000 4,500

a. Calculate Mitch and Sydney's 2022 regular tax and tentative minimum tax on the schedule provided.

Regular tax: Adjusted gross income Itemized deductions:

$

Total itemized deductions Taxable income Tax from 2022 tax rate schedule Alternative minimum tax: Adjusted gross income Add tax preferences and adjustments: Less allowable deductions:

$ $ $

Total deductions $ Alternative minimum taxable income AMT exemption ($114,600) Alternative minimum tax base Tentative minimum tax $ (26 percent of income up to $206,100; 28 percent of income in excess of $206,100) Powered by Cognero

Page 10

Name:

Class:

Date:

CH 06 Accounting Periods and Other Taxes b.

How much is the total tax liability shown on Mitch and Sydney's 2022 Form 1040?

62. Ciana uses the head of household filing status and has a dependent daughter. Ciana has self-employment income of $310,000 as an architect and $10,000 of self-employment losses from a jewelry making business. a. What is Ciana’s 0.9 percent additional Medicare tax for 2022? b. Is Ciana allowed to include a portion of the 0.9 percent additional Medicare tax in computing the deduction for selfemployment taxes reported as an adjustment for AGI on the front page of her income tax return?

63. Piper is single and earns $80,000 in dividend income and $180,000 in wage income in 2022. Compute their additional 3.8 percent Medicare tax on net investment income.

64. Imani is single and earns wages of $250,000 in 2022. She has no other income. How much is her 0.9 percent Medicare tax on earned income?

65. If a corporation has a short tax year, other than their first or last year of operation, explain how the corporation calculates the tax for the short period.

66. If a cash basis business owner pays 18 months' of rent expense in advance during the last month of the tax year, how is this treated on the tax return? What is the reason tax law requires this treatment?

Powered by Cognero

Page 11

Name:

Class:

Date:

CH 06 Accounting Periods and Other Taxes Answer Key 1. False 2. False 3. True 4. True 5. True 6. True 7. False 8. False 9. False 10. False 11. True 12. False 13. True 14. True 15. False 16. True 17. True 18. d 19. d 20. a 21. c 22. c 23. b 24. a 25. b Powered by Cognero

Page 12

Name:

Class:

Date:

CH 06 Accounting Periods and Other Taxes 26. c 27. c 28. b 29. c 30. d 31. c 32. a 33. b 34. c 35. d 36. b 37. c 38. b 39. d 40. d 41. b 42. d 43. c 44. a 45. c 46. d 47. a 48. a 49. d 50. d 51. a Powered by Cognero

Page 13

Name:

Class:

Date:

CH 06 Accounting Periods and Other Taxes 52.

Sales income Rental income Total income Expenses other than rent and interest Rent Interest Total expenses Net income

$90,000 8,000 98,000 30,000 2,250 2,000 34,250 $63,750

53.

Rental income Apartments A–F Rental income from new tenant Total income

Accrual $216,000 36,000 $252,000

Operating expenses (except for interest) $24,000 Prepaid interest 1,700 Total expenses $25,700 Total net income

$226,300

54. a. 75% = 25% + 30% + (80% × 25%) b. $7,500. Nate does not constructively own more than 50 percent of BOND Corporation.

55. a. 30% b. 68%. [30% + 20% + (90% × 20%)] c. 68%. [30% + 20% + (90% × 20%)] d. $6,000. Andy does not constructively own more than 50 percent of ABC Corporation.

56. $0. Because Beverly and Bev & Associates are related parties, the interest is not deductible until it has been paid by Bev & Associates.

57. a. Alan’s taxable income is $10,550 ($11,700 − $1,150). His net unearned income is $9,400 ($11,700 − $2,300).

Alan’s taxable income that is taxed at his rate is $1,150. The tax on his unearned income at his parent’s rates is $3,290 ($9,400 × 35%) plus the tax on his taxable earned income of $115 ($1,150 × 10%) for a total of $3,405. b. Many well-off parents have given income-earning bank accounts, dividend-generating stocks, and low basis stock to generate capital gains, to their children, to take advantage of the lower tax rates available to their children. The “kiddie tax,” which taxes the income earned by children on such investments at the parent's rates, is meant to limit the benefit of income shifting.

58. The purpose of the original alternative minimum tax was to ensure that wealthy taxpayers could not take advantage of special tax write-offs (tax preferences and other adjustments) to avoid paying tax.

Powered by Cognero

Page 14

Name:

Class:

Date:

CH 06 Accounting Periods and Other Taxes 59.

Wages Taxable interest income State income tax refund Adjusted gross income

$830,000 8,000 3,000 $841,000

Tax preferences and adjustments: State income tax refund Total

(3,000) $838,000

Less allowable itemized deductions: Home mortgage interest Charitable contribution Total deductions

$(19,000) (75,000) $(94,000)

Alternative minimum taxable income Alternative minimum tax exemption

$744,000 118,100

Alternative minimum tax base

$625,900

Tentative minimum tax at 26% × $206,100 Tentative minimum tax at 28% × $419,800 Total tentative minimum tax

$53,586 $117,544 $171,130

60. (1) Adjustments and preferences would include the standard deduction, property tax and other taxes allowed as itemized deductions, state income tax refunds, private activity bond interest, and other items.

(2) The simplified formula is: Regular taxable income (before standard deduction) Plus or minus AMT tax preferences and adjustments Equals alternative minimum taxable income (AMTI) Less AMT exemption (phased out to zero as AMTI increases) Equals amount subject to AMT Multiplied by the AMT tax rate(s) Equals tentative minimum tax Less regular tax Equals amount of AMT due with return, if a positive amount 61. a. Adjusted gross income ($908,000 + $102,000) Itemized deductions Mortgage interest Real estate and state taxes (limited to $10,000) Charitable contributions CPA fees (Misc. expenses subject to 2% floor was suspended) Total itemized deductions Taxable income Powered by Cognero

$1,010,000 $23,000 10,000 56,000 0 89,000 $921,000 Page 15

Name:

Class:

Date:

CH 06 Accounting Periods and Other Taxes Tax from tax rate schedule Alternative minimum tax: Adjusted gross income Less allowable deductions: Mortgage interest Charitable contributions Total deductions Alternative minimum taxable income AMT exemption Alternative minimum tax base Tentative minimum tax, at 26% ($206,100 × 26%) Tentative minimum tax, at 28% ($606,800 × 28%) Total tentative minimum tax b

$303,725 $1,010,000 $23,000 56,000 79,000 931,000 118,100 $812,900 $53,586 $169,904 $223,490

$303,725, the greater of the regular tax or the tentative minimum tax

62. a. $900. [($310,000 − $10,000 − $200,000) × 0.9%] b. No 63. $2,280. {3.8% × [the lesser of ($260,000 − $200,000) or $80,000]} 64. $450. [0.9% × ($250,000 − $200,000)] 65. Corporations with a short tax year are required to annualize their taxable income in order to calculate tax for the short period. The tax liability is calculated on the total annualized income and then prorated back to the short period based on the number of months in the short period.

66. The cash basis business owner is not allowed to deduct advance payments of rent expense beyond 12 months on the tax return. The payments must be deducted on the accrual basis in the year to which the rental payments relate. Tax law requires this treatment to prevent cash basis taxpayers from making large prepayments of rental expense covering multiple tax years at year-end to reduce taxable income.

Powered by Cognero

Page 16

Name:

Class:

Date:

CH 07 Tax Credits

Indicate whether the statement is true or false.

1. The 2022 child tax credit is not available for children ages 17 and older. a. True b. False 2. The 2022 child tax credit is $2,000, unless it is phased out due to higher levels of parental income. a. True b. False 3. The use of the earned income credit could result in a taxpayer receiving a refund even though the taxpayer has not paid any income taxes. a. True b. False 4. To be eligible for the earned income credit, a taxpayer must have a "qualifying child." a. True b. False 5. Avery is a single, 26-year-old graduate student at State University with no children. She is a U.S. citizen with a valid Social Security number. Her only income is from a part-time job on campus from which she earned wages of $16,000.

Avery qualifies for the earned income credit. a. True b. False 6. Amounts paid to a relative generally do not qualify as child care expenses for purposes of the child and dependent care credit. a. True b. False 7. The maximum amount of expenses that qualify for the child and dependent care credit is the same for three dependents as it is for two dependents. a. True b. False 8. A taxpayer with earned income of $50,000 is not eligible to claim the credit for child and dependent care expenses. a. True b. False 9. Married taxpayers must generally file a joint tax return to claim the child and dependent care credit. a. True b. False 10. In determining the amount of the 2022 child and dependent care credit, there is a limit of $2,000 on the amount of qualified expenses for one dependent. a. True Powered by Cognero

Page 1

Name:

Class:

Date:

CH 07 Tax Credits b. False 11. All taxpayers are required to have minimum essential health coverage in order to avoid the individual shared responsibility tax. a. True b. False 12. Taxpayers are required to wait until they file their tax return to receive the premium tax credit. a. True b. False 13. Makayla is a single taxpayer with no dependents that has AGI of $11,200 in 2022. Makayla is required to carry minimum essential coverage in 2022 or else pay additional tax (individual shared responsibility). a. True b. False 14. Vicky is a single, 21-year-old, full-time student who purchased health care through the state health care exchange for the full year. Her part-time job pays her $12,000 in 2022. She files her own tax return but is claimed as a dependent by her parents. Vicky is eligible for the premium tax credit. a. True b. False 15. After raising two children, Anh, a single 48-year-old, decided to go to college to earn her first college degree. She spent 2 years in community college and earned an associate’s degree. In 2022, she is enrolled half time at State University to earn a Bachelor’s degree in accounting and also works part time. Anh is eligible for the American Opportunity tax credit. a. True b. False 16. The foreign tax credit applies only to foreign corporations. a. True b. False 17. In 2022, the total expenses that can be taken as a credit for all tax years for adoption of a child without special needs are $10,000. a. True b. False 18. An individual may claim both a credit and an exclusion from income in connection with the adoption of an eligible child but may not claim both a credit and an exclusion for the same expense. a. True b. False

Indicate the answer choice that best completes the statement or answers the question.

19. Denise is divorced and files a head of household tax return claiming her two children, ages seven and nine, as dependents. Her AGI for 2022 is $81,500. How much is Denise's child tax credit for 2022?

Powered by Cognero

Page 2

Name:

Class:

Date:

CH 07 Tax Credits a. $0 b. $2,000 c. $3,000 d. $4,000 20. Carla and Rita are married, file a joint return, and have two dependent children, ages 11 and 13. Their AGI is $417,000. How much is their child tax credit in 2022? a. $2,000 b. $1,150 c. $4,000 d. $3,150 21. How much is the refundable portion of the child tax credit for a taxpayer with one or two eligible children? a. The lesser of $1,500 per child or 15 percent of the taxpayer’s earned income over $2,500 b. The greater of $1,500 per child or 15 percent of the taxpayer’s earned income over $2,500 c. The lesser of $2,000 per child or 15 percent of the taxpayer's earned income over $1,500 d. The greater of $2,000 per child or 15 percent of the taxpayer's earned income over $1,500 22. Shawn and Simone file their tax returns using the married filing jointly status. Their 2022 AGI is $162,500. They have two children, ages 11 and 5. How much child tax credit can Shawn and Simone claim for their two children in 2022? a. $2,000 b. $4,000 c. $5,950 d. $6,600 23. Guilherme files as a head of household. His AGI is $26,875. What is his "Saver's Credit" rate? a. 0 percent b. 10 percent c. 20 percent d. 50 percent 24. Which of the following is true of the earned income credit? a. In some cases, it must be calculated on earned income and adjusted gross income. b. It cannot exceed the amount of the tax liability. c. It is available only if the taxpayer has qualifying children. d. It is available to U.S. residents with no Social Security number.

25. In 2022, Alex has income from wages of $16,000, adjusted gross income of $18,000, and tax liability of $300 before the earned income credit. What is the amount of Alex's earned income credit for 2022, assuming he is single and his 5year-old dependent son lives with him for the full year? a. $0 b. $2,000 c. $3,733 d. $3,584 Powered by Cognero

Page 3

Name:

Class:

Date:

CH 07 Tax Credits 26. Which one of the following taxpayers qualifies for the earned income credit in 2022? a. A 70-year-old taxpayer with only Social Security income b. A 16-year-old high school student who earns $8,000 at a part-time job c. A 22-year-old single college student who can be claimed as a dependent by their parents d. A single, 31-year-old construction worker with $22,000 of AGI and two children 27. For the 2022 tax year, Sally, who is single, reported the following items of income: Interest income $ 600 Wages 4,100 Earnings from self-employment 3,000 She maintains a household for herself and her 1-year-old son who qualifies as her dependent. What is the earned income credit available to her for 2022, using the tables? a. $503 b. $1,369 c. $2,423 d. $529 28. What is the purpose of the Low-Income Retirement Plan Contribution Credit? a. To increase the amount of taxpayers' Social Security benefits b. To encourage taxpayers to participate in retirement plans c. To encourage employers to match employee contributions to 401(k) plans d. To increase the amount that employers can put in employee pension plans 29. Which of the following is a requirement to claim an earned income credit? a. Income tax withheld b. At least one child claimed as a dependent c. At least $100 of earned income d. U.S. citizenship or resident alien status 30. Ahmet, a widower, maintains a household for himself and his two dependent preschool children. For the year ended December 31, 2022, Ahmet earned a salary of $32,000. He paid $3,600 to a housekeeper to care for his children in his home and also paid $1,500 to a kiddie play camp for child care. He had no other income or expenses during 2022. Before considering any limitation due to tax liability, how much can Ahmet claim as a child and dependent care credit in 2022? a. $910 b. $2,550 c. $1,326 d. $5,100 31. Trinity and Saurav have two young children. Trinity earns $24,000. Saurav is a full-time student 10 months of the year and has no income. What is their maximum amount of qualifying child and dependent care expenses? a. $2,500 b. $5,000 c. $8,000 d. $12,000 Powered by Cognero

Page 4

Name:

Class:

Date:

CH 07 Tax Credits 32. Which of the following is true regarding the child and dependent care credit? a. It applies only to children under age 15. b. It is available only to single parents. c. It is available for the care of a spouse incapable of self-care. d. It is allowed only for taxpayers earning less than $43,000.

33. Victor and Maggie file a joint tax return for 2022 with adjusted gross income of $104,000. Victor and Maggie earned income of $30,000 and $74,000, respectively, during 2022. In order for both parents to be gainfully employed, they pay the following child care expenses for their 4-year-old son, J.J.: Union Day Care Center $6,700 Wendy (Victor's mother) for babysitting 4,000 What is the amount of the child and dependent care credit they should report on their tax return for 2022 (assume no tax liability limitation)? a. $2,140 b. $5,350 c. $10,700 d. $3,000 34. As of now, which individual energy credit has the latest expiration? a. Clean vehicle credit b. Residential clean energy credit c. Energy-efficient home improvement credit d. Qualified fuel cell motor vehicle credit 35. Phillip and Naydeen Rivers are married with two dependent children. The family has household income of $41,200 in 2022. They paid $11,000 for health care for the year through the health care exchange. A designated silver plan would have cost $9,800, and the poverty level for a family of four is $26,500. The applicable percentage is 0.24 percent. What is the Rivers' premium tax credit? a. $505 b. $2,352 c. $7,909 d. $9,701 36. The Johnsons have replaced all of their exterior windows and doors with energy-efficient ones. The windows cost $1,000, and the doors cost $850. They also replaced their water heater for $900. How much is their energy-efficient home improvement credit? a. $ 825 b. $1,155 c. $1,555 d. $2,750 37. Hal is enrolled for one class at a local community college where tuition cost him $190. Hal’s AGI is $20,000. Before considering a limitation due to tax liability, Hal can take a lifetime learning credit of how much? a. $0 b. $38 Powered by Cognero

Page 5

Name:

Class:

Date:

CH 07 Tax Credits c. $100 d. $190 38. Keith has a 2022 tax liability of $2,250 before taking into account his American Opportunity tax credit. He paid $2,600 in qualifying expenses, was a full-time student, and was not claimed as a dependent on his parents’ return, and his American Opportunity tax credit was not subject to phase-out. What is the amount of his American Opportunity tax credit allowed? a. $0 b. $2,150 c. $2,250 d. $2,600 39. Which of the following is true regarding the American Opportunity tax credit? a. It is 50 percent of the first $1,200 of tuition and fees paid and 100 percent of the next $1,200. b. It is available for 2 years of post-graduate education. c. It is fully refundable even if the credit exceeds the tax liability. d. Is available for qualifying expenses paid on behalf of the taxpayer, spouse, and dependents.

40. Harold goes to Tri-State University and pays $40,000 in tuition. Harold works to pay for his schooling and has an AGI of $37,000. How much is his American Opportunity tax credit? a. $2,000 b. $2,500 c. $4,000 d. $1,000 41. Taxpayer Q has net taxable income of $30,000 from Country Y which imposes a 40 percent income tax. In addition to the income from Country Y, taxpayer Q has net taxable income from U.S. sources of $120,000, and U.S. tax liability, before the foreign tax credit, of $30,290. What is the amount of Q's foreign tax credit? a. $6,058 b. $8,350 c. $12,000 d. $30,290 42. James has foreign income. He earns $26,000 from Country A which taxes the income at a 20 percent rate. He also has income from Country B of $18,000. Country B taxes the $18,000 at a 10 percent rate. His U.S. taxable income is $90,000, which includes the foreign income. His U.S. income tax on all sources of income before credits is $19,000. What is his foreign tax credit? a. $6,500 b. $7,000 c. $9,289 d. $19,000 43. In the case of the adoption of a child who is not a U.S. citizen or resident of the United States, when is the credit for qualified adoption expenses available? a. In the first year the expenses are paid b. Each year expenses are paid Powered by Cognero

Page 6

Name:

Class:

Date:

CH 07 Tax Credits c. In the last year expenses are paid d. In the year the adoption becomes final 44. Carla and Curt finalized an adoption in 2022. Their adoption fees totaled $10,000. They have AGI of $246,660 for 2022. What is their adoption credit? a. $10,000 b. $7,263 c. $4,188 d. $14,890 45. A tax credit is allowed for qualified adoption expenses paid by taxpayers, and . a. an additional credit is allowed for qualified adoption expenses paid for by taxpayers’ employers b. an income exclusion is allowed for qualified adoption expenses paid for by taxpayers’ employers c. it is available each year qualifying expenses are incurred d. it is not subject to a phase-out based on adjusted gross income 46. Taxpayers are allowed which two tax breaks for adoption expenses? a. A credit for qualified expenses paid personally and a credit for qualified expenses paid by an employer b. An income exclusion for qualified expenses paid personally and an income exclusion for qualified expenses paid by an employer c. A credit for qualified expenses paid personally and an income exclusion for qualified expenses paid by an employer d. An income exclusion for qualified expenses paid personally and a credit for qualified expenses paid by an employer

47. Fletch and Cammie are married with three dependent children and household income of $82,836 in 2022. They purchased health care insurance on their state’s exchange for total premiums of $6,800. A designated silver plan for their family in their state costs $9,700. The poverty level for a family of five is $31,040, and the applicable percentage is 4.80 percent. Calculate their premium tax credit.

48. Brad works at the local pizza shop as a delivery person. He is hoping to change to a position in the kitchen and takes a culinary course at the local community college for $1,400. Assuming he is eligible, how much is Brad’s lifetime learning credit?

49. a. Nicholas and Elissa are married, file a joint return, and have a 5-year-old child. Their adjusted gross income is $436,000. What is their child tax credit for the current year? b. If Nicholas and Elissa had a 3-year-old as well as the 5-year-old and an 18-year-old from Elissa’s first marriage, what would their total child tax credit and other dependent credit be for the current year? c. In b. above, how many children qualify for the child tax credit? Explain.

50. Calculate the total child tax credit and other dependent credit for the following taxpayers. Please explain your answers. a. Nina is a single mother with 8-year-old and 9-year-old dependent sons and has $50,000 of AGI. b. Shari and Mark have one dependent 2-year-old child and $426,300 of AGI. Powered by Cognero

Page 7

Name:

Class:

Date:

CH 07 Tax Credits c. Kacey is single and has one dependent 18-year-old son and $21,000 of AGI. 51. Clark maintains a household for himself and his two dependent preschool children (both under age 6) and files as head of household. For the year ended December 31, 2022, Clark earned a salary of $62,000. He paid $5,600 to a housekeeper to care for his children in his home and also paid $2,500 to a kiddie play camp for child care. He had no other income or expenses during 2022. His tax liability before any credits is $4,923. How much can Clark claim as a child and dependent care credit and child tax credit in 2022?

52. For 2022, Beatrice qualifies for the earned income credit. She has one daughter who is 7 years old. Her earned income and adjusted gross income for 2022 are $6,200. a. b.

Using the EIC tables, calculate the amount of her 2022 earned income credit.

Calculate the amount of Beatrice's 2022 earned income credit assuming her earned income for 2022 is $8,500 and her adjusted gross income is $10,000.

53. In 2022, Willis and Virginia qualify for the earned income credit. They file married filing jointly and have two dependent children, ages 6 months and 4 years at the end of the year. a. b.

Using the EIC tables, calculate the amount of their earned income credit assuming Willis has earned income of $7,300 and Virginia has no earned income. Their adjusted gross income for 2022 is $9,000.

Calculate the amount of their earned income credit assuming Willis has earned income of $21,700 and Virginia has earned income of $5,000. Their adjusted gross income for 2022 is $26,500.

54. Tyler is a 29-year-old single parent. Their tax liability before any credits is $1,000, and their only credit is the earned income credit of $2,500. What is the amount of Tyler's refund? Explain.

55. What is the maximum investment income a taxpayer is allowed to have and still be allowed to claim the earned income credit?

56. Jeff is a stay-at-home father who earns $600 (after deducting one-half of self-employment taxes) from odd jobs and takes care of his daughter. His wife, Michelle, brings in $60,000 of income a year. In addition to the care provided by Jeff, Michelle pays $4,500 in external child care.

In the current year, how much are Jeff and Michelle’s qualifying expenses for the child and dependent care credit?

57. In 2022, Jeb and Geri are married and have AGI of $95,000 and three young children. Geri pays $6,000 a year to day care providers so she can teach a yoga class and do household errands. Geri earns $5,000 (after deducting one-half of selfemployment taxes) teaching the yoga class. How much child and dependent care credit can Jeb and Geri claim? Why? 58. Marion has an 11-year-old daughter. Calculate her child and dependent care credit prior to any tax liability limitation under these two alternatives: a. Marion pays $4,000 a year in day care costs. Her salary is $32,000. b. Marion pays $10,000 a year in day care costs. Her salary is $135,100.

