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Multiple choice Tax QuestionsPeter and Eileen are married and live in a common law state. Peter wants to make gifts to their five children in 2009. What is the maximum amount of the annual exclusion they will be allowed for these gifts?A) $60,000.B) $65,000.C) $120,000.D) $130,000.E) None of the above.2.Which is a primary source of tax law?A) J. W. Yarbo v. Comm., 737 F.2d 479 (CA-5, 1984).B) Article by a Federal judge in Harvard Law Review.C) Technical Advice Memoranda.D) Letter ruling.E) All of the above are primary sources.3.Jerry purchased a U.S. Series EE savings bond for $279. The bond has a maturity value in 10 years of $500 and yields 6% interest. This is the first Series EE bond that Jerry has ever owned.A) Jerry must report the interest income each year using the original issue discount rules.B) Jerry can report all of the $221 interest income in the year the bond matures.C) The interest on the bonds is exempt from Federal income tax.D) Jerry must report ($500 – $279)/10 = $22.10 interest income each year he owns the bond.E) None of the above.4.Home Office, Inc., leased a copying machine to a new customer on December 27, 2009. The machine was to rent for $500 per month for a period of 36 months beginning January 1, 2010. The customer was required to pay the first and last month’s rent at the time the lease was signed. The customer also was required to pay an $800 damage deposit. Home Office must recognize as income for the lease:A) $1,000 in 2009, if Home Office is an accrual basis taxpayer.B) $1,000 in 2010, if Home Office is a cash basis taxpayer.C) $1,800 in 2009, if Home Office is a cash basis taxpayer.D) $0 in 2009, if Home Office is an accrual basis taxpayer.E) None of the above.5.Kathy operates a gym. She sells memberships that entitle the member to use the facilities at any time. A one-year membership costs $360 ($360/12 = $30 per month); a two-year membership costs $600 ($600/24 = $25 per month). Cash payment is required at the beginning of the membership period. On July 1, 2009, Kathy sold a one-year membership and a two-year membership.I. If Kathy is a cash basis taxpayer, her 2009 gross income from the contracts is $960 ($360 + $600).II. If Kathy is an accrual basis taxpayer, her 2009 gross income from the contracts is $330 [(6/12 $360) + (6/24 $600)].III. If Kathy is an accrual basis taxpayer, her 2010 gross income from the contracts is $630 [(6/12)($360) + $450].A) Only I is true.B) Only I and II are true.C) Only II and III are true.D) I, II, and III are true.E) None of the above.6.Ben was diagnosed with a terminal illness. His physician estimated that Ben would live no more than 18 months. After he received the doctor’s diagnosis, Ben cashed in his life insurance policy to pay some medical bills. Ben had paid $12,000 in premiums on the policy, and he collected $50,000, the cash surrender value of the policy. Henry enjoys excellent health, but he cashed in his life insurance policy to purchase a new home. He had paid premiums of $12,000 and collected $50,000 from the insurance company.A) Neither Ben nor Henry is required to recognize gross income.B) Both Ben and Henry must recognize $38,000 ($50,000 – $12,000) of gross income.C) Henry must recognize $38,000 ($50,000 – $12,000) of gross income, but Ben does not recognize any gross income.D) Ben must recognize $38,000 ($50,000 – $12,000) of gross income, but Henry does not recognize any gross income.E) None of the above.Roger, age 19, is a full-time graduate student at State College. During 2009, he received the following payments:State scholarship for ten months (tuition and books) $3,600Loan from college financial aid office 1,500Cash support from parents 3,000Cash prize awarded in contest 500$8,600Roger served as a resident advisor in a dormitory and therefore the university waived the $2,400 charge for the room he occupied. What is Roger’s adjusted gross income for 2009?A) $11,000.B) $4,100.C) $2,900.D) $500.E) None of the above.8.Early in the year, Mike was in an automobile accident during the course of his employment. As a result of the injuries he sustained, he received the following payments during the year:Worker’s compensation benefit $4,000Reimbursement of medical expenses from the company’s group medicalinsurance plan 6,000Regular salary under the company’s sick pay plan 5,000What is the amount that Mike must include in gross income for the current year?A) $15,000.B) $11,000.C) $9,000.D) $5,000.E) None of the above.9.Which of the following is a deduction from AGI (itemized deduction)?A) Contribution to a traditional IRA.B) Roof repairs to a rental home.C) Safe deposit box rental fee in which stock certificates are stored.D) Alimony payment.E) None of the above.10.Rex, a cash basis calendar year taxpayer, runs