Chapter 14-15 (Tax) Flashcards by Joe Diaz Jr

In order for a place to be considered a(n)
____ ___, people must be able to live and sleep there.

Dwelling Unit

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A dwelling unit is considered to be a residence if the taxpayer’s number of personal use days in the home is more than the greater of __ days or ___% of the days rented during the year

14 days
10 percent

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Which of the following days are counted as personal use days for a dwelling unit?

The taxpayer or other owner resides in the unit.
A relative of an owner stays in the home for free.
A friend of the taxpayer stays in the home and pays a below market rental rate.
A relative of an owner stays in the home and pays a fair market rental rate.

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Rachel owns a house and property in Ogden, Utah. She does NOT live in the home continuously, but she spends about 28 days there in the winter and another 28 days there in the summer. She is able to rent the house to sports enthusiasts and their families for 280 days of the year. Skiers like to stay in the winter months and hikers like to rent the house in the summer months. Which type of dwelling unit is this house for Rachel?

The property is a residence, but NOT her principal residence.

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Which of the following facts would NOT necessarily be taken into consideration when trying to determine which of two residences is the principal residence of the taxpayer?

The proximity of each residence to the taxpayer’s close friends

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Which of the following choices can be considered a dwelling unit?

Recreational vehicle (camper)
Mobile home
Houseboat
Condominium

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Bob purchased a second home which he rented for 180 days this year. Assuming Bob does not plan to rent it the rest of the year, he must live in the home for at least ___ days during the remainder of the year in order for it to qualify as a residence

19 days

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Which of the following days are counted as rental days for a dwelling unit?

A friend of the taxpayer stays in the home and pays a fair market rental rate.
The home is being repaired for rental use.

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Which of the following rules for determining the basis of a personal residence is measured correctly?

Gift - the donor’s basis

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Julia owns a house and property in Salt Lake City, Utah and another house in Florida. She stays in Florida for about three months a year and stays in Utah the other nine months. Julia is a consultant. Her employer and office are located in Utah, but she is able to work remotely when she is in Florida. What type of dwelling unit is the Utah home to Julia?

Principal residence

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Jack and Susan sold their principal residence for $240,000. They had paid $200,000 four years earlier. How will this transaction be treated for tax purposes?

The $40,000 gain is excluded from taxation because it results from the sale of a principal residence.

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When a taxpayer lives in more than one residence during the year, she will have to distinguish which one is her ___ ___ based on time spent there, proximity to her job, living arrangements of her immediate family, and where her bills are mailed.

Principal Residence

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Which of the following statements is INCORRECT concerning the ownership and use tests used to qualify for the exclusion of a gain on the sale of a personal residence?

The time of ownership and use must be a continuous two-year period.

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Which of the following rules for determining the basis of a personal residence is measured INCORRECTLY?

Inheritance - the basis carries over from the deceased owner

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The loss on the sale of a principal residence is classified as a deductible capital loss.

False (The loss on personal use assets is NOT deductible)

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To qualify for the exclusion on the sale of a personal residence, the taxpayer must have owned and used the property as his/her principal residence for a total of ___ or more years during the ___ - year period ending on the date of sale.

Two
Five

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Ed owned and used his home in Kentucky as his principal residence for 15 years. He moved to another state in the 16th year and rented the Kentucky home. Two years later he sold the Kentucky home. Ed’s brother, Fred, had two houses. Fred owned and used his home in Tennessee as his principal residence for 10 years. He had another home in Florida. In the 11th year, he moved into his Florida home. He resided there for 3 years and then sold the Florida home. Which of the brothers has “nonqualified use” of his principal residence that will reduce the exclusion on the gain on a sale of a personal residence?

Fred - because he moved into the home after a period of nonqualified use.

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If a taxpayer is UNABLE to meet the two-year requirement for the ownership and use tests due to ____ circumstances, he can exclude a percentage of the gain based on the time he owned and used the home.

Unforeseen, unusual, or hardship

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Drake purchased a second home this year. He lived in the home for 12 days and rented the home for 70 days. Which of the following statements is correct?

The home is NOT a residence. Drake did not use the residence for more than the greater of 14 days or 10% of rental days.

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Which of the following statements is NOT correct regarding the deductibility of home mortgage interest?

A qualified residence must be the taxpayer’s primary residence.

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Which of the following statements are correct regarding acquisition indebtedness?

Acquisition indebtedness can be increased by additional debt used to substantially improve the residence.
Principal payments on the loan reduce acquisition indebtedness

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Which of the following circumstances leading to failure in meeting the ownership and use tests would most likely NOT be considered a hardship that would allow the taxpayer to exclude a portion of the gain on the sale of the taxpayer’s primary residence?

