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.
Which of the following costs qualify as business “start-up costs”?
A. Deductible interest.
B. State and local taxes.
C. A survey of potential markets.
D. Research and experimental costs.
C. A survey of potential markets.
- When a company opens for business, the company can elect to amortize certain costs for the set-up (start-up costs) and organization of the business over an amortization period of 60 months or more.
- Start-up costs include costs for the following items:
- An analysis or survey of potential markets, products, labor supply, transportation facilities, etc.
- Advertisements for the opening of the business
- Salaries and wages for employees who are being trained, and their instructors
- Travel and other necessary costs for securing prospective distributors, suppliers, or customers
- Salaries and fees for executives and consultants, or for similar professional services.
- Additionally, start-up costs DO NOT include deductible interest, taxes, or research and experimental costs.
- Therefore, in line with the above, the only qualifying start-up cost would be a survey of potential markets.
The computation of recapture amounts is not necessary when the business use percentage of Section 179 or listed property exceeds:
A. 10%.
B. 25%.
C. 45%.
D. 50%.
D. 50%.
- The computation of recapture amounts under sections 179 and 280F(b)(2) or listed property is required when its use decreases to 50% or less.
In January 2023, Ms. Black purchased an office building and used office furnishings. The used office furnishings consisted of chairs, desks, and file cabinets. $900,000 of the purchase price was allocated to the office building and $50,000 of the purchase price was allocated to the used office furnishings. According to the general depreciation system (GDS) under MACRS for depreciation, what recovery period must she use for the purchased items?
A. 27.5 years for the entire asset (building and furnishings).
B. 39 years for the building and 5 years for the used office furnishings.
C. 27.5 years for the building and 7 years for the used office furnishings.
D. 39 years for the building and 7 years for the used office furnishings.
D. 39 years for the building and 7 years for the used office furnishings.
- 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, Mrs. Black would use 39 years for the building and 7 years for the office furniture.
Ryan runs a manufacturing business employing several people with young children. These employees require daycare as both parents work. He decided that, in order to make it easier for his employees to come to work each day, he would allocate some of the unused space in his manufacturing facility to a childcare facility. In 2023 he incurred $20,000 in qualified childcare facility expenditures. He had no qualified childcare resource and referral expenditures and had no pass-through credits. What is Ryan’s credit for 2023?
A. $20,000.
B. $2,000.
C. $10,000.
D. $5,000.
D. $5,000.
- Form 8882, pages 1 and 2, provides the general rules for the credit for employer-provided childcare facilities and services. This credit applies to the qualified expenses the taxpayer paid for employee childcare and qualified expenses paid for childcare resource and referral services.
- The credit is 25% of qualified expenses paid by the taxpayer for employee childcare facility expenditures and 10% of qualified expenses paid by the taxpayer for childcare resource and referral expenditures. This credit is limited to $150,000 each year. Excess expenses (i.e., beyond the credit limit) are depreciable.
- As provided in the instructions of Form 8882, qualified childcare expenditures are amounts paid or incurred:
- To acquire, construct, rehabilitate, or expand property that:
- Is to be used as part of a qualified childcare facility of the taxpayer,
- Is depreciable (or amortizable) property, and
- Is not part of the principal residence of the taxpayer or any employee of the taxpayer;
- For the operating expenses of a qualified childcare facility of the taxpayer, including expenses for training of employees, scholarship programs, and providing increased compensation to employees with higher levels of childcare training; or
- Under a contract with a qualified childcare facility to provide childcare services to employees of the taxpayer.
- To acquire, construct, rehabilitate, or expand property that:
- In this problem, Ryan can claim a tax credit of $5,000, which is 25% of qualified expenses ($20,000), which is less than the credit limit of $150,000 for the year.
When is a partnership required to electronically file Forms 1065, Schedules K-1, and related forms?
A. Generally when a partnership has 100 or less partners.
B. Generally when a partnership has 100 or more partners.
C. Generally when a partnership has more than 100 partners.
D. Partnerships are encouraged but not required to electronically file Forms 1065.
C. Generally when a partnership has more than 100 partners.
- Publication 541, page 4, and Form 1065 Instructions, page 4, provide that certain partnerships with more than 100 partners are required to file Form 1065, Schedules K-1, and related forms and schedules electronically (e-file).