59. In 2022, Martin and Ricardo are married and have a 3-year-old child. Martin is going to medical school full time for Powered by Cognero

Page 8

Name:

Class:

Date:

CH 07 Tax Credits 12 months of the year, and Ricardo earns $45,000. Their child is in day care so Martin can go to school while Ricardo is at work. The cost of their day care is $10,000. What is their 2022 child and dependent care credit? Please show your calculations and explain.

60. Arthur is divorced with two dependent children, ages 8 and 13. His adjusted gross income is $28,000, and he incurs qualified child care expenses of $6,000, $3,000 for each child. a. b.

What is the amount of Arthur's qualified child care expenses after any limitation?

Calculate the amount of Arthur's child and dependent care credit before any tax liability limitation.

61. Explain what type of educational expenses qualify for the American Opportunity tax credit and what type of educational expenses qualify for the lifetime learning credit.

62. Ira graduates from high school in 2022 and enrolls in a private college in the fall. His parents pay $10,000 for his tuition and fees. a. Assuming Ira’s parents have AGI of $86,000, what is the American Opportunity credit they can claim for Ira? Explain. b. Assuming Ira’s parents have AGI of $175,000, what is the American Opportunity credit they can claim for Ira? Explain.

63. Jasmyn is a single marketing manager with a college degree. She continually updates her marketing knowledge and gets fresh ideas by taking classes at the local community college. This year, she spent $1,500 on course tuition and fees. If Jasmyn has AGI of $81,000, how much lifetime learning credit can she claim on her tax return? Explain.

64. Richard has $30,000 of income from a country that imposes a 40 percent income tax and $30,000 of income from a country that imposes a 34 percent income tax. In addition to the foreign income, he has taxable income from U.S. sources of $120,000 and a U.S. tax liability, before credits, of $54,000. What is the amount of Richard’s foreign tax credit?

65. Edward takes a job in Canada working for an automobile manufacturer. He spends all of 2022 in Canada, earns $130,000 in wages, and is a bona fide resident of that country. How much foreign income exclusion can Edward claim?

66. Sheila and Khalid are married taxpayers with $600 of foreign tax withholding from the dividends in a mutual fund.

They have enough foreign income from the mutual fund to claim the full $600 as a foreign tax credit. They are in the 35 percent tax bracket and they itemize deductions. Should they claim the foreign tax credit on Form 1040 or a deduction for foreign taxes on their Schedule A? Why? 67. Dylan is in the process of adopting Arwen from an orphanage. He pays $8,000 in 2021 and $7,500 in 2022. Dylan’s AGI for 2022 is $165,000. a. How much is the adoption credit that Dylan may claim for 2022 if the adoption becomes final in 2022? b. How much is the adoption credit that Dylan may claim for 2022 if the adoption becomes final in 2023? c. How much is the adoption credit that Dylan may claim for 2022 if the adoption falls through and is never finalized?

68. In 2022, Erin purchased a qualified solar photovoltaic system to generate electricity for her home, at a cost of $5,000. a. How much is her tax credit in 2022? b. If she had purchased a solar heating system for her swimming pool at a cost of $3,500, how much could she claim as a tax credit? c. If she had purchased a $5,000 solar electric system and a $4,500 solar heating system for her principal home (not for the swimming pool), how much could she claim as a tax credit?

Powered by Cognero

Page 9

Name:

Class:

Date:

CH 07 Tax Credits d. If she had purchased the electric system for her principal residence and the solar heating system for a second residence, how much could she claim as a tax credit?

69. In 2022, Brady purchases a new electric vehicle for his personal use. The critical minerals in the battery are domestically sourced and the battery components are foreign produced. His AGI is $135,000. What is the tax benefit Brady realizes from this purchase?

70. What would generally reduce income taxes more: a $100 tax credit or a $100 tax deduction?

Powered by Cognero

Page 10

Name:

Class:

Date:

CH 07 Tax Credits Answer Key 1. True 2. True 3. True 4. False 5. True 6. False 7. True 8. False 9. True 10. False 11. False 12. False 13. False 14. False 15. True 16. False 17. False 18. True 19. d 20. d 21. a 22. b 23. d 24. a 25. c Powered by Cognero

Page 11

Name:

Class:

Date:

CH 07 Tax Credits 26. d 27. c 28. b 29. d 30. b 31. b 32. c 33. b 34. b 35. d 36. b 37. b 38. b 39. d 40. b 41. a 42. b 43. d 44. c 45. b 46. c 47. $5,724. $82,836 ¸ $31,040 = 267% of the federal poverty level; thus, the applicable percentage is 4.80%. $82,836 × 4.80% = $3,976. $9,700 − $3,976 = $5,724. The premium tax credit is the lesser of $5,724 or $6,800 (the amount they paid).

48. $280 49. a. $200. One child × $2,000 less {$50 × [($436,000 − $400,000) ÷ $1,000]} b. $2,700. The original child tax credit and other dependent credit are $4,500. The phase-out is $1,800 {$50 × [($436,000 − $400,000) ÷ $1,000]}. $4,500 – $1,800 = $2,700 Powered by Cognero

Page 12

Name:

Class:

Date:

CH 07 Tax Credits c. Two. The 18-year-old does not qualify because of the age limitation but does qualify for the other dependent credit.

50. a. $4,000. Nina’s income is less than the phase-out range for the additional and original credit for a single taxpayer, so two child tax credits are allowed at $2,000 each. b. $650, calculated as $426,300 − $400,000 = $26,300; $26,300 ÷ $1,000 = 26.3, rounds to 27; 27 × $50 = $1,350 of the $2,000 child tax credit, phased out due to AGI limits. c. $500. Kacey's son is too old to qualify for the child tax credit but does qualify for the other dependent credit.

51. Clark’s child and dependent care credit is $4,050 [50% × ($5,600 + $2,500)]. His child tax credit is $4,000 ($2,000 × 2 children), and his income is below the phase-out threshold.

52. a. $2,117 b. $2,899

53. a. b.

Earned income credit: Earned income is less than the phase-out amount so they do not need to consider AGI. Earned income credit: Amount from table for earned income of $26,700 Earned income is more than the phase-out amount but is also more than the AGI and so they do not need to consider the EIC associated with AGI.

$2,930 $4,775

54. $1,500. The full earned income credit is available. The taxpayer is eligible to claim the credit and receive a refund equal to the amount of the credit in excess of the tax liability.

55. A taxpayer may have a maximum of $10,300 of investment income in 2022 and still claim the earned income credit.

56. $600. The qualifying expenses for the child care credit are limited to the lesser of either spouse’s earned income, in this case, Jeff’s $600.

57. $2,500, or $5,000 × 50%. Geri’s earned income of $5,000 is the maximum limit for day care expenses which can be used to calculate the credit. The credit is intended to help taxpayers who work at income-earning jobs.

58. a. $2,000. (50% × $4,000) b. $3,520. [44% × $8,000 (maximum for one child)] Credit percentage is 44% [($135,100 – $125,000) = $10,100 or six $2,000s thus 6% phase-out] 59. $1,500. Martin is credited with $250 a month of income while he attends school for 12 months, the equivalent of $3,000 of earned income for the year. The maximum qualifying expenses for their dependent are limited to $3,000, which is less than the $10,000 actually paid. Their credit is 50% × $3,000.

60. a. $3,000, the maximum for one dependent. Expenses incurred for care of the 13-year-old child Powered by Cognero

Page 13

Name:

Class:

Date:

CH 07 Tax Credits b.

do not qualify for the credit. $1,500. ($3,000 × 50%)

61. The American Opportunity tax credit covers tuition, fees, books and course materials when a student is enrolled at least half time, for the first 4 years of education after high school.

The lifetime learning credit may be claimed for tuition and fees, but not for books (unless required as part of the course and paid to the educational institution), for any year of college or graduate school, and may also be claimed for education courses taken at any time of life. The student does not have to be enrolled in school more than half time.

62. a. $2,500. Ira’s parents qualify for the full American Opportunity tax credit because they have AGI below the phaseout range. b. $625 ($2,500 − $1,875). The maximum American Opportunity tax credit available is $2,500. Because Ira’s parents have AGI over $160,000, the credit is phased out partially. $2,500 × ($175,000 − $160,000) ÷ $20,000 = $1,875, the amount of the phase-out.

63. $270. Jasmyn’s income is too high to qualify for the full lifetime learning credit. The credit phases out between $80,000 and $90,000 of AGI. Jasmyn can claim $270 [20% × $1,500 × ($90,000 − $81,000) ÷ $10,000].

64. $18,000. [($30,000 + $30,000)  $180,000] × $54,000, which is less than the actual foreign tax paid of $22,200 [($30,000 × 40%) + ($30,000 × 34%)] 65. 112,000. This is the maximum foreign earned income exclusion.

66. Sheila and Khalid should claim the $600 as a credit, which will reduce their taxes by $600. If they deduct the $600 as an itemized deduction, their reduction in tax will only be $210, calculated as $600 × 35%.

67. a. $14,890. $15,500 ($7,000 + $7,500), limited to $14,890 b. $8,000, the amount paid in 2021. c. $8,000, the amount paid in 2021.

68. a. $1,500. 30 percent of the cost of the improvement. b. $0. Systems that heat swimming pools do not qualify for energy tax credits. c. $2,850. $1,500 for the electric system and $1,350 ($4,500 × 30%) for the solar heating system. d. $2,850 ($1,500 + $1,350). Credits for purchases in these two categories can be claimed for both a principal and a second residence.

69. $3,750. This vehicle qualifies for only one of the two parts of the clean vehicle credit, but his AGI is low enough to qualify for it.

70. Tax credits reduce taxes more than deductions since credits are subtracted directly from the income tax. Deductions are subtracted from income before the income tax is calculated and therefore reduce taxes only by the tax rate (percentage) in effect.

Powered by Cognero

Page 14

Name:

Class:

Date:

CH 08 Depreciation and Sale of Business Property

Indicate whether the statement is true or false.

1. Routine maintenance costs for capital assets are deducted in the year the amount is paid or incurred, not capitalized as an improvement to the asset. a. True b. False 2. Accounting depreciation refers to the physical deterioration or loss of value of an asset. a. True b. False 3. Expenditures incurred to maintain an asset in good operating condition must be depreciated over the remaining useful life of the asset. a. True b. False 4. If land declines in value, it may be depreciated for tax purposes. a. True b. False 5. Depreciation is the process of allocating the cost of assets to expense over a period of years. a. True b. False 6. Residential real estate is currently assigned a 27.5-year cost recovery period under the Modified Accelerated Cost Recovery System. a. True b. False 7. Automobiles generally have a 3-year cost recovery period under the Modified Accelerated Cost Recovery System (MACRS). a. True b. False 8. If an asset's actual useful life is longer than the assigned recovery period, the MACRS tables cannot be used. a. True b. False 9. Under MACRS, the same method of depreciation (accelerated or straight-line) must be used for all property in a given class placed in service during a tax year. a. True b. False 10. Taxpayers must use the straight-line method of depreciation for all productive assets. a. True b. False Powered by Cognero

Page 1

Name:

Class:

Date:

CH 08 Depreciation and Sale of Business Property 11. In applying the statutory depreciation percentages from the MACRS tables, the cost of the asset must first be reduced by the prior year’s depreciation. a. True b. False 12. Depreciation on property in the 5-year MACRS class is claimed over a period of 6 tax years due to the half-year or mid-quarter convention. a. True b. False 13. Bonus depreciation in 2022 generally permits taxpayers to deduct 100 percent of the cost of the qualified property in the year placed in service. a. True b. False 14. Taxpayers may expense under Section 179 the cost of depreciable personal property placed in service during the year and used in a trade or business in an amount up to a maximum of $2,700,000 annually. a. True b. False 15. Section 179 immediate expensing can be taken on used property. a. True b. False 16. The maximum annual Section 179 immediate expensing deduction in 2022 is $1,040,000. a. True b. False 17. The election to expense is not permitted where listed property does not meet the qualified business use test. a. True b. False 18. The tax law imposes restrictions on the depreciation of "listed" property such as automobiles. a. True b. False 19. If listed property is used less than 80 percent in a qualified business use, depreciation must be calculated using the straight-line method. a. True b. False 20. The annual automobile depreciation limitations apply only to the first 4 years of the asset's recovery period. a. True b. False 21. If actual business use of an automobile is less than 100 percent, the annual automobile depreciation limitations must be reduced to reflect the actual business use only.

Powered by Cognero

Page 2

Name:

Class:

Date:

CH 08 Depreciation and Sale of Business Property a. True b. False 22. If an automobile is purchased for 100 percent use in the taxpayer's business, the annual automobile depreciation limitations do not apply. a. True b. False 23. Acquired goodwill is considered to be a Section 197 asset amortized over 15 years for tax purposes. a. True b. False 24. The depreciation recapture provisions are designed to prevent taxpayers from converting capital gains into ordinary income. a. True b. False 25. Gain recognized on the sale of a Section 1245 asset is classified as ordinary income up to the amount of depreciation claimed. a. True b. False 26. A net long-term gain from the theft of a Section 1231 asset is treated as a Section 1231 gain. a. True b. False 27. Assuming a taxpayer has no other gains or losses for the year, a loss from the theft of a Section 1231 asset is treated as a capital loss. a. True b. False 28. Taxpayers eligible to use the installment method for reporting gain on the sale of an asset must use the installment method unless they elect out of the provision. a. True b. False 29. If the proceeds from the sale of property will be collected over a period of more than 1 year, a taxpayer is required to use the installment method. a. True b. False 30. The exchange of inventory qualifies for like-kind exchange treatment. a. True b. False 31. The exchange of shares of stock qualifies for like-kind exchange treatment.

Powered by Cognero

Page 3

Name:

Class:

Date:

CH 08 Depreciation and Sale of Business Property a. True b. False 32. In a like-kind exchange, relief from a liability is treated as boot. a. True b. False 33. To have the like-kind exchange provisions apply, a taxpayer must make an election. a. True b. False 34. If insurance proceeds exceed the taxpayer's basis in property destroyed by fire and the proceeds are not invested in similar property, the taxpayer may be required to recognize a gain. a. True b. False 35. The taxpayer generally has only 1 year to replace involuntarily converted property in order to postpone the recognition of gain. a. True b. False 36. The condemnation of property is a voluntary conversion, even though it is done pursuant to a government decree. a. True b. False

Indicate the answer choice that best completes the statement or answers the question.

37. Coral Oak is a small business that qualifies for safe harbor election. It owns a building with an adjusted basis of $250,000 and spends $2,800 repairing the roof. How much can Coral Oak deduct? a. $0 b. $56 c. $1,400 d. $2,800 38. Jenny constructed a building for use as a residential rental property. The cost of the building was $164,976, and it was placed in service on August 1, 1999. The building has a 27.5-year MACRS life. What is the amount of depreciation on the building for 2022 for tax purposes? a. $2,250 b. $3,000 c. $6,000 d. $6,547 39. ABC Corp bought a production machine on January 1, 2020 for $31,250. The company did not elect Section 179 expensing, elected out of claiming bonus depreciation in 2020, and is depreciating the machine using the MACRS accelerated depreciation tables for 5-year property, half-year convention. What is the 2022 depreciation (Year 3) deduction for the machine?

Powered by Cognero

Page 4

Name:

Class:

Date:

CH 08 Depreciation and Sale of Business Property a. $6,000 b. $6,250 c. $10,000 d. $12,500 40. Which one of the following is true about the Modified Accelerated Cost Recovery System (MACRS)? a. A building is depreciated using 200 percent declining balance depreciation. b. Buildings and autos both have the same depreciation life. c. A light duty business truck is depreciated using accelerated depreciation. d. Most business furniture has a 10-year recovery period.

41. Grape Pack Corp bought a $600,000 apartment building in June of 2021. Of the purchase price, $104,950 is allocated to the value of the land. What is the maximum amount of depreciation that the company can claim in 2022 (Year 2) for the building? a. $9,752 b. $18,000 c. $3,816 d. $21,816 42. Which of the following statements with respect to the depreciation of real property under MACRS is true? a. Real property is depreciated using a mid-quarter convention. b. Only one-half year of depreciation is allowed in the year of acquisition of real property, regardless of the actual date the property is placed in service. c. Assuming the property is not disposed of during the year, the depreciation deduction for the second year of use of the real property will be greater than the depreciation deduction in the first year. d. In some cases, where a significant amount of property is acquired during the last quarter of the taxpayer's tax year, the taxpayer may be required to use a half-year convention in calculating depreciation on real property.

43. Jordan purchases residential rental property on June 30, 2022, for a cost of $290,000. Of this amount, $140,000 is allocable to the cost of the home, and the remaining $150,000 is allocable to the cost of the land. What is Jordan’s maximum depreciation deduction for 2022? a. $2,758 b. $1,485 c. $1,061 d. $370 44. On January 1, 2022, Roxy Company places a commercial storage building in service. The costs allocated to construction of the building total $300,000 and land is accounted for separately. Which of the following is a true statement with respect to the depreciation of the building? a. The period over which the building must be depreciated is shorter than the period over which a residential building must be depreciated. b. Since the building was placed in service on the first day of the year, the depreciation expense for each year the building is used, except for the year of disposition, will be the same amount. c. Since the land is accounted for separately, the amount of depreciation expense for the building cannot be determined from the information given. d. The depreciation expense for Year 2 would be the same regardless of whether the building is placed in service Powered by Cognero

Page 5

Name:

Class:

Date:

CH 08 Depreciation and Sale of Business Property on January 1, 2022, or February 1, 2022.

45. What is the minimum number of years over which computers may be depreciated under MACRS? a. 3 years b. 5 years c. 7 years d. 10 years 46. Which of the following is true about the MACRS depreciation system? a. No salvage value is used before depreciation percentages are applied to depreciable real estate. b. Residential rental buildings are depreciated straight-line over 20 years. c. Commercial real estate buildings are depreciated over 39 years using accelerated depreciation. d. No matter when equipment is purchased during the month, it is considered to have been purchased mid-month for MACRS depreciation purposes.

47. An asset is placed in service on May 15, 2022, and has a depreciable basis of $40,000. The asset is in the 7-year recovery class, and the half-year convention applies. What is the maximum depreciation deduction that may be claimed for 2022, assuming no election to expense and no bonus depreciation? a. $2,572 b. $5,144 c. $5,716 d. $25,000 48. Which of the following is true regarding MACRS tax depreciation? a. Straight-line depreciation is lower than 150 percent declining balance depreciation in the last year. b. Straight-line depreciation is lower than 200 percent declining balance depreciation in the first year c. Double declining balance is a method of straight-line depreciation. d. MACRS depreciation requires that salvage value be taken into account.

49. Which of the following statements is true regarding tax depreciation? a. Residential real property is depreciated over 39 years. b. Nonresidential real property is depreciated over 27.5 years. c. Nonresidential real property is depreciated over 39 years. d. Depreciation on real property starts at the beginning of the year in which the property is placed in service.

50. A taxpayer places a $50,000 5-year recovery period asset (not an auto) in service in 2022. This is the only asset placed in service in 2022. Assuming a half-year convention and no immediate expensing, what is the amount of bonus depreciation? a. $0 b. $10,000 c. $25,000 d. $50,000 51. A taxpayer places a $53,000 5-year recovery period asset (not an auto) in service in 2022. This is the only asset placed in service in 2022. Assuming no special elections (e.g., election to expense), what is the amount of total cost recovery Powered by Cognero

Page 6

Name:

Class:

Date:

CH 08 Depreciation and Sale of Business Property deduction? a. $5,300 b. $10,600 c. $17,490 d. $53,000 52. A taxpayer places a $1,090,000 5-year recovery period asset in service in 2022. This is the only asset placed in service in 2022. Assuming half-year convention, an election to expense under Section 179, and no income limitation, what is the amount of total cost recovery deduction (no bonus depreciation)? a. $1,040,000 b. $210,000 c. $1,082,000 d. $1,080,000 53. A taxpayer places a $75,000 5-year recovery period asset (not an auto) in service in 2022. This is the only asset placed in service in 2022. Assuming half-year convention, an election to expense under Section 179 (no bonus depreciation), and taxable income after all deductions except Section 179 of $8,000, what is the amount of Section 179 immediate expensing? a. $0 b. $4,000 c. $8,000 d. $75,000 54. A taxpayer places a $72,000 7-year recovery period asset in service in 2022. This is the only asset placed in service in 2022. Assuming half-year convention, bonus depreciation, and taxable income before cost recovery of $3,500, what is the amount of cost recovery in 2022? a. $0 b. $3,500 c. $36,000 d. $72,000 55. An asset (not an automobile) placed in service in June 2022 has a depreciable basis of $35,000 and a recovery period of 5 years. Assuming bonus depreciation is used, a half-year convention, and no expensing election, what is the maximum amount of cost that can be deducted in 2022? a. $7,000 b. $17,500 c. $24,500 d. $35,000 56. An asset (not an automobile) was put in service in June 2022. It has a depreciable basis of $535,000 and a recovery period of 7years. The taxpayer uses bonus depreciation, a half-year convention, and no expensing election. What is the maximum amount of cost that can be deducted in 2022? a. $107,000 b. $267,500 c. $321,000 d. $535,000 Powered by Cognero

Page 7

Name:

Class:

Date:

CH 08 Depreciation and Sale of Business Property 57. An asset (not an automobile) put in service in June 2022 has a depreciable basis of $87,000 and a recovery period of 5 years. It is the only asset placed in service this year. Assuming bonus depreciation is used, a half-year convention, and the expensing election is made, what is the maximum amount of cost that can be deducted in 2022 (assume no income limitation)? a. $8,700 b. $17,400 c. $43,500 d. $87,000 58. An asset (not an automobile) put in service in June 2022 has a depreciable basis of $1,095,000, has a recovery period of 5 years, and is the only asset placed in service during the year. Assuming bonus depreciation is used, a half-year convention, and the expensing election is made, what is the maximum amount of cost that can be deducted in 2022 (assume no income limitation)? a. $211,000 b. $500,000 c. $1,095,000 d. $1,080,000 59. An asset (not an automobile) put in service in June 2022 has a depreciable basis of $2,075,000, has a recovery period of 5 years, and is the only asset placed in service this year. Assuming bonus depreciation is used, a half-year convention, and the expensing election is not made, what is the maximum amount of cost that can be deducted in 2022? a. $415,000 b. $1,050,000 c. $1,255,000 d. $2,075,000 60. An asset (not an automobile) placed in service in June 2022 has a depreciable basis of $2,710,000, has a recovery period of 5 years, and is the only asset placed in service during the year. Assuming bonus depreciation is not used, a halfyear convention is used, and the expensing election is made for the maximum eligible amount, what is the amount of cost that can be deducted in 2022 assuming the business earned taxable income of $1,000,000 before deducting any cost recovery on the asset? a. $407,000 b. $500,000 c. $1,000,000 d. $1,407,000 61. A taxpayer places a $50,000 5-year recovery period asset (not an auto) in service in 2022. This is the only asset placed in service in 2022. Assuming half-year convention and no immediate expensing, what is the adjusted basis of the assets after applying 2022 bonus depreciation? a. $0 b. $10,000 c. $25,000 d. $50,000 62. During 2022, Travis purchases $43,000 of used manufacturing equipment (7-year property) for use in his business, his only asset purchase that year. Travis has taxable income from his business of $51,000 before any cost recovery. What is Powered by Cognero

Page 8

Name:

Class:

Date:

CH 08 Depreciation and Sale of Business Property the maximum amount that Travis may deduct under the Section 179 election to expense? a. $0 b. $43,000 c. $6,145 d. $51,000 63. Aaron has a successful business with $50,000 of income in 2022. He purchased a new 7-year MACRS property with a cost of $7,000. For tax purposes, what cost recovery will provide the largest amount Aaron can deduct in 2022 for the new asset? a. Typical MACRS depreciation b. Bonus depreciation c. Section 179 immediate expensing d. Bonus and Section 179 will result in an equal amount.

