Part 2 - Businesses - Unit 2 - Questions Flashcards
Patricia is a computer programmer and was laid off from Hard Drive Inc. due to downsizing. Hard Drive asked Patricia to work on a one-time project. They agreed to pay her a flat fee to create an advance product. The number of hours to complete this project is unknown, and there is no guaranteed minimum payment for the hours spent. Hard Drive provides the specifications to Patricia for the product. Patricia uses her own high-end computer and is not required to attend meetings held by the software engineering group. Which of the following statements about Patricia is correct?
A. Patricia is an employee.
B. Patricia is an independent contractor.
C. Patricia is a statutory employee.
D. Patricia is a statutory nonemployee.
B. Patricia is an independent contractor.
- Publication 15-A, pages 7 and 8, provides, in part, that the determination of whether an individual is an employee or an independent contractor under the common law requires an examination of the relationship between the worker and the business. In any employee-independent contractor determination, all information that provides evidence of the degree of control and the degree of independence must be considered. Facts that provide evidence of the degree of control and independence fall into three categories: behavioral control, financial control, and the type of relationship of the parties.
- Publication 15-A, pages 6 and 7, provides that there are three categories of statutory nonemployees: direct sellers, licensed real estate agents, and certain companion sitters.
- Publication 15-A, page 6, provides that workers that are independent contractors may still be treated as employees by statute. In particular, if a person falls within one of four categories and satisfies the three conditions described under Social Security and Medicare taxes, he or she is a statutory employee. In general, the four categories are a driver that is a company’s agent or paid on commissions, a full-time life insurance sales agent, an individual that works at home on materials or goods supplied by and returned to the company, and a full-time traveling or city salesperson.
- In this problem, it is apparent that Patricia is on her own, using her own equipment, and totally disengaged from the company. Patricia controls the means, whereas the corporation controls the result. Hence, she is an independent contractor.
Rich, Inc., a calendar year taxpayer employing the accrual method of accounting, acquired a business warehouse building in 2022 for $100,000. Rich, Inc., deducted $3,000 in warehouse asset depreciation expense on December 31, 2022. In January 2023, Rich incurred a $2,000 legal bill, successfully defending its title to the building. Later in the year, a second-floor office was added to the warehouse at a cost of $10,000. Rich deducted $5,000 in warehouse asset depreciation expense on December 31, 2023. What is Rich’s adjusted basis in the warehouse asset on January 1, 2024?
A. $100,000
B. $104,000
C. $110,000
D. $112,000
B. $104,000.
- Publication 551, pages 4 through 7, provides that the basis of any property increases by all items properly added to a capital account. These include the cost of any improvements having a useful life of more than 1 year. The following items also increase the basis of property:
- The cost of extending utility service lines to the property
- Impact fees
- Legal fees, such as the cost of defending and perfecting title
- Legal fees for obtaining a decrease in an assessment levied against property to pay for local improvements
- Zoning costs
- The capitalized value of a redeemable ground rent
- The basis of any property decreases by:
- Exclusion from income of subsidies for energy conservation measures,
- Casualty or theft loss deductions and insurance reimbursements,
- Credit for vehicles,
- Section 179 deduction,
- Depreciation, and
- Nontaxable corporate distributions.
- Rich, Inc., has an adjusted basis of $104,000 for the building, which is the initial cost allocation of $100,000, plus the legal fees of $2,000, plus the capital improvements of $10,000, less the depreciation charges of $8,000 ($3,000 + $5,000).
Frank sold his Ranier Corporation stock to his sister Bernie for $8,000. Frank’s cost basis in the stock was $15,000. Bernie later sold this stock to Wendy, an unrelated party, for $15,500. What is Bernie’s recognized gain or loss?
A. $500
B. $(7,000)
C. $(7,500)
D. $0
A. $500.
- A loss on the sale or exchange of property between related persons is not deductible. See page 32 in Publication 544 for a detailed list of “related persons.”
- If, in a purchase or exchange, the property is received from a related person who had a loss that was not allowable and the property is later sold or exchanged at a gain, the only amount of gain that is recognized is the excess over the previously disallowed loss. (Publication 544, page 31)
- As a result, Bernie’s realized gain of $7,500 ($15,500 − $8,000) is reduced by Frank’s disallowed loss of $7,000 ($8,000 − $15,000) to net a recognized gain of $500 ($7,500 − $7,000).
Note: This is an often-asked question and it is tricky. In this case, the recognized gain is $500 but sometimes a question asks for the realized gain (which is $7,500 in this question). So carefully read the question being asked.
Which of the following statements is correct concerning farming businesses that file Schedule F of Form 1040?
A. Farming losses are not subject to the at-risk and passive activity limits.
B. Farming losses are subject to the at-risk but not the passive activity limits.
C. Farming losses are subject to the passive activity but not the at-risk limits.
D. Farming losses are subject to the at-risk and passive activity limits.
D. Farming losses are subject to the at-risk and passive activity limits.
- Publication 225, page 28, addresses the issues associated with farming losses. In particular, the publication indicates that if a taxpayer’s deductible farm expenses are more than the farm income, the taxpayer has a loss from the operation.
- The amount of the loss that the taxpayer can deduct when figuring taxable income may be limited due to the applicability of the at-risk limits and the passive activity limits. If the deductible loss after applying the at-risk limits and passive activity limits is more than other income for the year, the taxpayer may have a net operating loss.
Note: Be aware that if a taxpayer does not carry on the farming activity to make a profit, then the loss deduction may be limited by the not-for-profit rules.
Which of the following statements is correct with respect to withholding of tax on a domestic corporation’s cash distribution made on its stock in the ordinary course of business to foreign shareholders?
A. It may be required in the case of a foreign shareholder.
B. It may be required unless it may be later determined that part or all of the distribution is a return of capital or gain from the sale or exchange of property.
C. It may be required unless the foreign shareholder files a statement requesting exemption from the rule.
D. It may be required only in the case of property other than cash being distributed.
A. It may be required in the case of a foreign shareholder.
- If a domestic corporation distributes U.S. source income in the form of cash or other property to a foreign person, it may have to withhold tax. Most types of U.S. source income received by a foreign person are subject to the U.S. tax of 30%. A reduced rate, including exemption, may apply if there is a tax treaty between the foreign person’s country of residence and the United States. A corporation that fails to withhold may be liable for the tax and any penalties and interest that may apply. For more information, see “Withholding of Tax” in Publication 515.
- The term “chapter 3 withholding” is used in Publication 515 descriptively to refer to withholding required under Sections 1441, 1442, and 1443 of the Code. Generally, “chapter 3 withholding” describes the withholding regime that requires withholding on a payment of U.S. source income. Payments to foreign persons, including nonresident alien individuals, foreign entities, and governments may be subject to chapter 3 withholding. (Publication 515, page 3)
- Corporate distributions may be subject to chapter 3 withholding even though a portion of the distribution may be a return of capital or capital gain that is not fixed or determinable annual or periodical (FDAP) income (Publication 515, page 23).