- Other partnerships generally have the option to file electronically. Thus, the correct statement is a partnership is required to electronically file when a partnership has more than 100 partners.
Which of the following property acquired in 2023 will not qualify for bonus depreciation by the taxpayer?
A. Tangible property depreciated under MACRS with a recovery period of 25 years or less.
B. Water utility property.
C. Qualified film, television, and live theatrical productions.
D. All of the answer choices qualify for bonus depreciation.
A. Tangible property depreciated under MACRS with a recovery period of 25 years or less.
- A taxpayer can take a special depreciation (also known as bonus depreciation) allowance to recover part of the cost of qualified property placed in service in 2023. The allowance applies only for the first year the property is placed in service. For qualified property placed in service in 2023, the taxpayer can take an additional 80% special allowance. (Instructions for Form 4562, page 5)
- The allowance is an additional deduction a taxpayer can take after any Section 179 deduction and before figuring regular depreciation under MACRS for the year it is placed in service (Instructions for Form 4562, page 5).
- Instructions for Form 4562, page 5, provides that certain property acquired after September 27, 2017, can qualify for bonus depreciation if the property meets certain conditions. The following is an abbreviated list of the conditions:
- A recovery period of 20 years or less (not 25 years, as given in one of the answer choices)
- Water utility property
- Certain computer software
- Qualified film, television, and live theatrical productions
- The CARES Act, signed into law on March 27, 2020, expanded bonus depreciations to include qualified improvement by assigning QIP a 15-year recovery period thus fixing the legal “glitch” of TCJA (39-year recovery).
Bob works on the loading dock for the Loaden Partnership from 7 a.m. to 3 p.m., Monday through Friday. Susan, the full-time secretary, works a 4-day week. Max, the bookkeeper, is the sole proprietor of the Books-I-Keep Accounting Service and is a licensed accountant. Max works a different schedule each week for Loaden but is very conscientious and reliable. How many of these individuals are considered employees?
A. 3.
B. 2.
C. 1.
D. None.
B. 2.
- Page 11 of Publication 15 states, in part, that a worker who performs services for a taxpayer is the taxpayer’s employee if the taxpayer can control what will be done and how it will be done.
- People in business for themselves generally are not employees. For example, doctors, lawyers, veterinarians, and others in an independent trade in which they offer their services to the public are usually not employees. If, however, the business is incorporated, corporate officers who work in the business are employees.
- If an employer-employee relationship exists, it does not matter what it is called. The employee may be called an agent or independent contractor; that does not mean that they are one.
- In this problem, Susan (secretary) and Bob (loader) would be employees, but Max (accountant) is self-employed and thus is not an employee of Loaden. Hence, there are two employees in this problem.
Which of the following taxes is imposed on wagering activities?
A. Occupational tax only.
B. Wagering tax only.
C. Occupational tax and wagering tax.
D. None of the taxes listed.
C. Occupational tax and wagering tax.
- Form 11-C, page 3, and Form 730, page 2, cover the two taxes imposed on wagering activities:
- The first tax is the occupational tax (Form 11-C), which is paid if the taxpayer accepts taxable wagers for themselves or another person. There are two amounts of occupational tax ($50 or $500). One or the other applies depending on whether the wagers the taxpayer accepts are authorized by the laws of the state in which they accept the wager.
- The second tax is the wagering tax (Form 730), which is paid if the taxpayer is in the business of accepting taxable wagers or running a wagering pool or lottery. In addition, the taxpayer must pay the tax on wagering if the taxpayer has not properly registered the name and address of his or her principal on Form 11-C.
Hampshire, Inc., a calendar-year taxpayer, had an accumulated earnings and profits balance at the beginning of 2023 of $20,000. During the 2023 year, Hampshire distributed $30,000 to its sole individual shareholder. On December 31, 2023, Hampshire reported taxable income of $50,000, federal income taxes of $7,500, and had tax-exempt interest on municipal bonds of $2,500. What is Hampshire, Inc.’s, accumulated earnings and profits balance at the beginning of 2024?
A. $15,000.
B. $25,000.
C. $30,000.
D. $35,000.
D. $35,000.
- A corporation will arrive at current earnings and profits by adding and subtracting applicable amounts against its taxable income. (See the instructions in Form 5452, pages 2 through 4, and Schedule M-1 in Form 1120 for further details.)
