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Question 1

When can private company employees elect to defer recognition of income?

Answer 1

Private company employees can elect to defer for up to five years the recognition of income from private company stock acquired due to the exercise of a stock option or the settlement of a Restricted Stock Unit, provided the employee received the stock as part of a qualified equity grant. If election is made, income taxes are due upon the earliest of:
When the stock becomes transferable, including to the employer;
Five years after the first date the rights of the employee in such stock are transferable or are not subject to a substantial risk of forfeiture, whichever occurs earlier (Year 14 for Benjamin); or
The date the employee revokes his or her election.

Question 2

Johnson worked for ABC Co. and earned a salary of $100,000. Johnson also received, as a fringe benefit, group term-life insurance at twice Johnson’s salary. The annual IRS-established uniform cost of insurance is $2.76 per $1,000. What amount must Johnson include in gross income?

Answer 2

The first $50,000 of group-term life insurance provided by an employer is a tax-free fringe benefit. Johnson receives $200,000 of group-term life insurance, so $150,000 of this coverage is taxable. There are 150 units of $1,000 each of excess coverage, included in income at $2.76 for each unit. The income from the insurance coverage is $414 ($2.76 × $150). When the $414 is included with the $100,000 salary, gross income is $100,414.

Question 3

Under a “cafeteria plan” maintained by an employer,

Answer 3

Under a “cafeteria plan” maintained by an employer,

Question 4

What are the requirements of a “cafeteria plan”?

Answer 4

1) all participants must be employees;
2) participants may choose between two or more benefits composed of cash or qualified benefits;
3) participants are required to make elections among the benefits;
4) the plan must be in writing and have certain specified information;
5) the plan may not provide participants with deferred income, except for under 401(k) plans.

This response states that under cafeteria plans participants may select their own menu of benefits.

Question 5

Employer-provided medical insurance coverage is a non-taxable employee fringe benefit.

Answer 5

The dividend income on shares of stock that the taxpayer received for services rendered.

Question 6

Under a nonaccountable plan

Answer 6

all reimbursements are included in the employee’s income

Question 7

Group-term life insurance

Answer 7

The first $50,000 of group-term life insurance provided by an employer is a tax-free fringe benefit. Any excess of that is taxable.

Question 8

Employee death benefits

Answer 8

must be included in income

Question 9

Under a 529 Educational Savings Plan

Answer 9

For distributions starting 2018 and forward, Qualified expenses include tuition at elementary or secondary public, private, or religious schools. Exclusion is limited to $10,000 per year.

Question 10

A 33-year-old taxpayer withdrew $30,000 (pretax) from a traditional IRA. The taxpayer has a 33% effective tax rate and a 35% marginal tax rate. What is the total tax liability associated with the withdrawal?

Answer 10

The $30,000 distribution from the traditional IRA is taxable at the taxpayer’s marginal tax rate for federal income tax purposes. In addition, since this is an early distribution (before age 59½) and none of the exceptions for early distributions are met, the distribution is also subject to a 10% penalty tax. Therefore, the $30,000 distribution will be taxed at a 45% rate (35% marginal tax rate + 10% penalty tax). Total tax liability is $13,500 ($30,000 × 45%).

Question 11

What is the difference between traditional IRAs and Roth IRA?

Answer 11

Deductibility of contributions. Contributions to Roth IRAs are never deductible whereas contributions to traditional IRAs are deductible if certain requirements are met. Deductible if the TP does not have a qualified pension plan (if they are then deduction is phased out).

Question 12

Hall earned a salary of $25,000 in 2020. Hall was not covered by any type of retirement plan but contributed $2,000 to an IRA in 2020. Hall’s $2,000 contribution to an IRA should be treated as

Answer 12

An adjustment to income arriving at AGI. Individual taxpayers not active in certain employer-sponsored retirement plans may deduct cash contributions to individual retirement accounts to the extent of the lesser of $6,000 or 100% of the taxpayer’s gross income in 2020. Those taxpayers covered by employer-sponsored retirement plans may still take individual retirement account deductions subject to a phase-out based on their adjusted gross income.

Question 13

Davis, a sole proprietor with no employees, has a Keogh profit-sharing plan to which he may contribute 25% of his annual earned income.

For this purpose, “earned income” is defined as net self-employment earnings reduced by the

Answer 13

Deductible Keogh contribution and one half of the self employment tax.

Question 14

What is the maximum amount of adjusted gross income that a taxpayer may have and still qualify to roll over the balance from a traditional individual retirement account (IRA) into a Roth IRA?

Answer 14

There is not max AGI limitation from 2010 and after.

Question 15

How to contributions received from a IRA be taxed?

