Exam 2 In-Class Review Questions

Question 1

The lifetime learning credit can be used towards the cost of any course to acquire/ improve a taxpayer’s skills with no age limit. True/ False?

Answer 1

TRUE

Question 2

Capital loss carryovers for individuals are __________________ indefinitely

Answer 2

carried forward

Question 3

Section ________ assets include all assets used in trade or business for at least one year

Answer 3

1231

Question 4

Which one of the following is not considered boot in a like-kind exchange?

A. Cash
B. mortgage received
C. other property
D. mortgage given

Answer 4

B. mortgage received

Question 5

real property is depreciated using the ________ method

Answer 5

straight- line

Question 6

under the 12-month rule a prepaid business expense may be immediately deducted if:

A. the contract period does not last more than one year
B. the contract period does not extend beyond the end of the taxable year following the tax year in which payment is made
C. both a and b
D. neither a or b

Answer 6

C. both a and b

Question 7

the all-events test for income determines the period in which income will be recognized for tax purposes. true or false?

Answer 7

true

Question 8

under the accrual method, what is required to recognize a deduction?

Answer 8

economic performance and all-events test

Question 9

the section 1231 look-back rule recharacteristics section 1231 gains if section 1231 losses have created ordinary losses in the last _________ years

Answer 9

5 years

Question 10

which of the following is not a section 1245 asset if held for more than 1 year

A. machinery
B. automobile
C. business cell phone
D. land

Answer 10

D. land

Question 11

all events test requires the recognition of income when:

Answer 11

1. all events that occur to secure rights to income has occurred
2. amount of income determinable

Question 12

the kiddie tax does not apply to children over ________ years old at year end

Answer 12

24

Question 13

a _________ is a legal entity whose purpose is to hold and administer property for the benefit of beneficiaries

Answer 13

trust

Question 14

the all events test requires the recognition of income at the __________ of 3 dates

Answer 14

earliest

Question 15

taxpayers use the _____________ convention unless at least 40 percent of acquired personal property assets are placed into service in the 4th quarter. Then, the ___________ convention is used.

Answer 15

half year; mid quarter

Question 16

what is serial gift strategy

Answer 16

maximizing amount of gift exclusion ( 18000 single; 36000 married) by gifting annually with intent

Question 17

_____________ is not like-kind property involved in like-kind exchange

Answer 17

boot

Question 18

what is underpayment penalty?

Answer 18

federal short term rate + 3% (3% is for the IRS’s trouble)

Question 19

which taxpayer would not be considered a material participant?

A. taxpayer materially participated for any 5 of the last 10 years
B. taxpayer participated on a regular/ continuous/ substantial basis last year
C. taxpayer participated 95 hours (but not less than anyone else)
D. taxpayer participated in the activity for 995 hours last year

Answer 19

C. taxpayer participated 95 hours (but not less than anyone else)

Question 20

in order to use MACRS, a taxpayer must know the asset’s basis, _________, _____________, and ______________

Answer 20

convention; method; recovery period

Question 21

deductible expenses must be: (3 criteria)

Answer 21

1. ordinary and necessary expense
2. used in business/ trade (profit motive)
3. reasonable in amount

Question 22

gain or losses realized on the sale of an asset is always recognized for tax purposes. true or false?

Answer 22

false

Question 23

the mid-month convention applies to ________________ int he year of acquisition and disposition

Answer 23

real property

Question 24

section 179 immediate expensing phases out based upon a taxpayer’s ____________

Answer 24

taxable income

Question 25

the test for whether an expenditure is reasonable in amount is whether the expenditure was for an _______________ amount

Answer 25

arm’s length

Question 26

which of the following expenditures is most likely to be deductible for a construction business?

A. a fine for a zoning violation
B. a tax underpayment penalty
C. an “under the table” payment to a government representative to get a better price
D. an arm’s length payment to a related party for emergency repairs of a line

Answer 26

D. an arm’s length payment to a related party for emergency repairs of a line

Question 27

realized gains are recognized unless there is a specific exception. true or false?

Answer 27

true

Question 28

tax recovery methods include ____________, ______________, and ___________________-

Answer 28

depreciation, depletion, amortization

Question 29

two advantages of investing in capital assets:

Answer 29

1. gains deferred (taxed when realized)
2. taxed at preferential losses

Question 30

which of the following results in an ordinary gain or loss?

A. sale of a machine at a gain
B. sale of stock held for investment
C. sale of section 1231 assets
D. sale of inventory

Answer 30

D. sale of inventory

Question 31

the IRC authorizes deductions for trade or business activities if the expenditures is ____________ and _____________

Answer 31

ordinary; necessary

Question 32

how much of start-up costs and organizational expenditures can be expensed?

Answer 32

50,000; rateably 55000

Question 33

_________ is the method used to recover capital investments in natural resources

Answer 33

depletion

Question 34

section 1250 recaptures generally no longer applies because ___________________

Answer 34

straight- line

Question 35

like financial accounting, most acquired business property must be _____________ for tax purposes

Answer 35

capitalized

Question 36

what income is subject to the kiddie tax?

Answer 36

net unearned

Question 37

which of the following is not an involuntary conversion?

A. destruction caused by a hurricane
B. eminent domain
C. a foreclosure
D. fire damage

Answer 37

C. a foreclosure