Other Tax Topics Flashcards
The Uniform Capitalization Rules of Code Sec. 263A apply to retailers whose average gross receipts for the preceding three years exceed what amount?
- $ 1,000,000
- $ 2,500,000
- $ 5,000,000
- $10,000,000
$10,000,000
The Uniform Capitalization Rules do not apply to small personal property dealers. Small personal property dealers are defined as those with $10 million or less in gross receipts during the preceding three years.
A cash-basis taxpayer should report gross income
- For the year in which income is either actually or constructively received, whether in cash or in property.
- For the year in which income is either actually or constructively received in cash only.
- Only for the year in which income is actually received whether in cash or in property.
- Only for the year in which income is actually received in cash.
For the year in which income is either actually or constructively received, whether in cash or in property.
A cash-basis taxpayer should report gross income for the year in which income is either actually or constructively received, whether in cash or in property.
Fuller was the owner and beneficiary of a $200,000 life insurance policy on a parent. Fuller sold the policy to Decker, for $25,000. Decker paid a total of $40,000 in premiums.
Upon the death of the parent, what amount must Decker include in gross income?
- $0
- $135,000
- $160,000
- $200,000
$135,000
Decker’s cost basis is the $25,000 he paid for the policy plus the $40,000 he paid in premiums. $200,000 less $65,000 = $135,000.
To Decker, the policy is an investment. Had it been Fuller, the owner and beneficiary, it would not have been included in income.
Blake, a single individual age 67, had a 2015 adjusted gross income of $60,000 exclusive of social security benefits. Blake received social security benefits of $8,400 and interest of $1,000 on tax-exempt obligations during 2015. What amount of social security benefits is excludable from Blake’s 2015 taxable income?
- $0
- $1,260
- $4,200
- $8,400
$1,260
PI = AGI + tax-exempt interest + 50% (SSB)
PI = $60,000 + $1,000 + 50% (8,400) = $65,200.
Since PI ($65,200) exceeds Base Amount 2 ($34,000), then the taxable amount of SSB is the lesser of:
- .85 x SSB ($8,400) = $7,140, or
- .85 x [PI - BA2; $65,200 - $34,000) = $26,520, plus the lesser of
- amount included based on the 50% formula (50% x $8,400) = $4,200, or
- $4,500 (unless married filing joint, then $6,000), which provides $26,520 + $4,200 = $30,720 for part b of the formula.
Thus, the amount included in income is the lower of $7,140 or $30,720, so the amount excluded is $1,260 ($8,400 - $7,140).
Unless the Internal Revenue Service consents to a change of method, the accrual method of tax reporting is mandatory for a sole proprietor when there are:
- Accounts receivable for services rendered
- Year-end merchandise inventories
- Accounts receivable for services rendered NO
- Year-end merchandise inventories YES
Unless the IRS consents to a change of method, taxpayers are to use the accrual method of accounting for purchases and sales if inventories are used.
Accounts receivable for services rendered does not trigger the required use of the accrual method.
This response correctly indicates that accounts receivable for services rendered would not lead to the required use of the accrual method and that the use of inventories would trigger the required use of the accrual method.
In 2014, Brun Corp. properly accrued $10,000 for an income item on the basis of a reasonable estimate. In 2015, Brun determined that the exact amount was $12,000. Which of the following statements is correct?
- Brun is required to file an amended return to report the additional $2,000 of income.
- Brun is required to notify the IRS within 30 days of the determination of the exact amount of the item.
- The $2,000 difference is includible in Brun’s 2015 income tax return.
- No further inclusion of income is required as the difference is less than 25% of the original amount reported and the estimate had been made in good faith.
The $2,000 difference is includible in Brun’s 2015 income tax return.
Under the accrual method of accounting, income is reported once all events to establish a taxpayer’s right to receive the income have occurred and the amount can be determined with reasonable accuracy. If an amount of income has been accrued on the basis of a reasonable estimate with the exact amount to be determined at a later date, any difference between the estimate and exact amount is to be included in income or deducted in the year when the exact amount can be determined.
