Concepts In Federal Taxation 2016, 23rd Edition By Murphy – Test Bank A+

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Concepts In Federal Taxation 2016, 23rd Edition By Murphy – Test Bank A+

Name: Concepts In Federal Taxation 2016, 23rd Edition By Murphy – Test Bank A+
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SKU: Concepts In Federal Taxation 2016, 23rd Edition By Murphy – Test Bank A+

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1. To be deductible, meals and entertainment must be both an ordinary and necessary business expense and must be either directly related to or associated with the active conduct of an activity for which the taxpayer has a business purpose.

	a.	True
	b.	False

ANSWER:

True

2. The Big Easy Company leases a luxury box and purchases 20 tickets to the New Orleans Saints home games. The entire amount is deductible as an entertainment expense as long as all the requirements are met.

	a.	True
	b.	False

ANSWER:

False

3. A taxpayer may use either the actual cost method or the standard mileage rate for deducting auto expenses.

	a.	True
	b.	False

ANSWER:

True

4. The actual cost method is a more-flexible way to compute the auto expense deduction and often results in a larger tax savings.

	a.	True
	b.	False

ANSWER:

True

5. To be away overnight requires the taxpayer to be away from their tax home for more than 24 hours.

	a.	True
	b.	False

ANSWER:

False

6. A taxpayer can deduct multiple gifts to a single customer as long as the total value of all gifts to that customer does not exceed $25.

	a.	True
	b.	False

ANSWER:

True

7. To be deductible, employee compensation must be for services actually performed by the employee and the amount must be reasonable.

	a.	True
	b.	False

ANSWER:

True

8. Business and nonbusiness bad debts are both deductible as a short-term capital loss.

	a.	True
	b.	False

ANSWER:

False

9. Discovery, Inc., a cash-basis consulting firm, can deduct a twelve-month insurance premium in the year the premium is paid even though the policy remains in effect into the following year.

	a.	True
	b.	False

ANSWER:

True

10. Legal expenses are generally deductible if they have a business purpose; they are generally not deductible if they originate from a personal transaction.

	a.	True
	b.	False

ANSWER:

True

11. If an employer reimbursement plan is an accountable plan, for an expense that is fully reimbursed the employee does not have to report either the expense or the reimbursement .

	a.	True
	b.	False

ANSWER:

True

12. 50% of the self-employment tax is deductible as a miscellaneous itemized deduction from adjusted gross income.

	a.	True
	b.	False

ANSWER:

False

13. In 2015, a husband and wife who are less than 50 and qualify may contribute $12,000 to two separate IRA accounts as long as their total income exceeds $12,000. The total amount contributed to each account cannot exceed $6,000.

	a.	True
	b.	False

ANSWER:

False

14. Danielle graduated from State University in 2014. She paid $2,100 of interest during 2015 on her qualified educational loan. The full amount is deductible.

	a.	True
	b.	False

ANSWER:

True

15. For moving expenses to be deductible the distance test must be met, which requires that the commuting distance from the old residence to the new job must be 50 miles further than the commuting distance was to the old job.

	a.	True
	b.	False

ANSWER:

True

16. Donald had a party to publicize the opening of his new accounting office. He invited community and business leaders to his office where food and beverage of $4,000 was served along with $1,000 of entertainment. How much of the total cost can Donald deduct?

	a.	$- 0 –
	b.	$2,500
	c.	$3,000
	d.	$4,500
	e.	$5,000

ANSWER:

17. Larry is a self-employed insurance salesperson. He decides to take his best customer to a Pacers basketball game. Larry is able to buy two floor seat tickets for $500 each. The face amount of the tickets is $200 each. How much of the total cost can Larry deduct?

	a.	$- 0 –
	b.	$ 200
	c.	$ 400
	d.	$ 500
	e.	$1,000

ANSWER:

18. The Wondercress Advertising agency rents a skybox at the Metrodome where the Minnesota Vikings plays its home games. The cost of the skybox for the season is $60,000 and includes ten tickets to each game. The team plays 8 games a year at the arena. The most expensive non-luxury box seat is $125. After acquiring a new advertising client, the president of the agency invites 9 business associates to watch a game in the company skybox. Food and drinks cost $900. What amount can Wondercress deduct as meal and entertainment expense?

	a.	$- 0 –
	b.	$1,075
	c.	$2,100
	d.	$2,150
	e.	$4,200

ANSWER:

19. The Crown Howe Accounting firm rents a skybox at Lucas Oil Field where the Indianapolis Colts play their home games. The cost of the skybox for the season is $80,000 and includes 8 tickets to each game. The team plays 10 games a year at the arena. The most expensive non-luxury box seat is $200. After acquiring a new accounting client, the Managing partner invites 5 business associates to watch a game in the firm skybox. Food and drinks cost $800. What amount can Crown Howe deduct as meal and entertainment expense?

	a.	$1,000
	b.	$1,200
	c.	$2,000
	d.	$2,400
	e.	$4,400

ANSWER:

20. After negotiating a new supply contract with Jim, Beth takes him to dinner at the Magnolia Cafe. The dinner costs $94. The amount includes tip ($15) and sales tax ($5). Cab fare to and from the restaurant is $20. How much can Beth deduct for the evening’s expenditures?

	a.	$ 47
	b.	$ 52
	c.	$ 67
	d.	$ 94
	e.	$114

ANSWER:

21. Olga is a technical sales consultant for Interactive Systems Corporation (ISC) based in San Diego. While on business in Boise, she entertains several clients at a cost of $600. When she returns to San Diego, Olga gives ISC receipts and other information to account for the entertainment expense. ISC reimburses Olga $600. How much can Olga and ISC deduct?

Olga ISC

	a.	$- 0 – $- 0 –
	b.	$- 0 – $300
	c.	$- 0 – $600
	d.	$300 $- 0 –
	e.	$600 $300

ANSWER:

22. Sandra, who owns a small accounting firm, pays $1,500 to the local country club for food and entertainment for her annual employee Christmas party. How much of the $1,500 in meals and entertainment cost can Sandra deduct?

	a.	$- 0 –
	b.	$500
	c.	$750
	d.	$1,000
	e.	$1,500

ANSWER:

23. Rodrigo works as a salesperson for a auto parts manufacturer. His job requires that he spend most of his time outside the office calling on customers. In addition, to supplement his income he works 1 night a week and on weekends as a waiter at an exclusive seafood restaurant in the city. During the year, he keeps the following record of his travel:

	Miles
Home to office	850
Office to home	425
Office to restaurant	300
Restaurant to home	1,200
Home to restaurant	725
Office to customers to office	7,100
Customers to restaurant	400
Total miles	11,000

If he uses the standard mileage rate, what amount can she deduct as a business automobile expense?

	a.	$3,621
	b.	$3,774
	c.	$3,941
	d.	$4,485
	e.	$6,105

ANSWER:

24. Donna is an audit supervisor with the IRS and on January 4, 2015 she uses her car in the following manner.

Personal residence to her office at the IRS.	8 miles
IRS office to X Corp to supervise new audit activities.	10 miles
X Corp to Y Corp to supervise ongoing audit activities	6 miles
From Y Corp. to personal residence	7 miles

What amount of Donna’s mileage for this day is qualified business mileage?

	a.	10 miles.
	b.	16 miles.
	c.	17 miles.
	d.	23 miles.
	e.	31 miles.

ANSWER:

25. Walker, an employee of Lakeview Corporation, drives his automobile 18,000 business miles during 2015. He pays tolls of $145 while traveling on business. What amount can Walker deduct as unreimbursed transportation expenses before considering any limitations on itemized deductions?

	a.	$10,350 for AGI.
	b.	$10,495 for AGI.
	c.	$10,350 from AGI.
	d.	$10,495 from AGI.

ANSWER:

26. Penny owns her own business and drives her car 12,000 miles a year for business and 3,000 miles a year for commuting and personal use. She wants to claim the largest tax deduction possible for business use of her car. Her total expenses related to her auto for 2015 are as follows:

Gas, oil, and maintenance	$4,050
Insurance	720
Interest on car loan	500
Depreciation	2,960
License	80
Parking fees and tolls (100% business)	130

Penny’s total deduction for business use of the auto in 2015 is:

	a.	$6,378
	b.	$6,778
	c.	$6,850
	d.	$7,030
	e.	$7,310

ANSWER:

27. Mercedes is an employee of MWH company and drives her car 12,000 miles a year for business and 3,000 miles a year for commuting and personal use. She is not reimbursed by her employer. She wants to claim the largest tax deduction possible for business use of her car, before any limitations on itemized deductions. Her total auto expenses for 2015 are as follows:

Gas, oil, and maintenance	$4,600
Insurance	720
Interest on car loan	500
Depreciation	2,960
License	80
Parking fees and tolls (100% business)	130

Mercedes’s total 2015 deduction for automobile use is:

	a.	$6,420
	b.	$6,818
	c.	$6,790
	d.	$7,030
	e.	$7,250

ANSWER:

28. Alfred uses his personal automobile in his business of selling party supplies to local businesses. He bought a new car in 2015 and drove it a total of 20,000 miles of which 2,000 miles were for commuting and other personal uses. Actual gas, oil, repairs, licensing, insurance, and depreciation totaled $11,000 for 2015. Actual parking expenses for business were $200. What is the maximum amount Alfred can deduct for 2015?

	a.	$9,750
	b.	$10,100
	c.	$10,170
	d.	$10,550
	e.	$11,200

ANSWER:

29. Lester uses his personal automobile in his business of selling insurances. He bought a new car in 2015 and drove it a total of 30,000 miles of which 3,000 miles were for commuting and other personal uses. Actual gas, oil, repairs, licensing, insurance, and depreciation totaled $16.500 for 2015. Actual parking expenses for business were $200. What is the maximum amount Lester can deduct for 2015?

	a.	$13,050
	b.	$13,970
	c.	$14,850
	d.	$15,050
	e.	$15,725

ANSWER:

30. During 2015, Marsha, an employee of G&H CPA firm, drove her car 24,000 miles. The detail of the mileage is as follows:

Personal Use	3,000 miles
Transportation between home and office	3,000 miles
Transportation to and from clients’ offices	18,000 miles

Marsha’s 2015 records show that her car expenses totaled $14,320. The details of the expenses are as follows:

Gas, oil, and repairs	9,260
Insurance and licensing	1,500
Depreciation	2,960
Interest on car loan	400
Tolls and parking at clients’ offices	200

What is the amount of her deduction for her use of the car?

	a.	$9,000
	b.	$9,990
	c.	$10,490
	d.	$10,670
	e.	$10,790

ANSWER:

31. In 2015, Eileen, a self-employed nurse, drives her car 20,000 miles, of which 12,000 miles pertain to business. Expenses concerning the car include the following:

Gas and oil	$5,720
Auto license tag	90
Insurance	900
Repairs	700
Tires	400
Parking during business use	300
Tolls during business use	150
Depreciation	2,960

Assuming Eileen purchases the car in 2015 and she wants to use the most advantageous method to determine her 2015 deduction for automobile expense, what amount can Eileen deduct as auto expenses?

	a.	$5,964
	b.	$6,780
	c.	$6,912
	d.	$7,350
	e.	$11,220

ANSWER:

32. Which of the following business expenses is/are subject to a 50% deduction limit for 2015?

I.	Meals while traveling
II.	Lodging while traveling

	a.	Only statement I is correct.
	b.	Only statement II is correct.
	c.	Both statements are correct.
	d.	Neither statement is correct.

ANSWER:

33. Which of the following business expenses is/are subject to a 50% deduction limit for 2015?

I.	Gifts
II.	Incidental expenses while traveling

	a.	Only statement I is correct.
	b.	Only statement II is correct.
	c.	Both statements are correct.
	d.	Neither statement is correct.

ANSWER:

34. Arlene, a criminal defense attorney inherits $500,000 from her grandmother. Unsure of how to invest the money, Arlene attends a three-day investment seminar in New York. Arlene attends all the sessions and receives a certificate for successfully completing the seminar. Her expenses to attend the seminar are as follows:

Airfare	$450
Hotel daily rate	110
Meals @ $40 per day	40
Incidentals @ $15 per day	15
Entertainment	140

What amount may she deduct as travel expenses for the seminar?

	a.	$- 0 –
	b.	$780
	c.	$825
	d.	$885
	e.	$955

ANSWER:

35. Julie travels to Mobile to meet with a client. While in Mobile, she spends 4 days meeting with the client and one-day sightseeing. Her husband Harry goes with her and spends all 5 days sightseeing and playing golf. The cost of the trip is as follows:

Airfare	$540 for each person.
Lodging at hotel	$150/day (Single Occupancy Rate = $125).
Meals	$75/day for each person.
Incidental expenses	$20/day for Julie. $15/day for Harry.

