Acct 3410 Exam 2

Question 1

Gross income less business expenses , expenses attributable to the production of rent or royalty income, the allowed capital loss deduction, and certain personal expenses.

Answer 1

Deductions for Adjusted Gross Income

Question 2

Certain personal expenditures allowed by the Code as deductions from adjusted gross income. Examples include certain medical expenses, interest on home mortgages, state income taxes, and charitable contributions.

Answer 2

Deductions from Adjusted Gross Income

Question 3

A nondeductible loss arising from a personal hobby as contrasted with an activity engaged in for profit. Generally, the law provides a rebuttable presumption that an activity is engaged in for profit if profits are earned during any three or more years during a five-year period.

Answer 3

Hobby Losses

Question 4

Appropriate and helpful in furthering the taxpayer’s business or income-producing activity

Answer 4

Necessary

Question 5

Common and accepted in the general industry or type of activity in which the taxpayer is engaged. It comprises one of the tests for the deductibility of expenses incurred or paid in connection with a trade or business; for the production or collection of income; for the management, conservation, or maintenance of property held for the production of income; or in connection with the determination, collection, or refund of any tax.

Answer 5

Ordinary

Question 6

The Code includes a reasonableness requirement with respect to the deduction of salaries and other compensation for services. What constitutes reasonableness is a question of fact. If an expense is unreasonable, the amount that is classified as unreasonable is not allowed as a deduction. The question of reasonableness generally arises with respect to closely held corporations where there is no separation of ownership and management.

Answer 6

Reasonableness

Question 7

The Code places restrictions upon taxpayers who rent their residence or vacation homes for part of the tax year. The restrictions may result in a scaling down of expense deductions for the taxpayers.

Answer 7

Vacation Homes

Question 8

A deduction is permitted if a business account receivable subsequently becomes partially or completely worthless, providing the income arising from the debt previously was included in income. Available methods are the specific charge-off method and the reserve method. However, except for certain financial institutions, TRA of 1986 repealed the use of the reserve method for 1987 and thereafter. If the reserve method is used, partially or totally worthless accounts are charged to the reserve. A nonbusiness bad debt deduction is allowed as a short-term capital loss if the loan did not arise in connection with the creditor’s trade or business activities.

Answer 8

Bad Debt

Question 9

A debt created or acquired in connection with a trade or business of the taxpayer, or a debt the loss from the worthlessness of which is incurred in the taxpayer’s trade or business. A business bad debt is deducted as an ordinary deduction.

Answer 9

Business Bad Debt

Question 10

A casualty is defined as “the complete or partial destruction of property resulting from an identifiable event of a sudden, unexpected or unusual nature” (e.g. floods, storms, fires, auto accidents). Individuals may deduct a casualty loss only if the loss is incurred in a trade or business or in a transaction entered into for profit or arises from fire, storm, shipwreck, or other casualty or from theft. Individuals usually deduct personal casualty losses as itemized deductions subject to a $100 nondeductible amount and to an annual floor equal to 10% of AGI that applies after the $100 per casualty floor has been applied. Special rules are provided for the netting of certain casualty gains and losses.

Answer 10

Casualty Loss

Question 11

A casualty sustained in an area designated as a disaster area by the President of the United States. In such an event, the disaster loss may be treated as having occurred in the taxable year immediately preceding the year in which the disaster actually occurred. Thus, immediate tax benefits are provided to victims of a disaster.

Answer 11

Disaster Area Losses

Question 12

A deduction based on 9% of the lesser of qualified production activities income (QPAI) or MAGI but not to exceed 50% of the W-2 production wages paid.

Answer 12

Domestic Production Activities Deduction (DPAD)

Question 13

A key component in computing the DPAD. Includes receipts from the sale and other disposition of qualified production property produced in significant part within the United States.

Answer 13

Domestic Production Gross Receipts (DPGR)

Question 14

A key determinant in computer the DPAD. The deduction is limited to a percentage of the lesser of QPAI or MAGI. MAGI is AGI as usually determined but without any domestic production activities deduction.

Answer 14

Modified Adjusted Gross Income (MAGI)

Question 15

To mitigate the effect of the annual accounting period concept, § 172 allows taxpayers to use an excess loss of one year as a deduction for certain past or future years. In this regard, a carryback period of 2 years and a carryforward period of 20 years are allowed.

Answer 15

Net Operating Loss (NOL)

Question 16

A bad debt loss not incurred in connection with a creditor’s trade or business. The loss is deductible as a short-term capital loss and is allowed only in the year the debt becomes entirely worthless.

Answer 16

Nonbusiness Bad Debt

Question 17

The recognized gain from any involuntary conversion of personal use property arising from fire, storm, shipwreck, or other casualty, or from theft.