Which of the following statements is correct with respect to virtual currency?
A. A taxpayer’s mining of virtual currency that constitutes a trade or business is not subject to self-employment tax.
B. A taxpayer remunerating an employee for services with virtual currency treats the remuneration as wages.
C. A taxpayer that successfully mines virtual currency includes the fair market value of the virtual currency on the date of the mining, not the date of receipt.
D. Self-employment income does not include income derived from services provided as an independent contractor.
B. A taxpayer remunerating an employee for services with virtual currency treats the remuneration as wages.
- IRS Notice 2014-21 provides in Q&A-8 that when a taxpayer successfully “mines” virtual currency, the fair market value of the virtual currency as of the date of receipt (not the date of mining) is includible in gross income. See Publication 525, Taxable and Nontaxable Income, for more information on taxable income.
- Likewise, if a taxpayer’s “mining” of virtual currency constitutes a trade or business, and the “mining” activity is not undertaken by the taxpayer as an employee, the net earnings from self-employment (generally, gross income derived from carrying on a trade or business less allowable deductions) resulting from those activities constitute self-employment income and are subject to the self-employment tax. (IRS Notice 2014-21, Q&A-9)
- Generally, self-employment income includes all gross income derived by an individual from any trade or business carried on by the individual as other than an employee. Consequently, the fair market value of virtual currency received for services performed as an independent contractor, measured in U.S. dollars as of the date of receipt, constitutes self-employment income and is subject to the self-employment tax. See IRC Fact Sheet 2007-18, Business or Hobby? Answer Has Implications for Deductions, available at www.irs.gov, for information on determining whether an activity is a business or a hobby. (IRS Notice 2014-21, Q&A-10)
Which of the following costs is part of the basis of a patent you get for your invention?
A. The cost of development, such as research and experimental expenditures (unless you deduct these as current business expenses).
B. The cost of working models.
C. The cost of attorneys’ and government fees.
D. All of the answer choices are added to the basis of a patent.
D. All of the answer choices are added to the basis of a patent.
- Publication 551, page 4, states that the basis of a patent a taxpayer gets for an invention is the cost of development, such as research and experimental expenditures, drawings, working models, and attorneys’ and governmental fees.
- If the taxpayer deducts the research and experimental expenditures as current business expenses, the taxpayer cannot include them in the basis of the patent. Furthermore, the value of the inventor’s time spent on an invention is not part of the basis.
- Therefore, all of the costs listed in this problem are part of the basis of a patent for an invention.
John has three employees who are certified as members of a targeted group. Two of the employees worked for John for 2 months in 2021 and came back to work for John on January 1, 2023. The other employee began working for John on January 1, 2023. Each employee makes $1,000 per month. How much can John claim as qualified first-year wages in computing the work opportunity credit?
A. $12,000
B. $6,000
C. $36,000
D. $18,000
B. $6,000.
- The work opportunity credit provides businesses with an incentive to hire individuals from targeted groups that have a particularly high unemployment rate or other special employment needs.
- Qualified first-year wages are qualified wages you pay or incur for work performed by a targeted group employee during the 1-year period beginning on the date the individual begins work for the taxpayer. Qualified 2nd-year wages are qualified wages a taxpayer paid to or incurred for certified long-term family assistance recipients for work performed during the 1-year period beginning on the day after the last day of the 1-year wage period.
- Qualified wages are generally wages (excluding tips) subject to the Federal Unemployment Tax Act (FUTA) without regard to the FUTA dollar limit, but not more than $6,000 each tax year for each employee ($3,000 each tax year for a summer youth employee). In the case of certified long-term family assistance recipients, the limit is raised to $10,000 for both years.
- In addition, the amount of qualified first-year wages that may be taken into account for any employee certified as a qualified veteran are $6,000, $12,000, $14,000, or $24,000, depending on the date of qualification and other criteria. (See Form 5884 Instructions, page 2.)
- The instructions for Form 5884 provide a complete list of wages that do not qualify for the credit. Some of the most common wages that do not qualify include wages the taxpayer pays or incurs to an employee:
- Who did not work at least 120 hours for the taxpayer,
- Who has worked for the taxpayer previously,
- Who is a relative or dependent of the taxpayer, or
- For whom 50% or less of the wages the employee received from the taxpayer were for working in the taxpayer’s trade or business.
- Rate and Maximum Credit Each Tax Year for Each Targeted Group Employee
Hours Worked for You: At least 400
Rate: 40%
Maximum Qualified 1st-Year Wages: *$6,000
Maximum Credit: $2,400
Hours Worked for You: Fewer than 400 but at least 120
Rate: 25%
Maximum Qualified 1st-Year Wages: *$6,000
Maximum Credit: $1,500
*$3,000 for a summer youth employee.
- John can only claim the third employee’s wages for the credit in 2023 since the other two employees are rehires. Moreover, the third employee’s wages for the year of $12,000 are limited to the maximum of $6,000.
George purchased a business on May 31, 2023, for a lump-sum price of $1.4 million. The values of the assets on the seller’s books were as follows:
Book Value FMV Cash $200,000 $200,000 Land 150,000 150,000 Building 300,000 450,000 Equipment 250,000 300,000 Cov. Not to Compete 0 100,000
George did not assume any loans. What is his basis for goodwill and the equipment?
A. Goodwill $0, Equipment $300,000
B. Goodwill $200,000, Equipment $300,000
C. Goodwill $200,000, Equipment $350,000
D. Goodwill $0, Equipment $350,000
B. Goodwill $200,000, Equipment $300,000.
- Publication 551, page 4, provides, in part, that if a taxpayer acquires a trade or business, the taxpayer should allocate the consideration paid to the various assets acquired. Generally, the consideration paid is reduced by any cash and general deposit accounts (including checking and savings accounts) received. The remaining consideration is allocated to the other business assets received in proportion to (but not more than) their fair market value in the following order:
- Certificates of deposit, U.S. government securities, foreign currency, and actively traded personal property, including stock and securities
- Accounts receivable, other debt instruments, and assets the taxpayer marks to market at least annually for federal income tax purposes
- Property of a kind that would properly be included in inventory if on hand at the end of the tax year or property held primarily for sale to customers in the ordinary course of business
- All other assets except Section 197 intangibles, goodwill, and going concern value
- Section 197 intangibles except goodwill and going concern value
- Finally, goodwill and going concern value (whether or not they qualify as Section 197 intangibles)
- As a result, the $1.4 million payment is allocated in the following order: $200,000 to cash, $150,000 to land, $450,000 to building, $300,000 to equipment, $100,000 to covenant not to compete, and the remaining $200,000 to goodwill.
Wilma Smith leased a building for 4 years beginning in March 2023 for $1,500 per month. On March 1, 2023, Mrs. Smith paid her landlord $33,000 in rent. How much can she deduct on her 2023 tax return?