If Julie is self-employed, what is the amount of the deduction she may claim for the trip?

	a.	$730
	b.	$1,270
	c.	$1,370
	d.	$1,420
	e.	$1,520

ANSWER:

36. Carlotta pays $190 to fly from Santa Fe to Denver. She spends three days finalizing a contract with the management of El Rancho Restaurant for the delivery of green chili in the upcoming year. Because she finalized the contract, Carlotta spends two-days attending the National Western Stock Show. Hotel costs are $108 per night and meals are $22 per day. How much can Carlotta deduct as business expenses from her trip?

	a.	$190
	b.	$514
	c.	$547
	d.	$580
	e.	$763

ANSWER:

37. Jason travels to Miami to meet with a client. While in Miami, he spends 2 days meeting with his client and 3 days sightseeing. Mary, his wife, goes with him and spends all 5 days sightseeing and shopping. The cost of the trip is as follows:

Airfare	$540 for each person.
Lodging at hotel	$150 per day (same rate for single and double rooms).
Meals	$75 per day for each person.
Incidental expenses	$20 per day for Jason. Mary kept no records.

If Jason is self-employed, what is the amount of the deduction he may claim for the trip?

	a.	$- 0 –
	b.	$415
	c.	$490
	d.	$955
	e.	$1,765

ANSWER:

38. Ernest went to Boston to negotiate several new contracts with clients. His airfare was $400 and he spent $150 per day on lodging, $40 per day on meals, and a total of $60 on cab fare.

I.	If Ernest spends 2 days on business and 3 days on personal activities, he can deduct $160 of his airfare.
II.	If Ernest spends 3 days on business and 2 days on personal activities, he can deduct $120 of the meal costs.

	a.	Only statement I is correct.
	b.	Only statement II is correct.
	c.	Both statements are correct.
	d.	Neither statement is correct.

ANSWER:

39. Caroline is a doctor in Little Rock. She travels to Atlanta to attend a two-day seminar for health professionals about investing in real estate. Transportation expenses are $400, the hotel cost $104/day, and meals cost $50/day. How much can Caroline deduct for travel to the seminar?

	a.	$- 0 –
	b.	$258
	c.	$308
	d.	$658
	e.	$708

ANSWER:

40. Carter is a podiatrist in Minneapolis. He travels to Milwaukee to attend a two-day seminar for health professionals about investing in commodities. Transportation expenses are $140, the hotel cost $125/day, and meals cost $60/day. How much can Carter deduct for travel to the seminar?

	a.	$- 0 –
	b.	$140
	c.	$390
	d.	$450
	e.	$510

ANSWER:

41. Francine operates an advertising agency. To show her appreciation to her 10 best customers, she sends a box of fancy chocolate, costing $75 a box, to each of them. How much of the cost of the chocolates can Francine deduct as a business gift?

	a.	$- 0 –
	b.	$125
	c.	$250
	d.	$375
	e.	$750

ANSWER:

42. Kadian purchases a block of 10 tickets to next Saturday’s basketball game. The tickets cost $45 each. He keeps two tickets for himself and gives the remaining tickets to his business customers. Each customer receives two tickets, and Kadian told all of them he would see them Saturday night. How much can Kadian deduct?

	a.	$- 0 –
	b.	$180
	c.	$200
	d.	$360
	e.	$450

ANSWER:

43. Which of the following information is not required for substantiation of business entertainment expenditures?

	a.	Time and place of event.
	b.	Specific business purpose of the event.
	c.	Receipt to provide evidence of amount of expenditure.
	d.	Identity of, and business relationship to, those persons attending the event.
	e.	All of the above information is required to substantiate business entertainment.

ANSWER:

44. Entertainment, auto, travel, and gift expenses are subject to strict documentation requirements. Taxpayers are required to keep records that show

I.	The business purpose of the event.
II.	The time and place of the event.

	a.	Only statement I is correct.
	b.	Only statement II is correct.
	c.	Both statements are correct.
	d.	Neither statement is correct.

ANSWER:

45. George is a full-time student at Indiana State University majoring in accounting. He works 12 to 20 hours per week at a local CPA firm inputting data for spreadsheets to prepare monthly financial statements for the firm’s clients. George’s tuition, fees, books, and supplies related to his education are $3,000 for the current year.

I.	The educational costs are deductible from AGI because they prepare him for a new trade or business.
II.	The education costs are deductible because it is part of a program that will qualify George to become a CPA.

	a.	Only statement I is correct.
	b.	Only statement II is correct.
	c.	Both statements are correct.
	d.	Neither statement is correct.

ANSWER:

46. Safina, a single taxpayer with adjusted gross income of $100,000, works as an engineer for the Wabash Corporation. The corporation reimburses all its employees 80% of tuition, fees and books for courses taken at the local university. Safina incurs $8,000 of expenses and can deduct the remaining 20% of the education expense

I.	Only if the course improves her skills as an engineer.
II.	Is not a deduction for adjusted gross income.

	a.	Only statement I is correct.
	b.	Only statement II is correct.
	c.	Both statements are correct.
	d.	Neither statement is correct.

ANSWER:

47. Matthew, a single taxpayer with adjusted gross income of $90,000, works as a computer programmer for the Novak Corporation. The corporation reimburses all its employees 50% of tuition, fees and books for courses taken at the local university. Matthew incurs $6,000, is reimbursed $3,000, and can deduct the remaining $3,000 of the education expense

I	As a deduction for adjusted gross income.
II.	Only if the course is required by state law to continue in his current job.

	a.	Only statement I is correct.
	b.	Only statement II is correct.
	c.	Both statements are correct.
	d.	Neither statement is correct.

ANSWER:

48. Nora is the CEO of the publicly traded Micro Tech Corporation. The company paid her a salary of $1,030,000 and made mortgage payments of $30,000 on her behalf. How much is deductible as compensation expense?

	a.	$- 0 –
	b.	$ 510,000
	c.	$1,000,000
	d.	$1,060,000
	e.	$1,030,000

ANSWER:

49. Which of the following taxpayers can claim a business bad debt deduction for the current year?

I.	Johnson is a dentist using the cash basis of accounting. He has accounts receivable from patients totaling $7,800 that are more than 90 days past due.
II.	George owns and operates a sporting goods store and uses the accrual method of accounting. He has several customers who have owed him money for more than 10 months.

	a.	Only statement I is correct.
	b.	Only statement II is correct.
	c.	Both statements are correct.
	d.	Neither statement is correct.

ANSWER:

50. Which of the following taxpayers can claim a business bad debt deduction for the current year?

I.	Sylvia lent her neighbor $4,000 to put a new roof on his home. Because they have been friends for over 15 years, Sylvia trusted her neighbor to pay her back and didn’t make him sign a note with interest. The neighbor has left town and Sylvia will not get any of her money back. Her loss is properly related to this year using the cash basis of accounting.
II.	Saul is an attorney using the cash basis of accounting. One of his clients is short of money to pay the utilities in the office building Saul rents from him. Saul advances the client $5,000. Saul has just learned that the client has filed bankruptcy and that Saul will not be repaid for any part of the loan.

	a.	Only statement I is correct.
	b.	Only statement II is correct.
	c.	Both statements are correct.
	d.	Neither statement is correct.

ANSWER:

51. Peter, proprietor of Peter’s Easy Loan Company, loaned Jessie $4,000 on December 1, 2013. The loan is to be repaid on December 1, 2014, along with $600 interest. On July 10, 2014, Peter learns that Jessie has filed for personal bankruptcy and that non-secured creditors will receive only $0.60 on the dollar. Peter actually receives nothing until February 24, 2015. On that date, Peter receives a check for $1,000 from Jessie’s bankruptcy proceedings in final settlement of the loan. How should Peter account for the loan to Jessie?

	a.	$1,600 short-term capital loss in 2014; and $1,400 short-term capital loss in 2015.
	b.	$3,000 ordinary loss in 2014.
	c.	$2,400 ordinary loss in 2014.
	d.	$1,600 ordinary loss in 2014; and $1,400 ordinary loss in 2015.
	e.	$3,000 short-term capital loss in 2015.

ANSWER:

52. Garcia is a self-employed chiropractor and a cash basis taxpayer. During the most recent tax year, he provides patient services totaling $400,000. Of that total amount, he estimates $20,000 will never be collected. How much can Garcia deduct as a bad debt expense in the current tax year?

	a.	$- 0 –
	b.	$6,000
	c.	$10,000
	d.	$14,000
	e.	$20,000

ANSWER:

53. In July of this year, Sam performs financial consulting services for William. On August 1, Sam sends William a bill for $1,200. As of September 30, Sam had not heard from William. After repeated efforts to collect the fee, Sam discovers in November that William has left the state and cannot be found. If Sam is an accrual basis taxpayer, for the current year he can deduct

	a.	$- 0 –
	b.	A $800 ordinary loss
	c.	A $1,200 ordinary loss
	d.	A $1,200 short-term capital loss
	e.	A $1,200 long-term capital loss

ANSWER:

54. During 2014, Wendy, a biologist, made a bona fide $10,000 loan to her friend Ben when he was in a time of need. Ben dies in 2015. Wendy has been informed by Ben’s estate that creditors can expect to receive 40% of amounts owed to them. No payments to creditors are made from Ben’s estate in 2015. Wendy’s maximum deduction in 2015 is

	a.	$- 0 –
	b.	$3,000
	c.	$4,000
	d.	$6,000

ANSWER:

55. Which of the following best describes the tax treatment of losses from uncollectible business debts?

	a.	Such losses are not deductible.
	b.	Such losses are limited to $3,000 per year.
	c.	Such losses are treated as short-term capital losses.
	d.	Such losses are deductible without limitation as an ordinary loss.

ANSWER:

56. Byron loaned $5,000 to his friend Alan in 2011. They drew up a formal loan agreement that called for a reasonable rate of interest. Alan used the loan proceeds to pay expenses during his last year in college. Byron was recently informed that his friend Alan was struck by lightning and died. Byron will never be able to collect the proceeds of this loan because Alan died with no assets. What tax benefit, if any, will Byron will be able to claim in 2015, the year that the loan became worthless.

	a.	$5,000 tax credit.
	b.	$5,000 ordinary loss.
	c.	$5,000 short-term capital loss.
	d.	This is a personal non-deductible loss.

ANSWER:

57. During 2014, Virginia, an architect, made a bona fide $7,500 loan to her friend Joe when he was in a time of need. Joe died in 2015. Virginia has been informed by Joe’s estate that he was insolvent. Virginia should record the nonpayment of the loan as

	a.	An ordinary loss.
	b.	An itemized deduction.
	c.	A short-term capital loss.
	d.	A long-term capital loss.
	e.	Nothing. It cannot be deducted.

ANSWER:

58. During 2014, Wan-Ying, a lawyer, made a bona fide $5,750 loan to her friend Bill when he was in a time of need. Bill died in 2015. Wan-Ying has been informed by Bill’s estate that he was insolvent. What is her deduction ton her 2015 tax return (she has no other capital transactions)?

	a.	$- 0 –
	b.	$1,500
	c.	$3,000
	d.	$3,500
	e.	$5,750

ANSWER:

59. Three years ago Edna loaned Carol $80,000 to help her get started in the TV repair business. Carol gave Edna a 5-year, 9% note with semiannual repayment terms. Edna and Carol have been friends for over 35 years. Edna is a recently retired college professor with a significant portfolio of investments. During the current year, Carol became ill and couldn’t continue operating the business. She has repaid $10,000 of the debt owed Edna. Because Carol has no remaining assets, no additional payments will be made to any of her creditors. For the current year, Edna realizes a

	a.	$- 0 –
	b.	$70,000 ordinary loss
	c.	$70,000 long-term capital loss
	d.	$70,000 short-term capital loss
	e.	$80,000 ordinary loss

ANSWER:

60. Marsh Harbor Company manufactures fishing gear. Its taxable income in 2015 before the Qualifying Production Activities Deduction (QPAD) is $4,000,000 and its qualified production activities income is $3,500,000. Its qualifying W-2 wages paid are $300,000. How much may Marsh Harbour claim as its QPAD deduction in 2015?

	a.	$150,000
	b.	$175,000
	c.	$210,000
	d.	$300,000
	e.	$315,000

ANSWER:

61. Milroy Company manufactures steering wheels. Its taxable income in 2015 before the Qualifying Production Activities Deduction (QPAD) is $2,000,000 and its qualified production activities income is $2,500,000. Milroy’s qualifying W-2 wages paid are $400,000. How much may Milroy take as it QPAD deduction in 2015?

	a.	$100,000
	b.	$180,000
	c.	$200,000
	d.	$225,000
	e.	$280,000

ANSWER:

62. Which of the following is true regarding the Qualified Production Activities Deduction (QPAD)?

I.	The QPAD deduction is limited to 9% of the lessor of taxable income before the QPAD deduction or qualified production activities income
II.	The QPAD deduction cannot exceed 50% of W-2 wages allocated to QPAD activities.

	a.	Only statement I is correct.
	b.	Only statement II is correct.
	c.	Both statements are correct.
	d.	Neither statement is correct.

