Income Tax Part 2
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Which of the following must be capitalized by a business?
[removed]a.Amount paid for a covenant not to compete
[removed]b.Replacement of a windshield of a business truck which was broken in an accident
[removed]c.Repair of a roof of a building used in business
[removed]d.Only “Repair of a roof of a building used in business” and “Amount paid for a covenant not to compete” must be capitalized.
[removed]e.”Replacement of a windshield of a business truck which was broken in an accident”, “Repair of a roof of a building used in business”, and “Amount paid for a covenant not to compete” can be expensed rather than capitalized.
Jed is an electrician. Jed and his wife are accrual basis taxpayers and file a joint return. Jed wired a new house for Alison and billed her $15,000. Alison paid Jed $10,000 and refused to pay the remainder of the bill, claiming the fee to be exorbitant. Jed took Alison to Small Claims Court for the unpaid amount and was awarded a $2,000 judgement. Jed was able to collect the judgement but not the remainder of the bill from Alison. What amount of loss may Jed deduct in the current year?
[removed]a.$5,000
[removed]b.$3,000
[removed]c.$2,000
[removed]d.$0
[removed]e.None of these choices are correct.
Jack, age 30 and married with no dependents, is a self-employed individual. For 2016, 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 |
$ 2,000 |
| Interest income |
6,000 |
| Itemized deductions—consisting of taxes and interest |
(12,000) |
Based on the above information, what is Jack’s net operating loss for 2016 if he and his spouse file a joint return?
[removed]a.($14,000)
[removed]b.($11,000)
[removed]c.($10,000)
[removed]d.($2,000)
[removed]e.($8,000)
On June 1 of the current year, Tab converted a machine from personal use to rental property. At the time of the conversion, the machine was worth $90,000. Five years ago Tab purchased the machine for $120,000. The machine is still encumbered by a $50,000 mortgage. What is the basis of the machine for cost recovery?
[removed]a.$70,000
[removed]b.$120,000
[removed]c.$140,000
[removed]d.$90,000
[removed]e.None of these choices are correct.
James purchased a new business asset (three-year personalty) on July 23, 2016, at a cost of $40,000. James takes additional first-year depreciation but does not elect Section 179 expense on the asset. Determine the cost recovery deduction for 2016.
[removed]a.$8,333
[removed]b.$26,666
[removed]c.$33,333
[removed]d.$41,665
[removed]e.None of these choices are correct.
Jordan performs services for Ryan. Which, if any, of the following factors indicate that Jordan is an independent contractor, rather than an employee?
[removed]a.Jordan files a Form 2106 with his Form 1040.
[removed]b.Jordan is paid based on tasks performed.
[removed]c.Ryan provides the tools used.
[removed]d.Ryan sets the work schedule.
[removed]e.None of these choices are correct.
During the year, John went from Milwaukee to Alaska on business. Preceding a five-day business meeting, he spent four days vacationing at the beach. Excluding the vacation costs, his expenses for the trip are:
| Air fare |
$3,200 |
| Lodging |
900 |
| Meals |
800 |
| Entertainment |
600 |
Presuming no reimbursement, deductible expenses are:
[removed]a.$5,500
[removed]b.$3,200
[removed]c.$4,800
[removed]d.$3,900
[removed]e.None of these choices are correct.
In contrasting the reporting procedures of employees and self-employed persons regarding job-related transactions, which of the following items involve self-employed?
[removed]a.Schedule C of Form 1040.
[removed]b.Schedule A of Form 1040.
[removed]c.Form 2106.
[removed]d.Form W-2.
[removed]e.None of these choices are correct.
Problem 3-36 (LO. 3, 4)
Determine whether the individuals will qualify as the taxpayer’s dependent in each of the following independent scenarios. Specify whether the dependency exemption would come under the qualifying child category, the qualifying relative category, or “not applicable” (if the individual does not qualify as a dependent).
a. Andy maintains a household that includes a cousin (age 12), a niece (age 18), and a son (age 26). All are full-time students. Andy furnishes all of their support.
b. Minerva provides all of the support of a family friend’s son (age 20), who lives with her. She also furnishes most of the support of her stepmother, who does not live with her.
| Family friend’s son |
|
|
| Stepmother |
|
|
|
c. Raul, a U.S. citizen, lives in Costa Rica. Raul’s household includes a friend, Helena, who is age 19 and a citizen of Costa Rica. Raul provides all of Helena’s support.
d. Karen maintains a household that includes her ex-husband, her mother-in-law, and her brother-in-law (age 23 and not a full-time student). Karen provides more than half of all their support. Karen is single and was divorced last year.
| Ex-husband |
|
|
| Mother-in-law |
|
|
| Brother-in-law |
|
|
|
Problem 4-45 (LO. 4)
Nell and Kirby are in the process of negotiating their divorce agreement. What should be the tax consequences to Nell and Kirby if the following, considered individually, became part of the agreement?
a. In consideration for her one-half interest in their personal residence, Kirby will transfer to Nell stock with a value of $200,000 and $50,000 of cash. Kirby’s cost of the stock was $150,000, and the value of the personal residence is $500,000. They purchased the residence three years ago for $300,000.
The transfer of the property is a event.
Nell’s basis for the stock is $[removed].
Kirby’s basis in the house is $[removed].
b. Nell will receive $1,000 per month for 120 months. If she dies before receiving all 120 payments, the remaining payments will be made to her estate.
The payments as alimony and are Nell’s gross income as they are received.
c. Nell is to have custody of their 12-year-old son, Bobby. She is to receive $1,200 per month until Bobby (1) dies or (2) attains age 21 (whichever occurs first). After either of these events occurs, Nell will receive only $300 per month for the remainder of her life.
$[removed] per month is alimony that is Nell’s gross income, and the remaining $[removed] per month is considered and is to Nell.
Problem 5-35 (LO. 2)
Leigh sued an overzealous bill collector and received the following settlement:
| Damage to her automobile that the collector attempted to repossess |
$3,300 |
| Physical damage to her arm caused by the collector |
$15,000 |
| Loss of income while her arm was healing |
$6,000 |
| Punitive damages |
$80,000 |
|
a. Regarding Leigh’s settlement, classify the following as either “Included in” or “Excluded from” her gross income.
|
|
Included in/Excluded from
Income |
| • |
Damage to her automobile that the collector attempted to repossess |
|
| • |
Physical damage to her arm caused by the collector |
|
| • |
Loss of income while her arm was healing |
|
| • |
Punitive damages |
|
|
b. Assume that Leigh also collected $25,000 of damages for slander to her personal reputation caused by the bill collector misrepresenting the facts to Leigh’s employer and other creditors. Is this $25,000 included in Leigh’s gross income?
Problem 6-33 (LO. 1)
Amos is a self-employed tax attorney. He and Monica, his employee, attend a conference in Dallas sponsored by the American Institute of CPAs. The following expenses are incurred during the trip:
|
Amos |
Monica |
| Conference registration |
$900 |
|
$900 |
|
| Airfare |
1,200 |
|
700 |
|
| Taxi fares |
100 |
|
0 |
|
| Lodging in Dallas |
$750 |
|
$300 |
|
|
Amos pays for all of these expenses.
a. What is the tax effect of these expenses for Amos?
The expenses are
b. Calculate the total amount of deductible expenses (for both Amos and Monica).
| Conference registration |
$[removed] |
| Airline tickets |
[removed] |
| Taxi fares |
[removed] |
| Lodging |
[removed] |
| Total |
$[removed] |
|
c. If the American Bar Association had sponsored the conference, calculate the total amount of deductible expenses (for both Amos and Monica).
$[removed]
