MCQ's Subunits 5 - 7 Aug 2023 Flashcards

Question

The Securities and Exchange Commission (SEC) may discipline accountants. Under its disciplinary powers, the SEC may suspend an accountant’s right to practice before it. What is a basis for suspension? A. Conviction of any misdemeanor. B. Intentional or unintentional violation of SEC regulations. C. Being subject to a temporary restraining order regarding securities practice. D. Conviction of a felony.

Answer 1

D. Conviction of a felony. The SEC may suspend or permanently revoke the right to practice before the SEC, including the right to sign any document filed by a registrant, if the accountant (1) does not have the qualifications to represent others; (2) lacks character or integrity; (3) has engaged in unethical or unprofessional conduct; or (4) has willfully violated, or willfully aided and abetted the violation of, the federal securities laws or their rules and regulations. Suspension by the SEC also may result from (1) conviction of a felony, or a misdemeanor involving moral turpitude; (2) revocation or suspension of a license to practice; or (3) being permanently enjoined from violation of the federal securities acts.

Answer 2

D. Simple grantor trust. A simple trust requires current distribution of all its income, requires no distribution of the res (i.e., principal, corpus), and provides for no charitable contributions by the trust. A grantor trust is any trust to the extent the grantor is the effective beneficiary. Since Max Miser’s trust meets the characteristics of both a simple trust and a grantor trust, it may be classified as a simple grantor trust.

Answer 3

A. Any person who prepares and signs a tax return or claim for refund and the individual with overall supervisory responsibility for the advice given by the firm with respect to the return or claim. A penalty may be assessed on any individual who prepares and signs a tax return or claim for a refund. Additionally, an individual with overall supervisory responsibility for advice given by the firm with respect to the return or claim may also be assessed the penalty.

Answer 4

B. All of the answers are correct. Generally, a preparer is prohibited from disclosing a taxpayer’s information without the client’s consent. However, several exceptions exist, including a disclosure made pursuant to a court order, pursuant to an IRS inquiry, or among partners in a partnership.

Answer 5

D. All of the answers are correct. Practitioners may be censured (publicly reprimanded), suspended, or disbarred from practice before the IRS for willful violations of any of the regulations contained in Circular 230.

Answer 6

C. Treasury regulations. Treasury regulations are interpretations of the IRC that allow the Treasury Department to implement the IRC. The regulations are authorized and allowed under law by the IRC, making them a primary authoritative source when conducting tax research. The IRS is bound by the regulations because it is a bureau within the Treasury Department. Courts are bound to follow them to the extent that the court does not find they conflict with the IRC.

Answer 7

B. The preparer is not subject to a penalty because she is not required to examine or review the client’s books and records in order to verify the client’s information. A preparer may generally rely in good faith without verification on information furnished by the taxpayer, although the preparer may not ignore the implications of information furnished to the preparer or actually known to the preparer. Furthermore, the preparer must make appropriate inquiries to determine the existence of facts required by a Code section or regulation as a condition to claiming a deduction.

Answer 8

D. $230 Interest income from corporate bonds is a fiduciary receipt of income, and 20% of the fiduciary fees that are allocable to income are considered fiduciary disbursements. Therefore, the trust income equals $2,500 of interest income less $200 of fiduciary fees, for a total of $2,300. The applicable tax rate is stated as 10%, resulting in a $230 tax. Trust income is taxed to the beneficiary of the trust.

Answer 9

C. $4,800 In a nonaccountable plan, the reimbursements are included in the employee’s gross income. These expenses are not deductible from 2018 to 2025. Since the employee accounted to the employer and returned the excess reimbursement, this could have qualified as an “accountable plan.” Under an accountable plan, the employee would include nothing in income. However, the company uses a nonaccountable plan, and Mel must include $4,800 ($400 × 12 months) in his gross income.

Answer 10

B. $8,181 The tax on self-employment income is imposed by Sec. 1401 on all taxpayers whose net earnings from self-employment exceed $400 [Sec. 1402(b)]. For 2023, the tax is divided into two components: the Social Security and Medicare taxes, which are based on the net earnings from self-employment. The Social Security tax is imposed at a 12.4% rate up to a $160,200 maximum. The Medicare tax is imposed at a 2.9% rate, and there is no maximum. Taxpayers may reduce their net income from self-employment by the product of the employer’s portion of the self-employment tax rate (7.65%) times the net income from self-employment [Sec. 1402(a)(12)]. The self-employment tax is computed separately for each spouse. Their taxes are The total self-employment tax for Mr. and Mrs. B is $8,181 ($2,119 + $6,062).

Answer 11

C. $6,300 The playing of professional jai alai would be considered a trade or business; however, the preparation for entering that business is not conducting that trade or business. Therefore, the $1,000 monthly club dues for the first 7 months are not deductible, whereas the dues for the last 5 months are deductible. The $1,500 initially spent for equipment is also not deductible since it is a depreciable asset. Replacement equipment is deductible assuming it does not have a life substantially longer than the current year. Transportation expenses are also deductible provided there is adequate documentation.

Answer 12

A. Applies to self-employed persons. The Social Security Act applies to self-employed persons who must pay taxes (SS and Medicare) on self-employment income (15.3% on the first $160,200 and 2.90% on all wages above that threshold in 2023). An additional Medicare tax of 0.9% applies to self-employment income above $200,000 ($250,000 if MFJ).

Answer 13

C. $1,700 Section 274(j) limits the deduction for employment achievement awards (tangible personal property awarded to an employee by reason of length of service or safety achievement) to $400 per employee per year or $1,600 per employee per year if it is a qualified plan award. A qualified plan award is an item awarded as part of a permanent, written plan or program that does not discriminate in favor of highly compensated employees. An item may not be treated as a qualified plan award if the average cost of all items awarded exceeds $400. Under Sec. 274(j)(4), further limitations on employee awards are provided whereby length-of-service awards must not be awarded until after the recipient has worked over 5 years. Also, the recipient must not have received any such award during the applicable year or any of the 4 prior years. Safety achievement awards are also not deductible if, during the taxable year, such awards have previously been awarded to more than 10% of the other employees or to a manager, clerical employee, or other professional employee. Here, since all the requirements of a qualified plan award are met, the full amount of each award, or a total of $1,700, is deductible.