a bingo operation which is illegal under state law. During 2009, a bill designated H.R. 9 is introduced into the state legislature which, if enacted, would legitimize bingo games. In 2009, Rex had the following expenses:Operating expenses in conducting bingo games $247,000Payoff money to state and local police 24,000Newspaper ads supporting H.R. 9 3,000Political contributions to legislators who support H.R. 9 8,000Of these expenditures, Rex may deduct:A) $247,000.B) $250,000.C) $258,000.D) $282,000.E) None of the above.11.Tommy, an automobile mechanic employed by an auto dealership, is considering opening a fast food franchise. If Tommy decides not to acquire the fast food franchise, any investigation expenses are:A) A deduction for AGI.B) A deduction from AGI, subject to the 2 percent floor.C) A deduction from AGI, not subject to the 2 percent floor.D) Deductible up to $5,000 in the current year with the balance being amortized over a 180-month period.E) Not deductible.12.John had adjusted gross income of $60,000. During the year his personal use summer home was damaged by a fire. Pertinent data with respect to the home follows:Cost basis $250,000Value before the fire 400,000Value after the fire 100,000Insurance recovery 270,000John had an accident with his personal use car. As a result of the accident, John was cited with reckless driving and willful negligence. Pertinent data with respect to the car follows:Cost basis $80,000Value before the accident 6,000Value after the accident 20,000Insurance recovery –0–What is John’s deductible casualty loss?A) $0.B) $15,800.C) $15,900.D) $35,900.E) None of the above.13.Janice, single with one dependent child, had the following items for the year 2009:Salary $30,000Dividend income 10,000Loss on § 1244 small business stock held for three years (45,000)Total itemized deductions (5,000)Determine Janice’s net operating loss for the year 2009.A) $0.B) $5,000.C) $13,350.D) $20,000.E) None of the above.14.Jack, age 30 and married with no dependents, is a self-employed individual. For 2009, his self-employed business sustained a net loss from operations of $10,000. The following additional information was obtained from his personal records for the year:Nonbusiness long-term capital gain $ 2,000Interest income 6,000Itemized deductions—consisting of taxes and interest (12,000)Based on the above information, what is Jack’s net operating loss for the current year if he and his spouse file a joint return?A) $2,000.B) $8,000.C) $10,000.D) $11,000.E) $16,400.15.Tara purchased a machine for $40,000 to be used in her business. The cost recovery allowed and allowable for the three years the machine was used are as follows:Cost Recovery Allowed Cost Recovery AllowableYear 1 $16,000 $ 8,000Year 2 9,600 12,800Year 3 5,760 7,680If Tara sells the machine after three years for $15,000, how much gain should she recognize?A) $3,480.B) $6,360.C) $9,240.D) $11,480.E) None of the above.16.Alice purchased office furniture on September 20, 2009, for $100,000. On October 10, she purchased business computers for $80,000. Alice did not elect to expense any of the assets under § 179, nor did she elect straight-line cost recovery. Alice does elect not to take additional first-year depreciation. Determine the cost recovery deduction for the business assets for 2009.A) $6,426.B) $14,710.C) $25,722.D) $30,290.E) None of the above.17.On January 15, 2009, Vern purchased the rights to a mineral interest for $3,500,000. At that time it was estimated that the recoverable units would be 500,000. During the year, 40,000 units were mined and 25,000 units were sold for $800,000. Vern incurred expenses during 2009 of $500,000. The percentage depletion rate is 22%. Determine Vern’s depletion deduction for 2009.A) $150,000.B) $175,000.C) $176,000.D) $200,000.E) $250,000.18.Corey performs services for Sophie. Which, if any, of the following factors indicate that Corey is an independent contractor, rather than an employee?A) Sophie sets the work schedule.B) Corey provides his own tools.C) Corey files a Form 2106 with his Form 1040.D) Corey is paid by the hour.E) None of the above.19.A worker may prefer to be classified as an employee (rather than an independent contractor) for which of the following reasons:A) To avoid the self-employment tax.B) To claim unreimbursed work-related expenses as a deduction for AGI.C) To avoid the cutback adjustment on unreimbursed business entertainment expenses.D) To avoid the 2%-of-AGI floor on unreimbursed work-related expenses.E) None of the above.20.Amy works as an auditor for a large major CPA firm. During the months of September thru and November of each year, she is permanently assigned to the team auditing Garnet Corporation. As a result, every day she drives from her home to Garnet and returns home after