Which of the following costs are subject to the Uniform Capitalization Rules of Code Sec. 263A for manufactured tangible personal property?
- Off-site storage.
- Advertising.
- Research.
- Marketing.
Off-site storage costs must be capitalized as part of the inventory cost for tax purposes.
Costs capitalizable under UNICAP are (in addition to DM, DL and OH:
- Off-site storage costs (onsite = NO)
- Quality control costs
- Taxes
- Utilities, repairs, rent and depreciation
Non-Unicap Costs are:
- Selling, marketing and administrative expenses
- R&D
- Advertising
- G&A
- Distributions
Which of the following is correct concerning the LIFO method (as compared to the FIFO method) in a period when prices are rising?
- Deferred tax and cost of goods sold are lower.
- Current tax liability and ending inventory are higher.
- Current tax liability is lower and ending inventory is higher.
- Current tax liability is lower and cost of goods sold is higher.
Current tax liability is lower and cost of goods sold is higher.
If prices are rising and LIFO is used then the cost of inventory, and therefore the total for costs of goods sold, will be higher. If costs of good sold is higher then taxable income will be lower, which also means that the current tax liability will be lower.
In calculating the tax of a corporation for a short period, which of the following processes is correct?
- Divide current-year income by prior-year income, then multiply the result by prior-year tax.
- Compute tax on short-period income, then multiply the result by 12 divided by the number of months in the short period.
- Determine the average taxable income for the past three years, then multiply the result by the number of months in the short period divided by 12.
- Annualize income and calculate the tax on annualized income, then multiply the computed tax by the number of months in the short period divided by 12.
Annualize income and calculate the tax on annualized income, then multiply the computed tax by the number of months in the short period divided by 12.
If a corporation filed a short-year return for 3 month, the income for that period is first multiplied by 4 (12 months/3 months) to annualize the income for 12 months. The corporate tax liability is then computed on this amount for the full 12 months. That amount is the multiplied by 3/12 to prorate for the short tax year.
Which of the following taxpayers may use the cash basis as its method of accounting for tax purposes?
- Partnership that is designated as a tax shelter.
- Retail store with $2 million in gross receipts.
- An international accounting firm organized as a partnership.
- Office cleaning corporation with average annual income of $8 million.
An international accounting firm organized as a partnership.
Partnerships can use the cash method regardless of the amount of gross receipts as long as none of the partners are C corporations.
Retail store is incorrect. Since a retail store has inventory gross receipts it would need to not exceed $1 million for the cash method to be permitted.
The selection of an accounting method for tax purposes by a newly incorporated C corporation
- Is made on the initial tax return by using the chosen method.
- Is made by filing a request for a private letter ruling from the IRS.
- Must first be approved by the company’s board of directors.
- Must be disclosed in the company’s organizing documents.
Is made on the initial tax return by using the chosen method.
Accounting methods for a new corporation are made on the initial tax return.
A corporate taxpayer plans to switch from the FIFO method to the LIFO method of valuing inventory. Which of the following statements is accurate regarding the use of the LIFO method?
- In periods of rising prices, the LIFO method results in a lower cost of sales and higher taxable income, when compared to the FIFO method.
- The taxpayer is required to receive permission each year from the Internal Revenue Service to continue the use of the LIFO method.
- The LIFO method can be used for tax purposes even if the FIFO method is used for financial statement purposes.
- Under the LIFO method, the inventory on hand at the end of the year is treated as being composed of the earliest acquired goods.
Under the LIFO method, the inventory on hand at the end of the year is treated as being composed of the earliest acquired goods.
The LIFO method assumes that the inventory items most recently purchased are the ones sold. Thus, the oldest inventory (earliest acquired goods) items are the ones that remain in ending inventory.