A. $33,000
B. $18,000
C. $0
D. $15,000
D. $15,000.
- Publication 334, page 14, states, in part, that a taxpayer cannot deduct expenses that are paid in advance, even if the taxpayer pays them in advance. It applies to prepaid interest, prepaid insurance premiums, and any other prepaid expense that creates an intangible asset, then the taxpayer must capitalize the amounts paid and begin to amortize the payment over the appropriate period.
- Expenses such as insurance are generally allocable to a period of time. That means that a taxpayer can deduct insurance expenses for the year to which they are allocable. To illustrate this point, the following example is given (Publication 334, pages 33 and 34):
Example: In 2023, you signed a 3-year insurance contract. Even though you paid the premiums for 2023, 2024, and 2025 when you signed the contract, you can only deduct the premium for 2023 on your 2023 tax return. You can deduct in 2024 and 2025 the premium allocable to those years.
- In this problem, Wilma Smith is able to deduct $15,000 for the year, which is the equivalent of 10 months of rent (i.e., $1,500 per month × 10 months). The trick here is to remember that March is counted.
The Phineas and Lily Partnership bought a business for $500,000 on January 15, 2023. Included in the purchase price were business assets as follows: a certificate of deposit of $100,000, accounts receivable of $50,000, a truck with fair market value of $80,000, and a milling machine with a fair market value of $20,000 and an adjusted basis of $18,000. For depreciation purposes, what portion of the $500,000 lump-sum payment is allocated to the milling machine?
A. $18,000.
B. $53,320.
C. $20,000.
D. $50,000.
C. $20,000.
- Publication 551, page 4, provides that if a taxpayer acquires a trade or business, allocate the consideration paid to the various assets acquired. In general, the taxpayer reduces the consideration paid by any cash and general deposit accounts (including checking and savings accounts) received. After allocating the cash, the taxpayer then allocates the remaining consideration to the other business assets received in proportion to (but not more than) their fair market value in the specified order given in the publication. The last item that is allocated to is goodwill and going concern.
- In this case, the taxpayer’s purchase price exceeded the value of the assets acquired, which means that the taxpayer acquired goodwill as part of the purchase. Hence, no prorating of the lump-sum payment is needed among the assets. Rather, the acquired assets would have an adjusted basis on the partnership’s books equal to the FMV of the assets purchased. The milling machine, for example, would have an adjusted basis of $20,000, which is its FMV.
In 2022, Katie Good, a sole proprietor of Good’s Bike Shop, had gross income of $235,000, a bad debt deduction of $7,000, and other expenses of $65,850. She reported the business on the accrual method of accounting and used the specific charge-off method for bad debts. In 2023, she recovered $5,000 of the $7,000 bad debt deducted in 2022. How much will she claim in income and in what year?
A. $7,000 in 2023.
B. Amend 2022 to eliminate bad debt deduction of $7,000.
C. $5,000 in 2023.
D. Amend 2022 to reduce bad debt deduction by $5,000.
C. $5,000 in 2023.
- Publication 334, page 20, states that a taxpayer generally must report all income received from the business unless it is excluded by law. In most cases, business income will be in the form of cash, checks, and credit card charges but it also can be in other forms, such as property or services.
- Publication 334, page 24, further states, in part, that if a taxpayer recovers a bad debt or any other item deducted in a previous year, the recovery amount is included in income on Schedule C. If all or part of the deduction in earlier years did not reduce the taxpayer’s tax, the taxpayer can exclude the part that did not reduce the tax. Likewise, if the taxpayer excluded part of the recovery from income, he or she must include a computation showing how the exclusion amount was figured.
- Since Katie is reporting income on the accrual basis, she would have reduced her income by the $7,000 in year 2022. Hence, Katie must include in income the $5,000 recovery amount in 2023, when she receives it.
You can compute your taxable income under which of the following accounting methods?
A. Hybrid method.
B. Accrual method.
C. Special method for certain items.
D. All of the answer choices are correct.
D. All of the answer choices are correct.
- In general, except as otherwise required and subject to the other rules, a taxpayer can compute taxable income under any of the following accounting methods:
- Cash method
- Accrual method
- Special methods of accounting for certain items of income and expenses
- Combination (hybrid) method using elements of two or more of the above
In December 2022, Mr. Smith purchased a manufacturing plant for $92,600. The cost was allocated as follows:
Land (20%): $18,520
Building (80%): $74,080
The following items relating to the property occurred before the property was placed in service on January 1, 2023:
Building remodeling expenses: $15,000
Storm damage (casualty loss) to building: 9,000
Easement granted for right-of-way: 2,500
Legal fees for perfecting title paid 3,600
What is the adjusted basis of the building and land on January 1, 2023?
A. Building $81,180, Land $18,520.
B. Building $82,960, Land $16,740.
C. Building $93,680, Land $16,020.
D. Building $80,080, Land $19,240.
B. Building $82,960, Land $16,740.
- Publication 551, pages 4 and 5, provides that the basis of any property increases by all items properly added to a capital account. These include the cost of any improvements having a useful life of more than 1 year. The following items also increase the basis of property:
- The cost of extending utility service lines to the property
- Impact fees
- Legal fees, such as the cost of defending and perfecting title
- Legal fees for obtaining a decrease in an assessment levied against property to pay for local improvements
- Zoning costs
- The capitalized value of a redeemable ground rent
- The basis of any property decreases by:
- Exclusion from income of subsidies for energy conservation measures,
- Casualty or theft loss deductions and insurance reimbursements,
- Credit for vehicles,
- Section 179 deduction,
- Depreciation, and
- Nontaxable corporate distributions.
- The amount the taxpayer receives for granting an easement is generally considered to be a sale of an interest in real property. It reduces the basis of the affected part of the property.
- Another factor to be handled is when a taxpayer purchases buildings and the land on which they stand for a lump sum. Specifically, the taxpayer must allocate the basis of the property among the land and the buildings so that the taxpayer can figure the depreciation allowable on the buildings. Figure the basis of each asset by multiplying the lump sum by a fraction. The numerator is the FMV of that asset and the denominator is the FMV of the whole property at the time of purchase. If the taxpayer is not certain of the FMV of the land and buildings, the taxpayer can allocate the basis based on their assessed values for real estate tax purposes.
- In this case, there is a $2,500 easement adjustment, which is made directly to the land’s basis. The legal fees of $3,600 must be allocated between the two assets ($2,880 or 80% to the building and $720 or 20% to the land). Finally, the building’s basis is increased by the remodeling expenses and decreased by the casualty loss.
- That means Mr. Smith has an adjusted basis of $82,960 for the building, which is the initial cost allocation of $74,080, plus the remodeling costs of $15,000, less the casualty loss of $9,000, plus the allocated portion of the legal fees of $2,880. The adjusted basis for the land portion is $16,740, which is the initial cost allocation of $18,520, less the easement adjustment of $2,500, plus the allocated portion of the legal fees of $720.