work. Mileage is as follows:MilesHome to office 10Home to Garnet 30Office to Garnet 35For these three months, Amy’s deductible mileage for each workday is:A) 0.B) 30.C) 35.D) 60.E) None of the above.21.Rosita is employed as a systems analyst. For calendar year 2009, she had AGI of $120,000 and paid the following medical expenses:Medical insurance premiums $3,900Doctor and dentist bills for Joseand Carmen (Rosita’s parents) 8,250Doctor and dentist bills for Rosita 6,750Prescribed medicines for Rosita 300Nonprescribed insulin for Rosita 825José and Carmen would qualify as Rosita’s dependents except that they file a joint return. Rosita’s medical insurance policy does not cover them. Rosita filed a claim for $3,150 of her own expenses with her insurance company in December 2009 and received the reimbursement in January 2010. What is Rosita’s maximum allowable medical expense deduction for 2009?A) $2,775.B) $11,025.C) $17,325.D) $17,775.E) None of the above.22.Sandra is single and does a lot of business entertaining at home. Because Arthur, Sandra’s 80-year old dependent grandfather who lived with Sandra, needs medical and nursing care, he moved to Twilight Nursing Home. During the year, Sandra made the following payments on behalf of Arthur:Room at Twilight $4,500Meals for Arthur at Twilight 850Doctor and nurse fees 700Cable TV service for Arthur’s room 107Total $6,157Twilight has medical staff in residence. Disregarding the 7.5% floor, how much, if any, of these expenses qualify for a medical deduction by Sandra?A) $6,157.B) $6,050.C) $5,200.D) $1,550.E) None of the above.23.Joseph and Sandra, married taxpayers, took out a mortgage on their home for $350,000 in 1989. In May of this year, when the home had a fair market value of $450,000 and they owed $250,000 on the mortgage, they took out a home equity loan for $220,000. They used the funds to purchase a single engine airplane to be used for recreational travel purposes. What is the maximum amount of debt on which they can deduct home equity interest?A) $50,000.B) $100,000.C) $220,000.D) $230,000.E) None of the above.24.Tara owns a shoe store and a bookstore. Both businesses are operated in a mall. She also owns a restaurant across the street and a jewelry store several blocks away.A) All four businesses can be treated as a single activity if Tara elects to do so.B) Only the shoe store and bookstore can be treated as a single activity, the restaurant must be treated as a separate activity, and the jewelry store must be treated as a separate activity.C) The shoe store, bookstore, and restaurant can be treated as a single activity, and the jewelry store must be treated as a separate activity.D) All four businesses must be treated as separate activities.E) None of the above.25.Tess owns a building in which she rents apartments to tenants and operates a restaurant. Which of the following statements is incorrect?A) If 60% of Tess’s gross income is from apartment rentals and 40% is from the restaurant, the rental operation and the restaurant business must be treated as separate activities.B) If 95% of Tess’s gross income is from apartment rentals and 5% is from the restaurant, she may treat the rental operation and the restaurant business as a single activity that is a rental activity.C) If 5% of Tess’s gross income is from apartment rentals and 95% is from the restaurant, she may treat the rental operation and the restaurant business as a single activity that is not a rental activity.D) If 98% of Tess’s gross income is from apartment rentals and 2% is from the restaurant, the rental operation and the restaurant business must be treated as a single activity that is not a rental activity.E) None of the above.26.Tony is married and files a joint tax return. His current investment interest expense of $95,000 is related to a loan used to purchase a parcel of unimproved land. Income from investments [dividends (not qualified) and interest] total $18,000 and miscellaneous itemized deductions (after adjustment for the 2%-of-AGI floor) amount to $2,800. In addition to the $1,400 of investment expenses included in miscellaneous itemized deductions, Tony paid $3,600 of real estate taxes on the unimproved land. He also has a $4,500 net long-term capital gain from the sale of another parcel of unimproved land. Tony’s maximum investment interest deduction for the year is:A) $95,000.B) $18,000.C) $17,500.D) $13,000.E) None of the above.27.Prior to the effect of tax credits, Eunice’s regular income tax liability is $200,000 and her tentative AMT is $190,000. Eunice has general business credits available of $12,500. Calculate Eunice’s tax liability after tax credits.A) $200,000.B) $190,000.C) $187,500.D) $177,500.E) None of the above.28.Which of the following normally produces positive AMT adjustments?A) Charitable