ANSWER:

63. Raisor Corporation pays an annual premium of $12,000 on the whole life insurance policy on the life of Wilson, the founder and CEO of the corporation. The corporation is the beneficiary of the multi-million dollar policy.

I.	The corporation can deduct the premiums.
II.	If Wilson dies, the corporation will receive the policy proceeds tax-free.
III.	If Wilson’s wife is the beneficiary instead of the corporation, the amount of the premiums paid is a tax-free fringe benefit for Wilson.
IV.	If Wilson’s wife is the beneficiary instead of the corporation, the corporation can deduct the amount of premiums paid as compensation.

	a.	Statements I, II, and III are correct.
	b.	Statements I and II are correct.
	c.	Only statement II is correct.
	d.	Statements II and IV are correct.
	e.	Statements I, II, and IV are correct.

ANSWER:

64. During the current year, Hope Corporation paid a $3,250 premium for a life insurance policy on the life of the chief executive officer, Joel. Determine the deductibility of the $3,250.

I.	Hope could deduct the premium as compensation if Joel’s daughter is the stated beneficiary of the policy.
II.	The premium is not deductible if Hope Corporation is the beneficiary.

	a.	Only statement I is correct.
	b.	Only statement II is correct.
	c.	Both statements are correct.
	d.	Neither statement is correct.

ANSWER:

65. Which of the following taxes paid by the Sill Engineering Company can be deducted during 2015?

I.	Federal taxes withheld from employees.
II.	Sill Engineering’s share of employee’s Social Security taxes.

	a.	Only statement I is correct.
	b.	Only statement II is correct.
	c.	Both statements are correct.
	d.	Neither statement is correct.

ANSWER:

66. Which of the following taxes paid by the Fowlers Company can be deducted during 2015?

I.	State sales tax on utilities.
II.	Federal income tax paid in 2015 when filing Fowlers’ 2014 corporate tax return.

	a.	Only statement I is correct.
	b.	Only statement II is correct.
	c.	Both statements are correct.
	d.	Neither statement is correct.

ANSWER:

67. Which of the following taxes paid by Woodhaven Inc. can be deducted during 2015?

I.	Special real estate tax assessment for upgrading the sewer.
II.	State income taxes paid in 2015 when filing Woodhaven’s 2014 corporate return tax return.

	a.	Only statement I is correct.
	b.	Only statement II is correct.
	c.	Both statements are correct.
	d.	Neither statement is correct.

ANSWER:

68. Which of the following taxes paid by Trevor Products, Inc. can be deducted during 2015?

I.	Real estate taxes.
II.	Sales tax on purchase of new equipment.

	a.	Only statement I is correct.
	b.	Only statement II is correct.
	c.	Both statements are correct.
	d.	Neither statement is correct.

ANSWER:

69. Drew incurs the following expenses in his grocery store business. Drew can deduct the following as business expenses in the current year

I.	$3,750 for advertising on the web.
II.	$2,000 of interest expense related to the purchase of a new delivery truck.

	a.	Only statement I is correct.
	b.	Only statement II is correct.
	c.	Both statements are correct.
	d.	Neither statement is correct.

ANSWER:

70. Winslow owns a residential rental property with an adjusted basis of $200,000 at the beginning of the current year. The county treasurer sends Winslow a tax bill payable by December 31. The bill is for real estate property taxes of $1,200 for the current calendar year and for a $6,000 special assessment for a new sewer line. On November 1, Winslow sells the property to Edwin for $225,000. As part of the sale contract, Winslow will pay the special assessment at closing and Edwin agrees to pay the realty taxes on the due date. What is Winslow’s gain on the sale?

	a.	$19,000
	b.	$20,000
	c.	$21,000
	d.	$25,000
	e.	$26,000

ANSWER:

71. Sidney owns a residential rental property with an adjusted basis of $200,000 at the beginning of the current year. The county treasurer sends Sidney a tax bill payable by December 31. The bill is for real estate property taxes of $1,200 for the current calendar year and for a $6,000 special assessment for a new sewer line. On November 1, Sidney sells the property to Donald for $225,000. As part of the sale contract, Sidney will pay the real estate taxes of $1,200 at closing and Donald agrees to pay the special assessment of $6,000 on the due date. What is Sidney’s gain on the sale?

	a.	$19,800
	b.	$20,000
	c.	$21,000
	d.	$24,800
	e.	$29,800

ANSWER:

72. On May 1, 2015, Linda sells her rental property for $125,000. Her basis in the property at the beginning of the year is $75,000. As part of the sales contract, the buyer agrees to pay the real property taxes of $1,500 for the current year when they come due on December 31, 2015.

I.	Linda has a gain on the sale of the rental property of $50,000.
II.	Linda can deduct $500 in real estate taxes.

	a.	Only statement I is correct.
	b.	Only statement II is correct.
	c.	Both statements are correct.
	d.	Neither statement is correct.

ANSWER:

73. Which of the following legal expenses paid by the Kerr Corporation can be deducted in the current year?

I.	Legal fees to resolve a tax dispute with the Internal Revenue Service.
II.	Legal fees to purchase land that will be used to expand its warehouse.

	a.	Only statement I is correct.
	b.	Only statement II is correct.
	c.	Both statements are correct.
	d.	Neither statement is correct.

ANSWER:

74. Which of the following legal expenses paid by the Sutton Corporation can be deducted in the current year?

I.	Legal fees to initiate a lawsuit against a competitor who is using its patent.
II.	Legal fees to settle a lawsuit filed by a delivery person who slipped on the ice delivering a package to Sutton’s office.

	a.	Only statement I is correct.
	b.	Only statement II is correct.
	c.	Both statements are correct.
	d.	Neither statement is correct.

ANSWER:

75. Gary, a sole proprietor, incurs the following expenses in his record store business. Gary can deduct the following as business expenses in the current year

I.	$3,000 in legal fees to acquire a competing record store.
II.	$500 to the local police chief to not write parking tickets to his customers whose time ran-out on parking meters in front of his store.

	a.	Only statement I is correct.
	b.	Only statement II is correct.
	c.	Both statements are correct.
	d.	Neither statement is correct.

ANSWER:

76. Walter recently received a notice of an income tax deficiency of $21,000 from the IRS. He hires an attorney to handle his IRS problems. Walter’s legal expenses are $4,000. Can Walter deduct the legal expenses?

I.	He can deduct the full amount if the tax deficiency relates to his business.
II.	He can deduct the full amount if the tax deficiency relates to income other than business income.
III.	He can deduct the legal fees if the income tax deficiency is personal in nature.

	a.	Only statement I is correct.
	b.	Only statement II is correct.
	c.	Only statement III is correct.
	d.	Statements I and II are correct.
	e.	Statements I and III are correct.

ANSWER:

77. Which of the following expenses is not deductible for AGI?

	a.	Alimony paid.
	b.	Contributions to an IRA.
	c.	Moving expenses.
	d.	Interest on qualified student loans.
	e.	Interest expense related to an investment.

ANSWER:

78. Deductions for adjusted gross income include

I.	Contribution to a Roth IRA.
II.	Contribution to conventional IRA

	a.	Only statement I is correct.
	b.	Only statement II is correct.
	c.	Both statements are correct.
	d.	Neither statement is correct.

ANSWER:

79. Deductions for adjusted gross income include

I.	Transportation of household goods for a qualified move.
II.	Unreimbursed employee business expenses for a nonaccountable plan.

	a.	Only statement I is correct.
	b.	Only statement II is correct.
	c.	Both statements are correct.
	d.	Neither statement is correct.

ANSWER:

80. Melissa is a corporate sales representative for Computer City. Melissa receives a monthly travel allowance from Computer City to cover her travel costs (transportation, food, lodging, entertainment, etc.). If Melissa is required to account to Computer City for the use of the travel advance and to return any excess travel advance

I.	Melissa will not have to show any aspect of the travel reimbursement or expenses incurred if she spends all of the reimbursement on valid travel expenses.
II.	Melissa will have gross income to the extent her travel allowance used for travel expenses reimbursed.

	a.	Only statement I is correct.
	b.	Only statement II is correct.
	c.	Both statements are correct.
	d.	Neither statement is correct.

ANSWER:

81. Sally is a corporate sales representative for Computer City. Sally receives a monthly travel allowance from Computer City to cover her travel costs (transportation, food, lodging, entertainment, etc.). If Sally is not required to account to Computer City for the use of the travel advance

I.	Sally will not have to show any aspect of the travel reimbursement or expenses incurred if she spends all of the reimbursement on valid travel expenses.
II.	Sally will only have gross income to the extent her travel allowance exceeds her actual costs.

	a.	Only statement I is correct.
	b.	Only statement II is correct.
	c.	Both statements are correct.
	d.	Neither statement is correct.

ANSWER:

82. Victor is a sales representative for Valley Winery. Victor receives a monthly travel allowance from Valley to cover his travel costs (transportation, food, lodging, entertainment, etc.). If Victor is required to account to Valley for the use of the travel advance and to return any excess travel advance

I.	To the extent Victor is reimbursed for less than his costs, part of his expenses are deducted for AGI and part are deducted from AGI.
II.	Victor must include the travel allowance in his gross income. His actual costs are deductible from AGI, subject to all applicable limits on such deductions.

	a.	Only statement I is correct.
	b.	Only statement II is correct.
	c.	Both statements are correct.
	d.	Neither statement is correct.

ANSWER:

83. Richard is a sales person for Publix Company. Every month Richard fills out an expense account report, documenting all his expenses and submits it for reimbursement. During the current year, Richard submitted documentation and receives $12,500 of reimbursements. All his claims are reimbursed. How will these expenses and reimbursements affect Richard’s income tax calculation?

I.	Expense amounts are deductible from AGI.
II.	Reimbursed amounts are excluded from gross income.

	a.	Only statement I is correct.
	b.	Only statement II is correct.
	c.	Both statements are correct.
	d.	Neither statement is correct.

ANSWER:

84. Lynn is a sales representative for Textbook Publishing Company. He receives a monthly travel allowance from Textbook to cover his travel costs (transportation, food, lodging, entertainment, etc.). If Lynn is not required to account to Textbook for the use of the travel advance

I.	Lynn will not have to show any aspect of the travel reimbursement or expenses incurred if he spends all of the reimbursement on valid travel expenses.
II.	To the extent Lynn is reimbursed for his costs he will get a deduction for AGI.

	a.	Only statement I is correct.
	b.	Only statement II is correct.
	c.	Both statements are correct.
	d.	Neither statement is correct.

ANSWER:

85. Ester is a sales representative for a pharmaceutical company. She receives a monthly travel allowance from the company to cover her travel costs (transportation, food, lodging, entertainment, etc.). If Ester is not required to account to the company for the use of the travel advance

I.	Ester will only have gross income to the extent her travel allowance exceeds her actual costs.
II.	Ester must include the travel allowance in her gross income. Her actual costs are deductible from AGI, subject to all applicable limits on such deductions.

	a.	Only statement I is correct.
	b.	Only statement II is correct.
	c.	Both statements are correct.
	d.	Neither statement is correct.