64. Which of the following is true for taxpayers choosing the Section 179 election to expense? a. They may depreciate the amount of the asset cost that exceeds the amount allowed under the election to expense. b. They will have the maximum that can be expensed under the election reduced by $0.50 for each dollar by which the cost of the asset acquired exceeds a specified limit. c. They may not carry over any amounts elected which are not allowed because of taxable income limitations. d. They may expense a $125,000 automobile so long as it is used 100 percent for business.

65. On January 1, 2022, Aniyah, a sole proprietor, purchased for use in her business a used production machine (7-year property) at a cost of $4,000. Aniyah does not purchase any other property during 2022 and has net income from her business of $80,000. If the standard recovery period table would allow $572 of depreciation expense on the $4,000 of equipment purchased in 2022, what is Aniyah’s maximum depreciation deduction including the Section 179 election to expense (but not bonus depreciation) for 2022? a. $572 b. $800 c. $2,000 d. $4,000 66. Which one of the following may be depreciated using an accelerated method? a. A personal pickup truck used once a year to pull the farm's float in a parade b. A printer used 30 percent for farming business c. A computer used 75 percent for farming business d. A farm truck that is operated for personal use 60 percent of the time 67. What is the maximum depreciation expense deduction for Year 2 (2023) for a passenger automobile, used 100 percent for qualified business use, placed in service on June 15, 2022 (half-year convention), and costing $16,000 (the election to expense is not made and no bonus depreciation was taken)? a. $3,200 b. $3,918 c. $16,000 d. $5,120 Powered by Cognero

Page 9

Name:

Class:

Date:

CH 08 Depreciation and Sale of Business Property 68. On June 1, 2022, Sandalwood Corporation purchases a passenger automobile for 100 percent use in its business. The automobile is in the 5-year cost recovery class and has a basis for depreciation of $60,000. Assuming that the corporation elects the accelerated method of cost recovery for the asset and does not elect to expense any of its cost or take bonus depreciation, what is the total tax depreciation deduction for the 2022 calendar tax year (Year 1)? a. $11,160 b. $19,200 c. $12,000 d. $11,200 69. On June 1, 2022, Elway Corporation purchased a passenger automobile for 100 percent use in its business. The auto, with a cost basis of $22,000, has a 5-year recovery period. How much depreciation (half-year convention) should be taken for 2022, assuming Elway Corporation uses the accelerated depreciation method under MACRS but does not choose to make the election to expense or take bonus depreciation? a. $11,200 b. $3,160 c. $4,400 d. $19,200 70. What is the maximum amount of depreciation including bonus depreciation on a passenger auto placed in service in 2022? a. $8,000 b. $11,200 c. $18,000 d. $19,200 71. Max purchases a new auto in 2022 at a cost of $56,000. He uses the car 80 percent for business. Assuming a half-year convention and bonus depreciation, but no immediate expensing, what is the depreciation deduction on the auto? a. $44,800 b. $14,400 c. $15,360 d. $19,200 72. On June 1, 2022, TreePro Corporation purchased a passenger automobile for 100 percent use in its business. The automobile is in the 5-year cost recovery class and has a basis for depreciation of $45,000. TreePro elects the accelerated method of cost recovery for the asset and takes bonus depreciation. What is the total tax depreciation deduction for the 2022 calendar tax year (Year 1)? a. $9,000 b. $19,200 c. $14,400 d. $45,000 73. Which one of the following is a Section 197 intangible? a. Computer software available for purchase by the general public b. Workforce in place c. A stock investment Powered by Cognero

Page 10

Name:

Class:

Date:

CH 08 Depreciation and Sale of Business Property d. An interest-earning certificate of deposit 74. On July 11, 2022, Luis purchased a small software business for $200,000. He paid $120,000 for the fixed assets of the company and $80,000 for the trade name. How much amortization may Luis deduct on his 2022 tax return for the purchased trade name? a. $80,000 b. $5,333 c. $5,750 d. $2,667 75. Which of the following is true regarding Section 197 intangibles? a. They include non-compete covenants. b. They qualify for bonus depreciation. c. They can be capitalized rather than depreciated. d. They can be characterized as a Section 1231 gain.

76. Which of the following is true regarding the amortization of Section 197 intangibles? a. They are amortized based on current fair market value rather than their actual cost. b. They must be amortized over a 15-year life, regardless of their actual life. c. They are amortized over the actual estimated useful life of the intangible asset. d. The amortization period begins in January of the year in which they are purchased.

77. Which of the following assets is considered a Section 1231 asset? a. Expensive paintings on the wall in an exclusive boutique b. The unharvested crops of a farmer c. A retail store owned for 9 months d. A hardware store's inventory 78. Which one of the following statements about Section 1231 assets is true? a. Section 1231 assets are treated like capital assets when they produce losses on sale. b. Business property held 1 year or less is considered a Section 1231 asset. c. Section 1231 assets include company stock. d. Section 1231 asset losses are netted against 1231 asset gains to determine tax treatment.

79. In the current year, Henry, a sole proprietor, sold for $65,000 a machine that was used in his business. The machine had been purchased a few years ago for $50,000, and when it was sold, it had accumulated depreciation of $20,000 and an adjusted basis of $30,000. For the current year, how should this gain be treated? a. Ordinary income of $35,000 b. Section 1231 gain of $35,000 c. Section 1231 gain of $20,000 and ordinary income of $15,000 d. Section 1231 gain of $15,000 and ordinary income of $20,000 80. Ben purchased an apartment building about 10 years ago for $200,000. The building has been depreciated over the appropriate recovery period using the straight-line method. In the current year, the building was sold for $220,000, when the accumulated depreciation was $62,500. Ben is in the 32 percent tax bracket; on his current year tax return, what Powered by Cognero

Page 11

Name:

Class:

Date:

CH 08 Depreciation and Sale of Business Property should he report? a. Section 1231 gain of $20,000 and ordinary income of $62,500 b. Section 1231 gain of $62,500 and ordinary income of $20,000 c. Ordinary income of $82,500 d. Section 1231 gain of $20,000 and "unrecaptured depreciation" taxed at 25 percent of $62,500 81. In the current year, Tim sells Section 1245 property for $28,000 that he had purchased 6 years ago. Tim has claimed $7,000 in depreciation on the property and originally purchased it for $20,000. How much of the gain is taxable as ordinary income? a. $7,000 b. $8,000 c. $13,000 d. $18,000 82. Zehra acquired an apartment building 15 years ago for $150,000 and sold it for $410,000 in the current year. At the time of the sale, there is $65,000 of accumulated straight-line depreciation on the apartment building. Assuming Zehra is in the 32 percent tax bracket for ordinary income, how much of her gain is taxed at 15 percent? a. None b. $65,000 c. $260,000 d. $325,000 83. Which of the following is true regarding the treatment of casualty gains and losses from business or investment property? a. How they are treated depends on whether the property was held for more or less than 1 year. b. They are treated the same as casualty gains and losses from personal property. c. They are subject to a limitation of 10 percent of adjusted gross income. d. They are not subject to the depreciation recapture provisions.

84. Simon sold investment property 2 years ago for $750. Simon's basis in the property was $200. Simon is receiving $150 per year from the buyer. Simon reports this income on the installment method. If Simon collects $150 in principal during the current year, how much gain should he report from the sale for the year? a. $0 b. $75 c. $90 d. $110 85. Brianna acquired raw land as an investment 16 years ago. The land cost $60,000. In the current year, the land is sold for a total sales price of $120,000, consisting of $10,000 cash and the buyer's note for $110,000. If Brianna elects to recognize the entire gain in the year of sale, what is her recognized gain in the current year? a. $50,000 b. $60,000 c. $100,000 d. $110,000 86. Chloe purchased land as an investment 16 years ago. The land cost $50,000. In the current year, the land is sold for a Powered by Cognero

Page 12

Name:

Class:

Date:

CH 08 Depreciation and Sale of Business Property total sales price of $120,000, consisting of $10,000 cash and the buyer's note for $110,000. Assume that Chloe uses the installment method to recognize the gain and receives only the $10,000 down payment in the year of sale. How much gain should Chloe recognize in the current year? a. $4,166 b. $5,833 c. $7,000 d. $9,000 87. Taio sells land to Brad for $90,000. Taio originally purchased the land for $50,000. Brad agrees to pay Taio six annual installments of $15,000 each. In Year 3, Brad makes his third installment of $15,000. How much taxable gain will Taio recognize in Year 3? a. $5,000 b. $6,667 c. $13,333 d. $15,000 88. Which one of the following qualifies as a like-kind exchange? a. An auto used by a business that was traded in for a new model b. A home owned and lived in by a taxpayer exchanged for a new personal residence c. IBM stock exchanged for Exxon stock d. Land used in business traded in for a different parcel of land also for business use 89. In the current year, Keyaki Construction Company exchanged a building, which cost $530,000 and had accumulated depreciation of $160,000, for a new building having a fair market value of $650,000. In connection with the exchange, Keyaki paid $280,000 in cash. What is the tax basis of the new building? a. $370,000 b. $530,000 c. $650,000 d. $690,000 90. Which of the following is true of a like-kind exchange? a. There must be no cash exchanged to qualify. b. The properties exchanged cannot be personal property. c. Office furniture can be exchanged for computers. d. A new holding period for capital gains treatment starts on the day the exchange is completed.

91. Josef exchanged land (tax basis of $34,000), that he had held for 4 years as an investment, for similar land valued at $42,000 which was owned by Adrian. In connection with this transaction, Adrian assumed Josef’s $11,000 mortgage. As a result of this transaction, Josef should report a long-term capital gain of how much? a. $0 b. $8,000 c. $11,000 d. $19,000 92. Which of the following statements is true with respect to the deferral provisions of the tax law?

Powered by Cognero

Page 13

Name:

Class:

Date:

CH 08 Depreciation and Sale of Business Property a. The like-kind exchange provision is elective. b. The involuntary conversion provision is elective. c. The exclusion of gain on the sale of a personal residence is elective. d. Both the like-kind exchange and the involuntary conversion provisions are elective.

93. Johnny owned a gas station with an adjusted basis of $300,000. After it was destroyed in a fire, he received $560,000 from the insurance company. Within the next year, he bought a new gas station for $500,000. What is Johnny's recognized gain, and what is the basis in the new building? a. $260,000; $500,000 b. $200,000; $300,000 c. $60,000; $300,000 d. $260,000; $300,000

94. To be depreciated, must an asset actually lose value each year?

95. If a taxpayer purchases land worth $200,000 with an office building valued at $100,000 on it, how are the two depreciated for tax purposes?

96. On August 1, 2022, Elijah purchased manufacturing equipment for use in his business. This is the only asset placed in service this year. The equipment cost $14,000 and has an estimated useful life and MACRS class life of 7 years. a. Calculate the amount of depreciation on the manufacturing equipment for 2022 using the accelerated MACRS method and no election to expense or use bonus depreciation is made. b. Calculate the amount of depreciation on the manufacturing equipment for 2022 using the accelerated MACRS method and bonus depreciation used but no election to expense. c. Calculate the amount of depreciation on the manufacturing equipment for 2022 using the straight-line MACRS optional method and no election to expense or use bonus depreciation is made.

97. On May 2, 2022, Scott purchased a commercial building. The cost basis assigned to the building is $600,000. Scott also owns a residential apartment building he purchased on June 15, 2021, with a cost basis of $400,000. a. Calculate Scott's total depreciation deduction for the buildings for 2022, using the Modified Accelerated Cost Recovery System. b. Calculate Scott's total depreciation deduction for the buildings for 2023, using the Modified Accelerated Cost Recovery System.

98. On July 21, 2022, Jada purchased a commercial building. The cost basis assigned to the building is $700,000. Jada also owns a residential apartment building he purchased on June 15, 2021, with a cost basis of $500,000. a. Calculate Jada's total depreciation deduction for the buildings for 2022, using MACRS. b. Calculate Jada's total depreciation deduction for only the commercial building for 2023, using MACRS. 99. Explain the use of the half-year convention for MACRS depreciation for assets other than real estate and the exception to the half-year convention rule.

100. Calculate the following amounts (assuming no Section 179 or bonus depreciation and no other assets were purchased Powered by Cognero

Page 14

Name:

Class:

Date:

CH 08 Depreciation and Sale of Business Property in any years). a. The first year of depreciation on a residential rental building costing $100,000, purchased on May 30, 2022. b. The first year of depreciation on an auto used 100 percent in business, costing $35,000, purchased in May 2022. c. The second year of depreciation on a computer used exclusively for business, costing $2,000, purchased May 2021. d. The third year of depreciation on business furniture costing $3,000, purchased in July 2020.

101. Tyler purchases a used car for $62,000 in 2022, to use exclusively in their business. Assuming half-year convention, what is the depreciation for each year of the recovery period of the auto until fully depreciated (no Section 179 or bonus depreciation)?

102. What are the depreciable or recovery periods for 2022 tax purposes for these assets: Automobiles Business furniture Computers Residential real estate Commercial real estate Land Purchased goodwill 103. Dalton purchased office equipment (7-year property) for use in their business. They paid $100,000 for the equipment on July 1, 2022. Dalton did not purchase any other property during the year. For 2022, their business had net income of $350,000, before depreciation on the office equipment and before considering the election to expense. a. What is the maximum amount that Dalton can deduct in 2022 under the election to expense? b. What is the total depreciation (regular depreciation and the amount allowed under the election to expense) on the office equipment for 2022, assuming Dalton uses the accelerated method under MACRS and claims the maximum amount allowable under the election to expense? c. What is Dalton's total depreciation deduction for 2023 on the 2022 purchase of equipment?

104. Eva purchased office equipment (7-year property) for use in her business. She paid $12,600 for the equipment on July 1, 2022. Eva did not purchase any other property during the year. For 2022, her business had net income of $6,000, before depreciation on the office equipment and before considering the election to expense. Eva elects out of bonus depreciation. a. b.

c.

What is the maximum amount that Eva is eligible to elect to expense (i.e., assuming no income limitation) in 2022 under Section 179?

What is the total depreciation (regular depreciation and the amount allowed as a 2022 deduction under the election to expense) on the office equipment for 2022, assuming Eva uses the accelerated method under MACRS and claims the maximum amount allowable under the election to expense?

Assuming that Eva elected to expense the equipment in 2022 and that her business has net income in 2023 of $200,000, before depreciation and before considering the election to expense, what is Eva's total depreciation deduction (regular depreciation and the amount allowed under the election to expense) for the equipment for 2023?

105. On July 15, 2022, Wyatt purchases a personal computer for his home. The computer cost $4,000. Wyatt uses the computer 60 percent of the time in his business, 15 percent of the time for managing his investments, and the remaining Powered by Cognero

Page 15

Name:

Class:

Date:

CH 08 Depreciation and Sale of Business Property 25 percent of the time for various personal uses. Calculate Wyatt’s maximum depreciation deduction for 2022 for the computer, assuming he does not make the election to expense or take bonus depreciation.

106. Indicate with a "Yes" or a "No" whether each of the following assets is considered listed property. a. Airplane used 25 percent for business b. Fleet of cabs c. A moving van d. A smart TV used 10 percent for business e. A digital camera used 30 percent of the time to list eBay items 107. Patrick purchased a used passenger automobile on June 1, 2022. He paid $19,000 for the automobile. During 2022, he uses the automobile 75 percent of the time for business. Patrick wishes to claim the maximum amount of depreciation possible (no bonus depreciation or election to expense). a. Calculate Patrick's depreciation expense on the automobile for 2022. b. Calculate Patrick's depreciation expense on the automobile for 2023, assuming the same 75 percent business use.

108. Helena purchased a passenger automobile on March 2, 2022. She paid $66,000 for the automobile and can support business use of 80 percent. Calculate the amount of depreciation (half-year convention) on the automobile for 2022 using the accelerated MACRS method (if available), assuming Helena does not make the election to expense or claim bonus depreciation.

109. Omar purchases a small business from Anthony on August 1, 2022. He paid the following amounts for the business: Land $100,000 Commercial building 200,000 Furniture and equipment 78,500 Going-concern value 50,000 Workforce in place 29,500 Total $458,000 a. How much of the $458,000 purchase price is for Section 197 intangible assets? b. What amount can Omar deduct on his 2022 tax return as Section 197 intangible amortization? c. What amount can Omar deduct on his 2023 tax return as Section 197 intangible amortization?

110. Perry develops a successful advertising business that he subsequently sells to his competitor, Carl, for $108,000.

Perry retires in the same town where he has always lived and done business. Carl insists that Perry sign a covenant not to compete. The advertising business has no tangible assets; Carl receives only the name of the business, the client lists, and whatever going-concern value there is. How should Carl treat the $108,000 cost of the advertising business he purchased?

111. Daniel sold machinery used in his business for $20,000. The machinery originally cost $80,000 and had $45,000 of accumulated depreciation at the time of the sale. It is his only sale this year. a. What is the gain or loss on the sale of the machinery? b. Is the gain or loss treated as capital or ordinary? Explain.

112. After 4 years, Doug decided to give up his goat ranch and move back to the city. He sold a milking machine for $1,000. The machine originally cost $1,200 and had $820 of accumulated depreciation at the time of sale. a. What is the total gain or loss on the sale of the milking machine? b. Is the gain or loss treated as capital or ordinary? Explain.

113. In the current year, Madison sold Section 1245 property for $6,000. The property cost $26,000 when it was purchased 5 years ago. The depreciation claimed on the property was $24,000.

Powered by Cognero

Page 16

Name:

Class:

Date:

CH 08 Depreciation and Sale of Business Property a. b. c.

Calculate the adjusted basis of the property.

Calculate the amount of ordinary income under Section 1245.

Calculate the Section 1231 gain.

114. Roberto acquired his rental property 10 years ago for $110,000 and sold it in the current year for $230,000. The accumulated straight-line depreciation on the property at the time of the sale was $35,000. Roberto is in the 32 percent tax bracket for ordinary income. a. What is Roberto’s gain on the sale of his rental property? b. How is the gain taxed (i.e., what tax bracket is the gain subject to)?

115. Rod had the following business casualty in the current year: Decrease in fair market Insurance Holding value due to Adjusted basis reimbursement period casualty Business furniture $2,500 $500 $1,700 20 years vandalized.

Calculate the amount and nature of Rod’s gain or loss as a result of this casualty.

116. Malika’s storage shed, a business-use property, was partially destroyed by fire. She owned the shed for 2 years. Her adjusted basis was $700, and the decrease in fair market value from the fire was $300. Her insurance company reimbursed her $100. What is the amount and nature of her gain or loss as a result of this casualty?

117. Dan acquired rental property in 2012 for $370,000 and sold it in October 2022. Straight-line depreciation of $78,500 has been taken on the house. A run-up in housing prices allowed him to sell the house for $530,000. In the year of sale, Dan received $130,000 when the buyer sold some investments, made an additional $200,000 when the buyer closed a loan from the bank, and took a $200,000 note from the buyer, payable on the anniversary of the sale date in 10 installments of $20,000 each plus interest on the unpaid balance.

Using the installment method, calculate his taxable gain in the year of sale.

118. Kacey sells a commercial building and receives $50,000 in cash and a note for $60,000 at 10 percent interest.

Kacey’s adjusted basis in the building on the date of sale is $45,000 and they collect only the $50,000 down payment in the year of the sale. a. If Kacey elects to recognize the total gain on the property in the year of sale, calculate the taxable gain. b. Assuming Kacey uses the installment sale method, calculate the taxable gain they must report for the year of the sale. c. Assuming Kacey collects $10,000 (not including interest) of the note principal in the year following the year of sale, calculate the amount of income recognized under the installment sale method.

119. During the current year, Ethel exchanges a business land for different business land in a like-kind exchange. Ethel's adjusted basis in the land given up is $7,000, and she receives land worth $13,000 plus $3,000 cash. a. Calculate the amount of gain realized by Ethel on the exchange. b. Calculate the amount of gain that must be recognized by Ethel on the transaction. c. Calculate Ethel's basis in the new land.

120. M&N Milling exchanged a building used in the business for a different building. M&N Milling’s basis in the building was $200,000, and the owner still owes $60,000 related to the purchase of the building. The other party to the Powered by Cognero

Page 17

Name:

Class:

Date:

CH 08 Depreciation and Sale of Business Property exchange, GG Grinding, assumed the liability along with the building and transferred a newer and smaller building worth $300,000 to M&N Milling. a. Calculate the following for M&N Milling.

1. Realized gain on the exchange. $ 2. Recognized gain on the exchange. $ b. Calculate the adjusted basis of the newer building. $

121. In the current year, Penny exchanges an investment property in Santa Barbara with a mountain view for a lot with an ocean view in a qualifying like-kind exchange. Penny's basis in the land given up is $100,000, and the property has a fair market value of $250,000. In exchange for her property, Penny receives land with a fair market value of $200,000 and cash of $20,000. In addition, the other party to the exchange assumes a mortgage loan on Penny's property of $30,000. a. Calculate Penny's realized gain, if any, on the exchange. b. Calculate Penny's recognized gain, if any, on the exchange. c. Calculate Penny's basis in the property received.

122. During the current year, an office desk used by Patrice in his business was completely destroyed by a fire. The adjusted basis of the desk was $900 (original cost of $1,500 less accumulated depreciation of $600). Patrice received $500 from his insurance company, but he did not replace the desk. a. What is the amount of Patrice's recognized gain or loss (deduction) as a result of the casualty? this is Patrice's only casualty gain or loss for the year, what is the nature of the gain b. Assuming or loss?