Answer 17

Personal Casualty Gain

Question 18

The recognized loss from any involuntary conversion of personal use property arising from fire, storm, shipwreck, or other casualty, or from theft.

Answer 18

Personal Casualty Loss

Question 19

A key determinant in computed the DPAD. It consists of domestic production gross receipts (DPGR) reduced by cost of goods sold and other assignable expenses. Thus, QPAI represents the profit derived from production activities.

Answer 19

Qualified Production Activities Income (QPAI)

Question 20

The Code provides three alternatives for the tax treatment of research and experimentation expenditures. They may be expensed in the year paid or incurred, deferred subject to amortization, or capitalized. If the taxpayer does not elect to expense such costs or to defer them subject to amortization (over 60 months), the expenditures must be capitalized.

Answer 20

Research and Experimental Expenditures

Question 21

Stock issued under § 1244 by qualifying small business corporations. If § 1244 stock is disposed of at a loss or becomes worthless, the shareholders may claim an ordinary loss rather than the usual capital loss. The annual ceiling on ordinary loss treatment is $50,000 ($100,000 for MFJ).

Answer 21

Small Business Stock (§ 1244 Stock)

Question 22

A method of accounting for bad debts in which a deduction is permitted only when an account becomes partially or completely worthless.

Answer 22

Specific Charge-Off Method

Question 23

A loss from larceny, embezzlement, and robbery. It does not include misplacement of items.

Answer 23

Theft Losses

Question 24

The DPAD cannot exceed 50% of the W-2 wages paid for any particular year. The payments must involve common law employees. To qualify, the employees need to be involved in the production process.

Answer 24

W-2 Wages

Question 25

A loss (usually capital) is allowed for a security that becomes worthless during the year. The loss is deemed to have occurred on the last day of the year.

Answer 25

Worthless Securities

Question 26

Provides for an additional cost recovery deduction of 50 percent in the tax year the qualified property is placed in service. Qualified property includes most types of new property other than buildings.

Answer 26

Additional First-Year Depreciation

Question 27

A cost recovery system that produces a smaller deduction than would be calculated under ACRS or MACRS. The alternative system must be used in certain instances and can be elected in other instances.

Answer 27

Alternative Depreciation System (ADS)

Question 28

The allocation (and charge to expense) of the cost or other basis of an intangible asset over a statutory period of 15 years. Examples included patents, copyrights, covenants not to compete, acquired goodwill, and leasehold interests.

Answer 28

Amortization

Question 29

Depletion that is calculated based on the adjusted basis of the asset. The adjusted basis is divided by the expected recoverable units to determine the depletion per unit. The depletion per unit is multiplied by the units sold during the tax year to calculate cost depletion.

Answer 29

Cost Depletion

Question 30

The portion of the cost of an asset written off under ACRS (or MACRS), which replaced the depreciation system as a method for writing off the cost of an asset for most assets placed in service after 1980.

Answer 30

Cost Recovery

Question 31

The process by which the cost or other basis of a natural resource (e.g. oil or gas interest) is recovered upon extraction and sale of the resource. The two ways to determine the depletion allowance are the cost and percentage (or statutory) methods.

Answer 31

Depletion

Question 32

The deduction of the cost or other basis of a tangible asset over the asset’s estimated useful life.

Answer 32

Depreciation

Question 33

The half-year convention is a cost recovery convention that assumes all property is placed in service at mid-year and thus provides for a half-year’s cost recovery for that year.

Answer 33

Half-Year Convention

Question 34

Taxpayers may elect to expense or capitalize (subject to amortization) intangible drilling and development costs. However, ordinary income recapture provisions apply to oil and gas properties on a sale or other disposition if the expense method is elected.

Answer 34

Intangible Drilling and Development Costs (IDC)

Question 35

The term listed property includes (1) any passenger automobile, (2) any other property used as a means of transportation, (3) any property of a type generally used for purposes of entertainment, recreation, or amusement, (4) any computer or peripheral equipment (with an exception for exclusive business use), (5) any cellular telephone (or other similar telecommunications equipment), and (6) any other property of a type specified in the Regulations. If listed property is predominantly used for business, the taxpayer is allowed to use the statutory percentage method of cost recovery. Otherwise, the straight-line cost recovery method must be used.

Answer 35

Listed Property

Question 36

A cost recovery convention that assumes property is placed in service in the middle of the month that it is actually placed in service.

Answer 36

Mid-Month Convention

Question 37

A cost recovery convention that assumes property placed in service during the year is placed in service at the middle of the quarter in which it is actually placed in service. The mid-quarter convention applies if more than 40 percent of the value of property (other than eligible real estate) is placed in service during the last quarter of the year.