- Therefore, the accumulated earnings and profits for Hampshire, Inc., is $35,000, calculated as follows:Beginning Earnings and Profits $20,000
Shareholder Distribution (30,000)
Subtotal: (10,000)
Taxable Income: 50,000
Less:
Federal Income Taxes Paid (7,500)
Plus:
Tax-Exempt Income 2,500
Current Earnings and Profits $35,000
In July 2022, Judy placed in service a machine that cost $1,080,000. If she placed no other Section 179 property in service during the year, how much is her Section 179 maximum dollar limit?
A. $430,000
B. $510,000
C. $1,050,000
D. $1,080,000
D. $1,080,000.
- Publication 946, pages 17 to 18, provides the basic rule for the dollar limits available under Section 179. That is, the total amount a taxpayer can elect to deduct under Section 179 for most property in 2022 generally cannot be more than $1,080,000. If the taxpayer acquires and places in service more than one item of qualifying property during the year, the taxpayer can allocate the Section 179 deduction among the items in any way, as long as the total deduction is not more than $1,080,000.
- The amount that a taxpayer can elect to claim is not affected if the property is placed in service in a short year or if the property is placed in service for only part of a 12-month year.
- Under certain circumstances, the general dollar limits on the Section 179 deduction may be reduced. For example, if the cost of a taxpayer’s Section 179 property placed in service exceeds $2,700,000, the amount is reduced one dollar for every excess dollar spent (but not below zero). (Rev. Proc. 2020-37)
- In addition, a taxpayer cannot elect to expense more than $27,000 of the cost of any sport utility vehicle (SUV) and certain other vehicles placed in service during the year (Form 4562, page 1).
With regard to “other” business expenses for the tax year 2023, all of the following statements are correct, except:
A. Reimbursements you make to job candidates for transportation or other expenses related to interviews for possible employment are deductible business expenses.
B. Legal fees paid to acquire a new office building are ordinary and necessary expenses directly related to operating your business and are deductible as business expenses.
C. You may deduct your own education expenses, including certain related travel that is related to your trade or business.
D. None of the answer choices are correct.
B. Legal fees paid to acquire a new office building are ordinary and necessary expenses directly related to operating your business and are deductible as business expenses.
- The basic rule for a deductible business expense as given in Publication 535, page 3, is that a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.
- Publication 334, page 35, elaborates on the deductibility of legal and professional fees. More specifically, legal and professional fees, such as fees charged by accountants, are ordinary and necessary expenses directly related to operating a taxpayer’s business are deductible as business expenses. However, a taxpayer usually cannot deduct legal fees paid to acquire business assets. These fees are added to the basis of the property.
- Finally, reimbursements made to job candidates that are interviewing for possible employment are not wages. Rather, they are deductible business expenses.
- Thus, legal fees to acquire a new office building are capitalized (not deducted) business expenses.
What is the appropriate tax treatment for a self-employed person that was eligible to participate in a health plan subsidized by his spouse’s employer?
A. The taxpayer can deduct 100% of the premiums paid in the year 2023 for health insurance established under the taxpayer’s business for the taxpayer and the taxpayer’s spouse.
B. The taxpayer can deduct 100% of the premiums paid in the year 2023 for health insurance established under the taxpayer’s business for the taxpayer but not for the taxpayer’s spouse.
C. The taxpayer can deduct 100% of the premiums paid in the year 2023 for health insurance established under the taxpayer’s business for the taxpayer’s spouse but not for the taxpayer.
D. The taxpayer cannot deduct any of the premiums paid in the year 2023 for health insurance established under the taxpayer’s business for the taxpayer or the taxpayer’s spouse.
D. The taxpayer cannot deduct any of the premiums paid in the year 2023 for health insurance established under the taxpayer’s business for the taxpayer or the taxpayer’s spouse.
- Publication 334, page 33, provides the basic rules for deducting 100% of the amount paid for medical and dental insurance and qualified long-term care insurance for you, your spouse, and your dependents. To qualify, the taxpayer must be one of the following:
- A self-employed individual with a net profit reported on Schedule C or F,
- A partner with net earnings from self-employment reported on Schedule K-1 (Form 1065), box 14, code A,
- Used one of the optional methods to figure net earnings from self-employment on Schedule SE, or
- A shareholder owning more than 2% of the outstanding stock of an S corporation with wages from the corporation reported on Form W-2.