123. The office building Donna owned and used for her desktop publishing business was destroyed by a hurricane.

Although the basis of the building was $80,000, Donna carried replacement cost insurance and received $160,000 from the insurance company after it was determined that the building was a complete loss. It cost her $152,000 to rebuild the store in the current year. a. Calculate Donna’s recognized gain, assuming an election under the $ involuntary conversion provision is made. b. Calculate Donna’s basis in the replacement building. $ 124. Loretta has a manufacturing business. In the current year, her storage building is completely destroyed by fire, and she receives $315,000 from her insurance company. She purchased the building for $300,000 20 years ago and has claimed depreciation of $85,000 using the straight-line method. In the following year, she purchases a new storage building at a cost of $295,000. a. Calculate Loretta's realized gain or loss. b. Assuming Loretta makes an election under the involuntary conversion provision, calculate Lorretta's recognized gain or loss. c. Assuming Loretta makes an election under the involuntary conversion provision, what is Loretta's basis in the new building?

Powered by Cognero

Page 18

Name:

Class:

Date:

CH 08 Depreciation and Sale of Business Property Answer Key 1. True 2. False 3. False 4. False 5. True 6. True 7. False 8. False 9. True 10. False 11. False 12. True 13. True 14. False 15. True 16. False 17. True 18. True 19. False 20. False 21. True 22. False 23. True 24. False 25. True Powered by Cognero

Page 19

Name:

Class:

Date:

CH 08 Depreciation and Sale of Business Property 26. True 27. False 28. True 29. False 30. False 31. False 32. True 33. False 34. True 35. False 36. False 37. d 38. c 39. a 40. c 41. b 42. c 43. a 44. d 45. b 46. a 47. c 48. b 49. c 50. d 51. d Powered by Cognero

Page 20

Name:

Class:

Date:

CH 08 Depreciation and Sale of Business Property 52. c 53. c 54. d 55. d 56. d 57. d 58. c 59. d 60. c 61. a 62. b 63. d 64. a 65. d 66. c 67. d 68. d 69. c 70. d 71. c 72. b 73. b 74. d 75. a 76. b Powered by Cognero

Page 21

Name:

Class:

Date:

CH 08 Depreciation and Sale of Business Property 77. b 78. d 79. d 80. d 81. a 82. c 83. a 84. d 85. b 86. b 87. b 88. d 89. c 90. b 91. c 92. b 93. c 94. No. For tax purposes, the term depreciation does not necessarily mean physical deterioration or the loss of value of an asset. It is an allocation of the cost of an asset over a specified period of time. Tax law allows a taxpayer to take tax depreciation on a depreciable asset no matter what happens to the value of the asset. Even if the value of an asset increases significantly, depreciation is allowed according to the related IRS percentage schedule.

95. Land is considered to be an asset that is not subject to obsolescence; therefore, no depreciation is allowed.

The office building will be depreciated straight-line over 39 years, starting with the middle of the month in which it is placed in service.

96. a. $2,001. ($14,000 × 14.29% from Table 8.2) b. $14,000. ($14,000 × 100%) c. $1,000. ($14,000 × 7.14% from Table 8.3) 97. a. Commercial (nonresidential) ($600,000 × 1.605%) Powered by Cognero

$9,630 Page 22

Name:

Class:

Date:

CH 08 Depreciation and Sale of Business Property Residential ($400,000 × 3.636%) Total depreciation

14,544 $24,174

Commercial (nonresidential) ($600,000 × 2.564%) Residential ($400,000 × 3.636%) Total depreciation

$15,384 14,544 $29,928

98. a.

Commercial (nonresidential) ($700,000 × 1.177%) Residential ($500,000 × 3.636%) Total depreciation

$8,239 18,180 $26,419

b.

$17,948

b.

Commercial ($700,000 × 2.564%)

99. The half-year convention assumes for depreciation purposes that all assets are purchased at mid-year. When a taxpayer acquires an asset (other than real estate) during the year, the taxpayer must use the half-year convention in calculating depreciation. The exception to this rule occurs when more than 40 percent of the assets are purchased in the final quarter of the year. The mid-quarter convention then must be used. This treatment requires that all assets purchased in any quarter of the year be treated as having been purchased in the middle of that quarter.

100. a. $2,273. ( 2.273% × $100,000) b. $7,000. (20% × $35,000) c. $640. (32% × $2,000) d. $525. (17.49% × $3,000) 101. At a cost of $62,000, the car is subject to the luxury auto limitations. Using the standard MACRS depreciation: Year 1: $12,400 = $62,000 × 20% limited to $11,200 Year 2: $19,840 = $62,000 × 32% limited to $18,000 Year 3: $11,904 = $62,000 × 19.2% limited to $10,800 Year 4: $7,142 = $62,000 × 11.52% limited to $6,460 Year 5: $7,142 = $62,000 × 11.52% limited to $6,460 Year 6: $3,571 = $62,000 × 5.76% limited to $6,460 Year 7: $2,620 (Remaining balance) 102. Automobiles: 5 years Business furniture: 7 years Computers: 5 years Residential real estate: 27.5 years Commercial real estate: 39 years Land: No depreciation is allowed; it has an indefinite life Purchased goodwill: 15 years 103. a. $100,000 may be deducted under the election to expense b. $100,000 c. $0

Powered by Cognero

Page 23

Name:

Class:

Date:

CH 08 Depreciation and Sale of Business Property 104. a.

b. c.

$12,600. The cost of the asset in 2022 may be claimed as Section 179 expense but the deduction in 2022 is limited to the taxpayer's net income from the trade or business, less depreciation. Any part of the $12,600 that exceeds the limitation can be carried forward as an expense to following years. $6,000. ($12,600 election to expense limited to net income of $6,000). The excess Section 179 of $6,600 ($12,600 − $6,000) is carried forward. $6,600 carryover of expense election from 2022.

105. $600. $4,000 × 20% × (60% + 15%). The total allowable depreciation on the computer must be divided between the business use, $480 (60% ÷ 75% × $600) and the investment use, $120 (15% ÷ 75% × $600).

106. a. Yes b. No c. No d. Yes e. Yes 107. a. $2,850, which is the lesser of $8,400 = ($11,200 × 75%), or $2,850 = ($19,000 × 20% × 75%). b. $4,560, which is the lesser of $13,500 = ($18,000 × 75%), or $4,560 = ($19,000 × 32% × 75%).

108. $8,960. Actual depreciation of $10,560 [$66,000 × 20% (from Table 8.2) × 80% business use] limited to the maximum annual depreciation for the year under the luxury automobile limitations is $8,960 ($11,200 × 80%).

109. a. $79,500. ($50,000 + $29,500) b. $2,208. ($79,500 ÷ 15 years × 5 months ÷ 12 months) c. $5,300. ($79,500 ÷ 15 years) 110. Carl should amortize the $108,000 over 15 years as a Section 197 intangible asset at $600 a month ($7,200 a year).

111. a. $15,000 loss calculated as $20,000 − ($80,000 − $45,000).

Ordinary loss. Depreciable property used in a trade or business is considered Section 1231 b. property.

112. a. $620 gain. $1,000 − ($1,200 − $820) b. Ordinary Section 1245 depreciation recapture. The machine is considered Section 1231 property. The gain is all attributable to depreciation previously taken.

113. a. $2,000. ($26,000 − $24,000) Powered by Cognero

Page 24

Name:

Class:

Date:

CH 08 Depreciation and Sale of Business Property b. c.

$4,000. ($6,000 sales price − $2,000 adjusted basis) $0. The gain recognized did not exceed the amount of the potential Section 1245 recapture.

114. a. $155,000, calculated as $230,000 − ($110,000 − $35,000). b. $35,000 of the gain is attributable to unrecaptured depreciation which is taxed at 25 percent, while the remaining $120,000 gain is taxed at the 15 percent long-term capital gain rate.

115. $1,200 long-term Section 1231 gain due to casualty. $1,700 insurance reimbursement less $500 adjusted basis.

116. $300 loss. The loss is a Section 1231 loss which is treated as an ordinary (not capital) loss. The basis of the

shed is adjusted to $400 ($700 − $300).

117. $530,000 − ($370,000 − $78,500) = $238,500 profit. $238,500 ÷ $530,000 = profit percentage of 45 percent. $330,000 collected in the year of sale times the profit percentage of 45 percent gives Dan a taxable gain of $148,500 in the year of the sale.

118. a. $65,000. ($50,000 + $60,000 − $45,000) b. $29,545. $50,000 × ($65,000 ÷ $110,000) c. $5,909. ($10,000 × 59.09% gain rate)

119. a. $9,000. ($13,000 + $3,000 − $7,000) b. $3,000. (the lesser of the gain realized or the boot received) c. $7,000. ( $7,000 − $3,000 + $3,000)

120. a. 1. Value of new building, $300,000, plus the liability assumed by GG Grinding, $60,000, less the basis of $200,000 equals a $160,000 gain.

2. $60,000 of the gain, the amount equal to the boot received, is recognized as taxable gain. b. Basis of $200,000 for the property given up less $60,000 boot received plus gain recognized of $60,000 equals the new basis of $200,000. Note that $160,000 of gain was realized, but only $60,000 of boot was received, and this limits the amount of the realized gain to be recognized.

121. a. $150,000. [($200,000 + $20,000 + $30,000) − $100,000] b. $50,000. (the sum of the cash received and the loan assumed) c. $100,000. ($100,000 − $50,000 + $50,000) 122. a. $400 loss. ($900 − $500) b. Ordinary loss

Powered by Cognero

Page 25

Name:

Class:

Date:

CH 08 Depreciation and Sale of Business Property 123. a. A gain of $80,000 was realized, but only $8,000 (the amount not reinvested) was recognized. b. Although the new building cost $152,000, $72,000 of realized gain was deferred (not recognized) and the building cost minus the deferred gain results in a basis of $80,000 for the replacement building.

124. a. $100,000 gain realized. [$315,000 − ($300,000 − $85,000)] b. $20,000 recognized gain. ($315,000 − $295,000) $215,000. [calculated as $295,000 − ($100,000 − $20,000), purchase price less unrecognized c. gain of $80,000]

Powered by Cognero

Page 26

Name:

Class:

Date:

CH 09 Employment Taxes, Estimated Payments, and Retirement Plans

Indicate whether the statement is true or false.

1. Quinton hires a new employee in 2022 and the employee does not complete a Form W-4. Quinton must withhold tax as if the employee were single with 1 exemption. a. True b. False 2. If two spouses both work and decide to complete new Forms W-4 in 2022, they must divide their withholding equally on their W-4 forms. a. True b. False 3. The two most common methods of determining federal income tax withholding are the percentage method and the wage bracket method. a. True b. False 4. If taxpayers fail to provide their bank with a taxpayer identification number, they are subject to backup withholding on interest payments. a. True b. False 5. Taxpayers with large amounts of deductions may reduce the amount of withholding using their Form W-4. a. True b. False 6. An existing employee is required to complete a new post-2019 Form W-4 as soon as possible. a. True b. False 7. A new employee is required to complete a post-2019 Form W-4. a. True b. False 8. Helen is the payroll manager for Resource Funding Corporation (RFC). One of RFC's long-time employees was recently divorced and wishes to adjust the withholding amount. The employee was previously using a Form W-4 from 2013. The employee will be permitted to update the existing pre-2020 Form W-4 to adjust withholding. a. True b. False 9. A nondeductible penalty may be imposed on underpayments of estimated taxes. a. True b. False 10. If an individual taxpayer discovers that an original estimate for estimated tax payments was inaccurate, the taxpayer should continue to make payments based on the original estimate and pay any additional amount when the tax return is filed.

Powered by Cognero

Page 1

Name:

Class:

Date:

CH 09 Employment Taxes, Estimated Payments, and Retirement Plans a. True b. False 11. Individual quarterly estimated tax payments are filed with Form 1040-ES. a. True b. False 12. An individual who expects to receive more than $500 of income from sources other than wages meets the requirements for having to file quarterly estimated tax payments. a. True b. False 13. If an individual taxpayer's quarterly estimated tax payments equal or exceed 70 percent of the tax due for the current year, the taxpayer will not be subject to the penalty for underpayment of estimated tax. a. True b. False 14. Taxpayers with self-employment income who also have Form W-2 wage income from employment may be able to avoid making estimated tax payments by filing a Form W-4 and increasing the amount of their withholding. a. True b. False 15. In 2022, the maximum amount of wages subject to the Social Security portion of the FICA tax is unlimited. a. True b. False 16. When taxpayers overpay Social Security taxes, the excess taxes may be claimed as a credit against their income tax liability. a. True b. False 17. Employer deposits of withheld taxes may be made through any bank. a. True b. False 18. When required, gambling winnings are reported by the gambling establishment on Form 1099-MISC. a. True b. False 19. Gambling winnings must be reported to the IRS, but withholding of taxes on winnings is never required. a. True b. False 20. Usually, employers must provide employees with their Form W-2 by February 15 of the year following the calendar year of payment of the wages. a. True Powered by Cognero

Page 2

Name:

Class:

Date:

CH 09 Employment Taxes, Estimated Payments, and Retirement Plans b. False 21. The original copy of all Forms W-2 and Form W-3 must be filed with the Social Security Administration by January 31 of the year following the calendar year in which the wages were paid, regardless of the tax year of the employer. a. True b. False 22. The FUTA tax is a voluntary unemployment tax that an employer may or may not wish to contribute toward. a. True b. False 23. A credit against the FUTA tax is available for state unemployment tax paid by the employer. a. True b. False 24. The FUTA tax for 2022 is based on 6.2 percent of each employee's wages up to $10,000. a. True b. False 25. In order for a pension plan to be considered a "qualified" retirement plan, the plan must satisfy certain minimum vesting requirements. a. True b. False 26. Under a defined contribution plan, the contribution made on behalf of the employee is determined using a formula dependent on the employee's current compensation. a. True b. False

Indicate the answer choice that best completes the statement or answers the question.

27. What percentage of gross food and beverage sales is used in determining the amount of tips that an employer must report as allocated to employees? a. 8 percent b. 10 percent c. 12 percent d. 15 percent 28. Mina is 60 years old, and Jordan is 55 years old. They are married with three dependent children over age 17, and Mina has one job that pays wages of about $73,000. Mina and Jordan expect to take the standard deduction in 2022.

Assuming that Jordan is unemployed, what will Mina most likely report on her 2022 Form W-4? a. Six allowances b. Check the married filing jointly box on Step 1(c) only c. Check the married filing jointly box on Step 1(c) and claim dependents in Step 3 d. Check the single box on Step 1(c) and complete the Multiple Jobs Worksheet Powered by Cognero

Page 3

Name:

Class:

Date:

CH 09 Employment Taxes, Estimated Payments, and Retirement Plans 29. Which of the following amounts paid by an employer to an employee is exempt from withholding? a. Commissions, bonuses, and salaries b. Travel expense reimbursements from an accountable plan c. Business expense reimbursements under a nonaccountable plan d. Amounts paid in excess of substantiated expenses 30. In completing a 2022 Form W-4, employees may want to claim additional deductions in Step 4 if they a. work multiple jobs b. have deductible IRA contributions c. choose not to itemize deductions d. have high levels of interest and dividend income.

.

31. In which of these situations are payors required to use backup withholding? a. Taxpayers give the payor a taxpayer identification number. b. Taxpayers certify that they are not subject to backup withholding. c. The IRS informs the payor that the taxpayer gave an incorrect identification number. d. The IRS informs the payor the taxpayer is entitled to a refund.

32. Steve is single and lives alone. He has one job as a computer technician and takes the standard deduction. What is his 2022 Form W-4 likely to report? a. Check the single box in Step 1 only b. Check the box in Step 2(c) to reflect his job c. Claim two allowances d. Check the single box and report himself as a single dependent on Step 3 33. Which of the following is true regarding estimated income tax payments? a. They should be paid if the estimated tax, after subtracting withholding, is expected to be more than $750. b. If they are inadequate, they may result in nondeductible penalties. c. They may be based on the average of the tax liability for the prior three years. d. They are made in four installments on April 15, June 15, September 15, and December 15 of the tax year.

34. Which of the following taxpayers would not be required to make estimated payments? a. A car mechanic who is self-employed and earns $50,000 a year b. A wealthy individual whose earnings are from corporate dividends c. An employee who works at a local department store with appropriate withholding and no other income d. A self-employed individual whose tax liability for the year is expected to be under $2,000 35. For 2022, the maximum base for the Social Security portion of the FICA tax is a. $137,700 b. $57,000 c. $141,900 d. $147,000

.

36. Which of the following is true regarding FICA taxes? a. They are 7.65 percent of all earned income with no limitations.

Powered by Cognero

Page 4

Name:

Class:

Date:

CH 09 Employment Taxes, Estimated Payments, and Retirement Plans b. They are 7.65 percent of earned income up to $150,000. c. They are paid by the employee and by the employer. d. They are not subject to cost-of-living adjustments each year.

37. The Social Security portion of the FICA tax (not including any additional tax for high-income earners) is imposed at a rate of . a. 6.2 percent for the employee and 7.65 percent for the employer b. 6.2 percent for only the employer c. 6.2 percent for only the employee d. 6.2 percent for the employee and 6.2 percent for the employer 38. In 2022, Elwin had three jobs from which he earned $32,000, $25,000, and $12,000, respectively. What is the total amount of FICA tax that would have been withheld from Elwin's wages? a. $4,054.80 b. $4,092.00 c. $5,278.50 d. $5,049.00 39. Sabrina's salary was $149,000 in 2022. What is the total FICA tax (Social Security & Medicare) that would be withheld from her salary for the year? a. $11,398.50 b. $11,274.50 c. $11,245.50 d. $9,114.00 40. Angel worked at three jobs during 2022. She earned $130,000, $27,000, and $9,000, respectively, from the jobs. What amount can Angel apply as a credit against her 2022 income tax liability for overpayment of FICA taxes? a. $0 b. $1,178.00 c. $1,453.50 d. $130.50 41. Which of the following statements about the FICA tax is true? a. The FICA tax is composed of two parts, Social Security and Unemployment. b. Self-employed individuals pay a lower FICA tax rate than those employed by others. c. The income amount subject to the Social Security portion of FICA tax has increased over the years. d. The maximum wage base for the 1.45 percent Medicare portion of FICA is unlimited.

42. Pear Corporation pays its employees every 2 weeks. During the look-back period, in each pay period the total withholding and FICA tax (employees' and employer's share) amounted to $750. How often must Pear Corporation deposit payroll taxes? a. Annually b. Monthly c. Quarterly d. Daily Powered by Cognero

Page 5

Name:

Class:

Date:

CH 09 Employment Taxes, Estimated Payments, and Retirement Plans 43. When accumulated income tax withholding and FICA taxes reach $100,000, the employer is subject to the a. one-day deposit rule b. eight-day deposit rule c. semi-weekly deposit rule d. monthly deposit rule

.

44. What form does an employer use quarterly to report federal payroll tax withholdings and deposits as well as wages? a. Form 940 b. Form 941 c. Form 1099 d. Form W-2 45. Which of the following forms must an employer provide to an employee by January 31 of the following year? a. W-3 b. W-2 c. W-4 d. 941 46. Which of the following forms should be used by a company to report a 2022 payment of $1,500 to a computer consultant who is not an employee of the company? a. Form 1099-INT b. Form W-4 c. Form W-2 d. Form 1099-NEC 47. Form 1099-G is an information return used to show the payment of a. distributions from a partnership b. interest c. gambling winnings d. state income tax refunds

.

48. Dividends paid to a shareholder by a corporation should be reported on which of the following forms? a. 1099-INT b. 1099-DIV c. 1099-MISC d. 1099-R 49. Which of the following statements is true with regard to the reimbursement of employee business expenses? a. Reimbursements of ordinary and necessary expenses are not subject to federal income tax withholding if the employee provides substantiation. b. Excess reimbursements of ordinary and necessary expenses are never subject to withholding. c. Reimbursements received by an employee under a plan that contains a requirement to return excess amounts, and the employee does so on a timely basis, are excluded from the definition of wages subject to withholding. d. Provided that reimbursements are received by an employee under a plan that requires the employee to Powered by Cognero

Page 6

Name:

Class:

Date:

CH 09 Employment Taxes, Estimated Payments, and Retirement Plans substantiate the expenses to the employer, the amounts are excluded from the definition of wages subject to withholding, without regard to whether the employee actually substantiates the expenditures.

50. The FUTA tax is paid by a. full-time employees only b. employers only c. employers and employees d. part-time employees only

.

51. In 2022, Ship Shop had three employees. Two of the employees worked full time and earned salaries of $25,000 each.

The third employee worked part time and earned $4,000. The employer paid state unemployment tax equal to 5.4 percent of each employee's wages up to $7,000. How much unemployment tax was paid to the state from Ship Shop for 2022? a. $136 b. $168 c. $918 d. $972 52. In 2022, Desi’s Desserts had four employees. Two of the employees worked full time and earned salaries of $35,000 each. Two employees worked only part time, and each earned $5,000. The employer timely paid state unemployment tax equal to 5.4 percent of each employee's wages. How much FUTA tax is due from Desi's Desserts for 2022, after the credit for state unemployment taxes? a. $168 b. $1,296 c. $144 d. $480 53. Oliver has two employees who earned the following amounts during 2022: June $17,000 Eric $5,000 If Oliver timely pays 5.4 percent for state unemployment tax, what is the amount of his 2022 FUTA after the state tax credit? a. $0 b. $72 c. $112 d. $176 54. Regina has four employees who earned $75,000, $27,000, $2,100, and $6,200 during 2022, respectively. She paid 5.4 percent for state unemployment tax. How much FUTA tax will Regina owe for the four employees? a. $133.80 b. $882.40 c. $321.60 d. $224.00 55. Paul earns $55,000 during the current year. His employer contributes $3,000 during the year to a qualified retirement plan on behalf of Paul. The amount of the contribution for the year is based on Paul's desire to have a monthly retirement Powered by Cognero

Page 7

Name:

Class:

Date:

CH 09 Employment Taxes, Estimated Payments, and Retirement Plans benefit of $3,500. What type of retirement plan is this? a. Defined benefit plan b. Defined contribution plan c. Employee earnings plan d. Profit sharing plan 56. Ursula, an employee of Ficus Corporation, is 35 years old and plans to retire in 20 years. The corporation has a qualified retirement plan and contributes during 2022 for Ursula. In 2022, how should Ursula treat the $2,000 contribution made on her behalf by the corporation? a. The $2,000 and any earnings thereon must be included in Ursula's 2022 gross income. b. Only the earnings on the $2,000 contribution must be included in Ursula's 2022 gross income. c. Ursula is not required to include either the $2,000 contribution or the earnings thereon in her 2022 gross income. d. Ursula must include only $100 (1/20 of the $2,000 contribution) in her gross income for 2022, but the same amount must be included in gross income for the following 19 years.