contributions of property.B) Standard deduction.C) Personal exemption deduction.D) Only b. and c. are correct.E) a., b., and c. are correct.29.Factors that can cause the adjusted basis for AMT purposes to be different from the adjusted basis for regular income tax purposes include the following:A) A different amount of depreciation (cost recovery) has been deducted for AMT purposes and regular income tax purposes.B) The spread on an incentive stock option (ISO) is recognized for AMT purposes, but is not recognized for regular income tax purposes.C) Two-percent miscellaneous itemized deductions are not deductible in calculating the AMT.D) Only a. and b.E) a., b., and c.30.Refundable tax credits include the:A) Foreign tax credit.B) Tax credit for rehabilitation expenses.C) Credit for certain retirement plan contributions.D) Earned income credit.E) None of the above.31.The components of the general business credit include all of the following except:A) Credit for employer-provided child care.B) Disabled access credit.C) Research activities credit.D) Tax credit for rehabilitation expenditures.E) All of the above are components of the general business credit.32.Molly has generated general business credits over the years that have not been utilized. The amounts generated and not utilized follow:2005 $ 5,0002006 15,0002007 10,0002008 8,000In the current year, 2009, her business generates an additional $30,000 general business credit. In 2009, based on her tax liability before credits, she can utilize a general business credit of up to $40,000. After utilizing the carryforwards and the current year credits, how much of the general business credit generated in 2009 is available for future years?A) $0.B) $2,000.C) $23,000.D) $28,000.E) None of the above.33.On December 1, 2009, Evan purchases an office building from Ted for $600,000. Evan pays $48,000 to replace the roof, and on December 15, he pays the property taxes for 2009 of $10,000. What is the amount realized by Ted and the adjusted basis of the building (ignore the effect of depreciation) to Evan?A) $599,151 and $638,849.B) $600,000 and $648,000.C) $609,151 and $648,849.D) $609,151 and $657,151.E) None of the above.34.Which of the following decreases adjusted basis?A) Amortization of bond premium.B) A corporate distribution to a shareholder treated as a return of capital in which gain is recognized to the shareholder.C) Dividends received.D) Only a. and b.E) All of the above.35.Steve purchased his home for $500,000. As a sole proprietor, he operates a certified public accounting practice in his home. For this business, he uses one room exclusively and regularly as a home office. In Year 1, $3,042 of depreciation expense on the home office was deducted on his income tax return. In Year 2, Steve sustained losses in his business; therefore, no depreciation was taken on the home office. Had he been allowed to deduct depreciation expense, his depreciation expense would have been $3,175. What is the adjusted basis in the home?A) $493,783.B) $496,825.C) $496,958.D) $500,000.E) None of the above.36.In determining the basis of like-kind property received, postponed losses are:A) Added to the basis of the old property.B) Subtracted from the basis of the old property.C) Added to the fair market value of the like-kind property received.D) Subtracted from the fair market value of the like-kind property received.E) None of the above.37.Rita and Todd exchange real estate in a like-kind exchange. Rita’s property is subject to a $40,000 mortgage and has a basis of $75,000 (fair market value of $112,000). She receives real estate with a fair market value of $72,000 and Todd assumes the mortgage. What is her recognized gain and adjusted basis for the real estate received?A) $0; $75,000.B) $37,000; $72,000.C) $37,000; $75,000.D) $40,000; $115,000.E) None of the above.38.Which of the following qualify as replacement property under § 1033 (nonrecognition of gain from an involuntary conversion)?1. An office building occupied by the taxpayer is condemned. The building is to be replaced with a warehouse which is to be used to store taxpayer’s inventory.2. A shopping center leased to various retail tenants is destroyed by a tornado. The shopping center is to be replaced with a warehouse which is to be leased to various tenants.3. An office building occupied by the taxpayer is destroyed by a fire. The office building is to be replaced with a warehouse which is to be leased to various tenants.A) 1.B) 2.C) 3.D) Only 1 and 2.E) 1, 2, and 3.39.Virgil was leasing an apartment from Mauve, Inc. Mauve paid Virgil $1,000 to cancel his lease and move out so that Mauve could demolish the building. As a result:A) Virgil has a $1,000 capital gain.B) Virgil has a $1,000 capital loss.C) Mauve has a $1,000 capital loss.D) Mauve has a $1,000 