Answer 15

As ordinary income if received after age 59 1/2

Question 16

Income in respect of a cash-basis decedent

Answer 16

Income in respect of a decedent is income earned by a decedent before death that was not includible in the decedent’s final income tax return because of the decedent’s method of accounting (e.g., receivables of a cash basis decedent). Such income must be included in gross income by the person who receives it and has the same character (e.g., ordinary or capital) as it would have had if the decedent had lived.

Question 17

Which expense would be subject to the Uniform Capitalization Rules of Code Section 263A?

Answer 17

Quality Control. They are directly related to the manufacturing process so the costs are included in the basis of the inventory per the uniform capitalization rules.

Question 18

Which of the following costs are subject to the Uniform Capitalization Rules of Code Sec. 263A for manufactured tangible personal property?

Answer 18

Off-site storage costs must be capitalized as part of the inventory cost for tax purposes.

Question 19

Roth IRAs

Answer 19

The maximum annual contribution to a Roth IRA is subject to reduction if the taxpayer’s adjusted gross income exceeds certain thresholds. Unlike a traditional IRA, contributions are not deductible and can be made even after the taxpayer reaches age 70½. The contribution must be made by the due date of the taxpayer’s tax return (not including extensions).

Question 20

A retiree invested $100,000 in an annuity that pays $12,000 annually for 10 years. What portion of the first payment should be included in the retiree’s gross income?

Answer 20

The $100,000 cost basis in the annuity is recovered over the 10-year annuity period, which is $10,000 per year. $12,000 proceeds less $10,000 basis equals $2,000 income.

Question 21

Regarding interest income being tax exempt

Answer 21

Interest on obligations of a state or one of its political subdivisions (e.g., New York Port Authority bonds), or a possession of the U.S. (e.g., Puerto Rico Commonwealth bonds) is tax-exempt.

Question 22

Johnson borrowed $45,000 secured by land with a basis of $20,000. Johnson could not pay the principal, so the bank foreclosed and sold the land for $35,000 as full settlement of the debt. What income should Johnson recognize?

Answer 22

Forgiveness of debt is included in income. Johnson owed $45,000, but his land was sold for $35,000 in satisfaction of his debt. Therefore, he has $10,000 of debt relief, and this $10,000 is included in his income. His basis of $20,000 reduces the amount realized for the land of $35,000, resulting in recognized income of $15,000. $10,000 + $15,000 = $25,000.

Question 23

The 20% of Qualified Business income deduction under the new Section 199A is:

Answer 23

Deductible from AGI when calculating taxable income.

Question 24

In the current year, Essex sold land with a basis of $80,000 to Yarrow for $100,000. Yarrow paid $25,000 down and agreed to pay $15,000 per year, plus interest, for the next five years, beginning in the second year. Under the installment method, what gain should Essex include in gross income for the year of sale?

Answer 24

the total recognized gain from the sale is $20,000 ($100,000 selling price – $80,000 basis). Under the installment method, recognized income = cash collected × (gross profit/contract price). Therefore, $25,000 × ($20,000/$100,000) = $25,000 × 20% = $5,000.

Question 25

What is the amount of income a TP should report when services are rendered?

Answer 25

The amount of income realized by a taxpayer from services rendered equals the sum of the amount of cash received and the fair market value of any property received. (stock %, interest in an LLC ect)

Question 26

Unemployment compensation benefits received

Answer 26

must generally be included in gross income.

Question 27

The formula for the gain recognized in any year under the installment method:

Answer 27

(Gross Profit/ Total Contract Price) × Amount Received
Ex.
($200,000/$300,000) × $30,000 = $20,000
Total Contract Price: cash ($100,000) + note ($200,000) = $300,000
Gross Profit: Total Contract Price ($300,000) – Basis ($100,000) = $200,000
Amount Received: Principal Payment ($30,000)

Question 28

Which of the following costs is not included in inventory under the Uniform Capitalization rules for goods manufactured by the taxpayer?

Answer 28

Research and experimental expenditures. Taxpayers subject to the uniform capitalization rules must capitalize all direct costs and certain indirect costs properly allocable to real property and tangible personal property produced by the taxpayer

Question 29

What amount of group-term life insurance proceeds must be included in gross income by the beneficiary once the person dies?

Answer 29

Life insurance proceeds paid by reason of death are generally excluded from gross income. Note that although only the cost of the first $50,000 of group-term insurance coverage can be excluded from gross income during the employee’s life, the entire amount of insurance proceeds paid by reason of death will be excluded from the beneficiary’s income.

