Questions and Answers of Income Tax Fundamentals

Walnut Corporation owns 60 percent of Teak Corporation, a domestic corporation. During the current year, Walnut Corporation received $20,000 in dividends from Teak Corporation. Assuming that
Which of the following statements is false regarding corporate capital losses?a. Corporations are not allowed to deduct capital losses against ordinary income.b. Corporations may carry capital losses
Ironwood Corporation has ordinary taxable income of $40,000 in the current tax year and a long-term capital loss of $20,000. What is the corporation’s tax liability for the current year?a. $4,500b.
Emily Jackson (Social Security number 765-12-4326) and James Stewart (Social Security number 466-74-9932) are partners in a partnership that owns and operates a barber shop. The partnership’s first
Emily Jackson (Social Security number 765-12-4326) and James Stewart (Social Security number 466-74-9932) are partners in a partnership that owns and operates a barber shop. The partnership’s first
Go to the IRS website (www.irs.gov) and print out a copy of the most recent Schedule D of Form 1065.
Go to the IRS website (www.irs.gov) and determine which IRS publication addresses the topic of partnership taxation. Print out the page with the Table of Contents of this IRS publication.
Which of the following is considered to be a disadvantage of an LLC?a. There is no limit on the numbers or kinds of owners who may have an interest in an LLC.b. LLCs are relatively new legal entities
Mike purchases a rental property for $200,000 and takes out a loan from a lending institution to finance half of the purchase, or $100,000. The loan is considered to be qualified nonrecourse
A loss from the sale or exchange of property will be disallowed in which of the following situations?a. A transaction between a partnership and a partner who owns 40 percent of the partnership
Kendra is an attorney and owns 60 percent of a law partnership. Kendra sells land to the partnership for $50,000 in the current tax year. She bought the land for $100,000 eight years ago when real
Which of the following circumstances will not cause a partnership to close its tax year early?a. The partnership terminates by agreement of the partners.b. The business activity of the partnership
Trevor is a 50 percent partner in the Dalmatian Partnership. His basis in his partnership interest is $30,000 at the end of the tax year but before the partnership gives Trevor a cash distribution of
When calculating ordinary income, partnerships are not allowed which of the following deductions?a. Miscellaneous expensesb. Wages and salariesc. Depreciationd. Cost of goods solde. Personal
Which of the following items do not have to be reported separately on a partnership return?a. Tax-exempt incomeb. Casualty gains and lossesc. Interest on business loansd. Capital gains and lossese.
Linda and Ellen form an equal partnership. Linda contributes cash of $20,000 in exchange for a 50 percent partnership interest. Ellen contributes property with a fair market value of $30,000
Olson contributes property with an adjusted basis of $125,000 and a fair market value of $100,000 to O&W Associates, a partnership, in exchange for a 75 percent interest in the partnership. What
A partner’s interest in a partnership is decreased by:a. Capital gains of the partnershipb. Tax-exempt interest earned by the partnershipc. Losses of the partnership (but not below zero)d.
Which of the following is a partnership for tax purposes?a. Jackson and Wilson purchase and operate a shoe store as a corporation.b. Linda and Bill purchase an automobile and operate a limousine
Which of the following is not a partnership for tax purposes?a. Willis and James purchase and operate a shoe store.b. Sharon and Gary operate an accounting practice together.c. Lillian and Don
Dr. Carol Harris, CPA, is a single taxpayer and she lives at 674 Yankee Street, Durham, NC 27409. Her Social Security number is 793-52-4335 and her birthdate is July 1, 1968. Carol is an Associate
Fly-By-Night (P.O. Box 1234, Dallas, TX 75221, EIN 12-9876543) paid George Smith, an employee who lives at 432 Second Street, Garland, TX 75040, wages of $24,300. The income tax withholding amounted
Locate IRS Publication 15, “Circular E, Employer’s Tax Guide” at the IRS website (www.irs.gov), and review the table of contents on page 1 of the publication. Familiarize yourself with the
Big Bull restaurant employs twenty-three employees who receive tips. During the current year, Big Bull has $410,000 in gross revenues, and its employees do not report any tip income. In what ways may
Sophie is a single taxpayer. For the first payroll period in October 2016, she is paid wages of $3,280.50 monthly. Sophie claims three allowances on her Form W-4.a. Use the percentage method to
Ralph and Kathy Gump are married with one 20-year-old dependent child. Ralph earns a total of $39,000 and estimates their itemized deductions to be $16,000 for the year. Kathy is not employed. Use
Phan Mai is single with two dependent children under age 17. Phan estimates her wages for the year will be $36,000, will have $5,700 of dependent care expenses, and her itemized deductions will be
Christine and Doug are married. In 2016, Christine earns a salary of $250,000 and Doug earns a salary of $50,000. They have no other income and work for the same employers for all of 2016. How much
Skylar is single and earns $410,000 in salary during 2016. What is the amount of Medicare surtax for high-income taxpayers that his employer must withhold from his wages?a. $1,890b. $1,800c. $1,440d.