capital gain.E) None of the above.40.Harry inherited a residence from his mother when she died. The mother had a tax basis of $566,000 for the residence when she died and the residence was worth $433,000 at the date of her death. Which of the statements below is correct?A) Harry’s holding period for the residence includes his mother’s holding period for the residence.B) Harry’s holding period for the residence does not include his mother’s holding period for the residence.C) Harry’s holding period for the residence is automatically long term.D) b and cE) None of the above.41.Sara is filing as head of household and has 2009 taxable income of $27,000 which includes $13,000 of net long-tem capital gain. The net long-term capital gain is made up of $10,000 25% gain and $3,000 0%/15% gain. What is the tax on her taxable income using the alternative tax method?A) $0.B) $2,345.C) $3,003.D) $4,003.E) None of the above.42.Red Company had an involuntary conversion on December 23, 2009. The machinery had been acquired on April 1, 2007, for $49,000 and its adjusted basis was $14,200. The machinery was completely destroyed by fire and Red received $10,000 of insurance proceeds for the machine and did not replace it. This was Red’s only casualty or theft event for the year. As a result of this event, Red initially has:A) $10,000 § 1231 loss.B) $10,000 § 1245 recapture gain.C) $4,200 casualty loss.D) $4,200 § 1231 loss.E) None of the above.43.Which of the following statements is correct?A) When depreciable property is gifted to another individual taxpayer, the depreciation recapture potential is extinguished.B) When depreciable property is inherited by a taxpayer, the depreciation recapture potential is extinguished.C) When corporate depreciable property is distributed as a dividend, the depreciation recapture potential is generally not recognized.D) When depreciable property is contributed to charity, the depreciation recapture potential has no effect on the amount of the charitable contribution deduction.E) All of the above are correct.44.Business equipment is purchased on March 10, 2008, used in the business until September 29, 2008, and sold at a $23,000 loss on October 10, 2008. The equipment was not suitable for the work the business had purchased it for. The loss on the disposition should have been reported in the 2008 Form 4797, Part:A) I.B) II.C) III.D) IV.E) This transaction would not be reported in the Form 4797.45.Which of the following taxpayers is required to use the accrual method of accounting?A) A retail business with average annual gross receipts of $800,000.B) A medical doctor with average annual gross receipts of $2 million.C) An insurance agency with average annual gross receipts of $2 million.D) All of the above are required to use the accrual method.E) None of the above is required to use the accrual method.46.The accrual method generally must be used to report income:A) From long-term construction contracts.B) Earned by an incorporated public accounting firm with gross receipts in excess of $5 million.C) Earned by partnership that has a partner that is a C corporation.D) A grocery store with average annual gross receipts of $900,000.E) None of the above.47.Which of the following statements regarding the matching principle is correct?A) The matching principle is never relevant to tax accounting.B) The matching principle of financial accounting is an important component of the cash method of accounting.C) The matching principle of financial accounting is the cornerstone of accrual basis tax accounting.D) The matching principle of financial accounting is sometimes relevant to timing deductions for an accrual basis taxpayer’s recurring items.E) None of the above.48.Which is not considered to be a type of deferred compensation?A) § 401(k) plan.B) Incentive stock option (ISO) plan.C) Tax-deferred annuities.D) Company-supplied automobile.E) All of the above are types of deferred compensation.49.Which of the following characteristics does not describe a defined contribution plan?A) Includes a money purchase plan.B) An account for each participant is established.C) Exempt from funding requirements.D) Subject to PBGC plan termination insurance rules.E) All of the above describe a defined contribution plan.50.Susan is a self-employed accountant with a qualified defined contribution plan (a Keogh plan). She has the following income items for the year:Earned income from self-employment $50,000Dividend income 8,000Interest income 2,000Net short-term capital gain 12,000Adjusted gross income 72,000What is the maximum amount Susan can deduct as a contribution to her retirement plan in 2009, assuming the self-employment tax rate is 15.3%?A) $9,235.B) $12,000.C) $46,000.D) $46,468.E) None of the above.
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