Setting Sun Partnership purchased a business, Family Dry Cleaners, for $750,000. The acquired Family Dry Cleaners assets consisted of the following:
- $50,000 in cash
- Equipment with a fair market value of $200,000
- Land and building with a fair market value of $450,000
For real estate tax purposes, the city assessed the value of the land at $100,000 and the building at $200,000. The buyer and seller did not enter into an allocation agreement for this transaction. What basis must Setting Sun Partnership use for the land, building, and intangible asset “goodwill”?
A. Land $100,000, Building $200,000, and Goodwill $150,000
B. Land $150,000, Building $300,000, and Goodwill $0
C. Land $150,000, Building $300,000, and Goodwill $50,000
D. Land $100,000, Building $350,000, and Goodwill $50,000
C. Land $150,000, Building $300,000, and Goodwill $50,000.
- Publication 551, page 4, provides, in part, that if a taxpayer acquires a trade or business, the taxpayer should allocate the consideration paid to the various assets acquired. Generally, the consideration paid is reduced by any cash and general deposit accounts (including checking and savings accounts) received. The remaining consideration is allocated to the other business assets received in proportion to (but not more than) their fair market value in the following order:
- Certificates of deposit, U.S. government securities, foreign currency, and actively traded personal property, including stock and securities
- Accounts receivable, other debt instruments, and assets the taxpayer marks to market at least annually for federal income tax purposes
- Property of a kind that would properly be included in inventory if on hand at the end of the tax year or property held primarily for sale to customers in the ordinary course of business
- All other assets except Section 197 intangibles, goodwill, and going concern value
- Section 197 intangibles except goodwill and going concern value
- Finally, goodwill and going concern value (whether or not they qualify as Section 197 intangibles)
- As a result, the allocation of consideration to Section 197 intangibles (other than goodwill and going concern value) should follow the allocation of any excess consideration to tangible assets based on FMV. Thus, goodwill is $50,000, which is the difference between the cash paid of $750,000 and the FMV of the assets received of $700,000 ($50,000 + $200,000 + $450,000). With respect to the land and buildings, the $450,000 value is allocated as $150,000 to the land (($100,000 ÷ $300,000) × $450,000) and $300,000 to the building (($200,000 ÷ $300,000) × $450,000).
Which of the following activities would subject a taxpayer to the uniform capitalization rules?
A. Taxpayer produces real or tangible property for nonbusiness use.
B. Taxpayer acquires property not for resale.
C. Taxpayer produces real or tangible personal property for sale to customers.
D. None of the answer choices are correct.
C. Taxpayer produces real or tangible personal property for sale to customers.
- Publication 551, page 3, provides that a taxpayer must use the uniform capitalization rules if the taxpayer does any of the following in his or her trade or business or activity carried on for profit:
- Produce real or tangible personal property for use in the business or activity
- Produce real or tangible personal property for sale to customers
- Acquire property for resale
Which of the following statements pertaining to a taxpayer who has a farming net operating loss (NOL) is incorrect?
A. The carryback period for a farming loss is 2 years.
B. If you choose not to carry back an NOL, then you can use the NOL indefinitely until it is fully absorbed.
C. To waive the carryback of an NOL, a separate statement must be submitted within 6 months of the original NOL year return’s due date (including extensions).
D. Once the taxpayer elects to waive the carryback period, it is irrevocable.
C. To waive the carryback of an NOL, a separate statement must be submitted within 6 months of the original NOL year return’s due date (including extensions).
- Publication 536, pages 4 and 5, provides the general rules for an NOL from farming losses. To begin, if a taxpayer has an NOL for a tax year ending in 2018, the taxpayer must carry back the entire amount of the NOL to the 2 tax years before the NOL year (the carryback period) and then carry forward any remaining NOL indefinitely until it is fully absorbed. The taxpayer can, however, choose not to carry back an NOL and only carry it forward as described below.
- A taxpayer who has farming losses may elect not to carry back an NOL. Publication 536, page 5, states in general:
- If a taxpayer makes this choice, then the taxpayer can use the NOL indefinitely until it is fully absorbed.
- The taxpayer makes this choice by attaching a statement to the original return filed by the due date (including extensions) for the NOL year. This statement must show that the taxpayer is choosing to waive the carryback period under Section 172(b) of the Internal Revenue Code.
- If the taxpayer filed his or her return timely but did not file the statement with it, the taxpayer must file the statement with an amended return for the NOL year within 6 months of the due date of the taxpayer’s original return (excluding extensions).
- Once the taxpayer elects to waive the carryback period, it is irrevocable.
- Finally, the carryback period for farming losses is 2 years.
- Hence, it is incorrect to say a taxpayer waives the carryback of an NOL by filing a separate statement within 6 months of the original NOL year return’s due date (including extensions).
On January 1, 2023, Carrie leased property for her business for 5 years for $6,200 per year. Carrie paid the full $31,000 during the 1st year of the lease. What is Carrie’s rental deduction for the year 2023?
A. $31,000
B. $6,200
C. $15,500
D. $24,800
B. $6,200.
- Publication 334, page 14, states, in part, that a taxpayer cannot deduct expenses that are paid in advance, even if the taxpayer pays them in advance. It applies to prepaid interest, prepaid insurance premiums, and any other prepaid expense that creates an intangible asset, then the taxpayer must capitalize the amounts paid and begin to amortize the payment over the appropriate period.
- Expenses such as insurance are generally allocable to a period of time. That means that a taxpayer can deduct insurance expenses for the year to which they are allocable. To illustrate this point, the following example is given (Publication 334, pages 33 and 34):
- Example: In 2023, you signed a 3-year insurance contract. Even though you paid the premiums for 2023, 2024, and 2025 when you signed the contract, you can only deduct the premium for 2023 on your 2023 tax return. You can deduct in 2024 and 2025 the premium allocable to those years.
- In this case, Carrie’s payment of $31,000 for the forthcoming 5 years is limited to the payment of $6,200 ($31,000 ÷ 5 years), which is the amount associated with the current year.
Mr. Aspen, a cash basis CPA, pays Gail Smith to work during tax season as a data entry clerk. Mr. Aspen pays Gail the following:
Hourly wages $6,275
Bonuses 500
Loan 150
How much can Mr. Aspen deduct as compensation?
A. $6,035
B. $6,775
C. $6,875
D. $7,135
B. $6,775.
- Publication 334, page 33, states, in part, that a taxpayer can generally deduct the pay given to employees for the services they perform for the business. The pay may be in cash, property, or services. It may include wages, salaries, vacation allowances, bonuses, commissions, and fringe benefits.
- Additionally, a taxpayer can deduct as wages an advance that is made to an employee for services performed if the taxpayer does not expect the employee to repay. However, if the employee performs no services, treat the amount advanced to the employee as a loan, which the taxpayer cannot deduct unless it becomes a bad debt.
- In this problem, Mr. Aspen, a cash basis taxpayer, can deduct $6,775 as compensation paid to Gail Smith. The amount is the sum of Gail’s wages of $6,275 and bonuses of $500. The loan is presumably not for services rendered.
