Income Tax 2.0 Flashcards
Robin was given a painting in the current year. At the time of the gift, the painting had a fair market value of $50,000, and its adjusted basis to the donor was $8,000. The donor and his spouse paid a tax of $4,000 on the taxable gift of $50,000. What is Robin’s basis for gain?
A.$8,000
B.$11,360
C.$12,000
D.$20,500
B
Katarina owns depreciable residential rental real estate which has accumulated depreciation (all from straight-line) of $55,000. If Katarina sold the property, she would have a $23,000 gain. The initial characterization of the gain would be:
A.Section 1250 gain
B.Section 1231 gain
C.Section 1239 gain
D.Section 179 gain
B
Section 1250 Gain:
Section 1250 applies to depreciation recapture on real property that was not depreciated using straight-line methods.
However, since Katarina only used straight-line depreciation, there is no Section 1250 recapture.
Section 1231 Gain:
Section 1231 applies to the sale of business or rental property held for more than a year.
The net gain from Section 1231 property is generally taxed at capital gains rates (unless there is recapture).
Since all depreciation was done using straight-line (which does not trigger recapture under Section 1250), the gain remains a Section 1231 gain.
Section 1239 Gain:
Section 1239 applies when property is sold to a related party, converting capital gain into ordinary income if the property was depreciable by the buyer.
There is no indication that Katarina sold to a related party, so Section 1239 does not apply.
Section 179 Gain:
Section 179 relates to immediate expensing of business assets, mainly for tangible personal property (like equipment), not real estate.
Since Katarina’s property is residential rental real estate, Section 179 does not apply.
Which of the following would be considered alimony that could be deducted for the payor?
A.Alfred’s monthly payments of $10,000 to Martha while their son is under 18, based on their 2016 divorce.
B.Constance’s monthly payments of $5,000 to Havier based on their January 5, 2022 divorce.
C.Frank’s monthly payment to Brenda of $1,000 towards home expenses while he lives with her until he is able to find a place of his own following their December 2021 divorce.
D.Angela’s monthly payment to Rinaldo of $2,000 for 15 years, or his death if earlier, based on their July 2017 divorce decree.
D
Requirements for Alimony Deductibility:
The payment must be in cash (including checks or money orders).
The payment must be to a former spouse under a divorce or separation decree.
The payor and recipient must not live together when payments are made.
The payments must end upon the recipient’s death.
The payment cannot be designated as child support or part of property settlement.
Patterson, Inc placed a large piece of equipment into service in 2025. The equipment cost $5,300,000. What is the maximum Section 179 expense that Patterson, Inc could take for 2025 if the company has income of $10,000,000?
A.$0
B.$920,000
C.$1,250,000
D.$3,130,000
Solution: The correct answer is A.
The final allowable deduction under Section 179 is $0 due to the phase-out exceeding the deduction limit.
Section 179 Deduction Limit for 2025: The maximum deduction is $1,250,000.
Phase-Out Threshold for 2025: The phase-out begins at $3,130,000, with the deduction reduced dollar for dollar for amounts above this threshold.
Calculate the Excess Over Threshold:
Equipment cost = $5,300,000
Excess = $5,300,000 - $3,130,000 = $2,170,000
Impact of Excess: Since the excess amount ($2,170,000) exceeds the maximum Section 179 deduction limit in 2025 ($1,250,000), the deduction is fully phased out.
Choice B ($920,000) is not correct. This amount is the amount over the threshold for 2025, and has no relevance for the question.
Choice C ($1,250,000) is not correct. This is the maximum Section 179 deduction before considering the phase-out, which reduces the deduction to zero.
Choice D ($3,130,000) is not correct. This amount represents the phase-out threshold and not the allowable deduction.
Quintan has a primary residence in Vermont but loves visiting Hilton Head Island and purchased a condo there a few years ago. Since he spends most of his time in Vermont, he sometimes rents out the condo in Hilton Head when he is not there. This year, Quintan rented out the condo for thirty weeks and personally used the condo for eighteen days. How will Quintan’s rental activity be classified for tax purposes and why?
A.Nontaxable activity because Quin used the apartment personally more than he rented it out.
B.Mixed-use activity because Quin both rented out the apartment and used it personally.