Change in marital status

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Which of the following statements is INCORRECT regarding points charged on a home loan?

A point is 10 percent of the principal amount of the loan.

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Which of the following statements are correct regarding the deductibility of home mortgage interest?

Interest on home-equity indebtedness is only deductible if it is used for home improvements.
A taxpayer can deduct interest on up to two qualified residences.
The loan must be secured by the residence.

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Daniel and Debra have a principal residence in Ohio, but they also own residences in South Carolina and Colorado. None of the homes are rental property. For 2023, their total real property tax bills total $9,800. On how many of these homes can Daniel and Debra deduct the real property taxes?

- Three

When are real property taxes deductible for the taxpayer?

When the tax payment is made from the escrow account to the taxing authority

The maximum amount of acquisition debt that can generate deductible interest expense for debt incurred before December 16, 2017 is ___.

1,000,000

When property is sold during the year, the buyer of the property is charged with paying the property tax on the real estate and receives the tax deduction for the payment.

False (The real property tax is allocated between the buyer and the seller based on the time each party owns the property)

Points paid in connection with ___ of the taxpayer's principal residence are deductible immediately, but points paid to ___ the home are amortized and deducted over the life of the loan.

- Purchase - Refinance

Jack and Diane have their principal residence in Kansas. They operate a small retail business in town and they own the building that is used for their shop. In addition, they have an apartment building with 15 units. Jack and Diane paid real property taxes on each of these three buildings. The real property tax is a deduction ____ (for/from) AGI on their principal residence, ____ (for/from) AGI on their retail shop, and ____ (for/from) AGI on their rental property.

-From -For -For

A taxpayer is NOT required to report rental income or deduct rental expenses on a residence that is only rented for ___ days or less, as long as the taxpayer lives in the home for at least ___ days

- Fourteen -Fifteen

Richard makes monthly house payments that include a pro rated portion of real property taxes and insurance. The taxes and insurance are held in an escrow account until the mortgage company pays the taxing jurisdiction. During the current year, Richard paid $1,800 into the escrow account. The tax bill paid by the mortgage company totaled $1,600. The excess $200 will remain in the escrow account and accumulate toward taxes for the following year. What amount can Richard deduct as real property taxes for the current year?

$1,600

What is the formula used by the Tax Court when allocating mortgage interest and property taxes for residences with significant rental activities?

Expense × (total rental days ÷ 365)

Real property taxes are often assessed on the value of the property at the beginning of the year. When property is sold in the middle of year, who receives the deduction for the real property tax?

The property tax is pro rated at the time of the transfer, so both the buyer and seller can deduct their pro rated portion of the property tax.

A(n) ____ is 1 percent of the principal amount of the loan that is deductible when paid to the lender in exchange for a reduced ___ ___ on loans.

- Point - Interest - Rate

When a taxpayer rents his residence to unrelated parties for 15 or more days, how is the rental activity treated?

The owner includes the income and deducts the rental expenses to the extent of the rent income. Losses are NOT allowed unless due to Tier 1 expenses.

When a taxpayer rents his residence to unrelated parties for 14 or fewer days and lives in the residence for at least 15 days, her or she ___.

Does NOT report any rental income and is not allowed to deduct any rental expenses

Match the rental expenses to the appropriate tiers. Tier 1 Tier 2 Tier 3

Tier 1 - Expenses to obtain tenants Tier 2 - Operating expenses for the rental property Tier 3- Depreciation on the rental property

If a taxpayer stays in his rental property for even one day, the expenses must be allocated between rental and personal days.

True (The expenses must be allocated based on days occupied. The nonrental portion of property tax can be deducted as an itemized deduction)

What is the formula used by the IRS when allocating mortgage interest and property taxes for residences with significant rental activities?

Expense × (total rental days ÷ total days used)

Which of the following statements is INCORRECT regarding a residence with significant rental use?

Direct rental expenses are allocated between personal and rental use.

Which of the following statements is INCORRECT regarding the treatment of revenues and expenses for a residence with significant rental use?

For tax purposes, rental expenses can NOT exceed rental revenues.

When a taxpayer owns a home that he does not live in, the home is considered to be a(n) ___ property for tax purposes. If he rents the property at fair market value, any loss is ___ (deductible/nondeductible) for tax purposes

-Rental -Deductible

When a taxpayer has more than one business location, including the home, how can he determine which location is the principal place of business?

- The total time spent doing work at each location - The effort spent on administrative or management activities if there is NOT another location for that purpose - The relative importance of the activities performed at each business

Real property taxes are often assessed on the value of the property at the beginning of the year. When property is sold in the middle of year, who receives the deduction for the real property tax?