ABC, Inc., a regular domestic corporation and calendar-year taxpayer, had taxable income of $6,669 for the year 2023. Because the company’s accountant was on vacation during the month of April 2024, the corporate income tax return was not filed in a timely manner and no extension was filed. The new accountant mailed the return on July 15, 2024. Disregarding any possible late payment penalty, and assuming that no estimated tax payments were made, calculate the maximum failure to file penalty that could be assessed against ABC, Inc.
A. $1,400
B. $210
C. $485
D. $0
C. $485.
- If a corporation does not file its tax return by the required due date, including extensions, it may be penalized 5% of the unpaid tax for each month or part of a month the return is late, up to a maximum of 25% of the unpaid tax. In addition, if the corporation is charged a penalty for late payment of tax for the same period of time, the penalty for late filing is reduced by the amount of the penalty for late payment. The minimum penalty for a return that is over 60 days late is the smaller of the tax due or $485. The minimum penalty amount may be adjusted for inflation. A penalty will not be imposed if the corporation can show that the failure to file on time was due to a reasonable cause. A corporation that has a reasonable cause to file late must attach a statement to its tax return explaining the reasonable cause.
- For tax years beginning after 2017, a corporation’s tax rate is 21% of taxable income (Publication 542, page 16).
- Therefore, disregarding any possible late payment penalty and assuming that no estimated payments were made, the maximum failure to file penalty that ABC, Inc., will have to pay is $485, calculated as follows:Taxable Income $6,669
Tax Rate 0.21
Tax Due $1,400
Penalty % (3 months x 5%) 0.15
Calculated Penalty $210 - Minimum Penalty Due - $485 for a return over 60 days late (the lesser of $485 or the $1,400 tax due).
Which of the following tax years is not permissible for keeping records and reporting a taxpayer’s income and expenses?
A. Fiscal year.
B. Short tax year.
C. 52- or 53-week year.
D. All of the answer choices are permissible.
D. All of the answer choices are permissible.
- Publication 538, pages 2 and 3, provides that each taxpayer (business or individual) must figure taxable income on an annual accounting period called a tax year. The calendar year is the most common tax year. Other tax years are a fiscal year (including a period of 52 or 53 weeks) and a short tax year.
Generally, an employer can deduct the cost of which of the following fringe benefits provided to an employee?
A. Use of car.
B. Airline tickets.
C. Tickets to sporting events.
D. All of the answer choices are correct.
D. All of the answer choices are correct.
- Publication 334, page 34, provides that a fringe benefit is a form of pay provided to any person for the performance of services by that person. Examples of fringe benefits include:
- Benefits under employee benefit programs,
- Meals and lodging,
- Use of a car,
- Flights on airplanes, and
- Discounts on property or services.
- Entertainment expenses are generally not deductible. However, an employer may still deduct entertainment expenses that are recognized as compensation to the receiving individual. Given the above information, all of the items listed in this problem qualify as fringe benefits.
Mr. Bus paid $950,000 for an office building and furnishings on January 1, 2023. He plans to use the general depreciation system (GDS) under MACRS for the depreciation of his property. What recovery period must he use for the following items?
- $900,000 for the building
- $50,000 for office desks and file cabinets
A. 27.5 years for the entire asset, building and furniture.
B. 39 years for the building and 5 years for the office furniture.
C. 27.5 years for the building and 7 years for the office furniture.
D. 39 years for the building and 7 years for the office furniture.
D. 39 years for the building and 7 years for the office furniture.
- Depreciation is a means by which costs are recovered by deducting a portion of those costs on a person’s tax return each year. Each item of property that can be depreciated is assigned to a property class. The recovery period of the property depends on the class the property is in and the method used.
- Under the general depreciation system (GDS) as given on page 31 of Publication 946, property is depreciated over one of the following recovery periods:3-year property 3 years
5-year property 5 years
7-year property 7 years
10-year property 10 years
15-year property 15 years
20-year property 20 years
25-year property 25 years
Residential rental property 27.5 years
Nonresidential real property 39 years - Publication 946, page 28, provides, in part, that 7-year property includes office furniture and fixtures (such as desks, files, and safes). In addition, nonresidential real property includes Section 1250 property, such as an office building, store, or warehouse that is neither residential rental property nor property with a class life of less than 27.5 years.
- As a result, Mr. Bus would use 39 years for the building and 7 years for the office furniture.
The Needle and Thread Partnership traded an old machine having an adjusted basis of $10,000 and cash of $2,000 for a new machine with a fair market value of $15,000. What is the recognized gain and what is the basis of the new machine?
A. Gain $3,000, Basis $15,000.
B. Gain $0, Basis $12,000.
C. Gain $2,000, Basis $15,000.
D. Gain $3,000, Basis $12,000.
A. Gain $3,000, Basis $15,000.
- Publication 544, pages 16 and 17, provide that if, a taxpayer exchanges real property used in their business or held for investment solely for other business or investment real property of a like-kind, they do not recognize the gain or loss from the exchange. However, if the taxpayer receives non-like property or money as part of the exchange, the taxpayer does recognize gain to the extent of the value of the other property or money received in the exchange. The taxpayer does not recognize any loss from the exchange. The basis of the property received in a like kind exchange is generally the basis of the property given up, increased by the money paid.
- In an exchange, the basis of the acquired asset is the basis in the asset traded plus the following adjustments:
- Decrease the basis by:
a. Any money you receive
b. Any loss you recognize on the exchange - Increase the basis by:
a. Any additional cost you incur (i.e., $2,000)
b. Any gain you recognize on the exchange (i.e., $3,000)
- Decrease the basis by:
- Per above, the basis would be $10,000 + 2,000 + 3,000 = $15,000.
- In this problem, the Needle and Thread Partnership has a realized gain of $3,000 ($15,000 less the adjusted basis of $10,000 on the old machine and the cash given of $2,000). Because the nonrecognition rules for like-kind exchanges apply only to real property and not personal property such as the machine, all of the realized gain of $3,000 is recognized.
In 2022, Rex, a sole proprietor of Bay View Wrecking, had gross income of $200,000, a business bad debt deduction of $6,000, and other expenses of $156,000. Bay View Wrecking employed the accrual method of accounting and used the specific charge-off method for bad debts. In 2023, Bay View Wrecking recovered $4,500 of the $6,000 previously deducted in 2022. What is the correct way for Rex to report this recovery?
A. Report $4,500 as “Other Income” on Schedule C in 2023.
B. Report $4,500 as “Other Income” on return Form 1040, Schedule 1, line 8z, in 2023.
C. Report $4,500 as “Other Income” on an amended 2022 Form 1040X return.
D. Report $4,500 as a reduction of “Bad Debt” on Schedule C in 2023.
A. Report $4,500 as “Other Income” on Schedule C in 2023.
- Publication 334, page 20, states that a taxpayer generally must report all income received from the business unless it is excluded by law. In most cases, business income will be in the form of cash, checks, and credit card charges, but it also can be in other forms, such as property or services.