57. Which of the following statements is true? a. A distribution from a retirement plan can only be done as a direct rollover from one account to another account. b. The trustee must withhold 10 percent of the amount distributed whenever assets are transferred from one retirement plan to another retirement plan. c. If a taxpayer decides to roll over an IRA to a new account, then the whole IRA must be rolled over. d. There are no current-year tax consequences for a direct transfer.

58. Which of the following statements is true of a distribution rollover (not a trustee-to-trustee transfer) from a retirement plan? a. The taxpayer must instruct the trustee of the retirement plan to transfer assets to the trustee of another plan. b. No withholding is required. c. In one year, there is no limit to the number of times a taxpayer can request a distribution rollover from one IRA to another IRA. d. Assuming there are no unusual events, the taxpayer has a maximum of 60 days in which to transfer funds to a new plan to avoid current taxes and penalties.

59. Janet is single and has a pre-2020 Form W-4. In 2022, her salary is $950 semimonthly. a. Use the percentage method to calculate the amount of Janet's withholding for a semimonthly pay period. b. Use the wage bracket method to determine the amount of Janet's withholding for a semimonthly pay period.

60. Mike is a single taxpayer. For the payroll period of November 2022, he is paid wages of $1,200, semimonthly. Mike checked the single box on this 2022 Form W-4 and provided no additional income or deductions. a. Use the percentage method to calculate the amount of Mike's withholding for a semimonthly pay period. b. Use the wage bracket to determine the amount of Mike's withholding for the same period.

61. Karen is single with no dependents and earns $18,000 a year. She gives her employer a Form W-4 on which she claims "exempt." What is her employer required to do about the Form W-4? Explain.

Powered by Cognero

Page 8

Name:

Class:

Date:

CH 09 Employment Taxes, Estimated Payments, and Retirement Plans 62. Marty earned $5,000 in interest income from the Honey Springs Bank. She failed to notify the bank that she was not subject to backup withholding. a. If Marty’s taxable income puts her in the 25 percent bracket, how much would Honey Springs Bank withhold on the $5,000 of interest earnings? b. If Marty’s taxable income puts her in the 15 percent bracket, how much would Honey Springs Bank withhold on the $5,000 of interest earnings?

63. For 2022, Randy, a single taxpayer, has wages of $45,000. He also has a significant amount of income from dividends and interest and therefore expects to have a federal income tax liability of $18,000. His total federal income tax withholding for the year is $9,500. Randy had $100,000 of adjusted gross income and a federal tax liability of $11,000 on his 2021 return. To avoid a penalty for underpayment of estimated taxes, what is the minimum amount of total estimated tax that Randy must pay in 2022? Assume the payments are made on a timely basis.

64. Riley is self-employed for 2022. Riley estimates their required annual estimated tax payment for 2022 to be $4,000.

Riley had a $500 overpayment of last year's taxes which they will apply against their first quarter estimated payment. a. b.

How much should Riley pay with their first quarter estimated tax voucher?

When is the payment due?

65. Jada has two jobs during 2022. One employer withheld and paid FICA taxes on $83,200 of Jada's salary, and the other employer withheld and paid FICA taxes on $66,800 in salary paid to Jada. Calculate the amount of Jada's credit for the overpayment of Social Security taxes that she should claim on her 2022 Form 1040.

66. In 2022, Lew, who is single, earned wages of $390,000. a. What is the amount of Social Security tax withheld from his salary? b. What is the amount of Medicare tax (including additional 0.9 percent tax if any) withheld from his salary?

67. Foemina Corporation has two employees, Nancy and Penny. a.

If Nancy earns wages of $17,000 for 2022, calculate the total amount of the FICA tax that must be paid:

by Nancy

by Foemina Corporation Total

b.

If Penny earns wages of $151,000 for 2022, calculate the total amount of the FICA tax that must be paid:

by Penny

by Foemina Corporation Total

68. Tyler is employed by a major defense contractor and earns $156,000 in 2022. Calculate the following: a. The amount of Social Security tax withheld from his income b. The amount of Medicare tax withheld from his income Powered by Cognero

Page 9

Name:

Class:

Date:

CH 09 Employment Taxes, Estimated Payments, and Retirement Plans c. The amount of FUTA withheld from his income 69. For each of the following payments, indicate the form (Form W-2, W-4, W-2G, 1099-B, 1099-DIV, 1099-INT, 1099MISC, or 1099-R) that should be used to report the payment. a. b. c. d. e.

Dividends from a mutual fund Las Vegas gambling winnings Interest paid by a bank Payment of salary and commissions to an employee Distribution from an IRA account

70. Provide answers to the following questions: a. What form does an employer use to report wages to an employee? b. When must the employer give the form reporting wages to the employee? c. What form does an employer use to report wages to the Social Security Administration? d. When must the employer file the form reporting wages with the Social Security Administration?

71. Sally is an employer with one employee, Ciera. Ciera earned $12,000 from January 1, 2022, through June 30, 2022, and the state unemployment tax rate is 5.4 percent. a. How much FUTA tax does Sally have to pay? b. What form should Sally use to report her FUTA tax liability for 2022?

72. The Wash Your Paws self-service dog wash had two employees during the year. Lindsey worked from January through March 15 and earned $2,750. Avery worked for the whole year and earned $20,000. The state assesses unemployment tax at the rate of 5.4 percent. Calculate the total FUTA tax after the credit for the state unemployment tax.

73. Morgan's employer contributes $3,000 to a qualified retirement plan in 2022 for Morgan's retirement. a. Is the $3,000 deductible by Morgan's employer in 2022? Explain. b. Is the $3,000 income to Morgan in 2022? Explain. c. Is either the interest or dividend earnings on the $3,000 contribution taxable to Morgan in 2022? Explain.

74. Clay changes jobs in 2022 and decides to roll his $50,000 retirement plan balance from his old employer's plan into an IRA. He instructs the trustee of the retirement plan to transfer the money directly to the IRA he has chosen.

What are the tax consequences of the transfer to Clay? Explain.

75. Penny, age 52, takes a distribution of $30,000 from her traditional IRA account. She plans to deposit it in an IRA with a different bank. Shortly after the distribution she drives her car through the front window of her credit union in a freak accident and uses the funds to pay for the damages. What income and/or penalties related to the failure to roll over the IRA must she show on her tax return?

76. Ralph has a $130,000 IRA with Red Investments. For personal reasons, he decides to move his funds to Blue Investments. He requests that his funds be distributed to him on August 20, 2022. a. What amount will Ralph receive from Red Investments? b. What is the last day Ralph can deposit the funds from Red Investments and avoid taxation in the current year? c. If the funds were distributed from a qualified retirement plan (not an IRA), how much would Ralph receive?

Powered by Cognero

Page 10

Name:

Class:

Date:

CH 09 Employment Taxes, Estimated Payments, and Retirement Plans d. Assuming the funds were distributed from a qualified retirement plan, not an IRA, how much will Ralph have to contribute to Blue Investments to avoid taxable income and any penalties?

77. What is the purpose of backup withholding?

78. An employee is reimbursed for travel and other ordinary and necessary expenses. Under what circumstances would income tax be withheld from the employee on these amounts?

Powered by Cognero

Page 11

Name:

Class:

Date:

CH 09 Employment Taxes, Estimated Payments, and Retirement Plans Answer Key 1. False 2. False 3. True 4. True 5. True 6. False 7. True 8. False 9. True 10. False 11. True 12. False 13. False 14. True 15. False 16. True 17. False 18. False 19. False 20. False 21. True 22. False 23. True 24. False 25. True Powered by Cognero

Page 12

Name:

Class:

Date:

CH 09 Employment Taxes, Estimated Payments, and Retirement Plans 26. True 27. a 28. c 29. b 30. b 31. c 32. a 33. b 34. c 35. d 36. c 37. d 38. c 39. b 40. b 41. d 42. b 43. b 44. b 45. b 46. d 47. d 48. b 49. c 50. b 51. d Powered by Cognero

Page 13

Name:

Class:

Date:

CH 09 Employment Taxes, Estimated Payments, and Retirement Plans 52. c 53. b 54. a 55. a 56. c 57. d 58. d 59. a. $83.72. {[12% × ($950 − $609)] + $42.80} b. $84 60. a. $70.64. {[12% × ($1,200 − $968] + $42.80} b. $72 61. If the employer is aware that the W-4 is false, a new W-4 should be requested. If none is provided, the employer should withhold as if the employee is single with no exemptions. If the employer has no reason to believe that the Form W-4 is false, it should be used for withholding purposes. The employer is not required to submit the W-4 to the IRS unless directed to do so.

62. a. $1,200. The bank should withhold at the statutory rate of 24 percent and thus would retain $1,200. b. $1,200. Marty’s personal tax rate has nothing to do with the amount the bank is required to withhold.

63. $1,500. Lesser of $1,500, $11,000 (2021 federal tax liability) − $9,500 (withholding); or $6,700, (90% of $18,000) − $9,500 64. a. $500. [$4,000 ÷ 4) − $500] b. April 15, 2022

65. $186.00. [6.2% × ($83,200 + $66,800 − $147,000)] 66. a. $9,114.00. (Social Security maximum of $147,000 × 6.2%) b. $5,655.00. (Medicare rate of 1.45% × $390,000); $1,710.00.[Medicare tax of 0.9% × ($390,000 − $200,000)]; $7,365.00. ($5,655.00 + $1,710.00) 67. a. by Nancy

by Foemina Powered by Cognero

$1,300.50. ($17,000 × 7.65%) $1,300.50. ($17,000 × 7.65%) Page 14

Name:

Class:

Date:

CH 09 Employment Taxes, Estimated Payments, and Retirement Plans b.

Total

by Penny

by Foemina Total

$2,601.00 $11,303.50. [($147,000 FICA cap × 6.2%) + ($151,000 × 1.45%)] $11,303.50. [($147,000 FICA cap × 6.2%) + ($151,000 × 1.45%)] $22,607.00

68. a. $9,114. ($147,000 FICA cap × 6.2%) b. $2,262. ($156,000 × 1.45%) c. $0. Only employers pay FUTA. 69. a. 1099-DIV b. W-2G c. 1099-INT d. W-2 e. 1099-R 70. a. Form W-2 b. In general, the employer must furnish Form W-2 to the employee on or before January 31 of the year following the calendar year of payment. c. Form W-3 (along with Copy A of Form W-2) d. Form W-3 (along with Copy A of Form W-2) needs to be filed with the Social Security Administration by January 31 of the year following the calendar year of payment.

71. a. $42. ($7,000 × 0.6%) b. Form 940 72. $58.50.

Lindsey’s wages were $2,750 Avery’s wages were $20,000 (maximum of $7,000 is subject to FUTA) Total FUTA wages FUTA tax at 0.6 percent

$2,750 7,000 $9,750 $58.50

73. a. Yes. The contribution to a qualified retirement plan is a tax-deductible item for an employer. b. No. The contribution is tax deferred to the employee. Taxes will be paid when the pension is paid out to the employee. c. No. Any earnings on amounts in the pension plan are tax deferred to the employee. Taxes on earnings will be paid when the pension is paid to the employee.

74. There are no tax consequences. Since the transfer is a direct transfer, there are no withholdings and no penalties.

Powered by Cognero

Page 15

Name:

Class:

Date:

CH 09 Employment Taxes, Estimated Payments, and Retirement Plans 75. Penny must report the full $30,000 distribution as income on her income tax return and pay tax on it. In addition, since she is not yet 59½ years old, she must pay a 10 percent penalty of $3,000 due to the failure to rollover the IRA. 76. a. $130,000 b. October 19, 2022 c. $104,000 d. $130,000 77. The purpose is to ensure income tax is paid on income reported on Form 1099. Backup withholding only applies in specific situations such as when the taxpayer fails to provide the payor with the correct taxpayer identification number.

78. Reimbursements of travel and other employee business expense made under a nonaccountable plan must be included as wages and the amounts are subject to withholding. The amount of withholding may vary with the type of nonaccountable plan in use.

Powered by Cognero

Page 16

Name:

Class:

Date:

CH10 Partnership Taxation

Indicate whether the statement is true or false.

1. If Margo and Bruce purchase and operate an ice cream store, for tax purposes they have formed a partnership. a. True b. False 2. Income from a partnership is taxed to the partner only if the partner receives the income as a distribution during the year. a. True b. False 3. Because a partnership does not pay taxes, a partnership is not recognized as a legal entity under civil law. a. True b. False 4. In general, income is recognized by a partner when partnership interest is received in exchange for services rendered to the partnership. a. True b. False 5. The holding period of property contributed to a partnership includes the period of time that the contributor has held the property. a. True b. False 6. The basis of a partner's interest in a partnership is increased by losses of the partnership allocated to the partner. a. True b. False 7. A partnership may deduct a single personal exemption in calculating ordinary taxable income or loss. a. True b. False 8. A partnership reports its income on Form 1040. a. True b. False 9. Partnership losses that are not used because of a partner's basis in the partnership interest is zero may be carried back, but not forward. a. True b. False 10. Partnership income is taxed at the same tax rates as the income of corporations. a. True b. False Powered by Cognero

Page 1

Name:

Class:

Date:

CH10 Partnership Taxation 11. A partnership must separately report Section 1231 gains and losses rather than including them in ordinary taxable income. a. True b. False 12. A partnership may not show a loss as a result of deducting guaranteed payments made to the partners. a. True b. False 13. Guaranteed payments made by a partnership must be made to individuals other than partners in the partnership. a. True b. False 14. A partnership will terminate, and its tax year will close if the partnership ceases to carry on any business activity. a. True b. False 15. The tax year of a partnership generally closes upon entry of a new 35 percent partner. a. True b. False 16. A partnership generally must adopt the same tax year as its majority partners. a. True b. False 17. Guaranteed payments received from a partnership are included in the income of the partner receiving the payments on a cash basis, without regard to the partnership's tax year.

Guaranteed payments received from a partnership are included in the income of the partner receiving the payments on a cash basis, without regard to the partnership's tax year.Guaranteed payments received from a partnership are included in the income of the partner receiving the payments on a cash basis, without regard to the partnership's tax year. a. True b. False 18. Ownership of a partnership interest by a taxpayer's sibling is considered indirect ownership by the taxpayer. a. True b. False 19. If a partner has a more than 50 percent interest in a partnership, a capital gain resulting from the sale of property by the partner to the partnership will be taxed as ordinary income to the partner, provided the property is not a capital asset to the partnership. a. True b. False 20. Losses on transactions between a partnership and its partners are always disallowed. a. True b. False Powered by Cognero

Page 2

Name:

Class:

Date:

CH10 Partnership Taxation 21. Losses are disallowed for transactions between a partnership and a partner who has a 50 percent interest in the partnership. a. True b. False 22. A partner’s receipt of guaranteed payments is a form of qualified business income. a. True b. False 23. The "at-risk" rule applies, with limited exceptions, to all taxable activities. a. True b. False 24. The "at-risk" rule acts to prevent tax shelters from generating large losses for their investors while exposing them to little personal risk. a. True b. False 25. Real Estate is exempt from the "at-risk" rule. a. True b. False 26. There is no general partner requirement in a limited liability company (LLC). a. True b. False 27. Limited liability companies may operate in more than one state. a. True b. False

Indicate the answer choice that best completes the statement or answers the question.

28. Which one of the following statements about partnerships is true? a. There must be three or more owners. b. General partners assume less risk of legal liability than limited partners. c. An LLC limits certain liability risks. d. A partnership is taxed like a corporation.

29. Which of the following statements about partnerships is true? a. The formation of a general partnership must be documented in writing. b. An LLC is generally treated as a partnership for tax law purposes. c. General partners have no liability for partnership obligations beyond their capital contributions. d. When two individuals invest in land together, they are considered to have formed a partnership.

30. On July 1 of the current year, Bertram acquired a 25 percent interest in Sycamore Company, a partnership, by Powered by Cognero

Page 3

Name:

Class:

Date:

CH10 Partnership Taxation contributing property with an adjusted basis of $7,000 and a fair market value of $12,000. The property was subject to a mortgage of $8,000, which was assumed by Sycamore Company. What is Bertram's basis in his partnership interest in Sycamore Company immediately after the partnership contribution? a. $0 b. $1,000 c. $7,000 d. $12,000 31. On July 1 of the current year, Amaya was admitted to the partnership of Peters and Parker. Her contribution to capital consisted of 500 shares of stock in Paniculata Corporation, which she bought in 2016 for $10,000 and which had a fair market value of $50,000 on July 1 of the current year. Amaya's interest in the partnership's capital and profits is 25 percent. On July 1 of the current year, the fair market value of the partnership's net assets (after Amaya was admitted) was $200,000. What is Amaya's taxable gain in the current year on the exchange of stock for her partnership interest? a. $0 gain or loss b. $40,000 ordinary income c. $40,000 long-term capital gain d. $40,000 Section 1231 gain 32. During the current year, Norman contributed investment property held for over one year to the MaryAnn Partnership for a 40 percent interest in partnership capital and profits. His tax basis in the property contributed was $8,000, and the property had a fair market value of $10,000 on the date of the contribution to the partnership. What gain or loss should Norman report as a result of the contribution of the property to the partnership in exchange for the 40 percent partnership interest? a. No gain or loss b. $2,000 long-term capital gain c. $2,000 ordinary income d. $10,000 long-term capital gain 33. Leslie contributes a building worth $88,000, with an adjusted basis of $40,000, to a partnership in exchange for a 50 percent interest in the partnership's capital and profits. What is the amount of Leslie's basis in her partnership interest immediately after the contribution? a. $20,000 b. $40,000 c. $44,000 d. $88,000 34. Ryan and Taylor form an equal partnership. Ryan contributes cash of $18,000 and property with a fair market value of $125,000 and an adjusted basis of $65,000 and is subject to a liability of $50,000. Taylor contributes cash of $125,000.

What amount of gain must Ryan recognize as a result of this transaction? a. $95,000 b. $35,000 c. $5,000 d. $0 35. An equal partnership is formed by Rita and Gerry. Rita contributes cash of $10,000 and a building with a fair market value of $150,000, and an adjusted basis of $55,000, and is subject to a liability of $60,000. Gerry contributes cash of $100,000. What is Rita's basis in her partnership interest immediately after formation of the partnership?

Powered by Cognero

Page 4

Name:

Class:

Date:

CH10 Partnership Taxation a. $25,000 b. $35,000 c. $65,000 d. $70,000 36. An equal partnership is formed by Diego and Sanjay. Diego contributes cash of $100,000. Sanjay contributes cash of $15,000 and a building with a fair market value of $100,000 and an adjusted basis of $45,000 and is subject to a liability of $50,000. What is the partnership's basis in the building contributed by Sanjay? a. $45,000 b. $50,000 c. $55,000 d. $100,000 37. Loretta contributes property to a partnership in exchange for a 25 percent partnership interest. The property contributed has a fair market value of $45,000 and a basis of $35,000 on the date of the contribution to the partnership. In addition, Loretta receives a 10 percent partnership interest, valued at $18,000, in exchange for services rendered to the partnership. What is Loretta's basis in her partnership interest, immediately after these transactions? a. $35,000 b. $45,000 c. $53,000 d. $63,000 38. Which of the following can decrease a partner's interest in a partnership? a. Capital gains of the partnership b. Losses from operations of the partnership c. Taxable income of the partnership d. Tax-exempt income of the partnership e.

39. Sabrina contributes to a partnership property with an adjusted basis of $75,000. On the date of the contribution, the fair market value of the property is $125,000. What is Sabrina's basis in her partnership interest immediately after the contribution? a. $0 b. $50,000 c. $75,000 d. $125,000 40. Jamie enters into a partnership with her friends. She contributes $60,000 in cash and a building worth $375,000 that has an adjusted basis of $200,000. What is her basis in the partnership? a. $60,000 b. $260,000 c. $375,000 d. $435,000 41. Which of the following statements about partnerships is true?

Powered by Cognero

Page 5

Name:

Class:

Date:

CH10 Partnership Taxation a. Partnerships must file their tax returns on a calendar-year basis. b. No gain or loss is ever recognized in transactions between partners and a partnership. c. The partnership’s basis in property contributed by a partner is equal to the fair market value of the property on the date of the transfer. d. A partner's initial basis in a partnership interest is equal to the basis of the property transferred (plus cash contributed) to the partnership, adjusted for gain and liabilities.

42. The partnership of Truman and Hanover realized the following items of income during the current tax year: Net income from operations $65,000 Dividends received from domestic corporations 4,000 Interest income on corporate bonds 3,000 Net long-term capital gains 5,000 Net short-term capital gains 1,000 Both the partners are on a calendar year basis. What is the total income that should be reported as ordinary income from business activities of the partnership for the current tax year? a. $0 b. $65,000 c. $69,000 d. $71,000 43. Which of the following items must be reported separately from ordinary income or loss on a partnership return? a. Capital losses b. Miscellaneous income c. Cost of goods sold d. Sales income 44. For tax purposes, in computing the ordinary income of a partnership, a deduction is allowed for which of the following? a. Payments to partners b. The net operating loss deduction c. Contributions to charitable organizations d. Personal exemptions of the partners 45. Which of the following is true about partnerships and their income-reporting process? a. The partnership must file a Section 1231. b. The partner’s share of income/loss is presented on Schedule K-1. c. A partner’s deductible loss is limited to the percent of the partner's position in the partnership. d. The partnership pays income tax as determined on Form 1065.

46. The partnership of Felix and Xavier had the following items of income during the current tax year: Income from operations $157,000 Tax-exempt interest income 8,000 Dividend income 6,000 What is the total ordinary income from business activities passed through by the partnership for the current tax year?