Answer 14

C. $750 A 50% deduction from gross income is allowed for meals. However entertainment expenses are not deductible, and generally advance rental payments may be deducted by the lessee only during the tax periods to which the payments apply. Accordingly, Bobby is entitled to a deduction in 2023 of $750 (meal expenses).

Answer 15

B. $97,891 The net income per books amounted to $80,000. It is necessary to add back the salary that was drawn ($20,000) since an individual may not claim a deduction for salary that is paid to himself or herself. In addition, the estimated federal income taxes paid of $6,000 are not deductible. The malpractice insurance premium and the cost of attending the seminar are deductible business expenses. Bach’s tentative net self-employment income is $106,000. The net earnings from self-employment for Gilda Bach equals $97,891 ($106,000 – $8,109).

Answer 16

C. $5,600 Prepaid rent generally may not be deducted by either a cash-basis or accrual-basis taxpayer. To do so would violate the requirement that the taxpayer’s method of accounting must clearly reflect income [Sec. 446(b)]. Furthermore, an expenditure that creates an asset having a useful life extending substantially beyond the close of the taxable year is not deductible [Reg. 1.461-1(a)]. Because the prepayment extends beyond the tax year following the prepayment, the exception in Reg. 1.263(a)-4(f)(8) (i.e., the 12-month rule) does not apply. Only the $5,600 of rental expense allocable to the current year ($7,000 – $1,400) is deductible in the current year.

Answer 17

A. $10,480 Automobile expenses pertaining to a trade or business are deductible under Sec. 162 as ordinary and necessary business expenses. The taxpayer may either deduct the portion of actual operating cost of the automobile attributed to business use or compute the deduction based on the standard mileage rate. For 2023, the standard mileage rate is $0.655 per mile for all miles of business use. Mr. D’s deduction for 2023 is $10,480 ($16,000 miles x $0.655). The standard mileage rate is adjusted annually by the IRS to the extent warranted.

Answer 18

B. A $4,000 deduction for bad debts and does not have to include any portion of the “reserve” in taxable income. An accrual-basis taxpayer includes trade receivables in gross income, and a trade receivable is deductible as a business bad debt to the extent it is worthless. The allowance method of deducting bad debts is not allowed for tax purposes, so Gary must use the specific write-off method.

Answer 19

A. $675 Benefits received from an employer are compensation for services and included in gross income under Sec. 61 unless provided otherwise. Section 106 excludes from gross income contributions to accident or health plans (a medical insurance plan) made by an employer on behalf of the employee. Section 79 provides for the inclusion in gross income of the cost of group term life insurance paid by the employer but only to the extent that such cost exceeds the cost of $50,000 of such insurance provided the plan is not discriminatory. Hence, the cost of Mr. Hawk’s group term life insurance is not included in gross income. Section 127, which provides an exclusion of payments up to $5,250 per year made to reimburse an employee for educational expenses, was made permanent by the American Taxpayer Relief Act of 2012 including coverage of expenses for both undergraduate and graduate courses. Therefore, the reimbursement for the physics course is excluded. There is no provision excluding Christmas bonuses or memberships in off-premises health clubs, so $675 ($125 bonus + $550 membership) is includible in gross income.

Answer 20

D. $2,000 Costs of business borrowing are generally deductible, but prepaid interest in any form must be amortized over the period of the loan. Only 1 month of the loan has expired, so $2,000 [$24,000 × (1 ÷ 12)] is deductible.

Answer 21

B. $200 Organizational expenses are incurred in the formation of the partnership. The partnership may elect to amortize organizational expenses over a period of not less than 180 months. The fees related to preparing the partnership agreement are organizational expenses, but the expenses related to the issuance or sale of partnership interests (syndication fees) are specifically excluded. The partnership may recognize a maximum of 3 months of organizational expenses this year, or $200 ($12,000 ÷ 180 × 3).

Answer 22

D. $31,000 Net earnings from self employment are gross income derived from a trade or business, less allowable deductions attributable to the trade or business. Capital gains and losses and contributions to retirement plans are not considered income or expenses for self-employment purposes. Also, net operating losses are not considered for self-employment purposes. Michael’s net self-employment income is computed as follows:

Answer 23

C. Partially deductible from gross income in arriving at adjusted gross income. To arrive at AGI, a self-employed person may deduct the employer’s portion of the self-employment tax paid. This is an above-the-line deduction.

Answer 24

B. Juan must pay self-employment tax on the earnings of the business. Self-employed taxpayers must pay a self-employment tax on the earnings of their business. The FICA tax liability is imposed on net earnings from self-employment at the employer rate plus the employee rate.

Answer 25

D. $13,945 The $20,000 gross receipts would be reduced by the $2,500 for parts, the $2,000 in advertising expense, and the $400 in telecommunication expense. This $15,100 is net income from self-employment. Net earnings from self-employment is net income from self-employment reduced by the employer’s portion of FICA taxes (0.0765) times the taxpayer’s net income from self-employment. Thus, the $15,100 should be reduced by an additional $1,155 ($15,100 × 0.0765), resulting in net earnings from self-employment of $13,945.

Answer 26

B. At the taxpayer’s suggestion, the tax preparer deducted the expenses of the taxpayer’s personal domestic help as a business expense on the taxpayer’s individual tax return. A penalty is imposed on a tax return preparer if any part of an understatement of tax liability resulted from a willful attempt to understate the liability or from an intentional disregard of rules or regulations. A penalty for disclosure will not be imposed if client information is disclosed under a court order.

Answer 27

A. $13,000 Advance rental payments made by a cash-basis taxpayer-lessee are generally not deductible in the tax year in which they are made but must be allocated over the period of time for which the premises may be used as a result of such payments. ABC will deduct $13,000 as rent expense in the current year [($10,000 × 1 year) + ($6,000 × 1/2 year)]. Because the prepayment extends beyond the tax year following the prepayment, the exception in Reg. 1.263(a)-4(f)(8) (i.e., the 12-month rule) does not apply.

Answer 28

A. Added to the property’s adjusted basis. Taxes assessed for local benefit that tend to increase the value of real property are added to the property’s adjusted basis and are not currently deductible as tax expense. Tax on business property, if expensed, would be on Schedule C, not Schedule A.