Individual taxpayers may pay withholding taxes due with their individual income tax returns using Schedule H for each of the following workers except:a. a nanny hired to watch their children.b. a
Which of the following employees would not be exempt from the Social Security and Medicare taxes on wages paid for household work?a. The taxpayer’s 16-year-old daughterb. The taxpayer’s wifec.
Bob employs a maid to clean his house. He pays her $1,040 during the current year. What is the proper tax treatment of the Social Security and Medicare tax for the maid?a. Bob is not required to pay
The FUTA tax is:a. An unemployment tax with a rate of 2.9 percent up to $118,500 of salary per employee.b. A disability tax with a rate of 2.9 percent up to $7,000 of salary per employee.c. An
Which of the following is not subject to self-employment tax?a. Gain on the sale of real estate held for investmentb. Net earnings of a self-employed lawyerc. Distributive share of earnings of a
For 2016, Roberta is a self-employed truck driver with earnings of $45,000 from her business. During the year, Roberta received $2,500 in interest income and dividends of $500. She also sold
Which of the following forms is used to report wages, tips and other compensation paid to employees?a. Form W-4b. Form W-2Gc. Form W-2d. Form 1099-Re. Form 1099-MISC
Employers must file a quarterly tax return showing the amount of wages paid and the amount of income tax and FICA tax withholding due. This tax return is filed on:a. Form 944 or Form 945b. Schedule
Employers must file a quarterly tax return showing the amount of wages paid and the amount of income tax and FICA tax withholding due. This tax return is filed on:a. Form 944 or Form 945b. Schedule
Which of the following is not true about FICA taxes?a. The FICA tax has two parts, Social Security (Old Age, Survivors, and Disability Insurance) and Medicare.b. In 2016, the maximum wage base for
Which of the following is not true about FICA taxes?a. The FICA tax has two parts, Social Security (Old Age, Survivors, and Disability Insurance) and Medicare.b. In 2016, the maximum wage base for
Estimated payments for individual taxpayers are due on the following dates:a. Twice a year on April 15 and September 15b. Four times a year on April 15, June 15, September 15, and January 15 of the
Michele is single with no dependents and earns $23,000 this year. Michele claims sixteen allowances on her Form W-4 for 2016. Which of the following is correct concerning her Form W-4?a. Michele may
Michele is single with no dependents and earns $23,000 this year. Michele claims sixteen allowances on her Form W-4 for 2016. Which of the following is correct concerning her Form W-4?a. Michele may
Abbe, age 56, is married and has two dependent children over age 17. Abbe has one job, and her husband, age 58, is not employed. If she expects to earn wages of $50,000, how many allowances should
Which of the following amounts paid by an employer to an employee is not subject to withholding?a. Salaryb. Bonusc. Commissionsd. Reimbursement of expenses under an accountable plane. All of the
The following information is available for the Albert and Allison Gaytor family in addition to that provided in Chapters 1–7.Albert sold the following securities during the year and received a Form
Lisa Kohl (age 44) is a single taxpayer and she lives at 212 Quivira Road, Overland Park, KS 66210. Her Social Security number is 467-98-9784. Lisa’s earnings and income tax withholding as the
America Los Rios (age 36) is a single taxpayer, living at 4700 Oak Drive, Sacramento, CA 95841. Her Social Security number is 976-23-5132. America’s earnings and income tax withholding as the
Lisa Sizemore, a taxpayer in the 10 percent tax bracket, purchased stock as an investment on July 11, 2015. She sold the stock on July 9, 2016, 3 days before qualifying for the long-term holding
Your supervisor has asked you to research the following situation concerning Owen and Lisa Cordoncillo. Owen and Lisa are brother and sister. In May 2016, Owen and Lisa exchange business pickup
Go to the IRS website (www.irs.gov) and redo Problem 7 using the most recent Form 6252, Installment Sale Income. Print out the completed Form 6252.Problem 7:Steve Drake sells a rental house on
Teresa’s manufacturing plant is destroyed by fire. The plant has an adjusted basis of $270,000, and Teresa receives insurance proceeds of $410,000 for the loss. Teresa reinvests $420,000 in a