Ace Rentals Inc., an accrual-basis taxpayer, reported rent receivable of $35,000 and $25,000 in its 2015 and 2014 balance sheets, respectively. During 2015, Ace received $50,000 in rent payments and $5,000 in nonrefundable rent deposits.
In Ace’s 2015 corporate income tax return, what amount should Ace include as rent revenue?
- $50,000
- $55,000
- $60,000
- $65,000
$65,000
Ace Corp. would report rent revenue of $65,000. Of this amount, $55,000 (the sum of $50,000 in rental payments and $5,000 in nonrefundable rent deposits) would be cash receipts. Ace Corp. is an accrual based taxpayer. Therefore, for tax purposes, income is earned when 1) all the events have occurred to attach the taxpayer’s right to receive the income and 2) the amount of income can be determined with reasonable accuracy. With respect to rent receivable, the income must have been earned to record it as a receivable.
Hence, in calculating rent revenue, the $10,000 increase in rent receivable from 2014 to 2015 would have to be added to the corporation’s cash receipts.
Lake Corp., an accrual-basis calendar year corporation, had the following 2014 receipts:
- 2015 advanced rental payments where the lease ends in 2015 $125,000
- Lease cancellation payment from a 5-year lease tenant $50,000
Lake had no restrictions on the use of the advanced rental payments and renders no services. What amount of income should Lake report on its 2014 tax return?
- $0
- $50,000
- $125,000
- $175,000
$175,000
For accrual based taxpayers, items generally are included in gross income for the year in which the income is earned. However, for tax purposes, income is earned when 1) all the events have occurred to attach the taxpayer’s right to receive the income and 2) the amount of income can be determined with reasonable accuracy. Cash based taxpayers report income when it is actually received or constructively received (i.e., in the taxpayer’s control).
Since there are no restrictions on the advance lease payments or the lease cancellation payment and no services need to be rendered, Lake Corp. has a right to receive the advance lease payments and the lease cancellation payments in the current year. The payments also can be determined with reasonable accuracy. Hence, both the advance lease payments and the lease cancellation payments should be reported on Lake Corp.’s tax return.
This response includes both the advance lease payments and the lease cancellation payments in Lake Corp.’s taxable income.
Tom owns a fast-food restaurant which he reports as a sole proprietorship for tax purposes. Which of the following expenses is allowed as a deduction on Tom’s Schedule C for the current year?
- Wages of $20 per week to his 14 year-old daughter who cleans the restaurant on Saturdays.
- Speeding ticket of $75 that he incurred while picking up supplies to bring to the restaurant.
- A bribe of $200 to the city inspector charged with inspecting whether restaurants have met all city health requirements.
- State income taxes paid during the year of $1,650.
Wages of $20 per week to his 14 year-old daughter who cleans the restaurant on Saturdays.
It is an ordinary and necessary expense to have the restaurant cleaned and the $20 is reasonable.
Sam has been engaged in an illegal business this year related to electronically stealing funds from individuals’ bank accounts. Which of the following items is not deductible on his business tax return for the year?
- Salaries for two individuals that helped him operate the business.
- Rent expense for an office used to operate the illegal business.
- Interest expense on a loan used to purchase equipment for the business.
- The salaries, rent expense, and interest expense are all deductible.
The salaries, rent expense, and interest expense are all deductible.
The ordinary, necessary, and reasonable expenses of operating illegal businesses (other than illegal drug activity) are permitted (as long as the expense itself is not against public policy). Therefore, all of these expenses are deductible against the revenue earned from the activities.
On December 1, 2014, Michaels, a self-employed cash basis taxpayer, borrowed $100,000 to use in her business. The loan was to be repaid on November 30, 2015. Michaels paid the entire interest of $12,000 on December 31, 2014.
What amount of interest was deductible on Michaels’ 2015 income tax return?
