Questions and Answers of Income Tax Fundamentals

In Year 1, Citradoria Corporation is a regular corporation that contributes $35,000 cash to qualified charitable organizations during the current tax year. The corporation has net operating income of
Beech Corporation, an accrual basis calendar year taxpayer, was organized and began business on August of the current calendar tax year. During the current year, the corporation incurred the
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
Fisafolia Corporation has gross income from operations of $210,000 and operating expenses of $160,000 for 2018. The corporation also has $30,000 in dividends from publicly traded domestic
Mask Corporation generated a net operating loss of $60,000 in 2018 and taxable income of $24,000 in 2019. How much NOL can Mask use in 2019 to reduce taxable income? a. $0 b.
For its current tax year, Ilex Corporation has ordinary income of $260,000, a short-term capital loss of $60,000, and a long-term capital gain of $20,000. Calculate Ilex Corporation’s tax liability
Assume that Olive Corporation, in Comprehensive Problem 1, is an S corporation owned 50 percent by Linda Holiday and 50 percent by Ralph Winston. The corporation is not subject to any special taxes.
Ulmus Corporation is an engineering consulting firm and has $1,120,000 in taxable income for 2018. Calculate the corporation’s income tax liability for 2018.
Tayla Corporation generated $340,000 of taxable income in the 2018. What is Tayla’s corporate tax liability? a. $71,400 b. $119,000 c. $115,600 d. $0 e. None of the above
Olive Corporation was formed and began operations on January 1, 2018. The corporation’s income statement for the year and the balance sheet at year-end are presented below. The corporation
Quince Corporation has taxable income of $485,000 for its calendar tax year. Calculate the corporation’s income tax liability for 2018 before tax credits.
Ironwood Corporation has ordinary taxable income of $50,000 in 2018, and a longterm capital loss of $15,000. What is the corporation’s tax liability for 2018? a. $7,500 b. $5,250 c.
Which of the following properly describes a difference between a partnership and an LLC? a. Partnerships pass income and losses through to the partners while LLCs generally pay an entity level
Gloria is a 30% general partner in the VH Partnership. During the year, VH borrows $40,000 from a bank to fund operations and is able to pay back $10,000 before year end. VH also borrows $100,000
Jay is a 30% partner in the Closet Partnership. In 2018, Closet paid W-2 wages of $24,000 and held qualified property of $600,000. In 2018, Jay’s QBI deduction is subject to the wage limitation due
In 2018, Gloria, a single taxpayer, receives a Schedule K-1 from a partnership she is invested in. The K-1 reports ordinary business income of $40,000, dividend income of $500, tax-exempt interest of
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
Describe ways in which LLCs might differ from partnerships.
Joe, Ben, and Melissa are partners in Collins Partnership. All three use a calendar year end for their individual taxes. Collins Partnership’s year end is likely to be: a. October 31 since
Van makes an investment in an LLC in 2018. Van’s capital contributions to the LLC consisted of $30,000 cash and a building with an adjusted basis of $70,000, subject to a nonrecourse liability
Karen, 28 years old and a single taxpayer, has a salary of $31,000 and rental income of $33,000 for the 2018 calendar tax year. Karen is covered by a pension through her employer. a. What is the
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
Van makes an investment in a partnership in 2018. Van’s capital contributions to the partnership consisted of $30,000 cash and a building with an adjusted basis of $70,000, subject to a nonrecourse
Khushboo’s basis in her 30% interest in the Rishi Partnership is $46,000 at the start of the current year. During the current year, Rishi reports ordinary business income of $70,000. Rishi also
Which of the following donations are not deductible as a charitable contribution? a. A donation of clothing to Goodwill Industries.b. A cash contribution to a church. c. A contribution of
Jessica is a U.S. Army Reservist and in 2018 traveled 130 miles each way to serve duty at a local military installation. She was required to report four times in 2018. Her normal route from home to