Powered by Cognero

Page 6

Name:

Class:

Date:

CH10 Partnership Taxation a. $163,000 b. $157,000 c. $165,000 d. $171,000 47. Nash and Ford are partners who share profits and losses equally. For the current tax year, the partnership had book net income of $70,000 which included the following deductions: Guaranteed payments to partners: Nash Ford Charitable contributions

$35,000 25,000 5,000

What amount should be reported as ordinary income on the partnership return for the current tax year? a. $75,000 b. $85,000 c. $130,000 d. $135,000 48. Phil and Bill each own a 50 percent interest in P&B Interests. P&B Interests has ordinary income for the year of $35,000 before guaranteed payments to Phil. If Phil receives guaranteed payments of $10,000 during the tax year, what is the total ordinary income or loss that should be reported by Bill from the partnership for this tax year? a. $5,000 income b. $7,500 income c. $12,500 income d. $25,000 income 49. Barbara receives a current distribution consisting of $2,000 cash plus other property with an adjusted basis to the partnership of $2,300 and a fair market value on the date of the distribution of $7,000. Barbara has a 10 percent interest in the partnership, and her basis in her partnership interest, immediately prior to the distribution, is $5,000. What is Barbara's basis in the non-cash property received in the current distribution? a. $2,000 b. $2,300 c. $3,000 d. $7,000 50. Ian's basis in his partnership is $100,000. His share of the current year partnership income is $50,000. The partnership paid him a $60,000 distribution in the current year. What is his new basis in the partnership at the end of the year, and what is his taxable income from the partnership? a. $100,000; $110,000 b. $150,000; $110,000 c. $90,000; $50,000 d. $90,000; $110,000 51. Salix Associates is a partnership with an October 31 year-end. For the fiscal year ended October 31, 2022, Salix Associates reported ordinary income of $100,000, after deducting guaranteed payments. Max, a calendar-year taxpayer, is Powered by Cognero

Page 7

Name:

Class:

Date:

CH10 Partnership Taxation a 30 percent partner in the partnership and received $2,000 monthly as a guaranteed payment for the calendar year 2021, and $2,100 monthly for the calendar year 2022. What is the total income from the partnership that Max should report on his 2022 individual income tax return? a. $30,000 b. $54,200 c. $55,000 d. $55,200 52. Jordan files his income tax return on a calendar-year basis. He is the principal partner of a partnership reporting on a June 30 fiscal year-end basis. Jordan's share of the partnership's ordinary income was $24,000 for the fiscal year ended June 30, 2022, and $72,000 for the fiscal year ended June 30, 2023. How much should Jordan report on his 2022 individual income tax return as his share of taxable income from the partnership? a. $24,000 b. $36,000 c. $48,000 d. $72,000 53. A partnership would be forced to terminate and close its tax year if which of the following occurred? a. Divorce of a partner b. Cessation of business activities by the partnership c. Entry of a new partner d. Distribution of property to a 10 percent partner in complete termination of the partner's interest in the partnership 54. Kitty is a 60 percent partner of Tobin Associates. Kitty sells a building to the partnership for $75,000. If the building had an adjusted basis to Kitty of $95,000, how much gain or loss does Kitty recognize on this transaction? a. $95,000 loss b. $20,000 loss c. $0 gain or loss d. $20,000 gain 55. Barry owns a 50 percent interest in B&B Interests, a partnership. His brother, Benny, owns a 35 percent interest in that same partnership, and the remaining 15 percent is owned by an unrelated individual. During the current year, Barry sells a rental property with a basis of $60,000 to B&B Interests for $100,000. The partnership intends to hold the rental as inventory for resale. What is the amount and nature of Barry's gain or loss on this transaction? a. $40,000 long-term capital loss b. $0 gain or loss c. $40,000 long-term capital gain d. $40,000 ordinary income e.

56. Owen owns 60 percent of the TurboTee partnership. He sells to the partnership a machine for $70,000 that has a $45,000 basis. What would the taxable income be for Owen, and what is the partnership's basis in the machine? a. $25,000; $45,000 b. $0; $45,000 c. $25,000; $70,000 Powered by Cognero

Page 8

Name:

Class:

Date:

CH10 Partnership Taxation d. $70,000; $45,000 57. Wallace and Pedersen have equal interests in the capital and profits of the partnership of Wallace and Pedersen. They are otherwise unrelated to each other. On August 1, 2021, Wallace sold 100 shares of Kalmia Mining Corporation to the partnership for its fair market value of $7,000. Wallace had bought the stock in 2012 at a cost of $10,000. What is Wallace's deductible loss for 2022 as a result of the sale of this stock? a. $0 b. $1,500 long-term capital loss c. $3,000 long-term capital loss d. $3,000 ordinary loss 58. Jayla is a 30 percent partner in the Ghost Partnership. Ghost paid W-2 wages of $100,000 and also made a guaranteed payment to Jayla of $20,000. The amount included as wages in Jayla's wage limitation on her QBI deduction is . a. $0 b. $30,000 c. $50,000 d. $100,000 59. Which of the following liabilities would be considered nonrecourse? a. A bank loan for which the taxpayer is personally liable b. Credit card debt c. A real estate loan that allows the bank to take the real estate if the taxpayer stops making payments d. Debt owed to a utility company 60. At the beginning of the year, Amira’s basis in her partnership interest was $5,000. During the year, Amira contributed $10,000 in cash to the partnership and signed a bank loan to be personally liable for the partnership's debt of $25,000. For the current year, the partnership allocated a loss of $60,000 to Amira. In the following year, Amira’s portion of the partnership income is $30,000. Which of the following is accurate? a. In the following year, Amira’s reportable taxable income from the partnership is $10,000. b. Amira’s basis in her partnership at the end of the current year is $15,000. c. Amira may deduct all of the $60,000 loss in the current year. d. Amira may carry over a $45,000 loss to the following year.

61. Which of the following is true about a limited liability company (LLC)? a. An LLC is always treated like a corporation for tax purposes. b. An LLC must have at least two members. c. An LLC is always taxed like a partnership. d. An LLC's limited liability is similar to a corporation’s.

62. Which of the following is a true about the debt of an LLC? a. The general partner assumes full liability for the debt. b. Debt is included in the basis computations for members. c. Excess debt can force the LLC to be taxed as a corporation. d. The debt is generally treated as nonrecourse.

Powered by Cognero

Page 9

Name:

Class:

Date:

CH10 Partnership Taxation 63. For the following separate, independent situations, indicate with a “Yes” if a partnership return needs to be filed. Mark with a “No” if a partnership return is not required. a. Antonia and Gina form a joint venture to import goods from Vietnam. b. Nancy starts her own private investigative business. c. Uncle Walter’s estate assets are pooled together until they can be distributed to the beneficiaries. d. Russell, Ciara, and Nylah form an LLC. e. Madalyn, Taylor, and Xavier start a child care business. No official documents are drawn up.

64. James and Candice decided to pool their money and start a water delivery business. Since they trust each other so much, they did not draw up any legal documents for the business. During the first year of business, they earned $50,000 which was net of $10,000 paid to Candice as a guaranteed payment. During the second year of business, they decided to limit their liability exposure by forming an LLC. a. Was a partnership formed during the first year? b. If a partnership was formed, how much income will be taxed at the partnership level? c. For the second year, do they need to file a partnership tax return?

65. Cooke and Thatcher form the C&T Partnership. Cooke contributes equipment with a fair market value of $70,000 and a basis of $35,000, in exchange for a 70 percent interest in the partnership capital and profits. Thatcher performs services worth $30,000 for the partnership in exchange for a 30 percent interest in capital and profits. a. b. c. d. e.

What is the amount of Cooke's recognized gain or loss (if any) as a result of the contribution to the partnership in exchange for the partnership interest?

What is Cooke's basis in partnership interest immediately after the contribution?

What is the amount of Thatcher's recognized income or loss (if any) on the contribution to the partnership?

What is Thatcher's basis in partnership interest immediately after the contribution?

What is C&T Partnership's basis in the equipment received from Cooke?

66. Oscar and Tiana form an equal partnership, the O and T Partnership. Oscar contributes land with an adjusted basis of $45,000, subject to a mortgage of $100,000, in exchange for a partnership interest worth $250,000. Tiana contributes cash of $100,000 and performs services for the partnership in exchange for a partnership interest worth $250,000. a. b. c. d.

What is the amount of Oscar's recognized gain or loss (if any) as a result of the contribution to the partnership in exchange for the partnership interest?

What is Oscar's basis in his partnership interest immediately after the contribution?

What is the amount of Tiana's recognized income or loss (if any) as a result of the receipt of the partnership interest in exchange for the cash and services?

What is the partnership's basis in the land received from Oscar?

67. Hailey has a 25 percent interest in the Aspen Aircraft partnership. Her basis in her partnership interest is $10,000 at the beginning of the year. The partnership reported the following activity for the year: Ordinary income Section 1231 gain Charitable contribution Total distributions to partners Powered by Cognero

$40,000 $10,000 $12,000 $28,000 Page 10

Name:

Class:

Date:

CH10 Partnership Taxation What is Hailey's basis in her partnership interest at the end of the year?

68. Jada and Dalia formed a partnership. During the current year, the partnership had the following income and expenses: Gross income from operations Gain on sale of antique abacus (a business asset) Interest income from business bank account

$135,000 4,000 100

Deductions: Salaries to employees Payroll taxes Rent Depreciation Contribution to United Way charity Foreign income tax paid on overseas business deals

$65,000 5,000 8,000 3,500 2,000 3,000

Distributions to the partners

$40,000

a. Calculate the net ordinary income. b. List all of the items that need to be separately reported. c. If the partnership files on a calendar-year tax basis, when is the partnership tax return due?

69. Answer the following questions about partnerships: a. b.

c.

What form is used to report income and expenses for a partnership?

If a partner’s basis at the beginning of the year is $1,000 and the partnership allocates $7,000 of loss to the partner, how much of the loss is deductible in the current year; what is the partner's new basis in the partnership; and what happens to any excess loss not deducted (assume the at-risk amount is the same as the basis and the partner materially participates in the partnership)?

What is the exemption amount for a partnership?

70. Zaria's original contribution to the Boxwood Partnership was land with a basis of $10,000 and a market value of $55,000. Her share of the taxable income from the partnership since her original contribution has been $65,000, and Zaria's has received $45,000 in cash distributions from the partnership. Zaria did not recognize any gains as a result of the distributions. Calculate Zaria's current basis in her partnership interest.

71. Cypress Road is a partnership with two partners, Saul, a 40 percent partner, and Robbie, a 60 percent partner. The partnership has income for the year of $120,000 before guaranteed payments to Robbie. Guaranteed payments of $70,000 are paid to Robbie for his management services during the year. Calculate the amount of income that should be reported

by Saul and Robbie from the partnership for the year.

Saul should report income of $ Robbie should report income of $

. .

72. Lilac Designs is a partnership with a tax year that ends November 30, 2022. During that year, William, a partner, received $4,000 per month as a guaranteed payment and his share of partnership income after guaranteed payments was $20,000. For December of 2022, William received a guaranteed payment of $10,000. Calculate the amount of income from the partnership that William should report for his tax year ended December 31, 2022.

Powered by Cognero

Page 11

Name:

Class:

Date:

CH10 Partnership Taxation 73. Jamal receives cash of $15,000 and a building with a fair market value of $50,000 (adjusted basis of $30,000) in a current distribution. a. b.

Assuming his basis in his partnership interest was $50,000, what amount of gain must Jamal recognize as a result of the current distribution?

Assuming his basis in his partnership interest was $10,000, what amount of gain must Jamal recognize as a result of the current distribution?

74. Dariva and Gabrielle operate the D & G Partnership. Gabrielle, a 50 percent partner, receives a guaranteed payment of $10,000 for her services in operating the partnership. The partnership has income before the guaranteed payment of $5,000. What is the taxable income Dariva and Gabrielle must each report from the partnership for the year?

Dariva should report taxable income of $ Gabrielle should report taxable income of $

. .

75. In December of 2022, Chloe and Pip form a wedding planning business. They each own 50 percent of the partnership.

The partnership establishes a September 30 year-end since most weddings are during the summer. Therefore, the partnership's initial year-end is September 30, 2023. For the month of December 2022, the partnership made a net income of $3,000 after Chloe's guaranteed payment of $1,000. From January through September of 2023, the partnership made a net income of $65,000 after a $1,500 per month guaranteed payment to Chloe. a. How much income should Chloe report for 2022? b. How much income should Chloe report for 2023?

76. Assuming that a partnership normally has a calendar year-end, what should the tax year-end be in the following independent cases? a. Omar, a 70 percent partner, sells his partnership interest to Fred on August 10. b. On July 13, a partnership sells its office building and moves its business across town. c. Isabella buys a 15 percent interest in a partnership on May 14. d. The Helix partnership goes out of business on February 26.

77. Rochelle owns 40 percent of a partnership, and her brother owns the remaining 60 percent interest. During the current tax year, Rochelle sold a building to the partnership for $180,000, to be used for the partnership's office. She had held the building for 3 years at the time of the sale. a. b.

Assuming Rochelle's basis in the building was $200,000, what is the amount and nature of her gain or loss?

Assuming Rochelle's basis in the building was $150,000, what is the amount and nature of her gain or loss?

78. Kevin and Noah are brothers, and they are equal partners in Pipes of Your Dreams Plumbing. Kevin sells his fancy sports car to the business for $40,000. Kevin's basis in the car is $45,000 a. What is the amount of Kevin’s recognized gain or loss on this transaction, and what is the nature of the gain or loss? b. If the partnership later sells the sports car for $55,000, how much of the gain is recognized?

79. During the current year, Jay is a partner in an automobile dealership. Jay's amount at risk at the beginning of the year is $90,000, and during the current year Jay’s share of the dealership’s ordinary loss is $120,000.

Powered by Cognero

Page 12

Name:

Class:

Date:

CH10 Partnership Taxation a. b.

What is the amount of the loss from the automobile dealership that Jay may deduct in the current year?

If the dealership has a profit of $63,000 in the subsequent year, how much of the subsequent year income is taxable to Jay?

80. Madalyn invests in Buxus Interests, a partnership. Madalyn 's capital contribution to the partnership consists of $10,000 cash and equipment with an adjusted basis of $120,000 (fair market value of $150,000) subject to a nonrecourse liability of $60,000. a. b. c.

Calculate the amount that Madalyn is at risk in the activity after making the above contribution?

If Madalyn's share of the partnership loss in the year after she makes the contribution is $150,000, how much of the loss may be deducted in that year (before considering the limitations on passive losses)? Assume the partnership had no other transactions.

If Madalyn has any nondeductible loss in part b, what may Madalyn do with the nondeductible loss?

81. List three benefits of an LLC.

82. A partner contributes assets with a basis of $50,000 and a fair market value of $80,000 to a partnership. What is the basis of the property to the partnership, and what is the general rule for the basis of appreciated property contributed to a partnership?

83. A distribution of cash to a partner was greater than the partner's basis in the partnership. How would this distribution be treated by the partner, assuming the distribution is not a liquidating distribution?

Powered by Cognero

Page 13

Name:

Class:

Date:

CH10 Partnership Taxation Answer Key 1. True 2. False 3. False 4. True 5. True 6. False 7. False 8. False 9. False 10. False 11. True 12. False 13. False 14. True 15. False 16. True 17. False 18. True 19. True 20. False 21. False 22. False 23. True 24. True 25. False Powered by Cognero

Page 14

Name:

Class:

Date:

CH10 Partnership Taxation 26. True 27. True 28. c 29. b 30. b 31. a 32. a 33. b 34. d 35. b 36. a 37. c 38. b 39. c 40. b 41. d 42. b 43. a 44. a 45. b 46. b 47. a 48. c 49. b 50. c 51. c Powered by Cognero

Page 15

Name:

Class:

Date:

CH10 Partnership Taxation 52. a 53. b 54. c 55. d 56. d 57. c 58. b 59. c 60. a 61. d 62. d 63. a. Yes b. No c. No d. Yes e. Yes 64. a. Yes. b. $0. There is no tax at the partnership level. The partnership income and other items are passed through to the partners and taxed at the individual level. c. Yes. An LLC is generally treated as a partnership for tax law purposes.

65. a. $0. b. $35,000, the same as the basis of the property contributed to the partnership. c. $30,000, since services do not qualify as property. d. $30,000, the income recognized. e. $35,000, the same as the partner's basis in the property contributed.

66. a. $5,000 gain. [($100,000 × 50%) − $45,000] b. $0. ($45,000, basis of the property contributed, + $5,000, gain recognized, − $50,000, liability assumed by the other partner through the partnership) c. $150,000. ($250,000 - $100,000). Services do not qualify as property. d. $50,000. ($45,000 + $5,000).

67. $12,500. {$10,000 + [25% × ($40,000 + $10,000 − $12,000 − $28,000)]} Powered by Cognero

Page 16

Name:

Class:

Date:

CH10 Partnership Taxation 68. a. Ordinary income: Gross income from operations Less: Salaries to employees Payroll taxes Rent Depreciation Net ordinary income b. Items that need to be separately reported: Gain on sale of antique abacus Interest income Contribution to United Way charity Foreign income tax paid Distributions to the partners c.

$135,000 65,000 5,000 8,000 3,500 $ 53,500 $ 4,000 100 2,000 3,000 40,000

It is due on March 15 of the year following the end of the tax year.

69. a. Partnership income and expenses are reported on Form 1065. b. The partner may deduct $1,000 of the loss; the partner’s new basis is zero; and the excess loss of $6,000 is carried forward to future years when there is partnership basis available to deduct the loss. c. There are no exemption amounts for partnerships.

70. $30,000. ($10,000 + $65,000 − $45,000) 71. Saul: $20,000. [40% × ($120,000 − $70,000)] Robbie: $100,000. {[60% × ($120,000 − $70,000)] + $70,000} 72. $68,000. [$20,000 + (12 × $4,000)] 73. a. b.

$0. He still has a $5,000 basis in his partnership interest after the receipt of the cash and distribution. $5,000. ($15,000 cash − $10,000 basis)

74. Dariva: $2,500 loss. [50% × ($5,000 − $10,000)] Gabrielle: $7,500 income. {$10,000 + [50% × ($5,000 − $10,000)]} 75. a. Since the partnership’s initial year-end is September 30, 2023, Chloe does not report any income in 2022. b. In 2023, Chloe reports a total income of $48,500 {[50% × ($3,000 + $65,000)] + $1,000 + ($1,500 × 9 months)}.

Powered by Cognero

Page 17

Name:

Class:

Date:

CH10 Partnership Taxation 76. a. The partnership’s tax year-end is December 31. b. The partnership’s tax year-end is December 31. c. The partnership’s tax year-end is December 31. d. The partnership’s tax year-end is February 26.

77. a. $0. The potential $20,000 loss is disallowed as Rochelle is deemed to own more than 50 percent of the partnership. b. $30,000 gain. It is an ordinary gain since Rochelle is deemed to own more than 50 percent of the partnership and the building is a Section 1231 asset, not a capital asset, to the partnership.

78. a. $0. The $5,000 loss is disallowed since Kevin is deemed to own more than 50 percent of the partnership. b. $10,000. The partnership can use Kevin’s $5,000 loss which was disallowed to offset the $15,000 gain.

79. a. $90,000, the at-risk amount. b. $33,000. ($63,000 − $30,000)

80. a. $70,000. ($10,000 + $120,000 − $60,000) b. $70,000, the at-risk amount. c. The loss may be carried forward by the partner for an indefinite period, subject to similar limitations in the carryover years.

81. Any of the following are considered advantages of an LLC: a. An LLC for tax purposes is generally treated like a partnership. Taxable income and losses pass through to the owners, thereby avoiding double taxation. b. There is no requirement to have a general partner as in a limited partnership. All partners therefore have limited liability. c. All members in an LLC may participate in management. d. Tax attributes of an LLC transaction pass through to the owners. e. There can be a single member LLC. 82. The basis to the partnership is $50,000, the same as the basis to the partner who contributed the property. The contribution is not a taxable event; that is, the contributing partner does not recognize a gain on the contribution. The partnership generally has a basis in appreciated property equal to the contributing partner’s basis. If the partner is required to recognize gain on the contribution due to a liability assumed by other partners in excess of the partner's basis in the property, the partner’s gain is added to the partnership’s basis in the asset.

83. The portion equal to the partner's basis is return of investment and is not taxable. The excess would be treated as a capital gain, subject to taxation. The partner’s basis in the partnership interest would be reduced to zero.

Powered by Cognero

Page 18

Name:

Class:

Date:

CH11 The Corporate Income Tax

Indicate whether the statement is true or false.

1. In 2022, corporations pay a flat 21 percent rate for federal income tax. a. True b. False 2. Corporate tax rates favor large corporations over smaller corporations. a. True b. False 3. Corporations are granted favorable tax treatment for short-term capital gains. a. True b. False 4. A corporation may carry forward capital losses for an indefinite period. a. True b. False 5. Capital losses of a corporation may be used to offset capital gains, but net capital losses may not be deducted from the ordinary income of a corporation. a. True b. False 6. If a corporation is unable to deduct a capital loss against capital gains for a particular tax year, it loses the tax benefit since the loss may not be carried to other tax years. a. True b. False 7. Corporations may deduct without limitation any amount of charitable contributions providing the amounts are paid to qualified organizations (not a qualified disaster contribution). a. True b. False 8. Corporations are prohibited from amortizing the costs of organizing the corporation. a. True b. False 9. A corporation may elect to take a credit for dividends paid in lieu of claiming a dividends-received deduction. a. True b. False 10. A corporation owning 80 percent or more of the stock of another corporation has a dividends-received deduction of 100 percent. a. True b. False Powered by Cognero

Page 1

Name:

Class:

Date:

CH11 The Corporate Income Tax 11. Brokers' fees incurred in the issuance of a corporation's stock are considered organizational expenditures. a. True b. False 12. To prevent triple taxation, all corporations are entitled to deduct 50 percent of the dividends received from all other domestic corporations. a. True b. False 13. A regular corporation with excess charitable contributions may carry the excess forward to the five succeeding tax years. a. True b. False 14. Corporations can elect to deduct up to $5,000 of organizational costs in the year they begin business, assuming their total organizational expenses do not exceed $50,000. a. True b. False 15. A corporation must reconcile, to the IRS's satisfaction, the differences between net income as shown on the company's books and taxable income (before special deductions and net operating losses) as shown on the tax return. a. True b. False 16. Schedule M-1 on Form 1120 shows the reconciliation of a corporation's tax liability to the tax expense on the corporation's books. a. True b. False 17. The original due date for a tax return of a corporation filing a Form 1120 with a calendar tax year-end falls before the original due date of a return for an individual taxpayer with the same tax year. a. True b. False 18. An S corporation files a Form 1120S. a. True b. False 19. If the shareholders of an S corporation voluntarily revoke the corporation's S corporation status in the sixth month of the tax year and the revocation does not specify a prospective revocation date, the corporation is a regular corporation for that tax year. a. True b. False 20. The income of an S corporation is computed in much the same manner as that of a partnership. a. True Powered by Cognero

Page 2

Name:

Class:

Date:

CH11 The Corporate Income Tax b. False 21. Charitable contributions made by an S corporation are not deductible by the corporation; therefore, the shareholders receive no tax benefit from the contributions as itemized deductions. a. True b. False 22. S corporations almost always pay taxes at a higher rate than do regular corporations. a. True b. False 23. If a corporation's status as an S corporation is involuntarily terminated in the middle of the tax year, the corporation must file an S corporation tax return for the first half of the tax year and a regular corporation tax return for the second half of the tax year. a. True b. False 24. As a general rule, the transfer of property by a taxpayer to a corporation in exchange solely for 100 percent of the stock does not result in a taxable transaction. a. True b. False 25. The accumulated earnings tax will not be imposed on accumulations that can be shown to be necessary to meet the reasonable needs of the business. a. True b. False 26. The purpose of the accumulated earnings tax is to prevent shareholders from avoiding tax at the shareholder level by leaving the earnings in the corporation. a. True b. False 27. A corporation may be subject to both the accumulated earnings tax and the personal holding company tax in the same year. a. True b. False 28. In 2022, the Inflation Reduction Act enacted what is effectively a corporate alternative minimum tax rate of 28 percent. a. True b. False 29. Corporations may be subject to a new version of the alternative minimum tax, which was enacted in 2022. a. True b. False

Indicate the answer choice that best completes the statement or answers the question.