Carey exchanges real estate for other real estate in a qualifying like-kind exchange. Carey’s basis in the real estate given up is $120,000, and the property has a fair market value of $165,000. In
Rebecca has a $6,400 casualty loss, before any limitations, as a result of the complete destruction of personal-use property. She also receives $1,200 of insurance proceeds for the destruction of a
Gene, a single taxpayer, purchased a house 18 months ago for $350,000. If Gene sells his house due to unforeseen circumstances for $550,000 after living in it for a full 18 months, what is his
Kevin purchased a house 20 years ago for $100,000 and he has always lived in the house. Three years ago Kevin married Karen, and she has lived in the house since their marriage. If they sell
Susan, a single taxpayer, bought her home 25 years ago for $30,000. She has lived in the home continuously since she purchased it. In 2016, she sells her home for $200,000. What is Susan’s taxable
Jim, a single taxpayer, bought his home 20 years ago for $25,000. He has lived in the home continuously since he purchased it. In 2016, he sells his home for $300,000. What is Jim’s taxable gain on
Oscar, a single taxpayer, sells his residence of the last 10 years in January of 2016 for $190,000. Oscar’s basis in the residence is $45,000, and his selling expenses are $11,000. If Oscar does
What is Sarajane’s basis in the equipment received in the exchange described in Question 16, assuming her basis in the equipment given up was $12,000?a. $0b. $12,000c. $14,000d. $15,000e. None of
Fred and Sarajane exchanged equipment in a qualifying like-kind exchange. Fred gives up equipment with an adjusted basis of $12,000 (fair market value of $15,000) in exchange for Sarajane’s
Pat sells real estate for $30,000 cash and a $90,000 5-year note. If her basis in the property is $90,000 and she receives only the $30,000 down payment in the year of sale, how much is Pat’s
Virginia has a casualty gain of $5,000 and a casualty loss of $2,500, before reduction by the $100 floor. The gain and loss were the result of two separate casualties, and both properties were
Jeanie acquires an apartment building in 2005 for $250,000 and sells it for $500,000 in 2016. At the time of sale there is $75,400 of accumulated straight-line depreciation on the apartment building.
Jeanie acquires an apartment building in 2005 for $250,000 and sells it for $500,000 in 2016. At the time of sale there is $75,400 of accumulated straight-line depreciation on the apartment building.
During 2016, Paul sells residential rental property for $290,000, which he acquired in 1996 for $145,000. Paul has claimed straight-line depreciation on the building of $54,500. What is the amount
In 2016, Mary sells for $14,000 a machine used in her business. The property was purchased on May 1, 2014, at a cost of $13,000. Mary has claimed depreciation on the machine of $8,000. What is the
Which of the following is Section 1231 property?a. Land held for investment purposesb. A machine used in a businessc. Accounts receivabled. Inventorye. Paintings owned by the artist
In 2016, Tim, a single taxpayer, has ordinary income of $29,000. In addition, he has $2,000 in short-term capital gains, long-term capital losses of $10,000, and long-term capital gains of $4,000.
Harold and Wanda (married filing jointly) have $30,000 of ordinary income after the standard deduction and personal exemptions, and $50,000 in unrecaptured depreciation on the sale of rental
In November 2016, Ben and Betty (married, filing jointly) have a long-term capital gain of $54,000 on the sale of stock. They have no other capital gains and losses for the year. Their ordinary
In 2016, the top tax rates are percent on individual long-term capital gains on sale of stock, and percent on capital gains on sales of collectible items, assuming the ACA Medicare surtax does not
Bob sells a stock investment for $35,000 cash, and the purchaser assumes Bob’s $32,500 debt on the investment. The basis of Bob’s stock investment is $55,000. What is the gain or loss realized on
Vijay sells land and receives $5,000 cash, a motorcycle worth $2,000, two tickets to the Super Bowl with a total face value (cost) of $800 but worth $1,200, and the buyer assumes the mortgage on the
Yasmeen purchases stock on January 30, 2015. If she wishes to achieve a long-term holding period, she will have to wait until at least to sell the stock.a. January 20, 2016b. January 31, 2016c.