Answer 29

D. $60,000 Advance rental payments made by a cash-basis taxpayer-lessee are generally not deductible in the tax year in which they are made but must be allocated over the period of time for which the premises may be used as a result of such payments. Clyde will be able to deduct $60,000 of rent because he can deduct the allocated portion of the $30,000 prepaid rent and the $30,000 of current rent expenses paid. Because the prepayment extends beyond the tax year following prepayment, the exception in Reg. 1.263(a)-4(f)(8) (i.e., the 12-month rule) does not apply. Clyde may deduct the allocated share of prepaid rent he paid in the previous year.

Answer 30

B. $0 Prepaid insurance must be apportioned over the period of coverage. However, a cash-method taxpayer can deduct prepaid premiums if the 12-month rule applies (the contract is for 12 months or less and does not extend beyond the next taxable year). Thus, the $3,000 premium is recognized as insurance expense in Year 1, and $0 is recognized in Year 2. Carl is not able to deduct the insurance paid in arrears for Year 2. A cash-method taxpayer may not deduct a premium before it is paid.

Answer 31

C. $12,284 Only the OASDI (old-age, survivors, and disability insurance) component of the FICA tax has a wage ceiling. The OASDI rate is 6.20% for employers up to a maximum of $160,200 (in 2023). For the Medicare component, which has no wage ceiling, the rate is 1.45% for employers and employees. The employment taxes paid by Med-Tech with respect to Ernesto in 2023 are as follows:

Answer 32

B. $75 Expenditures for business gifts are deductible. The deduction is limited to $25 per recipient per year. Hal may deduct $75 ($25 × 3 recipients) for business gifts. The gift to the son of one of the owners is considered given to the owner; therefore, the total gift of both the champagne and the video game is limited to $25. The football tickets are considered entertainment and, therefore, cannot be deducted.

Answer 33

D. The employer. The cost of a medical reimbursement plan for employees is deductible by the employer. Any reimbursement in excess of medical expenses is included in the income of the employee.

Answer 34

D. $70,000 Net income from self-employment are gross income derived from a trade or business, less allowable deductions attributable to the trade or business. The rental income is not self-employment income since rental property is not Sarah’s ordinary course of business and she is not a real estate broker. Therefore, any rental expenses do not offset the self-employment income from the sporting goods business. Also, 100% of the health insurance premiums are deductible on Form 1040 as an adjustment but are not deducted against self-employment income. Capital gains and losses and contributions to retirement plans are not considered income or expenses for self-employment purposes. Sarah’s net self-employment income is computed as follows:

Answer 35

D. $14,000 All death benefits received by the beneficiaries or the estate of an employee from, or on behalf of, an employer are included in gross income. The pension payments must be included unless Frank made contributions to the pension plan.

Answer 36

D. $78,000 A deduction from gross income is allowed for all ordinary and necessary expenses paid or incurred during a tax year in carrying on a trade or business. An expenditure may be nondeductible if allowing the deduction would frustrate public policy. No amount can be deducted from gross income unless allowed by the Internal Revenue Code. Fines and penalties paid to a governmental entity and fees incurred that are deemed illegal by state laws are not deductible. Thus, net profit is $78,000 ($100,000 commission income – $2,000 auto rentals – $20,000 referral fees to other brokers).

Answer 37

B. $11,000 Deductions are allowed under the cash method of accounting in the taxable year when paid. However, prepaid interest must be capitalized. Thus, $11,000 of interest attributable to the 2023 tax year may be deducted on Michael’s 2023 income tax return and not earlier.

Answer 38

C. $690 A deduction for adjusted gross income is allowed for travel expenses while away from home in connection with a trade or business [Sec. 162(a)]. However, transportation is deductible only if the trip is primarily related to the taxpayer’s trade or business (Reg. 1.162-2). If more days are spent for personal purposes than for business purposes, none of the transportation is deductible. Since Mr. Pine spent 6 out of his 8 weeks in Chicago on personal matters, the cost of the flight to Chicago is not deductible. Meals and lodging must always be allocated between personal and business. Under Sec. 274(n), business meals are deductible at only 50% of their cost. The expenses for 2 weeks out of 8 weeks are deductible. Educational expenses are deductible if the education maintains or improves skills required in the taxpayer’s business (Reg. 1.162-5).

Answer 39

C. Provides that bonuses and commissions paid as compensation are included as wages in the calculation of employer-employee contributions. The definition of wages on which contributions are based includes all remuneration for employment [Sec. 3121(a)]. Bonuses and commissions are wages and are used in the calculation of the employer-employee contributions.

Answer 40

B. $450 as travel expense and $450 as compensation. An employer may deduct reimbursements to an employee for business travel under Sec. 162(a) subject to the restrictions in Sec. 274, with a limitation of 50% for meals. However, the expenses of an employee’s spouse on a trip are not deductible unless the spouse is an employee of the taxpayer, the travel of the spouse is for a bona fide purpose, and such expenses would otherwise be deductible by the spouse [Sec. 274(m)(3)]. It is not sufficient that the spouse is along for customary social activities. Therefore, the expenses relating to the spouse in this question are not deductible as travel expenses. Under Sec. 274(e), if an employer treats the nondeductible travel expenses as compensation to the employee, they may be fully deducted as compensation. Treating them as compensation requires withholding income tax, including the amounts on the employee’s W-2, and deducting them in the employer’s tax return as compensation. When the employee is reimbursed for the cost of meals, the 50% limitation applies to the party making the reimbursement. Therefore, Partiers may deduct the following:

Answer 41

C. $1,260 Under Reg. 1.162-2(b), on a trip made primarily for business, the entire amount for transportation may be deducted, but the food and lodging must be allocated between business and personal time. However, under Sec. 274(c) and Reg. 1.274-4, travel outside the United States must be allocated between business and personal (including the transportation) if the travel is in excess of 1 week when more than 25% of the time is for nonbusiness activity. The airfare on the trip to Buffalo is entirely deductible, while food and lodging are deductible for only 2 days. On the trip to Vancouver, the airfare must be apportioned (2/3 business) as well as the food and lodging. Under Sec.162, meals are only 50% deductible. Assuming Willy’s meals met the requirements for business meals, his business deduction is

Answer 42

D. $800 Section 274(j) limits the deduction for employee achievement awards. These are items of tangible personal property awarded to an employee by reason of length of service or safety achievement, and the award is given as part of a meaningful presentation and under circumstances that do not create a significant likelihood that the payment is disguised compensation. The deduction limit is $1,600 per employee per year if it is a qualified plan award (which requires a permanent written plan or program that does not discriminate in favor of highly compensated employees). In this case, the plan does discriminate in favor of officers, so the deduction is limited to $400 per recipient. Since each statuette costs the company $400, the amount is deductible in its entirety. The total deduction is $800.