Clifford Johnson has a limited partnership investment and a rental condominium. Clifford actively manages the rental condominium. During 2018, his share of the loss from the limited partnership was
Lydia, a married individual, was unemployed for a few months during 2018. During the year, she received $3,250 in unemployment compensation payments. How much of her unemployment compensation
Which of the following is included in gross income?a. Loans b. Scholarships for room and board c. Worker’s compensation d. Health insurance proceeds e. None of the above
Kristen, a single taxpayer, receives two 2018 Forms W-2 from the two employers she worked for during the year. One Form W-2 lists her wages in Boxes 1, 3, and 5 as $18,700. Her other employer’s
Which of the following items would be includable in the gross income of the recipient? a. Insurance payments for medical care of a dependent child b. Insurance payments for loss of the
Skyler is covered by his company’s health insurance plan. The health insurance costs his company $9,500 a year. During the year, Skyler is diagnosed with a serious illness and health insurance pays
George works at the Springfield Nuclear Plant as a nuclear technician. The plant is located 15 miles from the town of Springfield. George likes to take his lunch at the plant’s cafeteria because he
Ellen’s tax client, Tom, is employed at a large company that offers health care flexible spending accounts to its employees. Tom must decide at the beginning of the year whether he wants to put as
During 2018, Carl (a single taxpayer) has a salary of $91,500 and interest income of $11,000. Calculate the maximum contribution Carl is allowed for an educational savings account. a. $0 b.
Jose paid the following amounts for his son to attend Big State University in 2018: Tuition ......................$6,400 Room and board......................
George receives a $1,500 distribution from his educational savings account. He uses $1,200 to pay for qualified higher education expenses. Immediately prior to the distribution, George’s account
In 2018, Van receives $20,000 (of which $4,000 is earnings) from a qualified tuition program. He uses the funds to pay for his college tuition and other qualified higher education expenses. How much
Alicia loses her job part way through 2018. Her employer pays her wages of $15,450 up through her date of termination. After that, she received $3,400 of unemployment compensation from the state
For 2018, the minimum percentage of Social Security benefits that could be included in a taxpayer’s gross income is: a. 0% b. 25% c. 50% d. 75% e. 85%
During the 2018 tax year, Brian, a single taxpayer, received $7,400 in Social Security benefits. His adjusted gross income for the year was $14,500 (not including the Social Security benefits) and he
Which of the following is not a test for the deductibility of a business expense? a. Ordinary and necessary test b. Expectation of profit test c. Reasonableness test d. Business
If a taxpayer has beginning inventory of $25,000, purchases of $175,000, and ending inventory of $45,000, what is the amount of the cost of goods sold for the current year? a. $155,000. b.
The Blacks moved from Maine to Nevada. As a result, they sold their house in Maine on January 4, 2018. They originally paid $76,000 for the home on July 3, 1993, but managed to sell it for $604,000.
A. Dr. George E. Beeper is a single taxpayer born on September 22, 1970. He lives at 45 Mountain View Dr., Apt. 321, Spokane, WA 99210. Dr. Beeper’s Social Security number is 775-88-9531. Dr.
Rob operates a small plumbing supplies business as a sole proprietor. In 2018, the plumbing business has gross business income of $421,000 and business expenses of $267,000, including wages paid of
Lyndon, age 24, has a nonworking spouse and earns wages of $36,000 for 2018. He also received rental income of $5,000 and dividend income of $900 for the year. What is the maximum amount Lyndon can
Martha and Rob, a married couple, under 50 years of age, have adjusted gross income on their 2018 joint income tax return of $45,000, before considering any IRA deduction. Martha and Rob have no
What is the maximum amount a 55-year-old taxpayer and 52-year-old spouse can put into a Traditional or Roth IRA for 2018, assuming they earn $70,000 in total and are not participants in pension plans?