- If, however, the taxpayer has other coverage, the taxpayer cannot take the deduction for any month he was eligible to participate in any employer (including his spouse’s) subsidized health plan at any time during that month. This rule is applied separately to plans that provide long-term care insurance and plans that do not provide long-term care insurance. (Publication 535, page 24)
- In this case, therefore, the taxpayer would not be able to deduct the insurance premiums under his business because he is eligible to participate in a health plan that is subsidized by his spouse’s employer.
- However, any medical insurance payments not deductible on Schedule 1 (Form 1040 or 1040-SR), line 16 can be included as medical expenses on Schedule A (Form 1040 or 1040-SR) if the taxpayer itemizes deductions. But this amount would be generally subject to the 7.5% floor for medical expenses.
Able and Baker Partnership owns 51% of the outstanding stock of the Galaxy Corporation. Galaxy maintains its books on a cash basis. Which of the following statements is incorrect?
A. As a related party, Able and Baker cannot deduct business expenses and interest that it owes Galaxy until payment is made and is included in Galaxy’s gross income.
B. The related party relationship rule is determined as of the end of the tax year for which the expense or interest would otherwise be deductible.
C. A corporation and a partnership is a related party if the same persons own more than 50% in value of the outstanding stock of the corporation and more than 50% of the capital or profits interest in the partnership.
D. All of the answer choices are correct statements.
D. All of the answer choices are correct statements.
- Publication 542, page 9, states, in part, that business expenses and interest owed to a related person who uses the cash method of accounting are not deductible until the taxpayer makes the payment and the corresponding amount is includible in the related person’s gross income. Now, the relationship for this rule is determined as of the end of the tax year for which the expense or interest would otherwise be deductible.
- For purposes of the related persons rule, a listing of relationships is provided in Publication 542, pages 9 and 10. One of the relationships defined is a corporation and a partnership if the same persons own more than 50% in value of the outstanding stock of the corporation and more than 50% of the capital or profits interest in the partnership.
- In this case, Able and Baker own 51% of Galaxy Corporation and as such they satisfy the related person rule.
Which of the following transactions qualifies as a like-kind exchange?
A. The exchange of a copyright on a novel for a copyright on a song.
B. An exchange of the “goodwill or going concern value” of a business for the “goodwill or going concern value” of another business.
C. An exchange of land improved with an apartment house for land improved with a store building.
D. An exchange of personal property used predominantly in the United States for personal property used predominantly outside the United States.
C. An exchange of land improved with an apartment house for land improved with a store building.
- 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 given up and the real property received must be held for investment or for productive use in the trade or business by the taxpayer.
- To qualify for the non-recognition rules, there must be an exchange of like-kind property. Like-kind properties are properties of the same nature or character, even if they differ in grade or quality. The exchange of real estate for real estate is an exchange of like-kind property. An exchange of personal property for real property does not qualify as a like-kind exchange. An exchange of city property for farm property, or improved property for unimproved property, is a like-kind exchange. The exchange of real estate that the taxpayer owns for a real estate lease that runs 30 year or longer is a like-kind exchange.
- Real property located in the United States and real property located outside the United States are not considered like-kind property under the like-kind exchange rules. (Publication 544, page 18).
- As a result, an exchange of land improved with an apartment house for land improved with a store building qualifies as a like-kind exchange.
What is the tax treatment of sales tax?
A. It is a currently deductible expense when paid on depreciable business property.
B. It is currently deductible when paid on merchandise bought for resale.
C. It is capitalized to the basis of depreciable business property and deducted when the property is disposed of.
D. None of the answer choices are correct.
D. None of the answer choices are correct.
- Publication 334, page 36, provides that a taxpayer can deduct various federal, state, local, and foreign taxes directly attributable to the taxpayer’s trade or business as business expenses.
- With respect to sales taxes, a taxpayer treats any sales tax that is paid on a service or on the purchase or use of property as part of the cost of the service or property. If the service or the cost or use of the property is a deductible business expense, then the taxpayer can deduct the tax as part of that service or cost. If the property is merchandise bought for resale, the sales tax is part of the cost of the merchandise. If the property is depreciable, add the sales tax to the basis for depreciation. (Publication 334, page 36).