Answer 43

B. As between an employer and its employee, the tax rates are the same. Under the Federal Insurance Contributions Act (FICA), the tax rate for employers and employees is the same (7.65% for 2023). This requirement of shared responsibility has been followed since the Social Security Act was enacted in 1935.

Answer 44

C. $4,466 The two components of the FICA tax [Social Security (SS) and Medicare] must be reported separately on Form 941. The rate for SS is 6.2% for employers and employees on wages up to $160,200 (in 2023). The rate for Medicare is 1.45% each for employers and employees, with no wage ceiling. With respect to the SS component, the tax is paid until the wage ceiling is reached. Then no SS tax is paid for the rest of the year; i.e., it is not paid ratably over the year. The total wages subject to the SS component in the third quarter of 2023 amount to $29,000 since Y’s wages exceed the SS limitation before the end of the quarter. The total FICA tax is 7.65% in 2023. However, the employee and the employer are each required to pay the 7.65%, and the combined percentage of 15.3% is reported on Form 941, separated into its two components. Per Form 941 SS Wages are multiplied by .124 and Medicare Wages are multiplied by .029 (.124+.029 = 15.3%)

Answer 45

D. $3,670 Professional fees are deductible under Sec. 162, the same as compensation to an employee, provided they are reasonable in amount. Advertising and bank service charges are deductible as general expenses. Office supplies are also deductible under Reg. 1.162-3. Sec. 461(g) requires prepaid interest to be capitalized and allocated to the periods to which it relates. Since the interest was prepaid for 5 years, only one-fifth of the interest may be deducted in the current year.

Answer 46

A. $17,000 Under Sec. 3306(b)(1), wages are taxed for federal unemployment taxes up to $7,000 for each employee. Wages earned in excess of $7,000 are not subject to federal unemployment taxes. The full amount of wages paid during the current year to employee T and employee E is taxable. Only $7,000 of the wages paid to M is subject to federal unemployment taxes. Thus, the total amount of wages paid in the current year that is subject to federal unemployment taxes is $17,000.

Answer 47

A. Gross negligence. In some states, if the CPA has not contracted to perform for the third party, (s)he is not liable to that third party for negligence. Lack of privity is a defense. However, reckless departure from the standards of due care is treated as a form of constructive fraud and results in liability to foreseeable third parties that may be unknown to the CPA.

Answer 48

C. $100,414 The cost of group term life insurance up to a coverage amount of $50,000 is excluded from the employee’s gross income. Premiums paid by the employer for coverage in excess of $50,000 are included in gross income. As a result, $150,000 ($200,000 life insurance coverage – $50,000 exemption) of the coverage is taxable. Since Johnson must also include his salary in gross income, Johnson has gross income of $100,414 {$100,000 + [($150,000 ÷ $1,000) × $2.76]}.

Answer 49

C. Reckless disregard. The following four elements are necessary to prove constructive fraud: (1) misrepresentation of a material fact, (2) reckless disregard for the truth, (3) reasonable reliance by the injured party, and (4) injury. Thus, the presence of reckless disregard for the truth would support a finding of constructive fraud on the part of a CPA. Intent to deceive is a necessary element of actual fraud.

Answer 50

C. $2,800 Amounts that are paid for future services are required to be included in the year of receipt. This rule applies whether the taxpayer is on the cash or accrual method of accounting. There is an exception that allows accrual taxpayers a limited 1-year deferral of income for services performed in subsequent years. Payment for the 8 lessons in 2022 is included in income on the 2022 return. The remaining payment of $2,800 ($3,200 – $400) may be deferred to 2023.

Answer 51

A. Both I and II. In order for payments to qualify as deductible alimony, they must meet all of the following requirements in a post-1984 but pre-2019 divorce agreement: 1. Paid in cash 2. Paid pursuant to a written divorce or separation instrument 3. Not designated as other than alimony 4. Terminated at death of recipient 5. Not paid to a member of the same household 6. Not paid to a spouse with whom the taxpayer is filing a joint return

Answer 52

A. $50 Section 132(a)(2) provides an exclusion from gross income for qualified discounts provided by an employer to an employee. The amount of the discount must not exceed the employer’s gross profit percentage based on the price normally sold to customers. Since Midwest’s gross profit percentage is normally 45%, any discount in excess of 45% must be included in the employee’s gross income. Here the excess discount is 5% (50% – 45%). Accordingly, Mark must include $50 in his gross income ($1,000 × 5%).

Answer 53

D. $700 A penalty is provided in Sec. 6654(a) for the underpayment of estimated taxes. The amount of underpayment of each installment is the excess of the installment due if the estimated tax was 90% of that shown on the return over the amount of the installment timely paid. The estimated tax is due in four installments. Income tax withheld is considered paid equally on each installment date [Sec. 6654(g)(1)]. Therefore, the taxpayer is considered to have made estimated payments of $2,000 in each quarterly installment ($500 + 1/4 of $6,000). The amount of each installment payment should have been $2,700 (1/4 × 90% × $12,000 actual tax). B’s underpayment of tax for each installment is $700 ($2,700 – $2,000).

Answer 54

B. A $200 contribution to the taxpayer’s church charged by credit card on December 31, Year 1. A church is a qualified charitable organization. Once the rights of the donation have been transferred to the qualified organization, the charitable contribution is considered complete. A deduction is generally allowed in the year the contribution is paid, including the amount charged to a credit card.

Answer 55

C. $3,000 Alimony paid pursuant to a pre-2019 divorce is gross income to the recipient and deductible by the payor. Alimony is payment in cash, paid pursuant to a written divorce decree, not designated as other than alimony (e.g., child support), terminated at death of recipient, not paid to a member of the same household, and not paid to a spouse with whom the taxpayer is filing a joint return. The $3,000 alimony payment is the only amount included in Tana’s alimony deduction.