Eliza is a kindergarten teacher for Alexander Hamilton Elementary School. Eliza decorates her classroom with new artwork, posters, bulletin boards, etc. In 2018, she spends $470 on materials and
Helen paid the following amounts of interest during the 2018 tax year: Mortgage interest on Dallas residence (loan balance $50,000) ..............$1,585 Automobile loan interest (personal
Which of the following interest expense amounts is not deductible in the current year? a. Education loan interest of $2,000, assuming the taxpayer has income of $30,000. b. Home equity loan
Mark owns his home and has a $250,000 mortgage related to his purchase of the residence. When his daughter went to college in the fall of 2018, he borrowed $20,000 through a home equity loan on his
Go to the U.S. General Services Administration (GSA) website. For the month of September 30, 2018, what is the per diem rate for each of the following towns: a. Flagstaff, AZb. Palm Springs,
Under the high-low method, the federal per diem amount is a. The same in every city in the U.S. b. Different for every city in the U.S. c. The same for most cities but higher in
Joan is a self-employed attorney in New York City. Joan took a trip to San Diego, CA, primarily for business, to consult with a client and take a short vacation. On the trip, Joan incurred the
Heather drives her minivan 953 miles for business purposes in 2018. She elects to use the standard mileage rate for her auto expense deduction. Her deduction will be a. $510 b. $515 c.
Teresa is a civil engineer who uses her automobile for business. Teresa drove her automobile a total of 11,965 miles during 2018, of which 80 percent was business mileage. The actual cost of
Business with gross receipts of $25 million or less may treat inventory as nonincidental materials and supplies. Find Regulation Section 1.162-3 and read paragraphs (a)(1) and (a)(2) to help answer
Janie owns a 40% interest in Chang Partnership. Chang has W-2 wages of $50,000 and qualified property of $450,000 in 2018. a. When computing the W-2 wages limitation, what is the amount of wages
Which of the following items is generally reported separately on a partnership return? a. Ordinary income from the operations of the partnership business. b. Typical MACRS depreciation.c.
Feela is a one-third partner in Alchemy LLC, which is taxed as a partnership. Her basis prior to Alchemy paying Feela a $11,000 cash distribution is $27,000. How much income does Feela recognize from
Quince Interests is a partnership with a tax year that ends on September 30, 2018. During that year, Potter, a partner, received $3,000 per month as a guaranteed payment, and his share of partnership
When calculating taxable income, partnerships are not allowed which of the following deductions? a. Miscellaneous expenses. b. Qualified business income deduction. c.
Which of the following items is generally reported separately on a partnership return? a. Ordinary income from the operations of the partnership businessb. Bonus depreciation.c. Interest expense
L&J Interests is a partnership with two equal partners, Linda and Joanne. The partnership has income of $75,000 for the year before guaranteed payments. Guaranteed payments of $45,000 are paid to
A. Russell (birthdate February 2, 1967) and Linda (birthdate August 30, 1972) Long have brought you the following information regarding their income and expenses for the current year. Russell owns
Kevin owns a retail store, and during the current year he purchased $610,000 worth of inventory. Kevin’s beginning inventory was $67,000, and his ending inventory is $77,200. During the year, Kevin
Which of the following items do not have to be reported separately on a partnership return? a. Tax-exempt income b. Casualty gains and lossesc. Interest on business loan d. Capital
Bob is a self-employed lawyer and is required to take a week of continuing legal education every year to maintain his license. This year he paid $1,150 in course fees for his continuing legal
Go to the IRS website (www.irs.gov) and print pages 1 and 2 of Schedule K-1 (Form 1065), Partner’s Share of Income, Deductions, Credits, etc. Review the different elements of income which must be
Which of the following expenses is deductible as an entertainment expense? a. The depreciation on an airplane used to entertain customers. b. The cost of a hunting camp used to entertain
Which of the following is not likely to be a deductible expense? a. The cost of tickets to a stage play for a client and the taxpayer. b. The cost for Rosa to take a potential customer to
Marty is a sales consultant. Marty incurs the following expenses related to the entertainment of his clients in 2018: a. How much is Marty’s deduction for entertainment expenses for 2018? $