ANSWER:

86. Natasha is an employee of The Johnson Company. She incurs a total of $7,500 in business expenses as follows:

Lodging	$2,500
Transportation (no commuting)	3,500
Dues and subscriptions	1,500

Natasha receives reimbursement of $5,600 after an adequate accounting to her employer. Natasha’s itemized deductions before any limitations would be:

	a.	$- 0 –
	b.	$1,500
	c.	$1,900
	d.	$5,600
	e.	$7,500

ANSWER:

87. Eloise is a sales representative for a video production company. While at an exposition, she incurs $2,000 in entertainment expenses and $1,200 for meals. The expenses occur while she is discussing business and Eloise makes an adequate accounting to her employer and is reimbursed $1,200. How much may Eloise deduct if her AGI is $40,000?

	a.	$- 0 –
	b.	$1,200 for AGI and $200 from AGI.
	c.	$1,200 for AGI and $2,000 from AGI.
	d.	$- 0 – for AGI and $200 from AGI.
	e.	$- 0 – for AGI and $1,000 from AGI.

ANSWER:

88. Brees Co. requires its employees to adequately account for all reimbursed business expenses. Tracy, an employee of Brees Co. has AGI of $50,000 and submitted for reimbursement the following valid business expenses:

Transportation costs	$1,000
Meals	700
Entertainment costs	500
Hotel costs	800

What are the tax consequences if Brees reimburses Tracy $2,400?

I.	Tracy must report $2,400 of income.
II.	Tracy can deduct $2,400 of the expenses for AGI and $-0- as miscellaneous itemized deductions, after limitations.

	a.	Only statement I is correct.
	b.	Only statement II is correct.
	c.	Both statements are correct.
	d.	Neither statement is correct.

ANSWER:

89. Joline works as a sales manager for the Washington Manufacturing Company. Although the company has an accountable reimbursement plan, as a cost containment measure the company will only reimburse its sales personnel for 80% of their business expenses. During the year, Joline incurred the following business expenses:

Airfare	$3,000
Hotels	3,700
Meals	1,200
Entertainment	1,000

If Joline’s adjusted gross income is $62,000, what amount can Joline deduct as a miscellaneous itemized deduction?

	a.	$320
	b.	$540
	c.	$890
	d.	$1,560
	e.	$1,780

ANSWER:

90. Mathew works for Levitz Mortgage Company. The company has an accountable reimbursement plan. During the year Levitz reimburses Mathew $5,400 for his business expenses. Mathew’s adjusted gross income for the year is $45,000. His business expenses are as follows:

Airfare	$2,900
Hotel	1,900
Meals	1,400
Entertainment	1,000

What amount will Mathew be able to deduct as a miscellaneous itemized deduction?

	a.	$- 0 –
	b.	$600
	c.	$1,200
	d.	$1,500
	e.	$1,800

ANSWER:

91. Brenda travels to Cleveland on business for her employer. She spends 4 days in meetings with a client. Brenda’s plane fare for the trip is $400. Meals cost $40 per day. Hotel and incidental costs amount to $150 per day. Brenda receives no reimbursement for any expenses. Brenda’s adjusted gross income for the year is $40,000. What is Brenda’s deduction for the trip?

	a.	$- 0 –
	b.	$280
	c.	$1,080
	d.	$1,160
	e.	$2,320

ANSWER:

92. Charlie is single and operates his barber shop as a sole proprietorship. During the current year, Charlie paid $2,200 for his personal health insurance plan and $4,000 for health insurance for his employees. How much of these premiums can be deducted for Charlie’s adjusted gross income?

	a.	$- 0 –
	b.	$2.200
	c.	$4,000
	d.	$5,100
	e.	$6,200

ANSWER:

93. Margaret is single and is a self-employed proprietor of a convenience store near the mall. During the current year, Margaret paid $4,000 for health insurance coverage for herself. She paid another $500 for coverage for her unrelated employee, Corky. How should Margaret deduct the health insurance cost?

I.	Margaret takes $500 as a business expense.
II.	Margaret takes the $4,000 as a deduction for AGI.

	a.	Only statement I is correct.
	b.	Only statement II is correct.
	c.	Both statements are correct.
	d.	Neither statement is correct.

ANSWER:

94. Kyle is married and a self-employed landscaper. During the current year, Kyle pays $3,000 for health insurance coverage for himself. He pays another $400 for coverage for his employee, Tabatha. How should Kyle deduct the health insurance cost?

I.	Kyle deducts a total of $3,400 for AGI.
II.	Kyle cannot deduct any portion of his premium of $3,000 for AGI if his spouse is covered by a health plan through her employer.

	a.	Only statement I is correct.
	b.	Only statement II is correct.
	c.	Both statements are correct.
	d.	Neither statement is correct.

ANSWER:

95. Oliver owns Wifit, an unincorporated sports store. In 2015 Wifit earned $100,000, before Oliver drew out a salary of $60,000. What is Oliver’s 2015 deduction for self-employment taxes?

	a.	$2,826
	b.	$7,065
	c.	$7,650
	d.	$14,130
	e.	$15,300

ANSWER:

96. Concerning individual retirement accounts (IRAs),

I.	A single taxpayer that is not an active participant in a qualified plan may deduct up to $6,000 of the annual contribution.
II.	A taxpayer that is not working outside of the home may not deduct any amount if their spouse is an active participant in a qualified plan, unless their AGI is below $61,000.

	a.	Only statement I is correct.
	b.	Only statement II is correct.
	c.	Both statements are correct.
	d.	Neither statement is correct.

ANSWER:

97. Rhonda and Ralph are married. Rhonda earns $81,000 annually, and Ralph earns $6,000 annually working part-time. Their AGI is $108,000. Rhonda participates in an employer-sponsored retirement plan. Ralph’s company does not have a pension plan. Rhonda and Ralph contribute the maximum amount allowable annually to their IRAs. What is their allowable deduction for this year’s contributions?

	a.	$0 –
	b.	$2,200
	c.	$5,500
	d.	$8,000
	e.	$11,000

ANSWER:

98. Chi is single and an employee of Federal Company. Chi’s adjusted gross income for the current year is $63,000. Chi would like to make the maximum contribution to his individual retirement account this year. Which of the following statements about Chi’s contribution and deduction amounts is (are) true?

I.	He is not allowed to make an IRA contribution because his adjusted gross income is greater than $61,000.
II.	If Federal Company does not have a qualified pension plan; Chi can contribute and deduct a maximum of $5,500 to his IRA account.

	a.	Only statement I is correct.
	b.	Only statement II is correct.
	c.	Both statements are correct.
	d.	Neither statement is correct.

ANSWER:

99. Chelsea is an employee of Avondale Company. Chelsea’s adjusted gross income for the current year is $65,000. Chelsea would like to make the maximum contribution to her individual retirement account this year. Which of the following statements about Chelsea’s contribution and deduction amounts is (are) true?

I.	If Chelsea is single and is covered by a qualified pension plan, she is allowed to contribute $5,500 to her IRA account, but she is allowed a deduction for only $3,300 of the contribution because her adjusted gross income is greater than $61,000.
II.	If Chelsea is married and covered by a qualified pension plan and her husband does not work, they can contribute and deduct $5,500 to two separate IRA accounts (one for herself and one for her husband).

	a.	Only statement I is correct.
	b.	Only statement II is correct.
	c.	Both statements are correct.
	d.	Neither statement is correct.

ANSWER:

100. Darlene and Devin are married. Darlene earns $48,000 and Devin earns $41,000. Their adjusted gross income is $97,000. Darlene’s employer provides her with a qualified pension plan, Devin’s does not. What are Darlene and Devin’s maximum combined IRA contribution and deduction amounts?

Contribution Deduction

	a.	$11,000 $5,000
	b.	$11,000 $6,000
	c.	$11,000 $8,000
	d.	$11,000 $10,725
	e.	$11,000 $11,000

ANSWER:

101. Aaron is a 34-year-old head of household and a self-employed taxpayer. He contributed the maximum amount to his IRA account during the current year, and his net earnings from his business totaled $29,000. How much can Aaron deduct for AGI this year?

	a.	$- 0 –
	b.	$3,200
	c.	$3,800
	d.	$5,000
	e.	$5,500

ANSWER:

102. Hector is a 54-year-old head of household and a self-employed taxpayer. He contributed the maximum amount to his IRA account during the current year, and his net earnings from his business totaled $36,000. How much can Hector deduct for AGI this year?

	a.	$- 0 –
	b.	$3,200
	c.	$5,500
	d.	$6,000
	e.	$6,500

ANSWER:

103. Arturo and Josephina are married with salaries of $47,000 and $48,000, respectively. Their combined AGI is $101,000. Josephina is an active participant in her company’s qualified pension plan while Arturo is not. Determine Arturo and Josephina’s combined IRA contribution and deduction amounts?

Maximum Maximum

Contribution Deduction

	a.	$5,500 $2,750
	b.	$11,000 $2,750
	c.	$11,000 $5,500
	d.	$11,000 $10,175
	e.	$11,000 $11,000

ANSWER:

104. Fred and Irma are married with salaries of $49,000 and $44,000, respectively. Their combined AGI is $108,000. Both are active participant in their companies’ qualified pension plans. Determine their maximum combined IRA contribution and deduction amounts?

Maximum Maximum

Contribution Deduction

	a.	$5,500 $ 2,750
	b.	$11,000 $2,750
	c.	$11,000 $5,500
	d.	$11,000 $7,500
	e.	$11,000 $11,000

ANSWER:

105. Marshall and Michelle are married with salaries of $80,000 and $64,000, respectively. Their combined AGI is $183,000. Michelle is an active participant in her company’s qualified pension plan while Marshall is not. Determine the maximum combined IRA contribution and deduction amounts?

Maximum Maximum

Contribution Deduction

	a.	$5,500 $2,750
	b.	$11,000 $5,500
	c.	$5,500 $5,500
	d.	$11,000 $7,500
	e.	$ 11,000 $ 11,000

ANSWER:

106. Mark and Cindy are married with salaries of $45,000 and $42,000, respectively. Adjusted gross income on their jointly filed tax return is $98,000. Both individuals are active participants in employer provided qualified pension plans. What is the maximum amount each person may deduct for AGI with regard to IRA contributions?

Mark Cindy

	a.	$1,000 $1,000
	b.	$5,225 $5,225
	c.	$3,200 $3,200
	d.	$- 0 – $-0-
	e.	$ 5,500 $5,500

ANSWER:

107. Dan and Dawn are married and file a joint return. During the current year, Dan had a salary of $30,000 and Dawn had a salary of $36,000. Both Dan and Dawn are covered by an employer-sponsored pension plan. Their adjusted gross income for the year is $95,000. Determine the maximum IRA contribution and deduction amounts.

Maximum Maximum

Contribution Deduction

	a.	$11,000 $11,000
	b.	$11,000 $- 0 –
	c.	$11,000 $5,500
	d.	$5,500 $-0-
	e.	$8,000 $8,000

ANSWER:

108. Carl, age 59, and Cindy, age 49, are married and file a joint return. During the current year, Carl had a salary of $41,000 and Cindy had a salary of $35,000. Both Carl and Cindy are covered by an employer-sponsored pension plan. Their adjusted gross income for the year is $94,000. Determine the maximum IRA contribution and deduction amounts.

Maximum Maximum

Contribution Deduction

	a.	$12,000 $12,000
	b.	$11,000 $11,000
	c.	$12,000 $11,000
	d.	$11,000 $9,000
	e.	$13,000 $13,000

ANSWER:

109. Kevin, single, is an employee of the Colonial Company and is an active participant in its pension plan. Kevin’s adjusted gross income for the current year is $59,000. Kevin contributes $1,000 to his conventional individual retirement account. Which of the following statements about Kevin contributions and deduction amounts is (are) true?

I.	He is allowed to deduct his $1,000 contribution to his conventional IRA.
II.	Kevin can also contribute but not deduct $4,500 to his Roth IRA.

	a.	Only statement I is correct.
	b.	Only statement II is correct.
	c.	Both statements are correct.
	d.	Neither statement is correct.

ANSWER:

110. Mollie is single and is an employee of the Royal Corporation. She is an active participant in the company’s pension plan. Mollie’s adjusted gross income is $116,000 and she has never established an IRA account. How much can Mollie contribute to a Roth IRA?

	a.	$- 0 –
	b.	$1,000
	c.	$2,750
	d.	$4,400
	e.	$5,500

ANSWER:

111. Margie is single and is an employee of the Stitch Corporation. She is an active participant in the company’s pension plan. Margie’s adjusted gross income is $65,000 and she contributes the maximum amount allowable as a deduction to her IRA account during the current year. How much can Margie contribute to her Roth IRA?

	a.	$- 0 –
	b.	$1,000
	c.	$2,200
	d.	$4,000
	e.	$5,500

ANSWER:

112. Fred and Flossie are married and their adjusted gross income is $194,000. Both Fred and Flossie are active participants in their company’s qualified pension plan and have never established an Individual Retirement Account. What is the maximum combined amount they can contribute to Roth IRAs?

	a.	$- 0 –
	b.	$2,000
	c.	$5,500
	d.	$8,000
	e.	$11,000

ANSWER:

113. Homer and Marge are married and have an adjusted gross income of $183,000. Currently, neither is covered by an employer sponsored pension plan. They have never established an Individual Retirement Account until this year, when they opened a Roth IRA. What is the maximum amount they can each contribute to Roth IRAs?

	a.	$1,000
	b.	$2,000
	c.	$2,750
	d.	$4,950
	e.	$5,500

ANSWER:

114. Alex and Alicia are married and have two children ages 5 and 9. Their adjusted gross income for the year is $86,000. During the year they establish a Coverdell Education Savings Account (CESA) for each child.