Answer 56

B. $1,500 A deduction is allowed for contributions to a qualified organization. Therefore, no deduction is allowed for the contribution to the family. However, a deduction is available for the donation of stock in the amount of $1,500. Since the stock has not been held long term, it is ordinary income property, and the deduction is equal to the lesser of FMV or AB.

Answer 57

A. Deducted from gross income in arriving at adjusted gross income. Pay for jury duty is compensation gross income. Jury duty pay remitted to an employer (in return for being paid during the duty) is deductible for AGI.

Answer 58

A. $10,000 Because Shirley’s taxable income of $160,000 is less than $182,100, the W-2 wages/qualified property limit does not apply. Therefore, the deductible amount equals 20% of QBI, or $10,000.

Answer 59

C. $1,200 State income taxes are deductible as an itemized deduction and are reported on Schedule A. Self-employed individuals may deduct half of the self-employment taxes paid as an above-the-line business deduction, which is not on Schedule A.

Answer 60

D. $25,000 Charitable deductions at FMV of capital assets to a church are limited to 30% of AGI. However, the FMV ($25,000) of the land is less than 30% ($27,000) of Taylor’s AGI. Therefore, Taylor’s maximum deductible charitable contribution is equal to 100% of the FMV of the donated land.

Answer 61

C. Transportation to physician’s office for required medical care. The IRC defines medical care as including transportation for needed medical care.

Answer 62

A. $100 Investment interest expense is only deductible to the extent of taxable investment income. Taxable investment income does not include tax-exempt municipal bond interest or rental income (which is accounted for separately). Because the $100 from U.S. Treasury bond income is the only taxable investment income, only $100 of the investment interest expense may be deducted in the current year.

Answer 63

D. Deduction from gross income in arriving at 2024 adjusted gross income. A penalty charged for early withdrawal from a time savings account is a deduction for AGI. The deduction is taken on the return for the tax year the funds are withdrawn (January 2024).

Answer 64

C. $27,700 In general, a return must be filed if a taxpayer’s gross income equals or exceeds the standard deduction amount applicable to the taxpayer’s filing status. For a joint return, the standard deduction is $27,700 in 2023, and no additional standard deductions are allowed for taxpayers who are not over age 65 or blind. The couple must file a return if their gross income equals or exceeds $27,700.

Answer 65

A. $4,208 Taxable income is defined as adjusted gross income minus the standard deduction (or total itemized deductions, if greater). For a single taxpayer in 2023, the basic standard deduction is $13,850. Qualifying medical expenses in excess of 7.5% of AGI may be deducted as an itemized deduction. Poole’s income tax is computed as follows:

Answer 66

A. $0 The allowable deduction for contributions to an IRA is limited to the lesser of $6,500 or compensation. Compensation represents earned income and does not include distributions from pension plans or interest income. Therefore, since compensation is $0, the allowable IRA deduction is limited to $0. Note that the maximum amount otherwise deductible is $6,500 for Sol and another $6,500 for the contribution for his spouse.

Answer 67

A. $5,500 Medical expenses are deductible to the extent they exceed 7.5% of AGI. Medical care expenses include amounts paid for the diagnosis, cure, medication, treatment, or prevention of a disease or physical handicap or for the purpose of affecting any structure or function of the body. Therefore, $5,500 ($5,000 dentist and eye doctor fees + $500 contact lenses) qualifies for the deduction before the AGI limitation.

Answer 68

A. $2,160 A deduction is allowed for state and local real property taxes and for state and local personal property taxes. Real estate taxes must be apportioned between the buyer and seller on the basis of the number of days the property was held by each in the year of sale, regardless of an agreement not to prorate them. The taxpayers held the property for 6 months of the 9-month period the taxes covered. The amount of the taxes apportioned to the Bronsons is $1,800 [$2,700 × (6 months ÷ 9 months)]. The state motor vehicle tax on the value of the car is a tax on the value of personal property, so the $360 may also be deducted. The taxpayers may deduct a total of $2,160 as taxes in calculating their itemized deductions.

Answer 69

A. For the most part, the deduction is 21% of a taxpayer’s QBI from a partnership, S corporation, or sole proprietorship. Generally, the deduction is 20%, not 21%, of a taxpayer’s QBI from a partnership, S corporation, or sole proprietorship. The deduction is intended to reduce the tax rate on QBI to a rate that is closer to the corporate tax rate of 21%.

Answer 70

D. $14,000 Because Hannah’s taxable income is less than the $182,100 threshold amount, the W-2 wages/qualified property limit does not apply. Thus, Hannah takes a deduction equal to 20% of qualified business income ($70,000), $14,000.

Answer 71

A. I only. The IRC allows the deduction of a limited amount of investment interest as an itemized deduction. The limit is to the extent of net investment income.

Answer 72

B. $0 For the 2023 tax year, there is no charitable contribution deduction for taxpayers who claim the standard deduction.

Answer 73

B. Allocable losses associated with a qualified trade or business. QBI includes any items of income, gain, deduction, and loss to the extent that such items are effectively connected with the conduct of a trade or business within the United States and are included or allowed in determining taxable income for the taxable year.

Answer 74

C. $13,000 The maximum amount that any taxpayer under the age of 50 may deduct for a contribution to an IRA is limited to the lesser of $6,500 ($7,500 if qualified for a catch-up contribution) or the taxpayer’s compensation gross income for the year. The limit is applied separately to each spouse who has compensation and makes a contribution to a separate IRA account. Taxable alimony is treated as compensation for this purpose. The deduction is for AGI. If one spouse is covered by an employer’s retirement plan, the deduction is proportionately reduced once earned income exceeds $116,000 in 2023. Thus, Val and Pat may deduct $13,000.

Answer 75

D. $13,500 IRA distributions made before age 59 1/2 are subject to taxation as well as a 10% penalty. Each amount is calculated based on the distribution. No penalty is applied if the distribution is used for death or disability, medical expenses in excess of the percent limitation, the purchase of a first home (up to $10,000), higher education expenses, terminal illness, or the birth or adoption of a child (up to $5,000). None of these circumstances are applicable; therefore, the tax and penalty apply to the entire $30,000. The applicable tax rate is 35% for a tax liability of $10,500 ($30,000 × 35%), which is added to the penalty of $3,000 ($30,000 × 10%), for a total of $13,500.