- $12,000
- $11,000
- $1,000
- $0
$11,000
Cash basis taxpayers report income when cash or property is actually or constructively received. There is no constructive receipt for deductions. Deductions for cash basis taxpayers generally are taken when actually paid. However, for expenses covering 12 months or more, the deduction must be spread over the period for which the expenses apply. Thus, since the loan was to be repaid in 12 months, the deduction for the interest must be spread over the 12 month period.
Thus, to account for the period of December 1, 2014 to December 31, 2014, Michaels would have deducted $1,000 of the interest on her 2014 income tax return and $11,000 on her 2015 income tax return to account for the period January 1, 2015 to November 30, 2015.
This response is correct.
Mock operates a retail business selling illegal narcotic substances. Which of the following item(s) may Mock deduct in calculating business income?
- Cost of merchandise
- Business expenses other than the cost of merchandise
1 Only.
No deduction or credit shall be allowed for any amount paid or incurred during the taxable year in carrying on any trade or business if such trade or business (or the activities which comprise such trade or business) consists of trafficking in controlled substances (within the meaning of schedule I and II of the Controlled Substances Act) which is prohibited by Federal law or the law of any State in which such trade or business is conducted. However, a deduction is allowed for the cost of merchandise purchased.
Cole earned $3,000 in wages, incurred $1,000 in unreimbursed employee business expenses, paid $400 as interest on a student loan, and contributed $100 to a charity. What is Cole’s adjusted gross income?
- $3,000
- $2,600
- $2,500
- $1,600
$2,600
The unreimbursed employee business expenses and charitable contribution are itemized deductions, so these do not affect the computation of adjusted gross income. AGI equals the $3,000 of wages less student loan interest of $400, or $2,600.
In 2015, Roger, who is single, gave an outright gift of $15,000 to a friend, Matt, who needed the money to pay tuition at an accredited university. In filing his 2015 gift tax return, Roger was entitled to a maximum exclusion of
- $0
- $12,000
- $14,000
- $15,000
$14,000
The first $14,000 of gifts made to a donee during the calendar year (except gifts of future interests) is excluded in determining the amount of the donor’s taxable gifts for 2015. Note that Roger does not qualify for the unlimited exclusion for tuition paid on behalf of a donee, because Roger did not pay the $15,000 as tuition to an educational organization on Matt’s behalf.
For the year ended December 31, 2015, Sanchez had a net operating loss of $100,000. Taxable income for the earlier years, computed without reference to the net operating loss, was as follows:
Taxable income
- 2011 $90,000
- 2012 $80,000
- 2013 $50,000
- 2014 $40,000
If Sanchez makes no special election to waive the net operating loss carryback, what amount of net operating loss will be available to Sanchez for 2016?
- $0
- $10,000
- $60,000
- $100,000
$10,000
The $100,000 NOL would first be carried back to 2013 and offset $50,000 of income. It would then be carried to 2014 and offset $40,000 of income. This would leave $10,000 of NOL ($100,000 - $50,000 - $40,000) to carryforward to 2016.
Deduction for Bad Debts are available for?
- Accrual basis taxpayers
- Cash basis taxpayers
Accrual basis taxpayers ONLY. A cash basis TP does not have basis in the bad debt and thus is not allowed a deduction.
Example…Since Budd reports on the cash basis he did not recognize income when the client was billed. Therefore, he has no basis in the receivable to deduct when it becomes uncollectible.
An individual’s losses on transactions entered into for personal purposes are deductible only if
- The losses qualify as casualty or theft losses.
- The losses can be characterized as hobby losses.
- The losses do not exceed $3,000 ($6,000 on a joint return).
- No part of the transactions was entered into for profit.
The losses qualify as casualty or theft losses. An individual’s losses on transactions entered into for personal purposes are only deductible if the losses qualify as casualty or theft losses. If the losses originated due to a trade or business, individuals also may deduct losses originating from transactions entered into for profit.
Cobb, an unmarried individual, had an adjusted gross income of $200,000 in 2015 before any IRA deduction, taxable social security benefits, or passive activity losses.