Question 30

concerning an education IRA (Coverdell Education Savings Account)

Answer 30

• Contributions to an education IRA are not deductible.
• A taxpayer may contribute up to $2,000 in 2020 to an education IRA to pay the costs of the designated beneficiary’s higher education.
• Eligibility for an education IRA is phased out if adjusted gross income exceeds certain threshold levels
• Contributions generally cannot be made to an education IRA if the designated beneficiary is age eighteen or older.

Question 31

contributions to a defined contribution qualified retirement plan on behalf of a self-employed individual whose income from self-employment is $60,000 are limited to

Answer 31

he maximum amount of contributions to a defined contribution self-employed retirement plan is limited to the lesser of $57,000, or 25% of self-employment income for 2020 (25% x $60,000 = $15,000).

Question 32

A qualifying relative cannot have income of over

Answer 32

$4,300

Question 33

Qualifying medical expenses are deductible as an itemized deduction as long as the total exceeds

Answer 33

7.5% of adjusted gross income.

Question 34

Qualified Dividend income gets taxed at

Answer 34

the tax rate is 0% for qualified dividends if the taxpayer is in the lower tax brackets, 20% for qualified dividends in the higher tax brackets, and otherwise 15%.

Question 35

The portion of Reliant’s refund that represented the overpayment of the Year 2 federal taxes.

Answer 35

Nontaxable for regular tax purposes on Reliant’s Year 4 federal income tax return. Since the payment of federal income tax does not result in a deduction, a subsequent refund of federal income tax will be nontaxable.

Question 36

The portion of Reliant’s refund that is attributable to the interest on the overpayment of federal taxes.

Answer 36

Fully taxable for regular tax purposes on Reliant’s Year 4 federal income tax return. Interest is generally fully included in gross income, including the interest on an overpayment of federal taxes.

Question 37

Reliant received dividend income from a mutual fund that solely invests in municipal bonds.

Answer 37

Nontaxable for regular tax purposes on Reliant’s Year 4 federal income tax return. A mutual fund that invests in tax-exempt municipal bonds is permitted to pass the tax exemption on the bond interest on to its shareholders when the tax-exempt interest is distributed in the form of dividends. To qualify, the mutual fund has to have at least 50% of the value of its total assets invested in tax-exempt municipal bonds at the close of each quarter of its taxable year.

Question 38

Reliant, the lessor, benefited from the capital improvements made to its property by the lessee in Year 4. The lease agreement is for one year ending December 31, Year 4, and provides for a reduction in rental payments by the lessee in exchange for the improvements.

Answer 38

Fully taxable for regular tax purposes on Reliant’s Year 4 federal income tax return. Generally, a lessor will not recognize any income as a result of the capital improvements made by a lessee that revert to the lessor at the expiration of the lease. However, if the parties intend the improvements to be, in whole or in part, a substitute for rental payments, then the lessor must recognize the improvements as rental income equal in amount to the reduction in rental payments.

Question 39

Reliant collected the proceeds on the term life insurance policy on the life of a debtor who was not a shareholder. The policy was assigned to Reliant as collateral security for the debt. The proceeds exceeded the amount of the debt.

Answer 39

Partially taxable for regular tax purposes on Reliant’s Year 4 federal income tax return. Since Reliant was a collateral assignee as a result of the insured’s indebtedness, Reliant received the insurance proceeds as payment on the debt, rather than as life insurance proceeds paid “by reason of death of the insured.” Consequently, the insurance proceeds are tax-free only to the extent of the amount of unpaid debt, and any proceeds in excess of the debt repayment must be included in Reliant’s gross income.

Question 40

Saints Inc. has had more than $26 million in average gross receipts for the last three years. In 2020, Saints, Inc. reported the following information:

Gross receipts	$30,000,000
COGS	$18,000,000
Advertising	$25,000
Business interest expense	$250,000
Depreciation expense	$1,250,000
Other operating expenses	$11,500,000
How much can Saints Inc. deduct for business interest expense?

Answer 40

Business interest expense is limited to 50% of the business’s adjusted taxable income. The allowable business interest expense deduction is calculated as follows:

Gross receipts	$30,000,000
COGS	(18,000,000)
Advertising	(25,000)
Other operating expenses	(11,500,000)
Adjusted taxable income	$ 475,000
× 50%
Business interest expense limit	$ 237,500
The remaining $12,500 of business interest is carried forward to 2021. Depreciation expense is not included in computing adjusted taxable income.

Question 41

Regarding deductions for operating illegal drug business

Answer 41

the COGS can be deducted

Question 42

Atlas Corporation is a publicly traded corporation selling technology equipment that is recruiting for a new CEO. Jason was hired in the current year as the new CEO and will be paid $1,500,000 in salary and a performance-based bonus of $1,000,000 upon reaching certain performance objectives. If Jason meets the performance-based objectives and Atlas has a 21% tax rate, what is Atlas’s after-tax cost of paying Jason?