Powered by Cognero

Page 3

Name:

Class:

Date:

CH11 The Corporate Income Tax 30. For 2022, what is the maximum tax rate for personal service corporations? a. 21 percent b. 28 percent c. 35 percent d. 37 percent 31. Which of the following companies is subject to taxation at something other than a flat rate of 21 percent in 2022? a. An auto parts manufacturing corporation with taxable income of $73,000 b. A single-owner corporation involved in the retail sale of apparel c. A family-owned shoe store operating as an S corporation with earnings of $224,000 d. An employee-owned accounting firm 32. In 2022, Apricot Corporation had taxable income of $120,000. Included in taxable income was a $10,000 capital gain.

The $120,000 of taxable income does not include a $15,000 capital loss carryforward available from the previous year.

What is Apricot Corporation's 2022 income tax liability before any tax credits? a. $22,050 b. $21,000 c. $23,100 d. $25,200 33. Which of the following statements is true of corporations in 2022? a. Income of all corporations is taxed in the same way that income of partnerships is taxed. b. A corporation’s charitable contribution deduction is limited to 25 percent of the corporation's taxable income. c. Capital losses of a corporation may be deducted from ordinary income, subject to an annual limitation. d. If a corporation has a long-term capital loss that is carried back, it is treated as a short-term capital loss.

34. Which of the following is true with respect to capital gains and losses of a corporation? a. A corporation can offset ordinary income with capital losses. b. A corporation pays 15 percent long-term capital gains rate, just like an individual. c. A corporation can carry a capital loss back 5 years. d. A corporation can carry a capital loss forward 5 years.

35. For the current year, Beech Corporation has net income on its books of $60,000, including the following items: Net capital losses $15,000 Federal income tax expense $25,000 Federal tax depreciation exceeds the depreciation deducted on the books by $5,000. What is the corporation's taxable income? a. $66,000 b. $90,000 c. $95,000 d. $103,000 36. Paolo Corp. generated the following income /(loss) since its 2018 inception: Powered by Cognero

Page 4

Name:

Class:

Date:

CH11 The Corporate Income Tax Year Income/(loss) 2018 (5,000) 2019 7,000 2020 14,000 2021 (20,000) If Paolo generates $4,000 of income in 2022, what is the NOL carryforward to 2023? a. $3,200 b. $20,000 c. $16,800 d. $800 37. Pierre Corporation generated a net operating loss in 2022. Which of the following are options for Pierre? a. Carry the loss back to 2019 at the earliest b. Carry the loss back to 2016 at the earliest c. Carry the loss forward only to 2022 or later with an 80% income limitation d. Carry the loss back 2 years and forward for 20 years 38. Nandina Corporation, a calendar year corporation, was formed and began operations on July 1 of the current year and incurred the following expenses during that year: State fees for incorporation $ 800 Legal and accounting fees incident to organization 1,700 Legal fees for the issuance of stock 600 Temporary directors' fees 1,100 If the corporation chooses not to expense but rather amortizes organizational costs over 180 months, what is the amount of its amortization expense for the current year? a. $20 b. $120 c. $240 d. $3,600 39. ABC Company owns 40 percent of JMT Company and 95 percent of DEM Company. In 2022, AMC receives an $80,000 dividend from JMT and a $40,000 dividend from DEM. Assuming that ABC has $1,000,000 of taxable income, calculate AMC's dividends received deduction for 2022. a. $92,000 b. $104,000 c. $80,000 d. $120,000 40. Repens Corporation has taxable income of $250,000 for 2022, including dividends of $60,000 received from 10 percent-owned domestic corporations. How much is Repens Corporation's dividends received deduction for 2022? a. $0 Powered by Cognero

Page 5

Name:

Class:

Date:

CH11 The Corporate Income Tax b. $30,000 c. $39,000 d. $60,000 41. In 2022, Bayside Fig Corporation has $350,000 of taxable income from operations and dividends of $50,000 received from 10 percent-owned domestic corporations. How much is Bayside Fig Corporation's dividends received deduction for 2022? a. $25,000 b. $32,500 c. $50,000 d. $175,000 42. In 2022, Folia Inc. had $400,000 of revenue from operations and $160,000 of dividends from nonaffiliated 15 percentowned domestic corporations. The corporation's deductible operating expenses totaled $410,000. What is Folia Inc.'s dividends received deduction for 2022? a. 80,000 b. $75,000 c. $120,000 d. $160,000 43. BigBiz, Inc. began business on April 1 of the current year and elected to file its income tax return on a calendar-year basis. The corporation incurred $1,200 in organizational expenditures. BigBiz decided to amortize the costs over 180 months. What is the maximum allowable deduction for amortization of organizational expenditures in the current year? a. $6.67 b. $60.00 c. $80.00 d. $1,200.00 44. For the year ended December 31, 2022, Octo Inc. reported net income before federal income tax expense of $800,000 per the corporation's books. This figure included the following items: Interest income on tax-exempt municipal securities Loss on sale of land acquired in 1998 as an investment Interest expense on loan to purchase tax-exempt municipal securities

$30,000 40,000 10,000

What is the taxable income of Octo Inc. for 2022? a. $800,000 b. $820,000 c. $830,000 d. $870,000 45. Which of the following items is generally a Schedule M-1 adjustment? a. Gross sales b. Salaries paid c. Federal income tax expense d. Rent payments Powered by Cognero

Page 6

Name:

Class:

Date:

CH11 The Corporate Income Tax 46. In general, estimated payments for calendar year-end corporations are due on what dates? a. March 15, June 15, September 15, and December 15 b. March 15, June 15, September 15, and January 15 of the following year c. April 15, June 15, September 15, and December 15 d. April 15, June 15, September 15, and January 15 of the following year 47. Which of the following is true regarding filing requirements? a. For all tax year-ends, the due date for filing a corporate tax return is the fifteenth day of the third month after year-end. b. A corporation with a tax year ending on June 30 can get a 7-month extension instead of the usual 6 months. c. Filing an extension for a corporate tax return also provides an extension for paying the corporation’s tax due. d. A corporation can wait to pay its tax liability without penalty when the return is filed.

48. For its year ended December 31, 2022, Cupressa Corp, an S corporation, had net income of $216,000 that included $180,000 of ordinary income from operations and a $36,000 net long-term capital gain. During 2021, a total of $90,000 was distributed to the corporation's nine equal shareholders, all of whom are on a calendar year tax basis. For 2022, what should each shareholder report? a. $10,000 ordinary income and $4,000 net long-term capital gain b. $20,000 ordinary income c. $20,000 ordinary income and $4,000 net long-term capital gain d. $24,000 ordinary income 49. Which of the following corporations is allowed to make an S corporation election? a. A U.S. corporation owned and operated by two U.S. citizens (individuals) b. A U.S. corporation owned by a Brazilian corporation c. A U.S. owned and operated corporation with 7,000 separate shareholders d. A U.S. owned and operated corporation with two classes of stock 50. Which of the following statements is true of S corporations? a. In the case of the death of a shareholder, the shareholder’s portion of the S corporation items is divided on a proportional basis to the other shareholders. b. S corporations have guaranteed payments to owners but do not have to pay wages for services provided by a shareholder. c. The amount of S corporation losses that shareholders of an S corporation may report on their tax return is limited to the basis of the stock plus any loans made by the shareholder to the corporation. d. If a taxpayer purchases stock in an S corporation from another shareholder during the year, the new shareholder may report the entire amount of any loss for the year attributable to the shares purchased.

51. Which of the following is a requirement for qualification as an S corporation? a. The corporation must be a domestic corporation. b. The corporation must have less than 25 shareholders. c. The corporation must have three classes of stock outstanding. d. The shareholders of the corporation must be U.S. citizens or nonresident aliens.

52. Amir, Kevin and Luis form BlueSky Company. Amir performs $45,000 of services for his 45 shares of the company.

Kevin transfers property with a basis of $5,000 for $75,000 of stock (75 shares). Luis contributes cash of $100,000 for his Powered by Cognero

Page 7

Name:

Class:

Date:

CH11 The Corporate Income Tax 100 shares. Which of them must recognize income in the year of the formation? a. Amir only b. Amir and Kevin c. Kevin only d. Luis and Kevin 53. On July 1, 2022, Grey formed PuzzleMajik Corporation. On that same date, Grey contributed $100,000 cash and transferred property with an adjusted basis of $60,000 to PuzzleMajik in exchange for 3,000 shares of the corporation's common stock. The property transferred had a fair market value of $75,000 on the date of the transfer. PuzzleMajik Corporation had no other shares of common stock outstanding on July 1, 2022. As a result of this transaction, what are Grey's basis in the stock and PuzzleMajik Corporation’s basis in the property (other than the cash), respectively? a. $160,000 and $60,000 b. $160,000 and $75,000 c. $175,000 and $60,000 d. $175,000 and $75,000 54. Terry forms the CampCor during the current year. They transfer property with a value of $700,000 to CampCor in exchange for 100 percent of the stock in the corporation. Terry's basis in the property transferred was $400,000, and the corporation assumed a $275,000 mortgage on the property. If the fair market value of the stock received by Terry is $425,000, what is the corporation's basis in the property received from Terry? a. $125,000 b. $275,000 c. $400,000 d. $450,000 55. Isabella and Hannah formed AlderInk on October 1, 2022. On the same date, Isabella paid $75,000 cash to AlderInk for 1,500 shares of the corporation’s common stock. Simultaneously, Hannah received 100 shares of AlderInk’s stock for services rendered. How much should Hannah include in her taxable income for 2022, and what will be the basis of her AlderInk stock?

Taxable Income a. $0 b. $0 c. $5,000 d. $5,000

Basis of Stock $0 $5,000 $0 $5,000

56. On July 1, of the current year, Roberto forms the NewYou Corporation. In exchange for 100 percent of the corporation's stock, Roberto contributes land with a fair market value of $100,000. Roberto acquired the land 5 years ago at a cost of $30,000. At the date of the contribution, the land is subject to a $10,000 mortgage, which the corporation assumes. What is the basis of the land to NewYou Corporation? a. $20,000 b. $30,000 c. $90,000 d. $100,000 57. Harry forms Nectarine Corporation during the current tax year. To form the corporation, Harry transfers assets having Powered by Cognero

Page 8

Name:

Class:

Date:

CH11 The Corporate Income Tax a fair market value of $650,000 to Nectarine Corporation for 100 percent of the corporation's stock. Harry's adjusted basis in the assets transferred was $375,000 and Nectarine Corporation assumed a $200,000 mortgage on the assets. If the fair market value of the stock received by Harry is $450,000, what is his basis in the stock received from the corporation? a. $175,000 b. $200,000 c. $375,000 d. $450,000 58. ImEx Corporation is an import-export corporation. ImEx has accumulated earnings of $475,000 and cannot establish a reasonable business need for any of that amount. What amount of the accumulated earnings tax will ImEx have to pay? a. $45,000 b. $40,000 c. $95,000 d. $65,000 59. What is the maximum amount of accumulated earnings that a corporation is allowed to accumulate, without regard to business needs, before the accumulated earnings tax is imposed? a. $150,000 for all corporations b. $150,000 for nonservice corporations only c. $250,000 for all corporations d. $250,000 for nonservice corporations only 60. Which of the following is exempt from the accumulated earnings tax, which is imposed on corporations for the accumulation of earnings in excess of reasonable business needs? a. Closely held corporations b. Widely held corporations c. Personal holding companies d. Personal service corporations

61. For the year ended June 30, 2022, the Rossum Corporation, a regular C corporation, has a long-term capital loss of $25,000. a. b.

Assuming that in addition to the capital loss, the corporation has taxable income, before capital gains and losses, of $25,000 for 2022, calculate the corporation's tax liability before any credits.

Assuming that in addition to the long-term capital loss of $25,000 the corporation has taxable income, before capital gains and losses, of $90,000 and a short-term capital gain of $10,000 for 2022, calculate the corporation's tax liability before any credits.

62. During 2022, Squamata Corporation, a regular C corporation, has $30,000 in ordinary income, a long-term capital loss of $20,000, and a short-term capital gain of $10,000. a. b.

Calculate Squamata Corporation's tax liability for 2022.

Explain the nature and amount of any carrybacks or carryforwards that the corporation is entitled to use.

Powered by Cognero

Page 9

Name:

Class:

Date:

CH11 The Corporate Income Tax

63. Calculate the 2022 corporate tax liability in each of the following circumstances: a. b. c.

X Corporation has taxable income of $250,000 for its current calendar tax year.

Y Corporation has $1,600,000 in taxable income for the current tax year.

Z Corporation has taxable income of $100,000, before capital gains and losses, a short-term capital loss of $30,000, and a long-term capital gain of $10,000 in the current tax year.

64. During 2022, AquaCare Corporation received dividends from 50 percent-owned domestic corporations in the amount of $100,000. a. b.

Assuming that in addition to the dividend income the corporation has gross income from operations of $250,000 and deductible operating expenses of $210,000, calculate the amount of the corporation's dividends received deduction for 2022.

If, instead of $250,000 in gross income from operations, the corporation has $200,000 in gross income from operations and the same amount of dividends and expenses, calculate the amount of the corporation's dividends received deduction for 2022.

65. Lager Corporation was formed on January 1, 2022. Calculate the Lager Corporation's calendar year taxable income or loss for 2022 given the following information: Gross receipts Cost of goods sold Dividend income (from 10 percent-owned domestic corporation) Interest income Business expenses (other than organizational costs and charitable contributions) Cash charitable contributions Organizational costs expensed

$255,000 150,000 35,000 10,000

Taxable income/(loss)

$

120,000 15,000 5,000

66. Peachtree Corporation is a regular calendar year corporation that contributes $55,000 cash to qualified charitable organizations during 2022. The corporation has net taxable income of $190,000 before deducting the contributions. a. b.

What is the amount of Peachtree Corporation's allowable deduction for charitable contributions for 2022?

What may the corporation do with any excess amount of contributions?

67. Java Corporation has book net income $90,000 for the current year. Included in this figure are the following items, which are reported on the corporation's Schedule M-1, Reconciliation of Income (Loss) per Books with Income per Return.

1.

2.

3.

4.

5.

Federal income tax expense Depreciation deducted on books, not deductible for tax purposes Deduction for 50 percent of meals expense not allowed for tax purposes Deduction for payroll tax penalties not allowed for tax purposes Tax-exempt interest income included in book income but not in tax return income

Powered by Cognero

$25,000 4,000 3,000 2,000 12,000 Page 10

Name:

Class:

Date:

CH11 The Corporate Income Tax Based on the above information, calculate Java Corporation's taxable income for the year. Show your calculations.

68. Katz Corporation had $20,000 of book income in the current year. The following is a list of differences between federal and book income and expenses: Federal income tax expense deducted for books $ 4,400 Depreciation deducted on books 3,000 Depreciation deducted on tax return 14,000 50 percent of meals expense not allowed as an expense for taxes 2,000 Charitable contributions carried over from prior years and deducted on the current year tax return 2,300 Current year taxable gain on an installment sale that was reported on the books in a previous year 5,000 Prepaid interest not deductible in the current year for tax purposes but claimed as a deduction for book income 10,000 purposes Nondeductible club dues 1,000 Based on the above information, calculate Katz Corporation’s federal taxable income for the year. Show your calculations.

69. Avocado Corporation paid $3,000 in estimated tax payments for the calendar year ended December 31, 2022. The corporation has an actual tax liability of $4,000 for the year. a. b. c.

If no extension is requested, when is the tax return due?

If an extension of time to file is requested and approved, when is the tax return due?

If an extension of time to file is requested and approved, when is the additional $1,000 of the 2022 tax due?

70. XYZ Corporation has a December 31 year-end. a. When is XYZ Corporation’s tax return due? b. When does XYZ Corporation need to make its estimated tax payments? c. Assuming that XYZ Corporation owes $5,000 on the original tax return due date and it files for an extension and is granted an automatic extension to file tax returns, what is the extended tax return date and when should taxes be paid?

71. During the current year, Jupiter Company, which is an S corporation, had the following items of income and expenses: Gross income from operations Gain on sale of business assets Qualified dividend income from investments Deductions: Salaries to employees Payroll taxes Rent Depreciation Contributions to United Way charity Foreign income tax paid on overseas business deals Distributions to the shareholders

$137,000 5,000 100 65,000 6,000 7,000 3,500 2,000 3,000 40,000

a. Calculate the net ordinary income. b. List all the other items that must be separately reported. c. If the S corporation is on a calendar year, when is the corporation’s tax return due?

Powered by Cognero

Page 11

Name:

Class:

Date:

CH11 The Corporate Income Tax 72. Dalton and Maylin each own 50 percent of Grandiflora Corporation, an S corporation with a calendar tax year. At the beginning of the tax year, Maylin and Dalton each have a basis in the stock of the corporation of $25,000. On June 30, 2022, Dalton sells their interest in the corporation to Benjamin for $200,000, and for 2022 Grandiflora Corporation has a loss of $90,000. a. b. c.

Calculate the amount of the corporation's loss that may be deducted by Dalton on their 2022 tax return.

Calculate the amount of the corporation's loss that may be deducted by Benjamin on his 2022 tax return.

Calculate the amount of the corporation's loss that may be deducted by Maylin on her 2022 tax return.

73. Faith, Gabriel, and Helen form FGH Corporation. In exchange for 300 shares of the corporation, Faith contributes property with a basis of $15,000 and a fair market value of $50,000 and is subject to a liability of $20,000, which the corporation assumed. Gabriel contributes property with a basis of $20,000, and a fair market value of $30,000 in exchange for 250 shares of stock of the corporation with a value of $25,000 plus $5,000 cash. Helen performs services for the corporation and receives $2,000 worth of stock (20 shares) in exchange for the services. a. b. c. d. e.

What is the amount of Faith's recognized gain or loss on the transaction?

What is Faith's basis in the stock of the corporation?

What is the corporation's basis in the property received from Faith?

What is the amount of Gabriel's recognized gain or loss on the transaction?

What is Gabriel's basis in the stock of the corporation?

74. Russell, Kim, Tao, and Sharon decide to form the Ca$hNow Corporation. In exchange for 40 percent of the stock, Russell contributed an apartment building with a fair market value of $700,000 and is subject to a liability of $300,000.

Russell's basis in the apartment building is $225,000. Kim contributed warehouse storage units worth $450,000 in exchange for 40 percent of the stock plus $50,000 in cash from the corporation. Her basis in the warehouse is $125,000.

Tao contributed $100,000 cash for 10 percent of the stock. Sharon is performing services worth $100,000 for 10 percent of the stock. a. What is the recognized gain or recognized income for each of the following?

1. Russell 2. Kim 3. Tao 4. Sharon b. What is the basis in the stock for each of the following?

1. Russell 2. Kim 3. Tao 4. Sharon c. What is the corporation’s basis in each of the following?

1. The apartment building 2. The warehouse 75. Healing Hands Health Care Corporation, a service corporation, has accumulated earnings of $375,000 and the corporation can establish a reasonable need for $125,000. Calculate the amount of the accumulated earnings tax, if any, that will be imposed on the corporation.

76. Great Gumball Corporation is a gumball producer. The corporation has accumulated earnings of $425,000, and it can establish a reasonable need for $360,000. Calculate the amount of the accumulated earnings tax, if any, that will be Powered by Cognero

Page 12

Name:

Class:

Date:

CH11 The Corporate Income Tax imposed on the corporation.

77. What is the purpose of Schedule M-1?

Powered by Cognero

Page 13

Name:

Class:

Date:

CH11 The Corporate Income Tax Answer Key 1. True 2. False 3. False 4. False 5. True 6. False 7. False 8. False 9. False 10. True 11. False 12. False 13. True 14. True 15. True 16. False 17. False 18. True 19. False 20. True 21. False 22. False 23. True 24. True 25. True Powered by Cognero

Page 14

Name:

Class:

Date:

CH11 The Corporate Income Tax 26. True 27. False 28. False 29. True 30. a 31. c 32. c 33. d 34. d 35. c 36. c 37. c 38. b 39. a 40. b 41. a 42. b 43. b 44. b 45. c 46. c 47. b 48. c 49. a 50. c 51. a Powered by Cognero

Page 15

Name:

Class:

Date:

CH11 The Corporate Income Tax 52. b 53. a 54. c 55. d 56. b 57. a 58. a 59. d 60. c 61. a. $5,250. (21% × $25,000) b. $18,900. ($90,000 × 21%)

62. a. $6,300. ($30,000 × 21%) b. $10,000 long-term capital loss. It becomes a short-term capital loss and can be carried back 3 years and forward 5 years to offset capital gains in those years.

63. a. $52,500. ($250,000 × 21%) b. $336,000. ($1,600,000 × 21%) c. $21,000. ($100,000 × 21%)

64. a. $65,000. ($100,000 × 65%) b. $58,500. Lesser of: 65% × ($200,000 − $210,000 + $100,000) or ($100,000 × 65%) 65.

Gross receipts Cost of goods sold Gross profit Dividend income Interest income Total income Business expenses Powered by Cognero

$ 255,000 (150,000) 105,000 35,000 10,000 150,000 (120,000) Page 16

Name:

Class:

Date:

CH11 The Corporate Income Tax Organizational costs Income before charitable contribution deduction Charitable contribution deduction (10% × $25,000) Income before dividends received deduction Dividends received deduction [Lesser of (50% × $35,000 = $17,500 or ($22,500 × 50% = $11,250)]

(5,000) 25,000 (2,500) 22,500 (11,250) $ 11,250

Taxable income/(loss)

66. a. $19,000. (10% × $190,000) b. The excess may be carried forward to the five succeeding tax years, subject to the 10 percent limitation.

67. $112,000. ($90,000 + $25,000 + $4,000 + $3,000 + $2,000 − $12,000) 68. $29,100. ($20,000 + $4,400 + $3,000 − $14,000 + $2,000 − $2,300 + $5,000 + $10,000 + $1,000) 69. a. April 15, 2023. (Note that when the filing date falls on a Saturday or a Sunday, the actual filing date is the next business day.) b. October 15, 2023. (Note that when the filing date falls on a Saturday or a Sunday, the actual filing date is the next business day.) c. April 15, 2023. (Note that when the filing date falls on a Saturday or a Sunday, the actual filing date is the next business day.)