The property tax is pro rated at the time of the transfer, so both the buyer and seller can deduct their pro rated portion of the property tax.

Sandy owns a 2-bedroom house with a living room, 2 bathrooms, a kitchen/dinette, and a basement. Which of the following qualify for a home-office deduction?

- Sandy has turned the second bedroom into her office for billing and bookkeeping related to her business. She replaced the bedroom furniture with office furniture. - Sandy uses her basement as a photo developing lab and framing area for her photography business.

Which of the following statements are CORRECT when referring to a home that qualifies as a residence with significant rental use?

- The taxpayer rents the home for 15 days or more. - All rental income is included in gross income. - All direct rental expenses such as advertising are fully deductible.

Travis has a 2,400 square foot home. He is a sales representative for a pharmaceutical company and uses one room of his home exclusively for his business. The area of the office is 240 square feet. During the past year, he painted his office and replaced the door at a cost of $500; paid for utilities for his home, $3,000; paid property taxes, $1,500; paid mortgage interest, $3,600; and replaced a door jam and door for his patio, $600. Travis has $___ in deductible direct expenses and $___ in deductible indirect.

- Five Hundred - Eight Hundred and Ten

Travis has a 2,400 square foot home. He is a sales representative for a pharmaceutical company and uses one room of his home exclusively for his business. The area of the office is 240 square feet. During the past year, he painted his office and replaced the door at a cost of $500; paid for utilities for his home, $3,000; paid property taxes, $1,500; paid mortgage interest, $3,600; and replaced a door jamb and door for his patio, $600. Depreciation expense on the entire home would be $2,000 for the year. If Travis uses the simplified method for deducting home office expenses, which of the following choices are correct?

- Travis has a simplified method deduction of $5 x 240 square feet. - Travis is allowed to deduct 100% of his mortgage interest and property tax as itemized deductions.

Which of the following statements is INCORRECT regarding the home office deduction when using the actual expense method?

Tier 1 expenses are deductible to the extent of the Schedule C net income before considering the home office deduction.

(T/F) A taxpayer's principal place of business can also include the place of business used by the taxpayer for the management activities of the trade or business, if there is no other business location provided for that purpose.

True (A taxpayer's principal place of business also includes the place of business used by the taxpayer for the administrative or management activities of the taxpayer's trade or business if there is no other fixed location where these activities occur)

Corey has a $1,200 home office deduction carryforward from the prior year. He has decided to use the simplified method for calculating the home office deduction in the current year. Which of the following statements is CORRECT regarding the home office deduction?

Corey cannot use the actual expense carryforward as a deduction in the current year if he is using the simplified method.

In order to qualify for home office deductions, a taxpayer must use part of his home ___ and ___ as either a principal place of business or as a place to meet with clients in the normal course of business

- Regularly - Exclusively

Generally, under state law, business partnerships can be classified as:

- General - Limited

Sharon has a 2,800 square foot home with an additional 1,200 square foot basement. She is an artist and uses the basement exclusively as her painting studio. Sharon can deduct ___% of the direct expenses of her basement studio and ___% of the indirect costs from maintaining and using her home as a home office deduction.

- One hundred - Thirty

Which owner is ultimately responsible for the liabilities of the business?

General partners (General partners are responsible for the liabilities of a partnership)

When using the simplified method, the deduction for home office expenses is $_____ x business use square footage with a maximum deduction allowed of $____. In addition to this amount, taxpayers are allowed to deduct _____ percent of their mortgage interest and property tax as itemized deductions.

- Five - Fifteen Hundred - One Hundred

Match the ultimate responsibility for debt with the legal entity type:

Corporation - Entity General Partnership - General Partner Sole Proprietorship - Owner

Match the type of expense to the appropriate tier for the purpose of the home office deduction.

Tier 1 - Generally, mortgage interest and real property tax allocated to the business Tier 2 - Generally, expenses allocated to the business use of the home except for interest, taxes, and depreciation Tier 3 - Depreciation allocated to the business

Which of the following statements regarding the simplified method of home office deduction is incorrect?

If a taxpayer has a prior year carryover and chooses to use this method, the carryover is lost forever.

Match the tax classification with the required federal income tax return form:

C Corporation- 1120 S Corporation - 1120S Partnership - 1065 Sole Proprietorship - Form 1040, Schedule C

Shakira starts selling various homemade crafts in her front yard each Saturday morning. She can NOT afford an attorney and so she does not prepare any paperwork. Shakira's business is most likely a(n):

Sole Proprietorship (Shakira has NOT prepared any documentation to establish the business as an entity separate from herself which is a sole proprietorship)

Which business entity is NOT recognized as a specific tax entity by the U.S. tax system?