Answer 37

Mid-Quarter Convention

Question 38

A method in which the cost of tangible property is recovered over a prescribed period of time. This approach disregards salvage value, imposes a period of cost recovery that depends upon the classification of the asset into one of various recovery periods, and prescribes the applicable percentage of cost that can be deducted each year.

Answer 38

Modified Accelerated Cost Recovery System (MACRS)

Question 39

Percentage depletion is depletion based on a statutory percentage applied to the gross income from the property. The taxpayer deducts the greater of cost depletion or percentage depletion.

Answer 39

Percentage Depletion

Question 40

Buildings for which at least 80 percent of the gross rents are from dwelling units (e.g. an apartment building). This type of building is distinguished from nonresidential (commercial or industrial) buildings in applying the recapture of depreciation provisions. The term also is relevant in distinguishing between buildings that are eligible for a 27.5-year life versus a 39-year life for MACRS purposes. Generally, residential buildings receive preferential treatment.

Answer 40

Residential Rental Real Estate

Question 41

The ability to deduct a capital expenditure in the year an asset is placed in service rather than over the asset’s useful life or cost recovery period. The annual ceiling on the deduction is $500,000. However, the deduction is reduced dollar for dollar when §179 property placed in service during the taxable year exceeds $2 million. In addition, the amount expensed under §179 cannot exceed the aggregate amount of taxable income derived from the conduct of any trade or business by the taxpayer.

Answer 41

Section 179 Expensing

Question 42

Expenditures paid or incurred associated with the creation of a business prior to the beginning of business. Examples of such expenditures include advertising, salaries and wages, travel and other expenses incurred in lining up prospective distributors, suppliers, or customers, and salaries and fees to executives, consultants, and professional service providers. A taxpayer may elect to immediately expense the first $5,000 (subject to phaseout) of startup expenditures and generally amortize the balance over a period of 180 months.

Answer 42

Startup Expenditures

Question 43

An accountable plan is a type of expense reimbursement plan that requires an employee to render an adequate accounting to the employer and return any excess reimbursement or allowance. If the expense qualifies, it will be treated as a deduction for AGI

Answer 43

Accountable Plan

Question 44

Automobile expenses are generally deductible only to the extent the automobile is used in business or for the production of income. Personal commuting expenses are not deductible. The taxpayer may deduct actual expenses (including depreciation and insurance) or the standard (automatic) mileage rate may be used (56.5 cents). Automobile expenses incurred for medical purposes or in connection with job-related moving expenses are deductible to the extent of actual out-of-pocket expenses or at the rate of 24 cents per mile. For charitable activities, the rate is 14 cents per mile.

Answer 44

Automatic Mileage Method

Question 45

Taxpayers are allowed a deduction of up to $4,000 for higher education expenses. Certain taxpayers are not eligible for the deduction: those whose AGI exceeds a specified amount and those who can be claimed as a dependent by another taxpayer. These expenses are classified as a deduction for AGI and they need not be employment related.

Answer 45

Deduction for Qualified Tuition and Related Expenses

Question 46

Employees may deduct education expenses that are incurred either (1) to maintain or improve existing job-related skills or (2) to meet the express requirements of the employer or the requirements imposed by law to retain employment status. The expenses are not deductible if the education is required to meet the minimum educational standards for the taxpayer’s job or if the education qualifies the individual for a new trade or business.

Answer 46

Education Expenses

Question 47

These expenses are deductible only if they are directly related to or associated with a trade or business. Various restrictions and documentation requirements have been imposed upon the deductibility of entertainment expenses to prevent abuses by taxpayers. §274 disallows 50 percent of entertainment expenses.

Answer 47

Entertainment Expenses

Question 48

A deduction for AGI is permitted to employees and self-employed individuals provided certain tests are met. The taxpayer’s new job must be at least 50 miles farther from the old residence than the old residence was from the former place of work. In addition, an employee must be employed on a full-time basis at the new location for 39 weeks in the 12-month period following the move. Deductible moving expenses include the cost of moving the household and personal effects, transportation, and lodging expenses during the move. The cost of meals during the move are not deductible. Qualified moving expenses that are paid (or reimbursed) by the employer can be excluded from the employee’s gross income. In this case, the related deduction by the employee is not permitted.

Answer 48

Moving Expenses

Question 49

An expense reimbursement plan that does not have an accountability feature. The result is that employee expenses must be claimed as deductions from AGI. An exception is moving expenses, which are deductions for AGI.