- Publication 334, page 24, further states, in part, that if a taxpayer recovers a bad debt or any other item deducted in a previous year, the recovery amount is included in income on Schedule C. If all or part of the deduction in earlier years did not reduce the taxpayer’s tax, the taxpayer can exclude the part that did not reduce the tax. Likewise, if the taxpayer excluded part of the recovery from income, he or she must include a computation showing how the exclusion amount was figured.
- Since Rex is reporting income on the accrual basis, he would have reduced his income by $6,000 in year 2022. Hence, Rex must include in income the $4,500 recovery amount in 2023, when he receives it.
Which of the following statements is not true regarding corporate capital losses?
A. Excess net capital losses may not be deducted in the current year.
B. Capital losses may only offset capital gains.
C. Net capital losses may be carried back to the 3 preceding tax years.
D. Net capital loss carryovers may be carried forward to 7 succeeding tax years from the year of the loss.
D. Net capital loss carryovers may be carried forward to 7 succeeding tax years from the year of the loss.
- A corporation can deduct capital losses only up to the amount of its capital gains. In other words, if a corporation has an excess capital loss, it cannot deduct the loss in the current tax year. Instead, it carries the loss to other tax years and deducts it from any net capital gains that occur in those years.
- A capital loss is carried to other years in the following order:
- 3 years prior to the loss year,
- 2 years prior to the loss year,
- 1 year prior to the loss year, and then
- Any loss remaining is carried forward for 5 years.
- More importantly, when a net capital loss is carried to another year, it is treated as a short-term loss. It does not retain its original identity.
- Therefore, the only statement in the above question that is not true regarding corporate capital losses is that net capital loss carryovers may be carried forward to 7 succeeding tax years from the year of the loss.
The Susan Corporation is required to use electronic funds transfer to make its federal tax deposits for the current tax year. Which of the following is true?
A. The Susan Corporation is required to use EFTPS.
B. The Susan Corporation can arrange for its payroll service to make the transfer.
C. The Susan Corporation can arrange for its tax professional to make the transfer.
D. All of the responses are acceptable.
D. All of the responses are acceptable.
- The federal income tax system is a pay-as-you-go tax. Publication 542, page 6, provides that a corporation generally is required to make installment payments if it expects its estimated tax for the year will be $500 or more.
- Additionally, corporations must use electronic funds transfers to make all federal tax deposits (such as deposits of employment, excise, and corporate income tax). This includes installment payments of estimated taxes. Generally, electronic funds transfers are made using the Electronic Federal Tax Payment System (EFTPS). However, if the corporation does not want to use EFTPS, it can arrange for its tax professional, financial institution, payroll service, or other trusted third party to make deposits on its behalf.
- For deposits made by EFTPS to be on time, the corporation must initiate the deposit by 8 p.m. Eastern Time the day before the date the deposit is due. If the corporation uses a third party to make deposits on its behalf, they may have different cutoff times.
The total basis for all properties qualifying for nontaxable exclusion that you receive in a partially nontaxable exchange is the total adjusted basis of the properties you give up with the following adjustments, except:
A. Any additional cost you incur.
B. Any money you receive.
C. Unlike property you receive up to its cost on the date of the exchange.
D. Any gain you recognize on the exchange.
C. Unlike property you receive up to its cost on the date of the exchange.
- Page 23 of Publication 544 provides, in part, that a partially nontaxable exchange is an exchange in which unlike property or money is received in addition to like property.
- Page 23 of Publication 544 states the basis of the property received is the same as the basis of the property given up, with the following adjustments:
- Decrease the basis by any money received and any loss recognized by the taxpayer on the exchange, and
- Increase the basis by any additional costs incurred and any gain recognized by the taxpayer on the exchange.
- If the other party to the exchange assumes the taxpayer’s liabilities, treat the debt assumption as money received by the taxpayer in the exchange.
- As a result, the unlike property given up by a taxpayer in a partially nontaxable exchange is not an adjustment to the basis.
Which of the following statements is correct concerning charitable contributions?
A. Cash contributions made from a taxpayer’s self-employed business account are deductible in full on Schedule C in the year of contribution.
B. Cash payments from a self-employed business account to charitable organizations may be deductible as business expenses if the payments are not charitable contributions.
C. Cash contributions made from a taxpayer’s S corporation account are deductible in full in the year of contribution.
D. All of the answer choices are correct.
B. Cash payments from a self-employed business account to charitable organizations may be deductible as business expenses if the payments are not charitable contributions.
- Cash payments to an organization, charitable or otherwise, may be deductible as business expenses if the payments are not charitable contributions or gifts. If the payments are charitable contributions or gifts, you cannot deduct them as business expenses.
- For example, a taxpayer pays $15 to a local church for a half-page ad in a program for a concert it is sponsoring. The purpose of the ad is to encourage readers to buy the taxpayer’s products. The taxpayer’s payment is not a charitable contribution, but it can be deducted as an advertising expense.
- Corporations (other than S corporations), on the other hand, can deduct charitable contributions on their income tax returns.
A businessman can deduct up to $2,000 per year of expenses for attending conventions, seminars, or similar meetings held on cruise ships. All of the following requirements must be met, except:
A. The convention, seminar, or meeting is directly related to your trade or business.
B. The cruise ship company provides a statement that it has adequate facilities to accommodate the needs of the convention, seminar, or meetings.
C. You attach a statement signed by you that includes information about (1) the total days of the trip; (2) the number of hours each day that you devoted to scheduled business activities; and (3) a program of the scheduled business activities.
D. You attach to your return a written statement signed by an officer of the sponsoring organization or group that includes (1) a schedule of the business activities of each day of the meetings and (2) the number of hours you attended the scheduled business activities.
B. The cruise ship company provides a statement that it has adequate facilities to accommodate the needs of the convention, seminar, or meetings.
- Publication 463, pages 9 to 10, provides that a taxpayer can deduct up to $2,000 per year of his or her expenses of attending conventions, seminars, or similar meetings held on cruise ships. All ships that sail are considered cruise ships.
- However, a taxpayer can deduct these expenses only if all five of the following requirements are met:
- The convention, seminar, or meeting is directly related to his or her trade or business,
- The cruise ship is a vessel registered in the United States,
- All of the cruise ship’s ports of call are in the United States or in possessions of the United States,
- The taxpayer attaches to the tax return a written statement signed by the taxpayer that includes information about the total days of the trip (not including the days of transportation to and from the cruise ship port), the number of hours each day that the taxpayer devoted to scheduled business activities, and a program of the scheduled business activities of the meeting, and
The taxpayer attaches to the taxpayer’s return a written statement signed by an officer of the organization or group sponsoring the meeting that includes a schedule of the business activities of each day of the meeting, and the number of hours the taxpayer attended the scheduled business activities.
- The cruise ship company providing a statement that it has adequate facilities to accommodate the needs of the convention, seminar, or meetings is NOT a requirement for deducting expenses associated with attending conventions, seminars, or similar meetings that are held on a cruise ship.