I.	They can contribute $2,000 to each child’s CESA.
II.	They can deduct the CESA contributions for their adjusted gross income.

	a.	Only statement I is correct.
	b.	Only statement II is correct.
	c.	Both statements are correct.
	d.	Neither statement is correct.

ANSWER:

115. Laura and Jason are married and have 3 children ages 2, 6, and 8. Their adjusted gross income for the year is $95,000. The maximum they can contribute to their children’s Coverdell Education Savings Accounts is

	a.	$- 0 –
	b.	$667
	c.	$1,500
	d.	$2,000
	e.	$6,000

ANSWER:

116. James has three nieces, ages 11, 16, and 19 and is single. His adjusted gross income for the year is $100,000. The maximum he can contribute to their Coverdell Education Savings Accounts is

Each Account Total Contribution

	a.	$1,333 $2,667
	b.	$1,333 $4,000
	c.	$2,000 $4,000
	d.	$2,000 $6,000
	e.	$6,000 $6,000

ANSWER:

117. Phil and Faye are married and have 3 children ages 11, 14, and 17. Phil and Faye’s adjusted gross income for the year is $200,000. The maximum they can contribute to their children’s Coverdell Education Savings accounts is

Each Account Total Contribution

	a.	$- 0 – $-0-
	b.	$1,333 $4,000
	c.	$2,000 $4,000
	d.	$2,000 $6,000
	e.	$6,000 $6,000

ANSWER:

118. Carlos is single and has a 7 year-old child. Carlos’ adjusted gross income for the year is $101,000. The maximum amount he can contribute to his child’s Coverdell Education Savings Account is

	a.	$- 0 –
	b.	$800
	c.	$1,200
	d.	$2,000
	e.	$4,000

ANSWER:

119. Karen is single and graduated from Marring University in May of 2014. In January of 2015, she begins repaying her student loans and in 2015 pays $2,800 of interest on the loans. Her adjusted gross income is $51,000.

I.	Karen can deduct $2,500 of interest as a deduction for adjusted gross income.
II.	Karen can deduct $2,800 of interest as a deduction from adjusted gross income.

	a.	Only statement I is correct.
	b.	Only statement II is correct.
	c.	Both statements are correct.
	d.	Neither statement is correct.

ANSWER:

120. Victor is single and graduated from Wabash College in May of 2014. In January of 2015, he begins to repay his student loans. During the year he pays $1,500 of interest on the loans. His adjusted gross income for the year is $65,000. Victor can deduct student loan interest of

	a.	$- 0 –
	b.	$800
	c.	$1,000
	d.	$1,200
	e.	$1,500

ANSWER:

121. Martha is single and graduated from Ivy Tech in May of 2014. In January of 2015, she begins repaying her student loans and pays interest on the loans of $2,600 in 2015 and $1,200 in 2016. Her adjusted gross income in 2015 is $63,000 and is $80,000 in 2016. Martha can deduct student loan interest of

2015 2016

	a.	$- 0 – $-0-
	b.	$2,000 $1,200
	c.	$2,500 $1,200
	d.	$2,000 $-0-
	e.	$2,500 $-0-

ANSWER:

122. Which of the following is (are) correct concerning the time test for deducting moving expenses?

I.	Self-employed individuals must work in the new location for 39 weeks during a 2-year period.
II.	A transfer of the employee by the employer waives the time requirement.

	a.	Only statement I is correct.
	b.	Only statement II is correct.
	c.	Both statements are correct.
	d.	Neither statement is correct.

ANSWER:

123. Thomas changes jobs during the year and moves from Philadelphia to El Paso. Which of the following expenses relating to the move can Thomas deduct?

I.	Prior to the move, Thomas flies to El Paso to find an apartment.
II.	The cost of meals while driving his household goods to El Paso.

	a.	Only statement I is correct.
	b.	Only statement II is correct.
	c.	Both statements are correct.
	d.	Neither statement is correct.

ANSWER:

124. Carla changes jobs during the year and moves from Oklahoma City to Orlando. Which of the following expenses relating to the move can Carla deduct?

I.	Upon arriving in Orlando, her apartment is not ready so she spends 2 nights in a local hotel.
II.	Gas and tolls during the move to Orlando.

	a.	Only statement I is correct.
	b.	Only statement II is correct.
	c.	Both statements are correct.
	d.	Neither statement is correct.

ANSWER:

125. Jay obtains a new job in Boston and moves from Reno during the current year. He incurs the following moving expenses:

Transportation of household goods	$5,700
House-hunting trips to Boston	600
Cost of transporting Jay’s family	2,300
Meals incurred while moving the family	200
Temporary living expenses while waiting for the new residence to be ready	1,000

What is Jay’s moving expense deduction?

	a.	$- 0 –
	b.	$5,700
	c.	$8,000
	d.	$9,700
	e.	$9,800

ANSWER:

126. Julian and Deloris move during the current year from their home in Houston to Santa Fe. Julian was a rocket scientist with NASA in Houston and has accepted a new job with the Los Alamos research lab near Santa Fe. Moving expenses and reimbursement information are presented below.

•	Direct costs of moving themselves, furnishings and other personal belongings to Santa Fe total $8,000.
•	A house-hunting trip before their move to Santa Fe resulted in the total costs of $2,500.
•	Julian and Deloris incurred commissions and legal costs in the amount of $12,000 in conjunction with the sale of their Houston residence.
•	Los Alamos research laboratories reimbursed Julian and Deloris for $5,000 of their moving costs.

What is their Moving Expense deduction?

	a.	$17,500 deduction from AGI.
	b.	$8,000 deduction for AGI.
	c.	$10,500 deduction from AGI.
	d.	$3,000 deduction for AGI.
	e.	$22,500 decution from AGI.

ANSWER:

127. For each of the following situations, determine whether the item is deductible, how it would be deducted on the taxpayer’s return (if there are alternatives possible, discuss the conditions which would determine the treatment) and any limitations that might be placed on the deduction.

a.	Monica took a client out to dinner to discuss the tax aspects of the client’s proposed acquisition of a rival company. After dinner, Monica took the client to see a play.

1.	Assume Monica is self-employed
2.	Assume Monica is an employee of GHQ Corporation. GHQ does not reimburse its employees for entertaining clients.

b.	Sergio owes Edward $5,000. During the current year, Sergio files for bankruptcy. Sergio’s attorney indicates that due to Sergio’s poor financial condition his creditors will be lucky to get $.80 on the dollar for their debts.

1.	Assume Sergio is a customer of Edward’s (an accrual basis taxpayer) and the $5,000 debt is from an account receivable related to Edward’s business.
2.	Assume Sergio is a business associate of Edward’s. Edward loans Sergio the $5,000 to pay off some gambling debts. Edward owns a meat packing plant.

ANSWER:

a.
1.	The cost of the dinner is a directly related meal because Monica and the client actually discussed business. The cost of the play is an associated with entertainment expense because it directly followed a bona-fide business discussion. Monica can deduct 50% of the cost of the meal and the play as a deduction for adjusted gross income because it is a trade or business expense.
2.	As in (1), the meal and the play are deductible business expenses and 50% of the cost is allowed as an employee business expense. However, employee business expenses are deductible as miscellaneous itemized deductions that are subject to a 2% of adjusted gross income limitation. Therefore, to receive a deduction for the cost, Monica must itemize her deductions and Monica’s total allowable miscellaneous itemized deductions must exceed 2% of adjusted gross income.

b.
1.	The debt is related to Edward’s trade or business. Business bad debts are deductible in the year of partial worthlessness as an ordinary business expense. Edward can deduct $1,000 [$5,000 × (1 – .80)] as an estimate of the ultimate bad debt expense.
2.	The debt is not related to Edward’s trade or business. Nonbusiness bad debts are deducted as short-term capital losses in year of actual worthlessness. Therefore, Edward cannot deduct any of the bad debts until the actual amount of worthlessness is known.

128. Phong is a life insurance salesman for Swan Insurance and spends 4 days a month in the office. His office is 12 miles from home. He also has a part-time job as a salesman in a clothing store. Typically, he works 2 nights during the week and 1 day on the weekend. The clothing store where he works is 6 miles from his office and 7 miles from his home. What portion(s) of Phong’s travel is (are) considered business?

ANSWER:

Phong can deduct the cost of traveling from home to his business clients and back. He also can deduct the cost of traveling from his office to his clients and back to his office. The cost of traveling to his office and then home, as he does 4 days a month, is considered commuting and is nondeductible. However, the cost of traveling from either his office or clients to his second job is deductible. The cost of traveling home from his part-time job and to-and-from the job on the weekend is not deductible because the travel is considered commuting. Finally, any out-of-town traveling Phong incurs is fully deductible.

129. Jerry recently graduates with an MBA degree from a leading university and will be going to work as an employee of a major stock brokerage firm. Jerry is unsure of the circumstances under which he can legitimately deduct the costs of entertaining and dining with clients and prospective clients. Jerry will spend approximately $5,000 a year on such activities for which he will not be reimbursed. It is important that he be able to derive tax benefit for these costs. Advise Jerry of the general rules in this area of the tax law. Include a brief discussion of substantiation requirements for such business expenses.

ANSWER:

To be deductible, meal and entertainment expenses must be either directly related to or associated with the active conduct of an activity for which the taxpayer has a business purpose. The directly related test requires that the entertainment expense meet four tests, one of which is that a bonafide business activity takes place during the entertainment. For the entertainment to qualify under the associated with test, two requirements must be met. First, there must exist a clear business purpose, other than goodwill, for the entertainment. The second test requires that the entertainment occur either preceding or following a substantial business discussion. For substantiation, the tax law requires the taxpayer to keep records that will show the amount of the expense; the time and place of travel or entertainment, or date and description of a gift; the business purpose of the travel, entertainment or gift; and the business relationship to the person entertained or receiving the gift. Finally, Jerry needs to know that he can only deduct 50% of these expenses.

130. For each of the following situations, determine whether the item is deductible, how it would be deducted on the taxpayer’s return (if there are alternatives possible, discuss the conditions which would determine the treatment) and any limitations which might be placed on the deduction.

a.	Cassie sells insurance and other financial products for Bison Assurance Company. During the current year, she gives each client who has been with her for three years 2 tickets to a Willie Nelson concert. The tickets have a face value of $75 each, but Cassie has to pay $100 per ticket to obtain a block of 100 tickets. Cassie was out of town and did not attend the concert.

b.	Randolph was the CEO and chairman of the board of directors of Vison Inc., until his retirement 5 years ago. Although he still owns 5% of Vison’s stock, he has no other active involvement in the company. While playing golf one day he learns that 4 of the company’s biggest customers are coming to town to close a big deal. Randolph had been responsible for bringing 3 of the customers to the business 30 years earlier when he started working for the company. Because he has developed a solid business relationship with them through the years and to help the company out, he holds a reception for the 4 customers and top executives of the company at his country club. The cost of the reception is $2,000. Randolph did not ask for, nor did Vison offer, a reimbursement for the reception.

c.	Ai-leng is an engineer employed by Boiler Corporation. While having lunch with one of Boiler’s clients, she learns of a new relaxation technique that the client felt had greatly reduced his job-related stress. Ai-leng enrolls in a night course at the local community college to learn the new relaxation technique. The cost of the course is $200.