Answer 76

D. Payments must terminate at the death of the payee spouse. Only amounts that are required to be included as gross income of the recipient as alimony are deductible by the payor in calculating AGI. A component of the alimony definition is that the payor has no liability to make the payment for any period after the death of the payee spouse. Alimony payments must be made in cash.

Answer 77

Must Be Age 65 or Older or Blind = Yes Must Support Dependent Child or Aged Parent = No An additional standard deduction is allowed for a taxpayer if, during the year, the taxpayer is age 65 or over or blind. The respective amounts are doubled if the taxpayer is both elderly and blind. Support of a dependent is not a condition for an increase to the standard deduction.

Answer 78

C. $30,000 Properly substantiated cash contributions by individuals to qualified charities are limited to 60% of the taxpayer’s AGI, or $30,000 in this case. The carryover is deductible this year to the extent that the total deduction does not exceed the 60%-of-AGI limit, or $7,000 ($30,000 – $23,000).

Answer 79

C. Nondeductible interest. Qualified residence interest is deductible. It is interest paid or accrued during the tax year on home acquisition or home equity indebtedness. Home equity indebtedness is all debt other than acquisition debt that is secured by a qualified residence to the extent it does not exceed the fair market value of the residence, reduced by any acquisition indebtedness. However, for tax years 2018-2025, the home equity debt must be used to buy, build, or substantially improve a qualified residence. Therefore, the Browns may not deduct the interest.

Answer 80

C. $1,000 Medical expenses are deductible to the extent they exceed 7.5% of AGI. Medical care expenses include amounts paid for the diagnosis, cure, medication, treatment, or prevention of a disease or physical handicap or for the purpose of affecting any structure or function of the body. The term medical care also includes amounts paid for insurance covering medical care. However, the amount deductible for expenses incurred for medical care is reduced by the amount of reimbursements. The cost of insurance against loss of earnings is not deductible. Therefore, deductible medical expenses are $1,000 [($2,000 – $1,500 reimbursement) + $500].

Answer 81

D. $8,600 The repair and maintenance of the wheelchair for a handicapped, dependent child is a qualifying medical expense. In addition, the expenses for tuition, meals, and lodging at a residence primarily for medical care for the child are qualifying medical expenses because the meals and lodging are necessary incidents to the medical care.

Answer 82

D. $0 Federal income taxes and penalties are not deductible. The $70 of interest paid on the amounts owed to the IRS is considered personal interest and is not deductible. Therefore, none of the amount is deductible in 2023.

Answer 83

D. $1,900 For a cash-basis, calendar-year taxpayer, state and local income taxes paid or withheld during the year are fully deductible as itemized deductions. Federal income taxes are not deductible. State and local income taxes paid in the next calendar year are deductible in the next year.

Answer 84

C. $12,190 Under IRC, the maximum amount that can be deducted for a contribution on behalf of a self-employed individual is the lesser of $66,000 or 25% of the self-employed individual’s earned income from the trade or business. Kirk’s only income which qualifies as earned income is $66,000. The employer portion of payroll tax rate times the net earnings from self-employment reduces the earned income amount. The income is further reduced by the contribution deduction based on a 20% rate used for sole owners. The maximum deduction allowed is calculated as follows:

Answer 85

C. $6,600 The interest on U.S. savings bonds is taxable, and interest is deductible on the loan to purchase them. Investment interest expense is deductible only to the extent of net investment income. The interest on the credit card is personal interest, none of which is deductible. The home mortgage interest is deductible assuming it is qualified residence interest. The points on a conventional mortgage loan are deductible even though the points represent prepaid interest. The Crawleys’ maximum interest deduction is

Answer 86

B. $5,000 as an itemized deduction. Mortgage interest (qualified residence interest) is deductible in full from adjusted gross income (AGI) as an itemized deduction. A qualified residence is the principal residence of the taxpayer and any one other residence owned by the taxpayer. Insurance is allowable as a deduction only if it is a business expense, as long as it is ordinary and necessary. Here, however, the expense is for a second residence. The utilities are not deductible as well. Therefore, only the $5,000 mortgage interest is allowed as an itemized deduction.

Answer 87

D. $0 Qualified distributions from a Roth IRA are not included in the taxpayer’s gross income. To be a qualified distribution, the distribution must satisfy a 5-year holding period and must be (1) made on or after the date an individual attains age 59 1/2; (2) made to a beneficiary (or the individual’s estate) on or after the individual’s death; (3) attributed to the individual being disabled; or (4) used to pay ($10,000) qualified first-time homebuyer expenses. Since Mark has held the funds over 5 years and is over age 59 1/2, he may withdraw the funds tax-free.

Answer 88

C. $85,000 Amounts paid for qualified medical expenses that exceed 7.5% of AGI may be deducted. The deduction must be paid during the taxable year for the taxpayer, the taxpayer’s spouse, or a dependent and must not be compensated for by insurance or otherwise during the taxable year. Deductible medical expenses are amounts paid for (1) diagnosis, cure, mitigation, treatment or prevention of disease, or for the purpose of affecting any structure or function of the body; (2) transportation primarily for and essential to medical care; (3) medical insurance; and (4) qualified long-term care premiums and services. Expenditures for new building construction or for permanent improvements to existing structures may also be deductible in part. The excess of the cost of a permanent improvement over the increase in value of the property is a deductible medical expense. Therefore, $75,000 ($100,000 – $25,000 increase in FMV) is deductible. Construction of handicap entrance/exit ramps, installation of elevators, or widening of doorways also qualify.

Answer 89

B. $12,284 Only the OASDI (old-age, survivors, and disability insurance) component of the FICA tax has a wage ceiling. The OASDI rate is 6.20% for employers up to a maximum of $160,200 (in 2023). For the Medicare component, which has no wage ceiling, the rate is 1.45% for employers and employees. The employment taxes paid by Med-Tech with respect to Ernesto in 2023 are as follows:

Answer 90

D. $2,000 Investment interest expense is only deductible to the extent of net investment income. Taxable investment income does not include tax-exempt municipal bond interest. Because the $2,000 U.S. Treasury bond interest income is the only taxable investment income, only $2,000 of the investment interest expense may be deducted in the current year.

Answer 91

C. $0 The cost of the health club membership is not included in the computation of the medical expense deduction since the cost is incurred for the purpose of improving the taxpayers’ general health, not for curing a specific ailment or disease. Only prescription drugs and insulin are deductible, so the over-the-counter medicines are not included.