Which of the following taxpayers may not deduct their educational expense? a. A CPA who attends a course to review for the real estate agents’ exam. b. An independent sales representative
Blake and Ryan form the Poole Partnership. Blake contributes cash of $15,000. Ryan contributes land with an adjusted basis of $10,000 and a fair market value of $21,000. The land is subject to a
Wilson has a 40 percent interest in the assets and income of the CC&W Partnership, and the basis in his partnership interest is $45,000 at the beginning of 2018. During 2018, the partnership’s
a. Loren is a secretary in a lawyer’s office. Since he often deals with legal matters, Loren feels that a law degree will be beneficial to him. May Loren deduct his educational expenses for law
Which of the following is likely a deductible business educational expense? a. Leah is a self-employed tax preparer. The State Board of Taxation requires Leah to attend federal and state
Carey opens a law office in Chicago on January 1, 2018. On January 1, 2018, Carey purchases an annual subscription to a law journal for $170 and a 1-year legal reference service for $1,500. Carey
Abigail contributes land with an adjusted basis of $56,000 and a fair market value of $58,000 to Blair and Partners, a partnership. Abigail receives a 50% interest in Blair. What is Blair’s
Jay contributes property with a fair market value of $16,000 and an adjusted basis of $5,000 to a partnership in exchange for an 8 percent partnership interest. a. Calculate the amount of gain
Cooper and Brandy are married and file a joint income tax return with two separate Schedule Cs. Cooper is an independent security specialist who spent $395 on uniforms during the year. His laundry
Which of the following self-employed taxpayers are most likely permitted to deduct the cost of their uniform?a. A lawyer who is required by her employer to wear a business suit. b. A furnace
Abigail contributes land with an adjusted basis of $56,000 and a fair market value of $58,000 to Blair and Partners, a partnership. Abigail receives a 50% interest in Blair. What is Abigail’s
Abigail contributes land with an adjusted basis of $56,000 and a fair market value of $58,000 to Blair and Partners, a partnership. Abigail receives a 50% interest in Blair. What is Abigail’s basis
Abigail contributes land with an adjusted basis of $56,000 and a fair market value of $58,000 to Blair and Partners, a partnership. Abigail receives a 50% interest in Blair. What is Blair’s basis
A partner’s interest in a partnership is increased by:a. Capital losses of the partnershipb. Tax-exempt interest earned by the partnershipc. Losses of the partnership. d. Distributions by the
Which of the following is a partnership for tax purposes? a. Monica and Chandler form a corporation to acquire a trucking business. b. Jimmy and Stephen both purchase a small stock interest
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
Cindy operates a computerized engineering drawing business from her home. Cindy maintains a home office and properly allocates the following expenses to her
Carol maintains an office in her home where she conducts a dressmaking business. During the year she collects $4,000 from sales, pays $1,300 for various materials and supplies, and properly allocates
Which of the following factors is not considered by the IRS in determining whether an activity is a hobby? a. Whether the activity is conducted like a business.b. The time and effort expended by
Which of the following may not be treated as a partnership for tax purposes? a. Arnold and Willis operate a restaurant. b. Thelma and Louise establish an LLC to operate an accounting
Bonnie is getting close to retirement and realizes she has three different IRA accounts at three different financial institutions. To make life simpler, Bonnie wishes to consolidate her three IRAs
Betty owns three separate IRA accounts with different banks. She wishes to consolidate her three IRAs into one IRA in 2018. How many distribution rollovers may Betty make in 2018? a. Oneb. Twoc.
Tom quits his job with $150,000 in his employer’s qualified retirement plan. Since he is broke, Tom instructs the plan trustee to pay him the balance in his retirement account. How much will Tom
Scott Butterfield is self-employed as a CPA. He uses the cash method of accounting, and his Social Security number is 644-47-7833. His principal business code is 541211. Scott’s CPA practice is
Marta is 52 years of age and expects to retire from her current employer at age 65. Marta’s employer contributes $2,000 to a qualified retirement plan for Marta’s benefit in the current year. How
Stewie, a single taxpayer, operates an activity as a hobby. Brian, a different taxpayer, operates a similar activity as a bona fide business. Stewie’s gross income from his activity is $5,000 and

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