ANSWER:

a.	The tickets do not meet the criteria for deductibility as an entertainment expense. However, you are allowed to deduct business gifts up to a maximum of $25 per donee. Deductions for tickets are limited to the face value of the ticket. Therefore, Cassie can deduct $25 per client. Her total deduction is $2,500 ($25 × 100 clients). Because she is an employee, she must take the deduction as a miscellaneous itemized deduction, which is subject to a 2% of adjusted gross income limitation.

b.	No deduction is allowed. Deductions are allowed for meals and entertainment costs that are related to a trade or business. Since the company no longer employs Randolph, he is not in a trade or business and cannot deduct any of the $2,000. In addition, the expenditure is not ordinary (investors normally do not entertain clients of the company they own), or necessary (a prudent businessman would not make such an expenditure).

c.	The cost of the course is not deductible. To deduct education expenses, the course must either maintain or improve job skills or be required by law or by her employer. The course in relaxation techniques does not relate to Ai-Leng’s job as an engineer and was not required by her employer or by law.

131. For each of the following situations explain why the expenditure is or is not deductible and any limitations that may be placed on the amount of the deduction.

a.	Akira is self-employed as a personal financial planner. He went out-of-town for two days to visit three of his best clients and incurs the following expenses:

	Airfare	$350
	Rental car	160
	Lodging	240
	Incidentals	90
	Meals	220
	Entertainment	130

b.	Woodrow is President and CEO of ISPEP, a closely held corporation with assets of $20,000,000. Woodrow, who owns 60% of the company, decides to hire his twin daughters who have just completed their freshman year at Aztec State to work in the promotions department of the company. His daughters will be paid $5,000 each for the summer. Other college students who are hired for the summer to perform similar tasks will be paid $4,000.

c.	Felix is a Realtor. To show his appreciation, he gives each client who buys a home from him a $75 wall clock. During the year Felix gives 64 clocks to his clients.

d.	Sandy sues Harrison for divorce. Originally, Sandy asks for one-half of all their assets, including 50% of Harrison’s car dealership. Harrison’s lawyer has worked out a compromise with Sandy and her attorney that allows Harrison to retain 100% ownership of the dealership. Harrison pays his lawyer $10,000 in legal fees.

ANSWER:

a.	Akira can deduct the full cost of the airfare ($350), rental car ($160), lodging ($240), and incidentals ($90). The meals and entertainment expenses must be reduced by 50%. The deduction for the meals and entertainment is $175 [$220 + $130) × 50%]. Akira can deduct for adjusted gross income $1,015 ($350 + $160 + $240 + $90 + $175) for his trip.

b.	Because his daughters are related parties, the compensation paid by Woodrow to them is subject to scrutiny. The normal compensation for the work his daughters will perform is $4,000. Therefore, the additional compensation of $1,000 ($5,000 – $4,000) paid to each daughter is not deductible because it lacks a business purpose. Under the substance over form doctrine, the $2,000 ($1,000 × 2) is treated as a dividend to Woodrow and a $2,000 gift ($1,000 each) from Woodrow to his daughters. The gift to his daughters is excluded from income and is not deductible by Woodrow.

c.	Felix can deduct up to $25 per year for each clock he has given to a client. For the year, he can deduct $1,600 ($25 × 64) as business gifts.

d.	Harrison may not deduct any portion of the legal fees because the legal dispute originates from a personal matter. The fact that his wife sues for 50% control of his car dealership, which is a business asset, does not affect the tax treatment.

132. For each of the following situations explain why the expenditure is or is not deductible and any limitations that may be placed on the amount of the deduction.

a.	Ellis is a part-time bookkeeper for Gilmore Company. The owner of Gilmore told Ellis that if he earns an accounting degree and passes the CPA exam, he would hire him as Gilmore’s accountant. Ellis spends $5,600 taking classes towards an accounting degree at City College.

b.	Harry owns Circus City Condiments, a wholesaler of circus food. In 2010 he loaned his friend Joanna $8,000 at 6% annual interest with the balance due in 5 years. Joanna used the loan to open a beauty salon. In December 2015, Joanna tells Harry that she has filed for bankruptcy and that he will be lucky to get $2,000 of his money back. The bankruptcy proceedings had not been completed at the end of 2015.

c.	Audrey is a self-employed computer consultant. Harvey calls Audrey and asks her for information on installing a new Lan-based workstation system in his business. Audrey meets Harvey at Franco’s Chop House. They have dinner while Audrey explains how such a system will work and what it will cost. Audrey pays for the dinner, which costs $100. Harvey calls Audrey the next day and tells her that he has decided that the system costs too much and that he will not need her services.

ANSWER:

a.	To be deductible, education expenses must be either required by law (employer) or maintain or improve the job skills of the taxpayer. Education expenses that meet the minimum job requirements or which qualify the taxpayer for a new trade or business are not deductible. Because he is not currently an auditor with Gilmore Company, Ellis’s education expenses are to meet the minimum educational requirements of the job (and qualify him for a new trade or business) and are not deductible.

b.	The loan is not related to Harry’s trade or business and must be accounted for as a non-business bad debt. Non-business bad debts are deductible as short-term capital losses in the year in which the actual amount of worthlessness is determined. Because the actual amount of the bad debt has not been determined as of the end of 2015, Harry is not entitled to any deduction related to the loan in 2015.

c.	The meal is a directly related business expense. The meal had a clear business purpose and there was a reasonable expectation of Audrey obtaining Harvey’s business as a result of their discussion. The fact that she does not ultimately receive Harvey’s business is not relevant. She can deduct $50 ($100 × 50%) of the meal cost as a trade or business expense.

133. Roscoe is a religion professor. During the summer, he spends 3 months in Israel touring historical landmarks. The cost of the summer trip includes $1,300 for airfare, $2,750 for lodging, $1,175 for meals, and $850 for incidental expenses. The following semester he incorporates many of the items he collected and the knowledge he gained from his experiences into his lectures. How much of the travel costs can Roscoe deduct? Explain.

ANSWER:

None of the costs that Roscoe incurred are deductible travel expenses. Travel, as a form of education, is specifically not deductible. The expenses are personal.

134. For each of the following situations, determine whether the expenses are deductible as an education expense. Explain.

a.	Marvin owns a real estate development firm and his adjusted gross income is $60,000. He enrolls as a part-time student at Northern College. His primary motivation for taking the classes is to obtain a greater understanding of the accounting issues associated with his real estate development business. He also believes that he can save 25% of the amount he pays in accounting expenses. The cost of the 2 courses he enrolls in is $900.

b.	Nancy is employed as a computer manager for a data processing company and her adjusted gross income is $90,000. She enrolls in a night course ($225) at the local college. The course is not required by her employer, but does improve her job skills.

c.	Janine is a recent graduate of Western University and has been hired by a local accounting firm. The firm expects Janine to pass the CPA exam on her initial attempt. To help her prepare for the CPA exam, she takes the Booker CPA Review Course that costs $1,500.

d.	Cam runs a licensed day-care center. To maintain his license he is required to attend a minimum of 30 hours a year of continuing education. During the year, Cam attends 40 hours of continuing education seminars at a cost of $1,500.

ANSWER:

a.	The education expenses will help Marvin in his business by improving his job skills. Therefore, the $1,400 expense is deductible as a trade or business expense.

b.	Although her employer does not require the course, the cost of the night course is deductible because it improves her job skills. Nancy can deduct the $225 as an unreimbursed employee business expense. It is deducted as a miscellaneous itemized deduction from AGI.

c.	Even though Janine is an accounting graduate and is working in a local CPA law firm, she is not a CPA. The course she takes to pass the CPA exam is not deductible because the CPA review course is an education expense that will help her qualify for a new trade or business. Being a CPA is considered a separate trade or business from being an accountant. The expense is personal.

d.	Cam can deduct the $1,500 cost of the seminars. The fact that Cam attended more than the required number of continuing education hours does not limit the amount he can deduct. The first 30 hours of continuing education are deductible because state law requires them. The remaining 10 hours are deductible because the courses maintain or improve the skills required in his trade or business.

135. Sally and Kelly are both enrolled in a graduate accounting course at Deacon University. Discuss how it is possible that Sally can deduct the cost of her tuition as an education expense while Kelly’s tuition is not deductible.

ANSWER:

An education expense is deductible when the expense is either required by the taxpayer’s employer (or by law) to maintain the job or maintains or improves the taxpayer’s skills. That same education expense incurred by another taxpayer could be considered an expense, which qualifies the taxpayer for a new trade or business, or is needed to meet the minimum educational requirements required for the taxpayer’s job.

Therefore, if Sally already has a degree in accounting or is working in the field of accounting, the cost of her tuition is deductible because the course would improve or maintain her accounting skills. On the other hand, if Kelly is not working in the field of accounting, or has never worked in accounting but is just continuing her accounting education, the expense is not deductible because the education will qualify her for a new trade or business or help her meet the minimum educational requirements of being an accountant.

136. Amanda is the president and 60% owner of ANR, a closely held corporation. During the year, she is paid a salary of $650,000. Her salary is 40% higher than that for executives of comparably sized companies in the industry. ANR has experienced 4 straight years of increased sales growth, at 3% per year, while other companies in the industry have experienced decreasing or level sales. Discuss what factors are used to determine whether Amanda’s salary represents reasonable compensation.

ANSWER:

In determining whether Amanda’s salary is reasonable, the IRS will focus on several factors including the following:

•	Her duties, responsibilities, and pay history.
•	Her ability and accomplishments.
•	The relationship of her compensation to the gross and net income of the business and dividends paid to the shareholders.
•	The amount of her salary related to other executives at similarly situated companies in the industry.
•	The salary policy of the company over the past several years.
•	The size of the company and the economic environment.

For her salary to be considered reasonable, the amount paid to her should be based on the number of hours she works, and her responsibilities and duties. In addition, Amanda’s salary history should also be consistent with her accomplishments as president of the corporation. That is, her salary should be reflective of the financial performance and growth of the corporation.

A factor in Amanda’s favor is that she has guided her company to four straight years of increased growth while other companies in the industry have experienced decreasing or level sales. Amanda’s position will be further strengthened if other key financial variables (e.g., gross margin percentage, net income as a percentage of sales, return on assets) are significantly better than similar company’s in the industry.

Because Amanda’s salary is significantly greater than other presidents in the industry, the IRS might challenge whether Amanda’s performance justifies a 40% differential. In challenging Amanda’s salary, the IRS will assert that the corporation is attempting to disguise a dividend payment to Amanda in the form of excessive salary.

137. Sita loans her next-door neighbor, Ivan, $800 to pay his rent and cover his utilities for last month. Ivan promises Sita he will repay her at the end of next month when he receives his next payroll check. Two weeks after loaning Ivan the money, Sita discovers Ivan had left town. No one knows his whereabouts. Sita is told that Ivan also hasn’t paid his rent or utility bills. Discuss whether Sita can deduct the $800. Completely explain your reasoning.

ANSWER:

To receive a nonbusiness bad debt deduction, Sita will have to prove that her intent was not to make an $800 gift to Ivan. To have a nonbusiness bad debt, a bonafide loan must have existed. That is, a note to show evidence of the debt, a provision for interest on the loan, possible collateral for the loan, a payment due date, and collection efforts by Sita need to be present in all or part. If evidence could be found to show this situation is a bonafide loan, a nonbusiness bad debt deduction would be reported as a short-term capital loss.

138. Walter is a cash basis taxpayer with a drapery cleaning business. In the current year he determines he will never receive payment from Davis for cleaning services provided to Davis. Can Walter record a deduction for the bad debt? Explain.

ANSWER:

Allowing a bad debt deduction for a cash basis taxpayer would amount to a double deduction. The expenses of the services rendered are deducted when payments are made to vendors. Also, no income is recorded at the time services are performed. Income is recorded when payments are received. In the present case, no income has been recorded. Therefore, Walter does not have a basis in the bad debts and no expense can be recorded to offset the income.

139. For each of the following situations, determine whether the item is deductible, how it would be deducted on the taxpayer’s return (if there are alternatives possible, discuss the conditions that would determine the treatment) and any limitations, which might be placed on the deduction.

a.	Allison is self-employed. She pays the following taxes during the current year:

State income tax	$1,200
Federal income tax	4,000
Self-employment tax	3,200
Property tax on residence	700
Tax on business equipment	200

b.	A customer who owed Leon $5,000 declared bankruptcy last year. At that time, the customer’s accountant estimated that only 40% of the customer’s debts would be paid. In the current year, Leon receives $1,000 from the bankruptcy court as final payment on the $5,000 debt.