C.Mixed-use activity because Quin rented out the apartment for more than 14 days and personally used the apartment for the greater of 14 days or 10% of the rental days.
D.Rental activity because Quin rented out the apartment for more than 14 days and did not exceed the personal use limits.
D
Explanation:
Personal Use Limit: For a property to be classified as a rental activity rather than mixed-use, personal use must not exceed the greater of 14 days or 10% of the rental days.
Calculation:
10% of 30 rental weeks (210 days) = 21 days
Quin’s personal use = 18 days
Since 18 days of personal use is less than 21 days, Quin did not exceed the personal use limit.
Because he rented the condo for more than 14 days, it is classified as a rental activity for tax purposes.
Which of the following statements is correct?
A.Adjustments can only increase AMTI.
B.Tax preferences can only increase AMTI.
C.Tax preferences can only decrease AMTI.
D.The purpose of the AMT is to replace the regular income tax.
B
Tax preference items are certain deductions or exclusions that are added back to regular taxable income when calculating Alternative Minimum Taxable Income (AMTI). These items always increase AMTI because they represent tax benefits that are favorable under the regular tax system but must be adjusted for AMT purposes.
Examples of tax preference items include:
Tax-exempt interest from private activity bonds
Excess intangible drilling costs
Excess percentage depletion deductions
Excludable gains from small business stock sales (Section 1202)
Samuel owns a craft beer brewing facility that specializes in a traditional Lager. Several years ago, he purchased a processing machine for $2,000 and has since taken $600 in depreciation deductions. Samuel is now ready to replace the processing machine with a more current model, but he is not sure what the tax consequences of selling the old machine will be. Which of the following statements is true regarding the tax consequences of selling the old machine?
A.If Samuel sells the old machine for $1,400, he will have a $600 capital loss.
B.If Samuel sells the old machine for $1,200, he will have a $600 ordinary gain.
C.If Samuel sells the old machine for $1,600, he will have a capital gain of $200.
D.If Samuel sells the old machine for $2,200, he will have an ordinary gain of $600 and a $200 capital gain.
D
The gain due to appreciation is taxed at ordinary income and any excess is a capital gain.
The whole amount can’t be taxed at a capital gain because that would be a double tax benefit.
Deprecation taken is a tax benefit and so is the capital gain rate.
Sarah is a 10 percent owner in Canine Connection, LLC, a day-care center for dogs. She is also a 15 percent owner in Little Laughter, LLC, a successful children’s clothing store. She does not materially participate in either business. Her at-risk and loss/income for the current year is as follows:
Canine Connection-At-risk = $175,000; Loss of $275,000
Little Laughter-At-risk = $25,000; Income of $125,000
She also has wage income of $80,000 and capital gain income of $30,000. Which of the following statements is true?
A.The loss suspended because of the at-risk rules is $75,000 and the loss suspended because of the passive activity loss rules is $75,000.
B.The loss suspended because of the at-risk rules is $75,000 and the loss suspended because of the passive activity loss rules is $0.
C.The loss suspended because of the at-risk rules is $50,000 and the loss suspended because of the passive activity loss rules is $100,000.
D.The loss suspended because of the at-risk rules is $100,000 and the loss suspended because of the passive activity loss rules is $50,000.
D
$275,000 - $175,000 = $100k (at risk rule)
Canine loss $175k - Little Laughter gain $125k = $50k (passive activity rule)
On January 1, Andrea reviews her investment portfolio and finds out that she has had a very profitable year. To offset some of her gains, Andrea sells 100 shares of Big Bear Corporation for $10,000. She purchased those shares for $15,000 two years earlier. On January 25 of the same year, Andrea reads a newspaper article indicating that the price of Big Bear Corporation is expected to increase substantially. Second-guessing the wisdom of selling her previous shares of Big Bear stock, she purchases 100 shares of Big Bear Corporation for $8,000. What are the tax consequences to Andrea this year?
A.$5,000 realized, but not recognized loss.
B.$8,000 realized and recognized loss.
C.$5,000 realized and recognized loss.
D.$7,000 realized, but not recognized loss.
Solution: The correct answer is A.