Cobb incurred a loss of $30,000 in 2015 from rental real estate in which he actively participated.
What amount of loss attributable to this rental real estate can be used in 2015 as an offset against income from nonpassive sources?
- $0
- $12,500
- $25,000
- $30,000
$0
Passive activity losses normally only may be used to offset passive activity income. Rental activities are considered passive activities, regardless of the level of participation by the taxpayer.
However, a natural person is allowed an allowance for offsetting up to $25,000 of nonpassive income with passive losses resulting from rental activities, provided certain conditions are met. The person must own at least 10 percent of the rental activity and must have actively participated.
Hence, Cobb’s $30,000 loss from his rental real estate activities would be considered a passive loss, initially indicating that Cobb would be limited to the $25,000 allowance. However, the $25,000 allowance is reduced by 50 percent of the amount that the taxpayer’s adjusted gross income exceeds $100,000. Thus, Cobb’s credit must be reduced by $50,000, which exceeds Cobb’s $30,000 passive loss.
Therefore, Cobb may not use any of his loss attributable to the rental real estate to offset against income from nonpassive sources.
Barkley owns a vacation cabin that was rented to unrelated parties for 10 days during the year for $2,500. The cabin was used personally by Barkley for 3 months and left vacant for the rest of the year. Expenses for the cabin were as follows:
- Real Estate Taxes $1,000
- Maintenance and Utilities $2,000
How much rental income (loss) is included in Barkley’s adjusted gross income?
- $0
- $ 500
- $ (500)
- $(1,500)
$0
Special rules apply to realty that is used for both personal and rental purposes. If the number of rental days is less than 14 then the property is treated as if it was used 100% for personal use. In that case, the rental revenue is ignored (i.e., does not have to be recognized).
The only items that can be deducted are real estate taxes and mortgage and these items must be reported on Schedule A.
Therefore, there is no rental income and no rental expenses.
A review of Bearing’s year 2 records disclosed the following tax information:
- Wages $18,000
- Taxable interest and qualifying dividends $4,000
- Schedule C trucking business net income $32,000
- Rental (loss) from residential property $(35,000)
- Limited partnership (loss) $(5,000)
Bearing actively participated in the rental property and was a limited partner in the partnership. Bearing had sufficient amounts at risk for the rental property and the partnership. What is Bearing’s year 2 adjusted gross income?
- $14,000
- $19,000
- $29,000
- $54,000
$29,000
Wages, interest, dividends, and Schedule C income are all taxable for a total of $54,000. $25,000 of the rental loss is allowed since Bearing actively participates in the rental real estate activity and his modified AGI does not exceed $100,000. However, the $5,000 passive loss from the partnership cannot reduce other income. Therefore, AGI is $29,000.
Lane, a single taxpayer, received $160,000 in salary, $15,000 in income from an S Corporation in which Lane does not materially participate, and a $35,000 passive loss from a real estate rental activity in which Lane materially participated. Lane’s modified adjusted gross income was $165,000. What amount of the real estate rental activity loss was deductible?
- $0
- $15,000
- $25,000
- $35,000
$15,000
Lane has $160,000 in active income, $15,000 of passive income, and $35,000 of passive losses. Note that the exception that allows deduction for up to $25,000 of rental real estate losses does not apply since Lane’s modified AGI exceeds $150,000. The passive losses can only be deducted to the extent of passive income, so $15,000 is correct.
Phase-out:
50% reduced for over $100k of AGI up to $150k
$0 if > $150k in AGI
The federal estate tax may be reduced by a credit for
- Foreign death taxes.
- Gift taxes on gifts made 2 years before death.
- Income taxes paid in the year of death.
- Intangible property taxes.
Foreign death taxes.
The federal estate tax may be reduced by a credit for foreign death taxes. However, no federal estate tax credit is available for foreign gift taxes, foreign income taxes, or foreign intangible property taxes.