ANSWER:

a.	Allison can deduct the state income tax and the property tax on her residence as an itemized deduction. One-half of the self-employment tax, $1,600, is deductible for adjusted gross income. The tax on business equipment is capitalized as part of the cost of the equipment. Federal income taxes are not deductible.

b.	If Leon is a cash basis taxpayer, no deduction is allowed. He will include the $1,000 he receives in the current year in his gross income. If Leon is an accrual basis taxpayer, he would deduct $3,000 ($5,000 × 60%) last year as a bad debt expense. In the current year, he can deduct an additional $1,000 ($2,000 expected payment – $1,000 actual payment) as a bad debt expense.

140. For each of the following IRA situations, determine the amount the taxpayer can deduct. Discuss any limitations, which might be placed, on the deduction.

a.	Marissa is single and is an active participant in a qualified employee pension plan. Determine the maximum Roth IRA contribution that she can make if her adjusted gross income for the year is $73,000.

b.	David and Donna are married and file a joint return. Each is covered by an employee-sponsored pension plan, and their adjusted gross income is $103,000. Determine their maximum IRA contribution and deduction for the current year.

c.	Pedro and Roxanne are married and have two children, ages 8 and 4. Their adjusted gross income for the year is $196,000. What is maximum amount they can contribute to each child’s Coverdell Education Savings Account (CESA) for the year?

ANSWER:

a.	Assuming Marissa did not make any contributions to other IRA accounts during the year, she is allowed to make a $5,500 contribution to a Roth IRA. Marissa does not receive a deduction for the contribution. If Marissa’s adjusted gross income exceeds $116,000, the amount that can she can contribute to a Roth IRA is phased out ratably until no contribution is allowed when her adjusted gross income equals $131,000.

b.	They both can contribute $5,500 to IRA accounts because both are covered by an employer-sponsored pension plans, the amount of the IRA deduction is reduced when their adjusted gross income reaches $98,000. The deduction is fully phased out when adjusted gross income exceeds $118,000. The maximum contribution amount is not affected by this limitation, only the deductible amount of the contribution. The $10,000 deduction must be reduced by 35% [($103,000 – $98,000) ÷ $20,000]. This leaves an allowable deduction for adjusted gross income of $8,250 [$11,000 – ($11,000 × 25%)].

c.	All taxpayers can make a nondeductible contribution of up to $2,000 to CESA for the benefit of an individual who is not 18 years of age. However, the total amount contributed to an individual’s CESA is limited to $2,000. For married taxpayers, this amount is phased out ratably when their adjusted gross income exceeds $190,000 and is fully phased-out when adjusted gross income exceeds $220,000. Because their adjusted gross income exceeds $190,000, the amount that they can contribute to each CESA is phased out ratably until no contribution is allowed when adjusted gross income equals $220,000. Therefore, they must reduce the total amount they contribute to each CESA by 20% [($196,000 – $190,000) ÷ $30,000] and they can contribute $1,600 [$2,000 – ($2,000 × 20%)] to each CESA.

141. For each of the following situations, determine whether the item is deductible, how it would be deducted on the taxpayer’s return (if there are alternatives possible, discuss the conditions that would determine the treatment) and any limitations, which might be placed on the deduction.

a.	Tony and Rika are married and file a joint return. Only Tony is covered by an employee-sponsored pension plan and their adjusted gross income is $183,000. Determine their maximum IRA contribution and deduction for the current year.

b.	Elise graduated from Southern University in May of 2014 and immediately started working as a financial analyst for Simone Financial Group. To finance her college education, she borrowed $30,000 from a local bank. In January of 2014, she begins paying back her student loans and pays $2,400 of interest expense during the year. Her adjusted gross income for the year is $63,000.

c.	During the current year, Rowland accepts a job as a computer programmer with Davenport Industries. He incurs the following expenses in moving from East Brunswick, New Jersey to Durham, North Carolina. Davenport Industries reimburses him $4,000 for his move.

Transportation of household goods		$2,800
Airfare		340
Temporary living:
	Lodging	430
	Meals	120
House-hunting trip:
	Transportation	330
	Lodging	280
	Meals	110

ANSWER:

a.	Both Tony and Rika are allowed to contribute $5,500 to their IRA accounts. Because Tony is covered by an employer-sponsored pension plan and their adjusted gross income exceeds $118,000, he is not eligible to deduct his contribution. However, because Rika is not covered by an employer-sponsored pension plan, her contribution is fully deductible if their adjusted gross income is less than or equal to $183,000. Since their adjusted gross income equals $183,000, the amount that she can deduct must be reduced by 0% [($183,000 – $183,000) ÷ $10,000]. This leaves her with an allowable deduction for adjusted gross income of $5,500 [$5,500 – ($5,500 × 0%)].

b.	The maximum amount of student loan interest that can be deducted is phased-out ratably over a $15,000 range when adjusted gross income exceeds $60,000. Since her adjusted gross income is greater than $60,000 the amount that she can deduct must be reduced by 20% [($63,000 – $60,000) ÷ $15,000]. This leaves her with an allowable deduction for adjusted gross income of $1,920 [$2,400 – ($2,400 × 20%)]. The remaining $480 ($2,400 – $1,920) of interest is personal and is not deductible.

c.	Rowland must include the $4,000 in gross income and he can deduct $3,140 of moving expenses for adjusted gross income. He can only deduct his direct moving expenses. Direct moving expenses include the cost of moving household goods ($2,700) and personal effects to the new residence, and airfare to his new residence ($340). The housing hunting expenses and temporary living expenses are considered personal in nature and are not deductible.

Match each statement with the correct term below.

a.	Not deductible.
b.	Short-term capital loss.
c.	Limited to $25 per person.
d.	Deductible as an ordinary loss
e.	Only 50% of the cost is deductible.
f.	Must be away from tax home overnight to be deductible.
g.	General area where a taxpayer conducts principal activity.
h.	If the “directly-related” test fails; this test may allow the deduction.

142. Associated with

ANSWER:

143. Business meals

ANSWER:

144. Business gift

ANSWER:

145. Business bad debt expense

ANSWER:

146. Child support

ANSWER:

147. Nonbusiness bad debt

ANSWER:

148. Tax home

ANSWER:

149. Travel expenses

ANSWER:

Chapter 7

1. An operating loss occurs when an entity’s deductions exceeds the income generated for the period.

	a.	True
	b.	False

ANSWER:

True

2. A transaction loss occurs when an asset is disposed of at less than its basis.

	a.	True
	b.	False

ANSWER:

True

3. A corporation has a net capital loss. The significance of a net capital loss in 2015 for a corporation is that it can be carried back 3 years and carried forward 5 years by a corporation to offset capital gains in other taxable years.

	a.	True
	b.	False

ANSWER:

True

4. The term tax shelter refers to investment property that involves residential and commercial real estate.

	a.	True
	b.	False

ANSWER:

False

5. Lu-Yin purchased her consulting business with $75,000 of her own funds and she borrowed $125,000 from the local bank. If she is personally responsible for the loan, she is at risk only for $50,000.

	a.	True
	b.	False

ANSWER:

False

6. Material participation requires that an individual participates in an activity for more than 200 hours per year or spends more than 50 hours a year in the activity and the time spent is more than anyone else spends on the activity.

	a.	True
	b.	False

ANSWER:

False

7. Virginia owns a business that rents power equipment to construction companies. Despite maintaining, delivering, and picking up the equipment, Virginia’s business is passive since it is a rental activity.

	a.	True
	b.	False

ANSWER:

False

8. While most rental activities are classified as passive, an exception is low-income housing.

	a.	True
	b.	False

ANSWER:

True

9. Portfolio income consists of unearned income from dividends, interest, royalties, annuities, and other assets held as investments.

	a.	True
	b.	False

ANSWER:

True

10. A closely held corporation cannot offset net passive losses against income of the business.

	a.	True
	b.	False

ANSWER:

False

11. Dwight owns an apartment complex that has a $30,000 loss. His adjusted gross income is $85,000 before the loss. Since he qualifies as an active participant he may deduct $25,000.

	a.	True
	b.	False

ANSWER:

True

12. Leon is allowed to deduct all the current and suspended losses on his passive activity if he sells his entire interest in the passive activity during the year.

	a.	True
	b.	False

ANSWER:

True

13. John discovers that termites have destroyed the front porch of his office building. The damage occurred over a 3-year period. He is eligible for a casualty loss deduction.

	a.	True
	b.	False

ANSWER:

False

14. The Baskerville Corporation has a net $6,500 capital loss during the current taxable year. They will be able to deduct $3,000 this year and carries the remaining $3,500 forward.

	a.	True
	b.	False

ANSWER:

False

15. Any corporate capital loss not used in the current year can be carried back 2 years and carried forward 20 years to offset capital gains in those years.

	a.	True
	b.	False

ANSWER:

False

16. Constance owns a boutique. During the current year, she has gross income of $400,000 and allowable deductions related to the business of $425,000.

I.	Constance has incurred a transaction loss, which represents her unrecovered cost of capital.
II.	Constance has suffered an annual loss, which may be carried back 2 years or forward 20 years if not used in the current year.

	a.	Only statement I is correct.
	b.	Only statement II is correct.
	c.	Both statements are correct.
	d.	Neither statement is correct.

ANSWER:

17. Barry owns all of the stock of Jerrico Corporation; an internet based gaming firm. Barry is also the President of and works full-time for Jerrico. During the current year, Jerrico has a loss of $125,000 from its operations.

I.	If Jerrico is an S Corporation, Barry may deduct the loss on his personal tax return as a deduction for AGI.
II.	If Jerrico is a regular corporation, the corporation can elect to carryforward the loss to reduce taxable income during the next 20 years.

	a.	Only statement I is correct.
	b.	Only statement II is correct.
	c.	Both statements are correct.
	d.	Neither statement is correct.

ANSWER:

18. Perry owns all of the stock of Sound Corporation. Perry is also the President of Sound and works full-time running Sound. During the current year, Sound has a loss of $75,000 from its operations.

I.	If Sound is an S Corporation, Perry deducts the loss on his personal tax return as a deduction from AGI.
II.	If Sound is a regular corporation, the corporation can elect to carryforward the loss to reduce taxable income during the next 20 years.

	a.	Only statement I is correct.
	b.	Only statement II is correct.
	c.	Both statements are correct.
	d.	Neither statement is correct.

ANSWER:

19. Kenneth owns all of the stock of Kearney Corporation. Kenneth is also the President of Kearney and works full-time running the corporation. During the current year, Kearney has a loss of $40,000 from its operations.

I.	If Kearney is an S Corporation, the corporation may carryback the loss 2 years (and obtain a refund of taxes paid) with any remaining loss carried forward 20 years.
II.	If Kearney is a regular corporation, Kenneth may deduct the loss for AGI on his personal tax return because the corporation is a flow through entity.

	a.	Only statement I is correct.
	b.	Only statement II is correct.
	c.	Both statements are correct.
	d.	Neither statement is correct.

ANSWER:

20. Baker Corporation suffers a net operating loss (NOL) of $65,000 in 2014. Baker was incorporated in 2012. Baker had a NOL of $20,000 in 2012 and taxable income of $35,000 in 2013. The corporation expects a taxable income of $200,000 in 2015. What valid alternatives are available to Baker concerning the $50,000 loss?

I.	Baker can carryback the loss to 2015 and will receive a refund of $2,250.
II.	Baker can elect to carryforward the loss and expect to receive tax savings of $19,500.

	a.	Only statement I is correct.
	b.	Only statement II is correct.
	c.	Both statements are correct.
	d.	Neither statement is correct.

ANSWER:

21. Carmen purchased a business for $150,000 by investing $40,000 of her own funds and borrowing $110,000 from Local National Bank. Carmen signed the note payable as a personal guarantor. In the first year of operations the business had an operating loss of $120,000. During the second year, the business has an operating loss of $45,000. How much of the year two loss is deductible against Carmen’s income from other business activities? Assume that Carmen materially participates in the business.

	a.	$- 0 –
	b.	$15,000
	c.	$30,000
	d.	$45,000
	e.	$120,000

ANSWER:

22. Sullivan, a pilot for Northern Airlines, has adjusted gross income of $92,000 before considering the following losses. The passive activity rules disallow the deduction for a loss in which of the following?

I.	Sullivan has a $4,500 loss from his ownership interest in Cowco, a feeder-cattle limited partnership. Sullivan is a general partner and is responsible for day-to-day management decisions.
II.	Sullivan has a $7,000 loss from his ownership interest in Swineco, a feeder-pig limited partnership. Sullivan is a limited partner.

	a.	Only statement I is correct.
	b.	Only statement II is correct.
	c.	Both statements are correct.
	d.	Neither statement is correct.