Limited Liability Company (LLC)

Greta is concerned about the level of debt her business has incurred, as she is responsible for its liabilities. Assuming Greta is the sole owner, how could she organize her business to protect herself from the liabilities of the entity?

- Corporation - Single member limited liability company

The deduction for qualified business income (QBI) for flow-through entities is calculated as what percent of qualified business income?

- 20%

Which of the following legal entity types does not require the owners to formally organize the entity with the state?

General Partnership

In tax year 2023, an unmarried taxpayer had net investment income (NII) of $32,000 and AGI of $215,000. Calculate the amount of net investment income tax the taxpayer is required to pay?

$570 (The 3.8% tax would be applied to $15,000 (the amount above the $200,000 threshold). $15,000 * 3.8% = $570)

To calculate the taxpayer's net earnings from self-employment, 92.35% is multiplied by:

Taxpayer's self-employment income.

Unlike separate taxpaying entities, ___ entities do NOT pay taxes. Rather, owners of these entities pay taxes on income generated by the entities.

Flow-through

In 2023, a taxpayer (with $26,500 of employee compensation) was allocated $181,000 of self-employment income. Calculate the amount of self-employment tax the taxpayer would owe.

$20,658 (Taxpayer would report $167,154 of net earnings from self-employment ($181,000 * .9235) and owe $20,658 of self-employment tax [(160,200 – 26,500) * .153] + [($167,154 - $160,200) * .029] = $20,456 + $202 = $20,658. Rounded to the nearest dollar ($20,658).)

In general, a taxpayer can deduct ___ % of the amount of qualified business income allocated to her from a flow-through entity subject to certain limitations

- Twenty

When an S corporation shareholder does not work for the entity, the ___.

Business income allocated to the shareholder is considered to be passive income

If a single taxpayer had self-employment income (from all sources) of $243,638, then $___ would be subject to an additional Medicare tax of ___%

- 25,000 - 0.90

In 2023, a taxpayer who paid $16,500 of self-employment tax would deduct $___ of the tax as a (for/from) ___ AGI deduction

- 8,250 - For

The amount of net earnings from self-employment is used to calculate self-employment tax. A taxpayer’s net earnings from self employment equals ___% of self employment income

- 92.35%

Select the shareholder-type that is likely to pay a 15% (or 20%) tax on distributions from a C corporation.

Individual shareholders

Which business entity pays tax on their income at the entity level?

C corporation

Which of the following taxes does not apply to a C corporation?

Net investment income tax

The tax rate for the additional Medicare tax is:

- 0.9%

On their December 31, 2023 tax return, Ecogreen, Inc., a C corporation, suffered a difficult year and generated a loss. What are Ecogreen's options for dealing with the loss for tax purposes?

Carry the loss forward to reduce income in future years.

Match the entity with the description of income or loss allocation.

C corporation - No allocation Partnership - Based on owner's agreement S corporation - Based on stock ownership percentage Sole proprietorship - All earnings allocated to owner

Match the type of shareholder with the typical tax rate on corporate dividends.

Individual - 15% or 20% Corporate (before the DRD) - 21% Pension Funds - 0%

In an effort to avoid the second level of tax, corporations that retain earnings are subject to a ___ percent accumulated earnings tax on the retained earnings.

- 20%

Akram owns an S corporation that has generated a $10,000 loss in its first year. Akram has other forms of ordinary income available to offset these losses totaling $80,000. Assuming Akram's tax rate is 35% and a corporate rate of 21%, how much tax will Akram pay on his income assuming there are no other loss limitations?

$24,500 (Akram may offset the loss from the S corporation with his other income and will pay tax of $24,500 ($80,000 - $10,000) x 35%)

Which entity types can generally use either the cash or accrual method of accounting for tax purposes?

- Partnership - S corporation - Sole proprietorship

Akram owns a C corporation that has generated a $10,000 loss in its first year. Akram has other forms of ordinary income totaling $80,000. Assuming Akram's tax rate is 35% and a corporate rate of 21%, how much tax will Akram pay on the income?

$28,000 (Akram may NOT offset the loss from the corporation with his other income and will pay tax of $28,000 ($80,000 x 35%).

Shane starts a new business this year and incorporates the business entity as SNB, Inc (taxed as a C corporation). Unfortunately, SNB, Inc. has a slower than expected start and loses $6,800. Assuming a 21% income tax rate, how much income tax will SNB, Inc. pay this year?

$0 (C corporations can NOT reflect current year savings as a result of a loss when no loss carry back is available)

The entire $25,000 deduction for rental real estate is phased out when the taxpayer's AGI reaches $____

- $150,000