Since Andrea purchased and sold substantially identical securities within 30 days, a wash-sale occurs. Her realized loss on the sale of the original shares is calculated as follows:
Amount Realized: $10,000
Less: Adjusted Basis -$15,000
Equals: Gain or (Loss) ($5,000)
Due to the wash sale transaction, however, Andrea will not be permitted to recognize the loss in the year it was incurred. Instead, the realized but unrecognized loss of $5,000 will be added to the basis of the replacement securities. Andrea purchased the replacement securities for $8,000 so adding the unrecognized loss increases her basis to $13,000. By increasing basis in the amount of the unrecognized loss, Andrea will receive that back tax-free when she ultimately sells the stock.
Kate sells property for $120,000. The buyer pays $2,000 in property taxes that had accrued during the year while the property was still legally owned by Kate. In addition, Kate pays $6,000 in commissions and $2,000 in legal fees in connection with the sale. How much does Kate realize from the sale of her property?
A.$112,000.
B.$114,000.
C.$116,000.
D.$120,000.
E.None of the above.
Solution: The correct answer is B.
The amount realized is calculated as follows:
Sales price $120,000
Taxes paid by buyer on behalf of seller 2,000
Less: Commissions (6,000)
Legal fees (2,000)
Amount realized $114,000
Pam exchanges a rental building, which has an adjusted basis of $520,000, for investment land which has a fair market value of $700,000. In addition, Pam receives $100,000 in cash. What is Pam’s recognized gain or loss and her basis in the investment land?
A.$0 and $420,000
B.$100,000 and $420,000
C.$100,000 and $520,000
D.$280,000 and $700,000
E.None of the choices
Solution: The correct answer is C.
Amount realized ($700,000 + $100,000) $800,000
Adjusted basis (520,000)
Realized gain $280,000
Recognized gain $100,000
The receipt of boot in a like-kind exchange triggers the recognition of realized gain, with the ceiling on recognition being the realized gain. Because the boot received of $100,000 is less than the ceiling, gain up to the amount of the boot received is recognized. The basis of the land is calculated as follows:
FMV $700,000
Less: Postponed gain (180,000)
Basis $520,000
ared, a fiscal year taxpayer with a September 30th year end, owns an office building that was destroyed by a fire on September 12, 20x1. The adjusted basis was $715,000 and the insurance settlement was $950,000 (received on March 1, 20x2). What is the latest date that Jared can replace the office building in order to qualify for § 1033 (non-recognition of gain from an involuntary conversion)?
A.September 30, 20x2
B.September 30, 20x3
C.September 30, 20x4
D.December 31, 20x4
Solution: The correct answer is C.
Gain of $235,000 ($950,000 amount realized – $715,000 adjusted basis) is realized on March 1, 20x2. The taxpayer has two years from the close of that taxable year (September 30, 20x2) to replace the property. So the latest replacement date is September 30, 20x4.
If you meet all of the requirements of a 1031 tax-free exchange, which of the following is true?
A.Like-kind exchange treatment is mandatory.
B.Like-kind exchange treatment requires an affirmative election.
C.Like-kind exchange treatment is completely discretionary.
D.None of the above is true.
Solution: The correct answer is A.
Like-kind exchange treatment is mandatory if all of the requirements are met. In a non-simultaneous exchange, the target property must be identified within 45 days of release from the original property.
It is automatic and not an option!!!
Reese and Jake engage in a like-kind exchange. Reese transfers real estate with a fair market value of $500,000 and an adjusted basis of $200,000 to Jake. Jake transfers real estate worth $700,000 and an adjusted basis of $250,000, plus a $200,000 mortgage on the property, to Reese. What is Jake’s potential or deferred gain before and after the transaction?
A.$450,000 potential gain before the transaction; $50,000 potential gain after the transaction.
B.$250,000 potential gain before the transaction; $50,000 potential gain after the transaction.
C.$450,000 potential gain before the transaction; $250,000 potential gain after the transaction.
D.$250,000 potential gain before the transaction; $200,000 potential gain after the transaction.
C
In 20x1, Dan exercised an incentive stock option, acquiring 150 shares of stock at an option price of $75 per share (fair market value at the date of exercise was $130 per share). Which of the following statements is incorrect?