Answer 49

Nonaccountable Plan

Question 50

Employment and business-related expenses attributable to the use of a residence (e.g., den or office) are allowed only if the portion of the residence is exclusively used on a regular basis as a principal place of business of the taxpayer or as a place of business that is used by patients, clients, or customers. If the expenses are incurred by an employee, the use must be for the convenience of the employer as opposed to being merely appropriate and helpful.

Answer 50

Office in the Home Expenses

Question 51

An individual can contribute a maximum of $5,500 per tax year in 2013. No deduction is permitted. However, if a five-year holding period requirement is satisfied and if the distribution is a qualified distribution, the taxpayer can make tax-free withdrawals from a Roth IRA.

Answer 51

Roth IRA

Question 52

Statutory employees are considered self-employed independent contractors for purposes of reporting income and expenses on their tax returns. Generally, a statutory employee must meet three tests: (1) It is understood from a service contract that the services will be performed by the person. (2) The person does not have a substantial investment in facilities (other than transportation used to perform the services). (3) The services involve a continuing relationship with the person for whom they are performed.

Answer 52

Statutory Employees

Question 53

An individual can contribute and deduct a maximum of $5,500 per tax year. The deduction is a deduction for AGI. However, if the individual is an active participant in another qualified retirement plan, the deduction is phased out proportionately between certain AGI ranges.

Answer 53

Traditional IRA

Question 54

Transportation expenses for an employee include only the cost of transportation (taxi fares, automobile expenses, etc.) in the course of employment when the employee is not away from home in travel status. Commuting expenses are not deductible.

Answer 54

Transportation Expenses

Question 55

Travel expenses include meals (generally subject to a 50 percent disallowance) and lodging and transportation expenses while from home in the pursuit of a trade or business (including that of an employee).

Answer 55

Travel Expenses

Question 56

Debt incurred in acquiring, constructing, or substantially improving a qualified residence of the taxpayer. The interest on such loans is deductible as qualified residence interest. However, interest on such debt is deductible only on the portion of the indebtedness that does not exceed $1,000,000 ($500,000 for MFS).

Answer 56

Acquisition Indebtedness

Question 57

Property contributed to a charitable organization that, if sold rather than contributed, would have resulted in a long-term capital gain to the donor.

Answer 57

Capital Gain Property

Question 58

Contributions are deductible (subject to various restrictions and ceiling limitations) if made to qualified nonprofit charitable organizations. A cash basis taxpayer is entitled to a deduction solely in the year of payment. Accrual basis corporations may accrue contributions are year-end if payment is properly authorized before the end of the year and payment is made within two and one-half months after the end of the year.

Answer 58

Charitable Contributions

Question 59

Loans that utilize the personal residence of the taxpayer as security. The interest on such loans is deductible as qualified residence interest. However, interest is deductible only on the portion of the loan that does not exceed the lesser of (1) the fair market value of the residence, reduced by the acquisition indebtedness, or (2) $100,000 ($50,000 for MFS). A major benefit of a home equity loan is that there are no tracing rules regarding the use of the loan proceeds.

Answer 59

Home Equity Loans

Question 60

Medical expenses of an individual, spouse, and dependents are allowed as an itemized deduction to the extent that such amounts (less insurance reimbursements) exceed 10 percent (or 7.5 percent if at least age 65) of AGI.

Answer 60

Medical Expense

Question 61

A special category of itemized deductions that includes such expenses as professional dues, tax return preparation fees, job-hunting costs, unreimbursed employee business expenses, and certain investment expenses. Such expenses are deductible only to the extent they exceed 2 percent of AGI.

Answer 61

Miscellaneous Itemized Deductions

Question 62

Property contributed to a charitable organization that, if sold rather than contributed, would have resulted in other than a long-term capital gain to the donor (i.e. ordinary income property and short-term capital gain property). Examples are inventory and capital assets held for less than the long-term holding period.

Answer 62

Ordinary Income Property

Question 63

Loan origination fees that may be deductible as interest by a buyer of property. A seller of property who pays points reduces the selling price by the amount of the points paid for the buyer. While the seller is not permitted to deduct this amount as interest, the buyer may do so.

Answer 63

Points

Question 64

A term relevant in determining the amount of interest expense the individual taxpayer may deduct as an itemized deduction for what otherwise would be disallowed as a component of personal interest (consumer interest). Qualified residence interest consists of interest paid on qualified residences (principal residence and one other residence) of the taxpayer. Debt that qualifies as qualified residence interest is limited to $1 million of debt to acquire, construct, or substantially improve qualified residences (acquisition indebtedness plus $100,000 of other debt secured by qualified residences (home equity indebtedness). The home equity indebtedness may not exceed the fair market value of a qualified residence reduced by the acquisition indebtedness for that residence.

Answer 64

Qualified Residence Interest