Answer 92

C. $88,000 Section 162(a)(1) allows a deduction for reasonable compensation for personal services actually rendered. Section 83(a) allows the deduction to an employer equal to the fair market value of property given to the employee when the property is transferable or is not subject to a substantial risk of forfeiture. Therefore, Mr. Z’s salary and wage deduction is $88,000 ($80,000 + $8,000 FMV of car).

Answer 93

B. Interest incurred on an ordinary bank loan if the funds are used to provide medical care for a dependent of A. Personal interest is not deductible and is any interest other than qualified residence interest, investment interest, interest taken into account in computing income or loss from a passive activity, interest in connection with a business, and interest during certain extensions of time to pay the estate tax. Interest on an ordinary bank loan incurred for medical care is personal interest.

Answer 94

C. $19,375 Amounts paid for qualified medical expenses that exceed 7.5% of AGI may be deducted for regular income tax purposes if unreimbursed. The doctor bills resulting from the serious fall are deductible to the extent they exceed 7.5% of AGI. In addition, the cosmetic surgery to correct the congenital deformity is also deductible to the extent it exceeds the threshold. The cost of cosmetic surgery is generally not deductible unless it is necessary to ameliorate a deformity arising from, or directly related to, a congenital abnormality, a personal injury resulting from an accident or trauma, or disfiguring disease. Therefore, Carroll’s qualifying medical expenses are $25,000. The deductible expenses are those in excess of $5,625 ($75,000 × 7.5%) or $19,375.

Answer 95

C. $13,500 IRA distributions made before age 59 1/2 are subject to taxation as well as a 10% penalty. Each amount is calculated based on the distribution. No penalty is applied if the distribution is used for death or disability, medical expenses in excess of the percent limitation, the purchase of a first home (up to $10,000), higher education expenses, terminal illness, or the birth or adoption of a child (up to $5,000). None of these circumstances are applicable; therefore, the tax and penalty apply to the entire $30,000. The applicable tax rate is 35% for a tax liability of $10,500 ($30,000 × 35%), which is added to the penalty of $3,000 ($30,000 × 10%), for a total of $13,500.

Answer 96

B. $11,700 The basic standard deduction amount of a student under age 24 who is claimed as a dependent on another individual’s income tax return is limited to the greater of either $1,250 or the dependent’s earned income for the year plus $400 up to the otherwise applicable basic standard deduction amount. Earned income does not include either dividends or capital gains from the sale of stock. Since Anna’s earned income of $11,300 exceeds $1,250 and is less than the otherwise applicable standard deduction amount of $13,850, Anna’s applicable standard deduction is $11,700 ($11,300 earned income + $400).

Answer 97

B. Punitive damages. If the CPAs have merely been negligent, they will not be liable for punitive damages. Punitive damages are awarded only when the circumstances are extreme or aggravated.

Answer 98

D. Whether the parties involved have a clear understanding of the procedures and services to be performed. The basis of a CPA’s duty (performance) to a client is their contract. Thus, the parties should have a clear understanding of the procedures and services to be performed. The contract may be oral or written. Its terms are commonly included in an engagement letter sent by the CPA to the client and agreed to by the client.

Answer 99

A. $20,800 Generally, a taxpayer must file a tax return if the taxpayer’s gross income equals or exceeds his or her standard deduction [Sec. 6012(a)]. Standard deductions in 2023 are $27,700 for married filing jointly, $20,800 for heads of household, and $13,850 for single individuals (Publication 501). A taxpayer who has two children and files as a head of household must file a return if his or her gross income equals or exceeds $20,800.

Answer 100

C. $2,000 Joint filers with modified AGI below $190,000 may contribute up to $2,000 per beneficiary (child) per year. The amount a taxpayer is able to contribute to a CESA is limited if modified AGI exceeds certain threshold amounts. In 2023, the limit is phased out for joint filers with modified AGI at or greater than $190,000 and less than $220,000, and for single filers with modified AGI at or greater than $95,000 and less than $110,000.

Answer 101

A. $15,000 The maximum amount that any taxpayer may deduct for a contribution to an IRA is limited to the lesser of $6,500 or the taxpayer’s compensation gross income for the year. If the taxpayer is age 50 or older, a $1,000 catch-up contribution is allowed in addition to the $6,500 per year IRA contribution limit. If one spouse is eligible to make deductible IRA contributions, that spouse may contribute up to $15,000 if a joint return is filed and both taxpayers are age 50 or over. Furthermore, the Lees may deduct their IRA contribution for AGI.

Answer 102

B. $18,500 The $500 of personal interest paid on the auto loan is not deductible. Qualified residence interest is deductible and includes home acquisition or equity indebtedness used for buying, building, or improving a qualified residence secured by a qualified residence to the extent it does not exceed the fair market value of the residence. Thus, the interest on the room construction loan is deductible. This is based on the assumption that the fair market value of the home is at least $215,000.

Answer 103

C. $63,750 Because Tyler and Ross do not have any qualified property, the QBI allowed amount for this qualified trade or business is limited to the lesser of 20% of the taxpayer’s QBI with respect to the qualified trade or business or 50% of the W-2 wages with respect to the qualified trade or business. Because their taxable income of $470,000 is greater than $464,200, the W-2 wages/qualified property limit needs to be considered. Thus, the partnership’s allowed QBI is limited to the lesser of 20% of QBI ($66,920) or 50% of W-2 wages with respect to the partnership ($63,750). The QBI allowed from the partnership is only $63,750. In addition to being the allowed QBI from the partnership, since there is no indication of other qualified businesses or net capital gains, the allowed QBI from the partnership is also the QBID after considering the overall limit (i.e., 20% × Taxable income – Net capital gains).

Answer 104

A. $56,000 The QBID is available to noncorporate taxpayers when the income is from a flow-through entity, such as a sole proprietorship, partnership, or S corporation. The deduction is generally equal to 20% of qualified business income. Thus, the net amount of increase to the taxpayer’s taxable income is $56,000 [$70,000 – (20% × $70,000)].

Answer 105

D. $0 The allowable deduction for contributions to an IRA is limited to the lesser of $6,500 or compensation. Compensation represents earned income and does not include distributions from pension plans or interest income. Therefore, since compensation is $0, the allowable IRA deduction is limited to $0. Note that the maximum amount otherwise deductible is $6,500 for Sol and another $6,500 for the contribution for his spouse.