On June 30, 2023, Sally, who uses the cash method of accounting, borrowed $25,000 from a bank for use in her business. Sally was to repay the loan in one payment with $2,000 interest on December 30, 2023. On December 30, 2023, she renewed that loan plus the interest due. The new loan was for $27,000. What is the amount of interest expense that Sally can deduct for 2023?
A. $0
B. $333
C. $1,000
D. $2,000
A. $0.
- Publication 334, pages 34 and 35, provides that interest that is deductible relates to a trade or business if the taxpayer uses the proceeds of the loan for a trade or business expenses.
- If, however, a taxpayer uses the cash method of accounting, the taxpayer cannot deduct interest that is paid with funds borrowed from the original lender through a second loan, an advance, or any other arrangement similar to a loan. Rather, the taxpayer must wait to deduct the interest expense once he or she starts making payments on the new loan (Publication 334, page 35).
- As a result of the above rules, Sally cannot deduct any interest in the current year because she did not make any interest payments.
John maintains an inventory of ski equipment at his lodge in Winter Park, Colorado. He is an accrual basis taxpayer and reports his business income on a Schedule C each year. In November 2023, an avalanche destroyed 50% of the inventory. Which of the following statements is correct?
A. John will reflect his loss of inventory by properly reporting both his beginning and ending inventory in his cost of goods sold.
B. John can deduct the loss as a casualty or theft loss.
C. John cannot deduct the loss because he is an accrual basis taxpayer.
D. John either can deduct the loss by adjusting his closing inventory when he files his tax return for 2023 or can deduct the loss as a casualty or theft loss.
A. John will reflect his loss of inventory by properly reporting both his beginning and ending inventory in his cost of goods sold.
- The treatment of inventory losses is covered on page 17 of Publication 538. More specific to this question, a taxpayer can claim a casualty or theft loss of inventory, including items held for sale to customers, through the increase in the cost of goods sold by properly reporting opening and closing inventories. Be aware, the loss cannot be claimed again as a casualty or theft loss. Any insurance or other reimbursement received by the taxpayer for the loss is taxable.
- Be careful here, as a taxpayer can choose to claim the loss separately as a casualty or theft loss. However, if this method is elected, then the opening inventory or purchases must be adjusted to eliminate the loss items and avoid double-counting. As a result, the response that John can deduct the loss as a casualty or theft loss is not totally correct.
- Therefore, it is true to say that John will reflect his loss of inventory by properly reporting both his beginning and ending inventory in his cost of goods sold.
Joe Crisco purchased the following assets for $100,000:
Description FMV
Certificate of Deposit $10,000
Equipment/Furniture 20,000
Franchise 90,000
Account Receivable 30,000
Total $150,000
What is the purchase price of the intangible asset?
A. $55,000.
B. $90,000.
C. $85,000.
D. $60,000.
D. $60,000.
- Publication 551, page 4, states, in part, that if a taxpayer buys multiple assets for a lump sum, allocate the amount that the taxpayer pays among the assets received. The taxpayer must make this allocation to figure the basis for depreciation and gain or loss on a later disposition of any of these assets.
- In this problem, the total FMV of the multiple assets on the purchase date is $150,000. The intangible asset in this package of assets is the franchise (see Publication 551, page 4, for a list of intangible assets), which had an FMV of $90,000 on the purchase date or 60% ($90,000 ÷ $150,000) of the purchased assets. As a result, Joe Crisco must allocate $60,000 to the purchased franchise, which is 60% of the FMV ($100,000) of the purchased assets.
Jennifer Jones, an attorney, made loans of $5,000 and $2,000 to two of her clients in order to keep their business. She also made a loan of $1,000 to her cousin John to whom she had provided free legal advice regarding the start of his own business. If all three loans become uncollectible, what amount may Jennifer deduct as a business bad debt?
A. $8,000.
B. $1,000.
C. $7,000.
D. $2,000.
C. $7,000.
- Publication 550, page 82, provides that if someone owes a taxpayer money and the taxpayer is not going to be able to collect, the taxpayer has a bad debt. There are two kinds of bad debts—business and nonbusiness.
- Loans made to a client, supplier, employee, or distributor for a business reason become worthless and are treated as a business bad debt.
- Publication 550, pages 82 and 83, provides that a business bad debt is deductible as a business bad debt on the business tax return. Nonbusiness bad debts, however, are deductible only as short-term capital losses on Form 8949, Sales and Other Dispositions of Capital Assets, which is attached to Schedule D (Form 1040).
- Since the loan that Jennifer made to her cousin John is not a business loan, she is only able to deduct $7,000 as a business bad debt, which is the total amount lent to her two clients for $5,000 and $2,000, respectively.
Which of the following individuals would not be in a specified service trade or business and as such does qualify for the QBI deduction?
A. Enrolled agents
B. Health club and spas
C. Actors and directors
D. Actuaries
B. Health club and spas
- Form 8995-A Instructions, pages 1–2, provides that a specified service trade or business (SSTB) is any trade or business providing services in specific fields, such as:
- Health, including physicians, nurses, dentists, veterinarians, physical therapists, psychologists, and other similar healthcare professionals However, it excludes services not directly related to a medical services field, such as the operation of health clubs or spas; payment processing; or the research, testing, manufacture, and sale of pharmaceuticals or medical devices;
- Law, including lawyers, paralegals, legal arbitrators, mediators, and similar professionals;
- Accounting, including accountants, enrolled agents, return preparers, financial auditors, and similar professionals;
- Actuarial science, including actuaries, and similar professions;
- Consulting, including providing advice and counsel with the intention of influencing decisions made by a government or governmental agency and all attempts to influence legislators and other government officials on behalf of a client by lobbyists, and other similar professionals.
- A more complete list of SSTBs are provided on page 2 of Form 8995 Instructions.
- Hence, individuals drawing income from health clubs and spas are receiving QBI because their profession is excluded from the specified service trade or business classification.
Which of the following would be considered a fiscal tax year?
A. 02/15/2022–03/15/2023.
B. 08/01/2022–07/31/2023.
C. 04/01/2022–04/30/2023.
D. 01/01/2023–12/31/2023.
B. 08/01/2022–07/31/2023.
- Pages 2 and 3 of Publication 538 discuss the various tax periods. A fiscal year is 12 consecutive months ending on the last day of any month except December. A 52-53–week tax year is a fiscal year that varies from 52 to 53 weeks but may not end on the last day of a month. Under this election, the 52-53–week tax year must always end on the same day of the week. That is, the 52-53–week tax year must always end on:
- Whatever date this same day of the week last occurs in a calendar month or
- Whatever date this same day of the week falls that is nearest to the last day of the calendar month.
- Be careful: The 01/01/2023–12/31/2023 answer choice is a good accounting period, but it is a calendar year and not a fiscal year.
- Given the above information, a fiscal tax year in this problem would be the period of August 1, 2022, to July 31, 2023 (8/1/2022–7/31/2023).