A.Dan has a positive AMT adjustment from the ISO in 20x1.
B.Dan has no taxable income from the ISO in 20x1.
C.Dan has an AMT basis of $19,500 in the stock.
D.Dan has an income tax basis of $19,500 in the stock.
Solution: The correct answer is D.
The question is looking for the false statement.
The transaction has no effect on taxable income but there is a positive alternative minimum tax adjustment in 20x1. Dan’s AMT basis is equal to FMV at the date of exercise (19,500), and his regular income tax basis is equal to his cost (11,250).
Grant price was $75 per share (Dan’s tax basis - what he purchased the shares for)
Price on the date of exercise was $130 per share (Dan’s AMT basis)
To ensure the best tax consequences for ISOs, the sale must be 1 year from exercise and 2 years from grant.
Mitch, who is single and has no dependents, had AGI of $150,000. His potential itemized deductions were as follows:
Medical expenses (before percentage limitation) - $20,000
State income taxes - $3,000
Real estate taxes - $7,000
Mortgage (qualified housing and residence) interest - $9,000
Cash contributions to various charities - $4,000
Unreimbursed employee expenses (before percentage limitation) - $4,300
What is the amount of Mitch’s AMT adjustment for itemized deductions?
A.$10,000
B.$13,750
C.$16,800
D.$19,300
E.$25,800
Solution: The correct answer is A.
Mitch’s adjustment for itemized deductions for AMT purposes are as follows:
State income taxes 3,000
Real estate taxes 7,000
Total 10,000
Notes
Unreimbursed employee expenses: no longer deductible
Which of the following, if any, correctly characterize the check-the-box Regulations?
A.A one-owner business becomes a sole proprietorship if default (no election is made) occurs.
B.A one-owner business cannot elect to be taxed as a corporation.
C.If default (no election is made) occurs, a limited liability company is taxed as a corporation.
D.The check-the-box Regulations apply to all entities that are already incorporated under state law.
E.None of the choices.
Solution: The correct answer is A.
A one-owner business can elect to be taxed as a corporation. If default occurs, (no election is made), a limited liability company is taxed as a partnership. The check-the-box Regulations do not apply to entities that are incorporated under state law.
Kayci would like to establish a business with her business partner Nathan. They would like to have an entity that provides for limited liability. They would like the flexibility to allocate profits and losses in a percentage differing from their ownership interest. They expect losses in the first few years. Which entity should they establish?
A.Partnership
B.LLC taxed as a partnership
C.S-Corporation
D.C-Corporation
Solution: The correct answer is B.
The partnership does not allow for limited liability. The S-corporation does not allow for the allocation of profits. The C-Corporation does not allow for the allocation of profits or the flow through of losses. The LLC taxed as a partnership meets all of their requirements.
During the year, Myrna furnished more than 50% of the support for the following persons: Butch, Myrna’s husband, who has no income and does not file a return. Wallace, Myrna’s cousin, who does not live with her. Brad, Myrna’s father-in-law, who does not live with her. Dawn, Myrna’s 17 year old niece who lives with her and is in high school. Presuming all other dependency requirements are met, on a separate return, who may Myrna claim a qualified dependent credit for?
A.Brad only.
B.Brad and Dawn only.
C.Butch, Wallace and Dawn.
D.Butch, Wallace, Brad and Dawn.
Solution: The correct answer is B.
Butch, the husband, as a spouse never qualifies as a dependent.
Cousins do not meet the relationship test for qualifying relative unless they live with the Taxpayer the entire year. The fact that the father-in-law does not live with Myrna does not automatically disqualify him a dependent, if he meets all the other qualifying relative requirements, as stated, Myrna can claim the qualified dependent credit for him.
As for Dawn, she meets the requirement of a qualifying child but is age 17, so Myrna can’t claim a child tax credit for her. However, she can claim the qualified dependent credit of $500 for a qualifying child, age 17 and older.
Which of the following statements is representative of the Federal income tax on individuals?
A.Federal income tax rates are regressive.
B.The tax base for the application of income tax rates is adjusted gross income.
C.Persons who have earned income other than wages are subject to withholdings.
D.Self employed individuals must make estimated payments or face interest and penalties.