ANSWER:

23. Maria, an engineer, has adjusted gross income of $167,000 before considering the following losses. The passive activity rules disallow the deduction for the loss in which of the following?

I.	Maria has a $21,000 loss from her ownership of Family Apartment Village, a low-income housing project.
II.	Maria owns and actively participates in managing a rental house across the street from East State College. This activity generates a $7,000 loss in the current year.

	a.	Only statement I is correct.
	b.	Only statement II is correct.
	c.	Both statements are correct.
	d.	Neither statement is correct.

ANSWER:

24. If an individual is not a material participant, a rental activity is considered passive. However, certain rental activities are not deemed to be rentals for passive loss purposes even if the individual is not a material participant. Which of the following is not excluded from the passive loss rules?

	a.	Golf cart rentals.
	b.	Hotel rooms.
	c.	Jet ski rentals.
	d.	Apartment rentals.
	e.	Construction equipment rentals.

ANSWER:

25. Pedro owns a 50% interest in a limited partnership that operates an apartment complex. During the current year, the partnership generates a taxable rental loss of $42,000. Pedro’s other sources of income are salary of $55,000 and interest of $18,000. What is Pedro’s allowable loss from the apartment?

	a.	$ – 0 –
	b.	$18,000
	c.	$21,000
	d.	$25,000
	e.	None of the above.

ANSWER:

26. Jose, Mahlon, and Eric are partners in New Communications Partnership. Jose owns a 50% interest, Mahlon owns a 35% interest, and Eric owns a 15% interest. During the current year (the first year of operation for the enterprise), the business has a loss. Although the partnership is established as a general partnership, Jose functions as the manager and performs all of the day-to-day duties of a chief operating officer. Mahlon and Eric are merely investors who receive monthly reports about the business. At the close of the current tax year, each partner will receive a share of the partnership loss. Which of the partners will be able to deduct his (their) share of the partnership loss?

I.	Jose
II.	Mahlon
III.	Eric

	a.	Mahlon
	b.	Jose, Mahlon, and Eric
	c.	Jose
	d.	Jose and Mahlon
	e.	Mahlon and Eric

ANSWER:

27. During 2015, Pamela worked two “jobs.” She performed financial consulting activities for 1,000 hours and real estate development and rental activities for 1,200 hours. Her real estate development and rental activities produced a loss of $35,000. Her financial consulting generated a net business income of $40,000. How much of the loss can Pamela deduct against her financial consulting income?

	a.	$-0-
	b.	$17,500
	c.	$25,000
	d.	$35,000
	e.	$40,000

ANSWER:

28. During the current year, Alyssa incurred a net loss of $27,500 from a 5 percent interest in a partnership that operated and managed an office building. Alyssa had adjusted gross income from other sources of $110,000 and spent 67 hours assisting in the management of the building. Determine Alyssa’s total adjusted gross income for the current year.

	a.	$82,500
	b.	$90,000
	c.	$100,000
	d.	$105,000
	e.	$110,000

ANSWER:

29. Kenzie and Ross equally own rental real estate. The rental property generated a loss of $20,000. Kenzie is also employed as a part-time Tupperware salesperson and full time as a real estate agent. For her share of the loss to be fully deductible, she must:

I.	Not have an adjusted gross income in excess of $100,000.
II.	Spend more than 750 hours, in total, as a realtor
III.	Spend more than 100 hours managing the rental activity, and spend more time than Ross.
IV.	She must spend more than 50% of her time as a realtor and must own more than 5% of the real estate agency.

	a.	Only statement I is correct.
	b.	Only statement II is correct.
	c.	Statements I and II are correct.
	d.	Statements II, III, and IV are correct.
	e.	Statements I, II, III, and IV are correct.

ANSWER:

30. Travis is a 30% owner of 3 rental houses. He spends 625 hours a year managing the properties. In addition, he owns a 20% interest in a real estate business to which he devotes 1,800 hours a year. The rental units generate a total loss of $22,000, and Travis’ adjusted gross income in the current year, before considering the rental properties, is $120,000. How much of the loss can Travis deduct?

	a.	$- 0 –
	b.	$4,500
	c.	$6,600
	d.	$15,000
	e.	$22,000

ANSWER:

31. Susan is the owner of a 35-unit apartment complex. She spends 950 hours a year managing the property. In addition, she works part-time for a mortgage company. She spends 1,150 hours a year as a bookkeeper at the mortgage company. The apartment complex generated a loss of $32,000, and Susan’s adjusted gross income for the current year, before considering the apartment complex, is $48,000. How much of the loss can Susan deduct?

	a.	$- 0 –
	b.	$14,476
	c.	$16,727
	d.	$25,000
	e.	$32,000

ANSWER:

32. A passive activity

I.	includes an interest in a limited partnership held by a limited partner investor.
II.	includes a working interest in an oil and gas deposit.

	a.	Only statement I is correct.
	b.	Only statement II is correct.
	c.	Both statements are correct.
	d.	Neither statement is correct.

ANSWER:

33. A passive activity

I.	includes any trade or business in which a taxpayer does not materially participate.
II.	includes rentals of apartment buildings, rental houses, etc., where no significant personal services are involved.

	a.	Only statement I is correct.
	b.	Only statement II is correct.
	c.	Both statements are correct.
	d.	Neither statement is correct.

ANSWER:

34. Which of the following must be classified as “portfolio income?”

I.	Dividend income from an investment in Lincoln Corp. common stock.
II.	Royalty income from the ownership of the mineral rights on land. The taxpayer does not share the expenses with the extraction company.

	a.	Only statement I is correct.
	b.	Only statement II is correct.
	c.	Both statements are correct.
	d.	Neither statement is correct.

ANSWER:

35. Which of the following must be classified as “portfolio income?”

I.	Interest income on CDs from First National Bank.
II.	Loss realized from the sale of one-half of his stock shares in Lockleed Corp. Lockleed is qualified small business stock.

	a.	Only statement I is correct.
	b.	Only statement II is correct.
	c.	Both statements are correct.
	d.	Neither statement is correct.

ANSWER:

36. A taxpayer had the following for the current year:

	Active	Portfolio	Passive
	Income	Income	Income
Income	$75,000	$22,000	$55,000
Deductions	(45,000)	(16,000)	(110,000)
Income(Loss)	$30,000	$6,000	$(55,000)

I.	If the taxpayer is a closely held corporation, taxable income from the three activities is income of $6,000.
II.	If the taxpayer is an individual and the passive income is not related to a rental real estate activity, taxable income is $36,000.

	a.	Only statement I is correct.
	b.	Only statement II is correct.
	c.	Both statements are correct.
	d.	Neither statement is correct.

ANSWER:

37. If a taxpayer has the following for the current year:

	Active	Portfolio	Passive
	Income	Income	Income
Income	$75,000	$22,000	$55,000
Deductions	(45,000)	(16,000)	(110,000)
Income(Loss)	$30,000	$6,000	$(55,000)

I.	If the taxpayer is a regular corporation, taxable income from the three activities is a loss of $19,000.
II.	If the taxpayer is an individual and the passive income is related to a rental real estate activity in which the taxpayer is an active participant, taxable income is $11,000.

	a.	Only statement I is correct.
	b.	Only statement II is correct.
	c.	Both statements are correct.
	d.	Neither statement is correct.

ANSWER:

38. Salvador owns a passive activity that has a basis of $44,000 and a suspended loss of $18,000. Salvador’s taxable income from active and portfolio income is $55,000. If Salvador’s sells the passive activity for $56,000 how will he report the transaction on his tax return?

I.	Salvador will report an ordinary loss of $18,000.
II.	Salvador will report a capital gain of $12,000.

	a.	Only statement I is correct.
	b.	Only statement II is correct.
	c.	Both statements are correct.
	d.	Neither statement is correct.

ANSWER:

39. During the year, Aimee reports $30,000 of active business income, $15,000 of income from passive activity X, and a $25,000 loss from passive activity Y. Determine the tax consequences of these events.

I.	The $15,000 income from activity X can offset $15,000 of the loss from activity Y.
II.	Any passive loss that is not deducted in the current year is suspended.

	a.	Only statement I is correct.
	b.	Only statement II is correct.
	c.	Both statements are correct.
	d.	Neither statement is correct.

ANSWER:

40. Janine is an engineering professor at Southern College. Her annual salary is $110,000. She owns two 3-unit apartment buildings near the university. Because of the proximity to campus, Janine actively manages the property. During the current year, the rental of the property produced a $29,500 loss. How much of the loss may Janine deduct for the current year?

	a.	$- 0 –
	b.	$14,750
	c.	$20,000
	d.	$25,000
	e.	$29,500

ANSWER:

41. Nancy is the owner of an apartment complex. She actively participates in the management of the building. During the current year, it generates a taxable loss of $27,000. Nancy’s other sources of income are salary of $52,000 and interest of $21,000. What is Nancy’s allowable loss from the apartment?

	a.	$- 0 –
	b.	$18,000
	c.	$25,000
	d.	$27,000
	e.	None of the above.

ANSWER:

42. Nelson is the owner of an apartment complex. He actively participates in the management of the building. During the current year, it generates a taxable loss of $33,000. Nelson’s other sources of income are salary of $148,000 and interest of $12,000. What is Nelson’s allowable loss from the apartment?

	a.	$- 0 –
	b.	$ 1,000
	c.	$12,000
	d.	$25,000
	e.	$33,000.

ANSWER:

43. Bowden is a single individual and has the following income (loss) for the current tax year:

Salary	$85,000
Dividends and interest	24,000
Actively managed rental property	(23,000)

What is Bowden’s adjusted gross income for this year?

	a.	$ 85,000
	b.	$ 86,000
	c.	$ 88,500
	d.	$ 89,500
	e.	$109,000

ANSWER:

44. Karl has the following income (loss) during the current year:

Net business income	$45,500
Dividends and interest	12,000
Actively managed rental property	(34,000)

What is Karl’s adjusted gross income for this year?

	a.	$23,500
	b.	$31,400
	c.	$32,500
	d.	$45,500
	e.	$57,500

ANSWER:

45. Natalie is the owner of an apartment complex. She actively participates in the management of the building. During the current year, it generates a taxable loss of $33,000. Natalie’s other sources of income are salary of $114,000 and interest of $16,000. What is Natalie’s allowable loss from the apartment in the current year?

	a.	$-0-
	b.	$10,000
	c.	$15,000
	d.	$16,000
	e.	$25,000

ANSWER:

46. Tim owns 3 passive investments. During the current year, he has the following income and loss from each activity:

Activity 1	$(7,000)
Activity 2	(3,000)
Activity 3	4,000

What is the amount of suspended loss allocated to Activity 2?

	a.	$- 0 –
	b.	$1,800
	c.	$3,000
	d.	$4,200
	e.	$6,000

ANSWER:

47. Ricardo owns interests in 3 passive activities: A, B, and C. During the current year, activity A realizes income of $8,000 while activities B and C realize losses of $16,000 and $24,000, respectively. Determine the amount of suspended loss attributable to activity C.

	a.	$- 0 –
	b.	$ 8,000
	c.	$12,800
	d.	$19,200
	e.	$24,000

ANSWER:

48. Ling owns 3 passive investments. During the last two years, she has the following income and loss from each activity:

	2014	2015
Activity 1	$(14,000)	$(6,000)
Activity 2	(6,000)	(1,000)
Activity 3	8,000	12,000

At the end of 2015 what is the amount of suspended loss allocated to Activity 2?

	a.	$1,695
	b.	$1,815
	c.	$5,185
	d.	$5,305
	e.	$7,000

ANSWER:

49. Loren owns three passive activities that had the following results for the current year:

Passive Activity A	$25,000
Passive Activity B	(10,000)
Passive Activity C	(40,000)

If none of the passive activities are rental real estate activities, what is the amount of suspended loss attributable to Activity C?

	a.	$- 0 –
	b.	$18,750
	c.	$20,000
	d.	$25,000
	e.	$40,000

ANSWER:

50. Linda owns three passive activities that had the following results for the current year:

Passive Activity A	$(4,500)
Passive Activity B	20,000
Passive Activity C	(25,500)

If none of the passive activities are rental real estate activities, what is the amount of suspended loss attributable to Activity A?

	a.	$- 0 –
	b.	$ 1,500
	c.	$ 4,500
	d.	$ 8,500
	e.	$10,000

ANSWER:

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Concepts In Federal Taxation 2016, 23rd Edition By Murphy – Test Bank A+

Concepts In Federal Taxation 2016, 23rd Edition By Murphy – Test Bank A+

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