Answer 42

Atlas’s salary cost for Jason is $2,500,000, but its deductible amount is limited to $1,000,000. The tax savings from the salary deduction is $210,000 ($1,000,000 × 21%). The after-tax cost of Jason’s pay is $2,290,000 ($2,500,000 − $210,000). For taxable years beginning on or after January 1, 2019, the deduction for compensation with respect to a covered employee of a publicly traded corporation is limited to $1,000,000 per year per covered employee. For this purpose, compensation includes all compensation paid to an employee. Covered employees include the company’s CEO.

Question 43

When can a taxpayer deduct life insurance premiums

Answer 43

A taxpayer may not deduct life insurance premiums in which the taxpayer is directly or indirectly the beneficiary. However, a taxpayer may deduct the group term life insurance premiums if the insured employee or his/her beneficiaries would get the insurance proceeds.

Question 44

Where do you report rental expenses and revenues?

Answer 44

Schedule E

Question 45

Is alimony deductible?

Answer 45

YES on divorces finalized in 2018 and before. NO after divorces finalized 2019 and after.

Question 46

Nonbusiness deductions for AGI

Answer 46

Half of the self-employment taxes paid by self-employed taxpayers
100% of the medical insurance premiums (not exceeding self-employment income) paid by a self-employed taxpayer (including spouse, children under age 27, and dependents) for taxpayers (and spouse) who are not eligible to participate in an employer subsidized health plan
The same applies for premiums paid for long-term care insurance by self-employed individuals who are not eligible to participate in an employer subsidized long-term care plan.
IRA (Keogh) contributions and other contributions to self-employed retirement plans (discussed in the lesson “Taxation of Retirement Plans”)
Interest on student loans
Contributions to Health Savings Accounts (discussed in the lesson “Taxation of Retirement Plans”)
Attorney’s fees and court costs for discrimination suits
Penalty for early withdrawal of savings
Other deductions for AGI include forfeited interest on premature withdrawals, repayment of jury pay, and expenses associated with reforestation, clean fuels, and performing artists
Certain educator expenses

Question 47

Alimony payments you make under a divorce or separation instrument, such as a divorce decree or a written agreement incident thereto, are deductible if all of the following requirements are met:

Answer 47

You and your spouse or former spouse do not file a joint return with each other;
You pay in cash (including checks or money orders);
The divorce or separation instrument does not say that the payment is not alimony;
If legally separated under a decree of divorce or separate maintenance, you and your former spouse are not members of the same household when you make the payment;
You have no liability to make any payment (in cash or property) after the death of your spouse or former spouse; and
Your payment is not treated as child support.

Question 48

If an employer requires jury pay to be remitted in exchange for regular compensation for the period the employee was performing jury duty,

Answer 48

the employee may deduct the jury duty pay from her gross income as an adjustment arriving at adjusted gross income.

Question 49

Six types of personal expenses may be itemized:

Answer 49

Medical expenses
Interest
Taxes
Charitable contributions
Casualty losses
Miscellaneous deductions

Question 50

An additional amount is added to the standard deduction if either the taxpayer or his or her spouse is:

Answer 50

(1) age 65 or over or (2) blind. In 2020, the amount of the addition is $1,650 for unmarried and $1,300 for married taxpayers.

Question 51

Public charities are sometimes referred to as 50% charities can be:

Answer 51

government subdivisions, hospitals, churches, schools, and similar institutions operated for religious, scientific, educational, or charitable purposes.

Question 52

Private charities are sometimes referred to as 30% charities can be:

Answer 52

fraternal orders, cemetery companies, and private foundations operated for religious, scientific, educational, or charitable purposes.

Question 53

The limitations on the charitable contribution deduction are applied in the following order:

Answer 53

Cash contributions—60% of AGI
Contributions to 50% charities (public)—50% of AGI
Contributions to 30% charities (certain private foundations, fraternal orders, cemetery companies, etc.)—30% of AGI
Contributions of long-term capital gain property to 50% charities—30% of AGI
Contributions of long-term capital gain property to 30% charities—20% of AGI

Question 54

A casualty loss is calculated by

Answer 54

Insurance proceeds - adjusted basis of damaged property

Question 55

For personal casualty losses, the deduction is computed as follows:

Answer 55

Lower of decline in FMV or AB of property
Insurance Reimbursements
− $100 per casualty
− 10% × AGI
Casualty loss deduction