Solution: The correct answer is D.
All persons with taxable income are subject to the “pay-as-you-go” payment procedure but not withholdings. They must make estimated payments or face interest and penalties. Federal income tax rates are progressive. The tax base for the application of income tax rates is taxable income.
What is the primary advantage of using the Section 179 Deduction over other cost recovery methods?
A.By deducting more currently, total tax liability is increased and the present value of cash flows is decreased.
B.The Section 179 limit allows a business to deduct more up front.
C.Section 179 reduces the depreciation on most assets to only five years.
D.Section 179 applies only to business assets, whereas depreciation applies to business and personal assets.
Solution: The correct answer is B.
Section 179 is an upfront business deduction, now that can be used by businesses to reduce tax liabilities. It’s possible to reduce Section 179 deduction to zero, depending how much is placed into service. If too much is placed into service, Section 179 would not have any advantages over other methods of depreciation.
By deducting more currently, total tax liability is reduced and the present value of cash flows is increased.
Jacob is divorced and has full custody of his two children although they spend every other weekend with their mother. How many dependency exemptions is Jacob permitted on his Form 1040 for 2025?
A.0
B.1
C.2
D.3
Solution: The correct answer is A.
There are no dependency exemptions for years after 2017 (TCJA 2017).
Isaac is a middle school teacher with gross income this year of $40,000. His divorced was finalized in July 2018. Based on the following, what is Isaac’s adjusted gross income?
(1) $5,000 qualified education interest expense
(2) $4,000 alimony received
(3) $2,000 contribution to a traditional IRA
A.$33,000
B.$35,500
C.$37,000
D.$39,500
Solution: The correct answer is B.
Isaac’s adjusted gross income is his total gross income of $40,000 - $2,500 in qualified education interest expense (the deductible amount is limited to $2,500) - $2,000 contribution to a traditional IRA = $35,500. The alimony is RECEIVED, which is included in determining his gross income of $40,000. If it was paid then there would be a deduction but that’s not the case.
Sarah is a 10 percent owner in Canine Connection, LLC, a day-care center for dogs. She is also a 15 percent owner in Little Laughter, LLC, a successful children’s clothing store. She does not materially participate in either business. Her at-risk and loss/income for the current year is as follows:
Canine Connection-At-risk = $150,000; Loss of $200,000
Little Laughter-At-risk = $50,000; Income of $10,000
She also has wage income of $100,000 and capital gain income of $25,000. Which of the following statements is true?
A.The loss suspended because of the at-risk rules is $50,000 and the loss suspended because of the passive activity loss rules is $140,000.
B.The loss suspended because of the at-risk rules is $140,000 and the loss suspended because of the passive activity loss rules is $50,000.
C.The loss suspended because of the at-risk rules is $0 and the loss suspended because of the passive activity loss rules is $190,000.
D.The loss suspended because of the at-risk rules is $150,000 and the loss suspended because of the passive activity loss rules is $10,000.
Solution: The correct answer is A.
Passive gain of 10,000 is recognized from Little Laughter. Passive loss of 200,000 is first, limited by at risk of 150,000 thus 50,000 is suspended because of at risk. The loss is then limited to 10,000 of passive income and 140,000 is suspended because of passive loss values.
If you think of it like filters, it looks like this:
Filter 1: At risk.
She invested 150,000
She has loss of 200,000
She has loss 50k above her investment, that portion is suspended. The loss of 150,000 goes through to the next filter.
Filter 2: passive income.
She has passive income of 10,000
She has loss of 150,000 that made it through the first filter.
She can offset the full 10,000 of income
$140,000 of loss cannot be offset or taken, so it is suspended under passive activity rules.
Beau would like to invest in bonds and is considering either a taxable bond with an interest rate of 6% or a tax-exempt municipal bond of comparable risk and quality with an interest rate of 2%. Beau’s marginal tax rate is 37%. In order to help Beau compare these two bonds, compute the equivalent tax-free rate for the taxable bond.
A.1.21%
B.2.38%
C.3.78%
D.5%
Solution: The correct answer is C.
The equivalent tax free rate for the taxable bond is [0.06 × (1 - 0.37)] = 3.78%