Which of the following is a capital asset?a. Account receivableb. Copyright created by the taxpayerc. Copyright (held by the writer)d. Business inventorye. A taxpayer’s residence
All of the following assets are capital assets, except:a. A personal automobileb. IBM stockc. A child’s bicycled. Personal furnituree. Used car inventory held by a car dealer
The following information is available for the Albert and Allison Gaytor family in addition to that provided in Chapters 1–6.On September 14, Allison purchased the building where her store is
The following information is available for the Albert and Allison Gaytor family in addition to that provided in Chapters 1–6.On September 14, Allison purchased the building where her store is
Warner and Augustine Robins, both 33 years old, have been married for 9 years. They live at 638 Russell Parkway, Macon, GA 31207. Augustine’s Social Security number is 445-81-1423 and Warner’s is
Sherry Hopson owns a retail family clothing store. Her store is located at 4321 Heather Drive, Henderson, NV 89002. Her employer identification number is 95-1234321 and her Social Security number is
Charlie’s Green Lawn Care is a cash basis taxpayer. Charlie Adame, the sole proprietor, is considering delaying some of his December 2016 customer billings for lawn care into the next year. In
Go to the IRS website (www.irs.gov) and assuming bonus depreciation is used, redo Problem 15, using the most recent interactive Form 4562, Depreciation and Amortization. Print out the completed Form
Explain the use of the mid-quarter convention for MACRS depreciation.
Is it possible to depreciate a residential rental building when it is actually increasing in value? Why?
Is land allowed to be depreciated? Why or why not?
Geraldine is an accrual basis taxpayer who has the following transactions during the current calendar tax year:Calculate Geraldine’s net income from her business for the current year.
Yolanda is a cash basis taxpayer with the following transactions during the year:Calculate Yolanda’s income from her business for this calendar year.
The Au Natural Clothing Factory has changed its year-end from a calendar year-end to March 31, with permission from the IRS. The income for its short period from January 1 to March 31 is $24,000.
The Au Natural Clothing Factory has changed its year-end from a calendar year-end to March 31, with permission from the IRS. The income for its short period from January 1 to March 31 is $24,000.
BJT Corporation is owned 40 percent by Bill, 35 percent by Jack, and 25 percent by Teresa. Bill and Jack are father and son. What is Jack’s total direct and indirect ownership under Section 267?a.
Using the same facts as in Question 17, how much can B Corporation deduct on its 20X2 tax return?a. $0b. $4,000c. $15,000d. $19,000e. $12,000Data From Question 17:B Corporation, an accrual basis
B Corporation, an accrual basis taxpayer, is owned 75 percent by Bonnie, a cash basis taxpayer. On December 31, 20X1, the corporation accrues interest of $4,000 on a loan from Bonnie and also accrues
B Corporation, an accrual basis taxpayer, is owned 75 percent by Bonnie, a cash basis taxpayer. On December 31, 20X1, the corporation accrues interest of $4,000 on a loan from Bonnie and also accrues
Pekoe sold stock to Rose for $12,000, its fair market value. The stock cost Pekoe $16,000 5 years ago. Also, Pekoe sold Earl (an unrelated party) stock for $6,500 that cost $8,500 3 years ago. Rose
Which of the following intangibles is defined as a Section 197 intangible asset?a. An interest in landb. A partnership interestc. An interest in a corporationd. A covenant not to compete acquired as
The amortization period for Section 197 intangibles is:a. 5 yearsb. 7 yearsc. 10 yearsd. 15 yearse. 40 years
Which of the following is not considered listed property for purposes of determining the taxpayer’s depreciation deduction?a. A computer used exclusively by the taxpayer in managing his investment
On July 20, 2016, Kelli purchases office equipment at a cost of $12,000. Kelli elects out of bonus depreciation but makes the election to expense for 2016. She is self-employed as an attorney, and,
Assume that a taxpayer purchases a computer in 2016 that has an estimated useful life of 10 years. If the computer is used 100 percent for business and no election to expense was made, what is the

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