Question 56

Gambling losses can be deducted in itemized deductions

Answer 56

to the extent of winnings

Question 57

Entertainment expense deductions are limited to:

Answer 57

Dues for public service clubs (e.g., Kiwanis), professional organizations, chambers of commerce, and trade associations are deductible.
Business gifts up to $25 per donee
50% of meals

Question 58

Education expense deductions are limited to:

Answer 58

To maintain or improve existing skills required in a current job or
To meet the requirements of an employer or imposed by law to retain employment status

Question 59

Requirements for Deducting the Cost of Worthless Securities:

Answer 59

In general, the security must be totally worthless (no residual value).
A worthless asset is treated as being sold for nothing on the last day of the year..
The character of the loss is usually capital. However, if the loss is incurred by a corporation on its investment in an affiliated corporation (80% or more ownership), the loss is generally an ordinary loss.

Question 60

An individual’s losses on transactions entered into for personal purposes are deductible only if

Answer 60

the losses qualify as casualty losses in a federal disaster area.

Question 61

What method is used for a corporation that is not a financial institution in regards to deduction of bad debts?

Answer 61

Corporations other than certain financial institutions are required to use the direct charge-off method in accounting for bad debts. Certain financial institutions are allowed to use the reserve method.
Under the direct charge-off method, corporations may claim a deduction once a specific business debt becomes partially or wholly worthless and a specific nonbusiness debt becomes wholly worthless.

Question 62

Income:	
Wages	$ 5,000
Interest on savings account	1,000
Net rental income	4,000
Deductions:	
Standard deduction	12,400
Net business loss	16,000
Net short-term capital loss	2,000
What is the net operating loss available for carryforward

Answer 62

Wages	$ 5,000
Interest on savings account	1,000
Net rental income	4,000
Net business loss	(16,000)
Net short-term capital loss	( 2,000)
AGI	( 8,000)
Deductions:	
Standard deduction	12,400
Taxable loss	(20,400)

$20,400 TAXABLE LOSS
Plus $11,400 Adjustment for deductions that are not connected to a trade or business or employment, such as the standard deduction of $12,400 reduced by the non-business income of $1,000 interest from savings.
Plus $ 2,000 Short-term capital loss as adjusted by business capital gains and losses (-0-).
($ 7,000) Correct carryforward

Question 63

What is the max square footage allowable for home office deductions?

Answer 63

300. $5 per square foot so $1,500 total max allowed

Question 64

What can be a condition for a business to be considered nonpassive?

Answer 64

if the TP works in the business more than 500 hours for a year

Question 65

The term active participation for a passive activity loss is relevant in relation to

Answer 65

rental real estate activities

Question 66

regarding an individual’s suspended passive activity losses

Answer 66

suspended loses can be carried forward but not back, until utilized

Question 67

Passive activity losses of an individual taxpayer can generally be used to offset

Answer 67

Income from the rental residence. Rental real estate is considered passive without regard to the taxpayer’s participation. A passive loss can offset passive rental income.

Question 68

Medical expenses can be deducted

Answer 68

to the extend that they exceed 7.5% of AGI.

Question 69

How do you treat a forfeiture penalty for making a premature withdrawal from a time savings account?

Answer 69

should be deducted from gross income in arriving at adjusted gross income in the year in which the penalty is incurred.

Question 70

A taxpayer can deduct the medical expenses paid for a child at the time of adoption

Answer 70

if the child qualifies as the taxpayer’s dependent when the medical expenses are paid.

Question 71

What is the AGI medical expense limitation?

Answer 71

7.5% of gross income for the year

Question 72

Acquisition indebtedness is

Answer 72

debt incurred to acquire, construct, or substantially improve the taxpayer’s principal or secondary residence.

Question 73

The alternative minimum tax (AMT) is computed as the

Answer 73

Excess of the tentative AMT over the regular tax.
The alternative minimum tax (AMT) ensures that all taxpayers share the tax burden fairly by preventing taxpayers with substantial income from avoiding significant tax liability.

Question 74

Marginal Tax Rate is`

Answer 74

The amount of taxes that will be paid on the next dollar of taxable income or that will be saved on the next dollar of deduction

Question 75

Present Interest

Answer 75

the right to income or to enjoy property currently. A gift to a minor in a trust is considered a present interest if the trustee has the ability to use the funds for the benefit of the minor before the age of 21 (such as for education, medical, etc), and any remaining funds will be distributed to the minor upon reaching age 21.

Question 76

Consent Dividends

Answer 76

Hypothetical dividends that are treated as if they were paid on the last day of the corporation’s taxable year. Since they are not actually distributed, shareholders increase their stock basis by the amount of consent dividends included in their gross income