Answer 106

D. $30,700 In general, a return must be filed if the taxpayer’s gross income equals or exceeds his or her standard deduction [Sec. 6012(a)]. For a joint return, the basic standard deduction is $27,700 in 2023. In addition, Mr. and Mrs. Jones are allowed two additional standard deductions of $1,500 each for being age 65 or over [Sec. 63(f)]. The couple must file a return if their gross income equals or exceeds $30,700 ($27,700 + $1,500 + $1,500).

Answer 107

C. $400 Ordinary and necessary expenses paid or incurred during the tax year for the production of income are deductible for AGI. This includes deduction for depreciation on property held for production of income. Personal expenses are not deductible as rental expense. Insurance, taxes, and depreciation must be allocated between rental and personal expense. The taxes attributable to the apartment Emil occupies are deductible as an itemized deduction.

Answer 108

D. State and local income taxes of $3,200 and gross income from state and local income tax refund of $500. State and local income taxes are deductible. A cash-basis taxpayer is entitled to deduct state income taxes withheld by his or her employer in the year such amounts are withheld. Assessments of state income taxes are deductible in the year of payment by a cash-basis taxpayer even if the payments relate to prior years. A refund of a prior year’s tax payment must be included in the taxpayer’s gross income in the year received if the taxpayer deducted the taxes in an earlier year. In 2023, Harvey should deduct the taxes withheld of $2,500 and the assessment paid of $700. He should include the $500 refund he received in gross income.

Answer 109

B. $20,000 Generally, contributions to private operating foundations are limited to 30% of the taxpayer’s AGI. But contributions of long-term capital gain property to private nonoperating foundations are limited to 20% of the taxpayer’s AGI. Lewis’s charitable contribution deduction should be limited to $20,000 ($100,000 × 20%). The total charitable contribution is equal to $25,000 (lower of FMV or AB) because it is being made to a private nonoperating foundation. The amount of $20,000 can be deducted in 2023 because of the 20% limit. The remaining $5,000 can be carried forward for up to 5 years.

Answer 110

A. $5,000 The cash contribution to the church is fully deductible. The clothing donation is $600. The amount of the contribution with respect to the art object is the excess of what was given over what was received, or $400.

Answer 111

C. $0 While the correct amount of realized gain is $85,000, Sec. 121 excludes the gain on the sale of a principal residence, up to $250,000 per taxpayer, subject to certain rules and limitations. As none of the facts would lead us to reduce this exclusion, no gain is recognized on the disposition of the home.

Answer 112

C. $4,200 The IRC allows a deduction for certain interest paid or accrued during the year on indebtednesses. Investment interest is deductible up to the taxpayer’s net investment income for the year. Personal or consumer interest is disallowed. Qualified residence interest is deductible. The IRC disallows a deduction for interest on debt incurred to purchase or carry tax-exempt securities. Since Wolfe used two-thirds of the loan from Union National Bank to purchase tax-exempt securities, two-thirds of the interest on this loan is disallowed as a deduction. Wolfe may deduct

Answer 113

D. $4,300 Medical care expenses of a taxpayer, a spouse, or a dependent are deductible only to the extent they exceed 7.5% of AGI. Supplies purchased to alleviate a physical defect or provide relief from an ailment qualify as medical expense. Capital expenditures for qualified medical costs are also deductible. If so, the cost of repair and maintenance is also deductible. If the principal reason an individual is in an institution other than a hospital, such as a special school for the handicapped, is the need for, and availability of, the medical care furnished by the institution, the full costs of meals, lodging, and other services necessary for furnishing the medical care are all qualified medical expenditures.

Answer 114

A. $0 Taxes may be deducted only by the person on whom they are legally levied or by someone with a legally recognized interest in the property. Smith does not own the house, therefore none of the taxes paid can be deducted on his tax return and the payment is treated as a gift to Smith’s mother. Smith’s mother is entitled to the deduction only if she pays the taxes.

Answer 115

D. A taxpayer who files as a head of household with one dependent child and who earns $21,800. Generally, a taxpayer must file a tax return if the taxpayer’s gross income equals or exceeds his or her standard deduction [Sec. 6012(a)]. Standard deductions in 2023 are $27,700 for married filing jointly, $20,800 for heads of household, and $13,850 for unmarried individuals. A taxpayer who files as a head of household must file a return if his or her gross income equals or exceeds $20,800.

Answer 116

C. A medical expense deduction is allowed for payments made in the current year for medical services received in earlier years. To qualify for deduction, a medical expense must be paid, not necessarily incurred, during the taxable year for the taxpayer, the taxpayer’s spouse, or a dependent and must not be compensated for by insurance or otherwise during the taxable year.

Answer 117

D. Nondeductible interest. Qualified residence interest is deductible. It is interest paid or accrued during the tax year on home acquisition or home equity indebtedness. Home equity indebtedness is all debt other than acquisition debt that is secured by a qualified residence to the extent it does not exceed the fair market value of the residence, reduced by any acquisition indebtedness. However, for tax years 2018-2025, the home equity debt must be used to buy, build, or substantially improve a qualified residence. Therefore, the Browns may not deduct the interest.

Answer 118

D. Farb should deduct $8,000 in his Year 1 income tax return and report the $5,000 refund as income in his Year 2 income tax return. Property taxes are deductible when paid by a cash-basis taxpayer. Because Farb itemizes deductions, the taxes deducted reduce Year 1 tax liability. A taxpayer may exclude recovered items only to the extent that deduction of the item in a prior year did not produce a tax benefit. Thus, Farb should report as income that portion of the $5,000 recovered, the deduction of which resulted in lower Year 1 tax liability.

Answer 119

A. Ms. Maple does not have to file a 2023 income tax return. In general, a taxpayer does not have to file a return if his or her gross income is less than his or her standard deduction [Publication 501 and Sec. 6012(a)]. For single individuals who are 65 or over, the standard deduction increases by $1,850. Therefore, the filing threshold will be $15,700 ($13,850 regular standard deduction + $1,850 additional standard deduction for being 65). Ms. Maple’s income does not qualify her Social Security benefits for gross income inclusion in determining her filing requirement.