In 2022, Colleen started a SIMPLE plan for all five of her employees and herself. It cost her $400 in fees to administer the plan. She never had a pension plan prior to starting this plan. Her tax credit is:
A. $200.
B. $400.
C. $0.
D. $100.
A. $200.
- Publication 334, page 20, provides that the credit for small employer pension plan start-up costs applies to pension plan start-up costs of a new qualified defined benefit or defined contribution plan (including a 401(k) plan), SIMPLE plan, or simplified employee pension, and is filed on Form 8881. The tax credit for small employer pension plan start-up costs is for expenses paid or incurred in connection with the establishing or administering of an eligible employer plan or the retirement-related education of employees about the plan.
- The Further Consolidated Appropriations Act of 2020 increased the credit limit for the credit for small employer pension plan startup costs and introduced a new credit for small employer automatic enrollment with an auto-enrollment option for retirement savings (Form 8881 Instructions, page 1).
- For an eligible employer, the credit is 50% of the qualified startup costs paid or incurred during the tax year. The credit is limited to the greater of $500 or the lesser of $250 for each employee that is eligible to participate in the plan and not highly compensated (as defined in section 414(q)) or $5,000 for the first tax year and each of the following 2 tax years. No credit is allowed for any other tax year.
- Colleen would be able to claim a tax credit of $200, which is 50% of $400.
Mary, a seamstress, made loans of $5,000 and $1,000 to Buttons & Bows and Thread Bare, respectively. Both of these establishments are partnerships. Mary also made a loan of $2,000 to her cousin Sarah, who was starting her own business as a proprietorship. The loans to both partnerships improved Mary’s business, which was the reason Mary made the loans. If all three loans become uncollectible, what amount may Mary deduct as a business bad debt?
A. $5,000.
B. $6,000.
C. $1,000.
D. $2,000.
B. $6,000.
- Publication 550, page 82, provides that if someone owes a taxpayer money and the taxpayer is not going to be able to collect, the taxpayer has a bad debt. There are two kinds of bad debts—business and nonbusiness.
- Loans made to a client, supplier, employee, or distributor for a business reason become worthless and are treated as a business bad debt.
- Publication 550, pages 82 to 84, provides that a business bad debt is deductible as a business bad debt on the business tax return. Nonbusiness bad debts, however, are deductible only as short-term capital losses on Form 8949, Sales and Other Dispositions of Capital Assets, which is attached to Schedule D (Form 1040).
- Since the loan that Mary made to her cousin Sarah is not a business loan, she is only able to deduct $6,000 as a business bad debt, which is the total amount lent to Buttons & Bows ($5,000) and Thread Bare ($1,000).
The QBI deduction may be subject to certain limitations. Which of the following is not a possible limitation in 2023?
A. Taxpayer’s taxable income.
B. W-2 wages paid.
C. Number of employees.
D. Unadjusted basis immediately after acquisition.
C. Number of employees.
- The QBI deduction is subject to multiple limitations, depending on the taxpayer’s taxable income, and may include the type of trade or business, the amount of W-2 wages paid by the trade or business, and the unadjusted basis immediately after acquisition (UBIA) of qualified property held by the trade or business.
- The number of employees is not one of the possible limitations to the QBI deduction.
Which of the following fringe benefits cannot be excluded from the employee’s income?
A. Memberships in municipal athletic facilities for employees, their spouses and their dependent children.
B. Holiday gifts other than cash with a low market value.
C. Transportation up to $65 per month.
D. Qualified employee discounts given employees on certain property and services offered to customers in the ordinary course of the line of business in which the employee performs services.
A. Memberships in municipal athletic facilities for employees, their spouses and their dependent children.
- Publication 525, page 5, provides that if a taxpayer’s employer provides free or low-cost use of an employer-operated gym or other athletic club on your employer’s premises, the value is not included in your compensation. The gym must be used primarily by employees, their spouses, and their dependent children.
- If, however, the employer pays for a fitness program provided to the employee at an off-site resort hotel or athletic club, the value of the program is included in the employee’s compensation.
- Similarly, if a taxpayer’s employer gives a turkey, ham, or other item of nominal value at Christmas or other holidays, the value of the gift is not included in income. But if the employer gives cash or a gift certificate, the value is included in income. (Publication 525, page 5)
- Publication 525, page 8, provides that if an employer provides a qualified transportation fringe benefit, the amount can be excluded from the employee’s income, up to certain limits. For 20232, the exclusion for commuter vehicle transportation cannot be more than $300 a month. A qualified transportation fringe benefit is transportation in a commuter highway vehicle (such as a van) between your home and workplace, a transit pass, or qualified parking. It should be noted that the exclusion for qualified parking fringe benefit also is $300 a month.
- Finally, Publication 525, pages 5–6, provides that if an employer sells property or services at a discount, the employee may be able to exclude the amount of the discount from the employee’s income. The exclusion applies to discounts on property or services offered to customers in the ordinary course of the line of business in which the employee works.
Which of the following statements is correct concerning a statutory employee’s business expenses?
A. They are deductible on Schedule C (Form 1040) and are not subject to a reduction of 2% of adjusted gross income (AGI).
B. They are deductible on Schedule C (Form 1040) and are subject to a reduction of 2% of adjusted gross income (AGI).
C. They are deductible on Schedule A (Form 1040) and are subject to a reduction of 2% of adjusted gross income (AGI).
D. They are deductible on Schedule A (Form 1040) and are not subject to a reduction of 2% of adjusted gross income (AGI).
A. They are deductible on Schedule C (Form 1040) and are not subject to a reduction of 2% of adjusted gross income (AGI).
- Publication 334, page 3, states that statutory employees use Schedule C to report their wages and expenses.
- In addition, Publication 334, page 6, provides that the net profit or net loss from a business as reported on Schedule C is added to or deducted from gross income on Schedule 1 (Form 1040).
- For tax years beginning after 2017, the deduction for job-related or other miscellaneous itemized deductions subject to the 2%-of-adjusted-gross-income floor is suspended. Hence, the business expenses for statutory employees are not subject to the miscellaneous deduction limitation (2% floor adjustment) that previously appeared on a taxpayer’s itemized deduction form.
Which of the following property exchanges does not qualify as a like-kind exchange?
A. Exchange of city real property for farm real property.
B. Exchange of property used for personal purposes.
C. Exchange of improved real property for unimproved real property.
D. Exchange of an ownership in real estate for a 30-year lease in real estate.
B. Exchange of property used for personal purposes.
- The nonrecognition rules for like-kind exchanges apply only to exchanges of real property held for investment or for productive use in a taxpayer’s trade or business and not held primarily for sale. In a like-kind exchange, both the real property you give up and the real property you receive must be held by you for investment or for productive use in your trade or business. Buildings, land, and rental property are examples of property that may qualify.
- In general, the rules for like-kind exchanges do not apply to exchanges of the following property:
- Real property used for personal purposes, such as a taxpayer’s home,
- Real property held primarily for sale, or
- Generally, any personal or intangible property.
- Given the above listed exceptions, it is clear that an exchange of property used for personal purposes would not qualify as a like-kind exchange.