70. a. April 15 of the following year (or the first business day thereafter if a weekend or holiday) b April 15, June 15, September 15, and December 15 c. The extended tax due date is October 15 of the following year, but the taxes owed should be paid by April 15 after the year end.

71. a. Ordinary income: Gross income from operations Less: Salaries Payroll taxes Rent Depreciation Net ordinary income b. Items that need to be separately reported: Gain on sale of business assets Qualified dividend income Charitable contributions to United Way Foreign income tax paid Distributions to the shareholders

$137,000 (65,000) (6,000) (7,000) (3,500) $ 55,500 $

5,000 100 2,000 3,000 40,000

c. March 15 of the following year

Powered by Cognero

Page 17

Name:

Class:

Date:

CH11 The Corporate Income Tax

72. a. $22,315. ($45,000 × 181 days ÷ 365 days) b. $22,685. ($45,000 × 184 days ÷ 365 days) c. $25,000. Maylin’s share of the corporation’s loss is $45,000; however, her deductible loss is limited to her $25,000 basis in the corporation’s stock.

73. a. $5,000 gain ($20,000 − $15,000) b. $0 ($15,000 + $5,000 − $20,000) c. $20,000 ($15,000 + $5,000) d. $5,000, boot received e. $20,000 ($20,000 − $5,000 + $5,000)

74. a. The gain recognized is as follows: 1. Russell’s recognized gain is $75,000 ($300,000 − $225,000).

2. Kim’s recognized gain is $50,000 (the cash received as boot).

3. Since Tao paid cash for his stock, he has no recognized gain.

4. Since Sharon is performing services, she needs to recognize income of $100,000, the value of her stock. b. The basis in the stock is as follows: 1. Russell’s stock basis is $0 ($225,000 − $0 + $75,000 − $300,000).

2. Kim’s stock basis is $125,000 ($125,000 − $50,000 + $50,000 − $0).

3. Tao’s stock basis is $100,000 ($100,000 − $0 + $0 − $0).

4. Sharon’s stock basis is $100,000, the amount of her services. c. The corporation’s basis is as follows: 1. Apartment building: $300,000 ($225,000 + $75,000).

2. Warehouse storage units: $175,000 ($125,000 + $50,000).

75. $45,000. [20% × ($375,000 − $150,000)] 76. $13,000. [20% × ($425,000 − $360,000)] 77. Schedule M-1 is included in corporate tax returns and is used to reconcile corporate book income to taxable income.

Schedule M-1 provides a summary of the items of income and expense which are treated differently for purposes of calculating book income and taxable income.

Powered by Cognero

Page 18

Name:

Class:

Date:

CH12 Tax Administration and Tax Planning

Indicate whether the statement is true or false.

1. The tax laws of the United States are administered by the Federal Trade Commission. a. True b. False 2. Taxpayers are required by law to maintain records to facilitate an IRS audit. a. True b. False 3. The IRS may issue summons for a taxpayer's bank account records. a. True b. False 4. Tax returns are processed at the IRS national office in Washington, DC. a. True b. False 5. Taxpayers who are unable to pay their taxes may enter into a payment plan with the IRS if the amount they owe is within certain limits. a. True b. False 6. The Wage and Investment Office of the IRS handles small business taxpayers. a. True b. False 7. As a result of an IRS audit, a taxpayer may be required to pay additional taxes, but the taxpayer is never paid a refund. a. True b. False 8. A "correspondence audit" by the IRS is conducted through the mail. a. True b. False 9. An "office audit" is an audit in which the revenue agent visits the taxpayer's office. a. True b. False 10. Tax returns are selected for audit through a random process known as the Discriminant Function System. a. True b. False 11. The Discriminant Function System is designed to identify tax returns that may contain errors. a. True b. False Powered by Cognero

Page 1

Name:

Class:

Date:

CH12 Tax Administration and Tax Planning 12. Interest paid on an underpayment of taxes (other than an underpayment of estimated taxes) is not subject to the consumer interest limitation. a. True b. False 13. If taxpayers have too much income tax withheld from their salaries during the tax year, the IRS will pay interest on the excess amount. a. True b. False 14. Tax penalties are not deductible by taxpayers. a. True b. False 15. The tax law contains a penalty for filing a "frivolous" tax return. a. True b. False 16. The IRS charges a fixed 10 percent interest rate on underpayments of taxes. a. True b. False 17. The statute of limitations for the deduction of a worthless security is 5 years. a. True b. False 18. The statute of limitations for a tax return generally is 3 years. a. True b. False 19. All paid tax return preparers must obtain a preparer tax identification number (PTIN). a. True b. False 20. Tax return preparers must enter the annual filing season program (AFSP). a. True b. False 21. Tax practitioners can be assessed a penalty for promoting an abusive tax shelter. a. True b. False 22. A tax preparer may be subject to a penalty for failing to provide a copy of the taxpayer's tax return to the client. a. True b. False Powered by Cognero

Page 2

Name:

Class:

Date:

CH12 Tax Administration and Tax Planning 23. The Taxpayer Bill of Rights is summarized in IRS Publication 1. a. True b. False 24. A taxpayer with an average tax rate of 20 percent who receives additional income of $20,000 will pay additional taxes of $4,000. a. True b. False 25. Tax evasion involves the use of illegal methods to reduce or avoid income tax. a. True b. False 26. A taxpayer's average tax rate is determined by dividing the total tax paid by the total income of the taxpayer. a. True b. False

Indicate the answer choice that best completes the statement or answers the question.

27. At which of the following IRS locations are tax returns processed? a. Regional offices b. Campus Processing Sites c. Local offices d. The national office 28. If taxpayers make all of their income from a job and various investments, which division of the IRS would likely investigate their returns if they were audited? a. Wage and Investment Division (W&I) b. Large and Midsize Business Office c. Small Business Office d. Criminal Investigation Office 29. Which of the following accounts for the majority of audits performed on individual taxpayers? a. Office audit b. Telephone audit c. Correspondence audit d. Field audit 30. A tax return with a large casualty loss would be most likely selected for audit through which method? a. The Discriminant Function System b. Information from an informant c. Information from another governmental agency d. The National Research Program Powered by Cognero

Page 3

Name:

Class:

Date:

CH12 Tax Administration and Tax Planning 31. Which of the following is not a possible result of an audit by the IRS? a. Payment of a refund to the taxpayer b. Payment of a deficiency by the taxpayer c. A fine levied against the tax preparer d. No change in the liability 32. Which of the following types of audit taxpayers is somewhat controversial because of the way in which taxpayers are selected? a. Discriminant Function System selected audit b. National Research Program selected audit c. Correspondence audit d. Office audit 33. In which type of audit are taxpayers required to bring their records to an IRS office? a. Office audit b. Field audit c. Correspondence audit d. Operational audit 34. Which of the following is true regarding the return audit process? a. The lower the DIF score a return gets, the higher the likelihood for audit. b. An office audit is performed at tax preparer's office. c. Seventy-five percent of taxpayers are audited every year. d. Returns may be selected for audit through related examinations.

35. Which of the following is the calculation of the failure-to-file penalties? a. Half of 1 percent (0.5 percent) of the tax due for each month late, limited to 25 percent of the taxes due b. Five percent of the tax due for each quarter late, limited to 25 percent of the taxes due c. Five percent of the tax due for each month or part of the month that it is late, limited to 25 percent of the taxes due d. Twenty-five percent of the tax due 36. Craig commits fraud on his tax return. It is determined that he was $40,000 deficient in his tax because of the fraud.

What would his penalty be? a. $500 b. $30,000 c. $40,000 d. $0 37. If a calendar year taxpayer's 2022 individual income tax return is mailed on June 15, when would the statute of limitations normally run out? a. June 15, 2025 b. June 15, 2026 c. April 15, 2025 d. April 15, 2026 Powered by Cognero

Page 4

Name:

Class:

Date:

CH12 Tax Administration and Tax Planning 38. Which of the following will still fall under the general rule of a 3-year statute of limitations on a tax return? a. Omission of a significant amount of gross income b. Filing a fraudulent tax return c. Failure to pay the tax due with the tax return d. Failure to file a tax return 39. Anthony deducts a bad debt on his 2022 tax return. How many years is the statute of limitations for the bad debt deduction? a. 0 years b. 3 years c. 6 years d. 7 years 40. Which of the following is not a reason a penalty may be assessed on a tax preparer? a. Failing to give the taxpayer the preparer’s workpapers b. Failing to keep a copy of the prepared return c. Endorsing or cashing a refund check issued to a taxpayer d. Failing to sign a tax return 41. Which of the following statements is true regarding the Taxpayer Bill of Rights? a. It directs taxpayers to tax preparers and lawyers to assist with the filing and appeals processes. b. It explains how the IRS was founded and how it operates. c. It states that a taxpayer is responsible for payment of only the correct amount of tax due, no more, no less. d. It explains the role of a tax preparer in the income tax filing process.

42. Which of the following statements best describes the purpose of the Taxpayer Bill of Rights? a. To provide the IRS with additional enforcement powers b. To grant to taxpayers the right to choose the time and method of payment of delinquent taxes c. To inform taxpayers of their rights in dealing with the IRS d. To inform taxpayers of the right methods for completing their income tax returns 43. Which of the following is the best definition of tax planning? a. Preparing a client’s tax return b. Planning taxpayers’ financial affairs in an effort to minimize tax liability c. Planning taxpayers’ financial affairs to find the best way to avoid tax by successfully bending tax law d. Researching complex tax issues 44. Patricia has taxable income of $40,000 on which she pays income tax of $4,604. If Patricia's taxable income increases by $2,000, she will pay an additional tax of $440. What is Patricia's marginal tax rate? a. 15.00 percent b. 14.84 percent c. 22.00 percent d. 25.00 percent Powered by Cognero

Page 5

Name:

Class:

Date:

CH12 Tax Administration and Tax Planning 45. Krista is a CPA who helps her clients minimize their overall tax liability. What function is she performing? a. Tax evasion b. Tax deferral c. Tax planning d. Tax preparation 46. Piper has taxable income of $30,000 on which the income tax is $4,500. If Piper’s taxable income increases to $35,000, the income tax will increase to $5,100. Which of the following is true? a. Piper’s average tax rate is higher than the marginal rate. b. Piper’s average tax rate 12 percent. c. Piper's marginal tax rate is 15% percent. d. Piper's average and marginal tax rates are the same.

47. Which characteristic of tax planning involves deferring payment of taxes to a future year? a. Jurisdiction b. Timing c. Entity d. Character

48. Identify the part of the IRS structure that each of the following describes. a. Establishes policy, supervises the activities of the organization, and acts in an advisory capacity to the Treasury Department on legislative matters b. Processes the information from tax documents c. Services taxpayers with assets of $10 million or more d. Services individuals who file Form 1040 Schedules C, E, or F e. Services taxpayers who pay most of their taxes through withholding 49. In the following independent situations, is it better to make an installment agreement with the IRS, make an offer in compromise with the IRS, or ask for an extension of time to pay any taxes owed? a. A taxpayer is unlikely to pay the tax amount that is owed. b. Using monthly payments, a taxpayer can afford to pay off the tax owed within 2 years. c. A taxpayer can pay off the tax owed after selling a boat that is up for sale.

50. What type of audit (office, field or correspondence) is demonstrated in the following examples? a. An IRS agent views PayCo’s books and records at the PayCo headquarters. b. Sydney receives a letter from the IRS asking her to provide documentation to support her charitable contributions on her tax return filed in the prior year. c. Mr. and Mrs. Dower are asked to bring their supporting documents to the downtown IRS office so that an IRS agent may review their tax return which was filed 2 years ago.

51. List three different ways a tax return may be selected for an audit.

52. Lina filed her individual income tax return on its due date but failed to pay $1,000 in taxes that were due with the return. Lina promptly paid the taxes upon receipt of a notice and demand for payment. If Lina pays the taxes exactly 5 months late, calculate the amount of her failure-to-pay penalty.

Powered by Cognero

Page 6

Name:

Class:

Date:

CH12 Tax Administration and Tax Planning 53. The IRS determined that Javaris underpaid his 2020 tax liability by $6,000 due to negligence. In 2022, Javaris pays $1,000 of interest related to the underpayment and the full amount of any penalties assessed by the IRS. a. b.

Calculate the amount of the accuracy-related penalty that could be assessed by the IRS in this situation.

What part of the deficiency, income taxes, interest, and penalty, is deductible by Javaris on his current tax return?

Explain.

54. For each of the following situations, indicate the nature and amount of the penalty that could be imposed. (The penalties include both tax practitioner penalties and taxpayer penalties.)

Description of the Penalty a. Kyle files his tax return on the original due date and pays the entire balance of tax due of $5,000. He did not pay any estimated tax during the year and had no withholding. His prior year tax return showed a tax liability of $12,000 (do not calculate the penalty).

Penalty Amount n/a

b. Drew writes a check for $300 in payment of his income taxes.

Drew knows he does not have sufficient funds in his account to cover the check. c. Enrique has a $10,000 tax deficiency on his 2022 tax return due to civil fraud. d. Vladimir prepares a tax return for Oakley but does not keep a copy of the tax return. e. Priscilla, a self-employed accountant, prepares a tax return for Nathan. She signs the return but does not include her preparer tax identification number on the tax return as required. f. Noah prepares a tax return for his client who requests that Noah disregard a current tax law that would increase his tax liability by $17,000. Noah agrees to do so since he does not want to lose this important client.

55. Answer the following: a.

b.

Geoffrey filed his tax return 2 months and 8 days late and had not requested an extension of time for filing. Geoffrey's return indicated that he is to receive a $600 refund in taxes. Calculate the amount of Geoffrey's penalty for failure to file his tax return on time, assuming the failure to file was not fraudulent.

Joshua filed his individual income tax return 3½ months after it was due. He had not requested an extension of time for filing. Along with his return, Joshua remitted a check for $1,000, which was the balance of the taxes he owed with his return. Disregarding interest, calculate the total penalty that Joshua will be required to pay, assuming the failure to file was not fraudulent (and that he is not subject to failure-to-pay penalties).

56. Ellie did not file her tax return or pay her taxes for 2022 until November of 2023. She paid the following amounts to the IRS related to the late filing and payment of tax: Powered by Cognero

Page 7

Name:

Class:

Date:

CH12 Tax Administration and Tax Planning Interest Underpayment of estimated tax penalty Failure-to-file and failure-to-pay penalties

$500 350 1,700

What amount of the above items may be deducted on Ellet's 2023 individual income tax return? Explain.

57. Indicate the date the statute of limitations would run out on each of the following individual tax returns. a. b. c. d. e.

A 2022 tax return filed on April 15, 2023, which omitted $20,000 of income (total gross income shown on the tax return was $40,000) A 2022 tax return filed on April 15, 2023, which contained a large bad debt deduction A 2020 tax return that was never filed A 2022 tax return filed on April 15, 2023 A fraudulent 2022 tax return filed on April 15, 2023

58. Indicate the date that the statute of limitations would run out on the following situations: a. The IRS assesses additional taxes for a 2020 tax return audit on May 5, 2022. Until what date can the IRS collect the tax? b. On April 1, 2022, the IRS asks for and the taxpayer agrees to an additional year from April 1, 2022, to complete an audit for a 2018 tax return that was filed on March 9, 2019. c. Karim reported $10,000 of worthless debt on his 2021 tax return, which he filed on August 3, 2022. d. Taylor files their 2022 tax return on February 25, 2023. e. Jaylen omits 7 percent of his income on his 2022 tax return, which he filed on July 22, 2023.

59. What are the requirements that an unenrolled preparer needs to do in order to participate in the Annual Filing Season Program?

60. For the following independent situations, list who (the IRS, the taxpayer, the party who initiates the case, or both sides) has the burden of proof in most civil tax cases: a. A tax case involving a penalty b. A tax case involving a trust with net worth of $8.3 million c. A taxpayer who has credible evidence, maintains records, and cooperates with reasonable IRS requests d. The IRS using statistics to reconstruct an individual’s income 61. Mark with a “Yes” if the following statement is true and is in Publication 1, The Taxpayer Bill of Rights. Mark with a “No” if the following statement is false or is not addressed in Publication 1. a. There is a phone number to call to have tax questions answered. b. The IRS may contact a neighbor, bank, employer, or employees in order to obtain the information. c. Only the taxpayer has the right to represent themselves in front of the IRS. d. The taxpayer has recourse if the IRS does not resolve issues properly and in a timely manner.

62. Mark with a “Yes” if the following statement is true and is in Publication 1, The Taxpayers Bill of Rights. Mark with a “No” if the following statement is false or is not addressed in Publication 1. a. If you do not agree with the IRS examiner’s proposed changes in an audit, you must go directly to the court system to resolve the issue.

Powered by Cognero

Page 8

Name:

Class:

Date:

CH12 Tax Administration and Tax Planning b. If a taxpayer is due a refund, but did not file a return, then the IRS uses statistics to reconstruct an individual’s income in order to compute the refund for the taxpayer. c. The tax law generally provides for interest on your refund if it is not paid within 45 days of the date you filed your return or filed your claim for refund. d. Publication 1 explains how to file an amended tax return.

63. Kendall is considering the purchase of a home. She has saved $22,000 for a down payment on a home and will finance the remainder of the purchase price with a home mortgage loan. Kendall currently rents an apartment for $1,200 per month and does not anticipate an increase in her monthly income. She wants to make sure that the monthly payment on her new home does not exceed $1,200, after-tax. Kendall has a marginal tax rate of 25 percent and an average tax rate of 22 percent. Assuming the monthly mortgage payment (before-tax) will be equal to 1 percent of the initial mortgage balance and the entire amount of each monthly payment will be deductible home mortgage interest, what is the maximum amount that Kendall can spend on a new home?

64. Stephanie has taxable income of $48,200 and a tax liability of $6,358. If Stephanie’s income increases by $4,000, her tax liability will be $7,238. a. What is her average tax rate on the $48,200 of income? b. What is her marginal tax rate?

65. A taxpayer made estimated tax payments in excess of the tax due for the year but failed to file a tax return. Since the taxes were paid in full, would there be a failure-to-file penalty? Why or why not?

66. What is the difference between tax avoidance and tax evasion?

Powered by Cognero

Page 9

Name:

Class:

Date:

CH12 Tax Administration and Tax Planning Answer Key 1. False 2. True 3. True 4. False 5. True 6. False 7. False 8. True 9. False 10. False 11. True 12. False 13. False 14. True 15. True 16. False 17. False 18. True 19. True 20. False 21. True 22. True 23. True 24. False 25. True Powered by Cognero

Page 10

Name:

Class:

Date:

CH12 Tax Administration and Tax Planning 26. True 27. b 28. a 29. c 30. a 31. c 32. b 33. a 34. d 35. c 36. b 37. b 38. c 39. d 40. a 41. c 42. c 43. b 44. c 45. c 46. a 47. b 48. a. Commissioner of Internal Revenue b. IRS Campus Processing Site c. Large Business and International Division d. Small Business/Self-Employed Division e. Wage & Investment Division 49. a. An offer in compromise Powered by Cognero

Page 11

Name:

Class:

Date:

CH12 Tax Administration and Tax Planning b. Installment agreement c. Ask for an extension of time to pay the taxes owed 50. a. Field audit b. Correspondence audit c. Office audit 51. Any of the following are acceptable responses: 1. By the Discriminant Function (DIF) System (i.e., computerized statistical sampling technique) 2. Apparent reporting errors on the face of the return 3. By an informant 4. Through other governmental agencies (i.e., matching program) 5. News items 6. Associated tax returns 7. Special audit research program (i.e., sampling to test and encourage correct reporting) 8. Taxpayer-initiated action such as claim for refund 52. $25. ($1,000 × 0.5% × 5 months) 53. a. b.

$1,200. (20% × $6,000) $0. None of the amounts are deductible. The interest is considered consumer interest, which is completely disallowed. The negligence penalty and the tax liability are also not deductible.

54. a. Underpayment of estimated tax; the amount of the penalty is dependent on the amount of the underpayment, the period of the underpayment, and the interest rate(s) applicable for the period(s) of underpayment b. Bad check; $25 c. Fraud penalty; $7,500 d. Failure to keep a copy of the prepared return; $55 e. Failure to furnish preparer's identifying number; $55 f. Willful understatement penalty; $5,000 (less the $1,000 penalty for unrealistic positions, if assessed) 55. a. b.

$0, since no taxes are due with the return $450. Since Joshua failed to file his tax return within 60 days of its due date, the minimum failure-to-file penalty is the lesser of $450 or the total of taxes due with the tax return ($1,000).

56. $0. The interest is consumer interest and not deductible; the penalties are considered additional taxes and are not deductible.

57. a.

April 15, 2029. the statute of limitations is increased to 6 years for omitting more than 25 percent of gross income shown on the return.

Powered by Cognero

Page 12

Name:

Class:

Date:

CH12 Tax Administration and Tax Planning b. c. d. e.

April 15, 2026, except for the bad debt deduction, which is April 15, 2030.

No statute of limitations applies.

April 15, 2026.

No statute of limitations applies.

58. a. May 5, 2032 b. April 1, 2023 c. August 3, 2025, except for the worthless debt deduction, which is August 3, 2029 d. April 15, 2026 e. July 22, 2026 59. In order to participate in the Annual Filing Season Program, an unenrolled preparer needs to complete 18 hours of continuing education, which includes at least 6 hours of a federal tax refresher course and 2 hours of ethics. The preparer also needs to pass a knowledge-based exam administered by the course provider.

60. a. The IRS b. The taxpayer c. The IRS d. The IRS 61. a. Yes b. Yes c. No d. Yes 62. a. No b. No c. Yes d. No 63. $182,000, determined as $22,000 down payment + $160,000 mortgage loan. The amount of the mortgage loan is calculated as follows: $1,200 (maximum after-tax payment possible) ÷ (100% − 25% marginal tax rate) = $1,600 maximum monthly payment possible, before tax. Monthly payment of $1,600 represents 1 percent of the mortgage balance; therefore, the mortgage balance must be $160,000.

64. a. 13.19%. ($6,358 ÷ $48,200) b. 22%. [($7,238 − $6,358) ÷ $4,000] 65. The penalty for failure to file a tax return is computed as a percentage of the net tax due on the unfiled tax return. If there is no tax due, there is no penalty for failure to file.

66. Tax avoidance consists of using provisions of tax law in legal ways to minimize taxes. Tax evasion is the use of illegal procedures to reduce taxes.

Powered by Cognero

Page 13