Brandon leases property for use in his business. Which of the following statements is correct?
A. If Brandon makes permanent improvements to the leased property, he can take depreciation for the improvements only.
B. If Brandon makes permanent improvements to the leased property, he can take depreciation for both the leased property and the improvements.
C. If Brandon makes permanent improvements to the leased property, he can expense the improvements in the year made.
D. If Brandon makes permanent improvements to the leased property, he can expense the improvements in the year the lease expires.
A. If Brandon makes permanent improvements to the leased property, he can take depreciation for the improvements only.
- Publication 946, page 4, states, in part, that a taxpayer can depreciate leased property only if the taxpayer retains the incidents of ownership in the property. This means that the taxpayer bears the burden of exhaustion of the capital investment in the property. Therefore, if the taxpayer leases property from someone to use in his or her trade or business or for the production of income, the taxpayer generally cannot depreciate its cost because the taxpayer does not retain the incidents of ownership. The taxpayer can, however, depreciate any capital improvements made to the property by the taxpayer.
Jeanne incurred start-up costs for her new business, which opened October 1, 2023. The costs were for advertising of $1,200, a market analysis survey of $2,500, employee training costs of $6,000, and travel costs for securing prospective distributions of $2,500. What is the maximum start-up deduction that Jeanne can take in 2023?
A. $12,200.
B. $5,120.
C. $5,000.
D. $203.
B. $5,120.
- Pages 9 and 10 of Publication 583 provides the general rules for start-up costs paid by a taxpayer. In particular, start-up costs are costs for creating an active trade or business or investigating the creation or acquisition of an active trade or business. Start-up costs include any amounts paid or incurred in connection with any activity engaged in for profit and for the production of income in anticipation of the activity becoming an active trade or business.
- Business start-up and organizational costs are generally capital expenditures. A taxpayer can elect to deduct up to $5,000 of business start-up costs and $5,000 of organizational costs as a current business expense. The $5,000 deduction is reduced by the amount the total start-up or organizational costs exceed $50,000. Any remaining costs must be amortized ratably over a 180-month period. (Publication 583, pages 9 and 10)
- The amortization period starts with the month that the taxpayer’s active trade or business begins.
- Start-up costs include costs for the following items:
- An analysis or survey of potential markets, products, labor supply, transportation facilities, etc.
- Advertisements for the opening of the business
- Salaries and wages for employees who are being trained and their instructors
- Travel and other necessary costs for securing prospective distributors, suppliers, or customers
- Salaries and fees for executives and consultants, or for similar professional services
- Start-up costs do not include deductible interest, taxes, or research and experimental costs.
- The total amortized cost Jeanne may deduct in 2023 is $120.Advertising $1,200
Market analysis survey 2,500
Employee training 6,000
Travel for securing prospective distributions
2,500
Total start-up costs $12,200 - Since the total start-up costs of $12,200 are less than $50,000, Jeanne can deduct the $5,000 business start-up costs, and also amortize the remaining costs of $7,200 ($12,200 − $5,000) over 180 months (($7,200 ÷ 180 months) × 3 months, or $120). Hence, the maximum deduction is $5,120.
NOTE: Be advised that this type of question appears often on the exam in one form or another.
Stephanie owns and operates a small flower shop that generated a $7,000 loss in 2023. She sold some of the land she uses for the business at a $3,000 gain, and some business equipment at a loss of $1,000. She also earned $2,000 from her part-time job as a supermarket cashier. She earned $450 in interest on her personal savings account in 2023. Stephanie files as single and claims the standard deduction. Her standard deduction amount for 2023 is $13,850. Her net operating loss (NOL) for 2023 is:
A. $0.
B. $14,750.
C. $2,550.
D. $3,000.
D. $3,000.
- Publication 536, page 2, provides that a net operating loss (NOL) is one where the deductions for the year are more than the income for the year. In such a case, there are rules that limit what a taxpayer can deduct when calculating an NOL. In general, the following items are not allowed when computing an NOL:
- Capital losses in excess of capital gains
- The IRC Section 1202 exclusion of the gain from the sale or exchange of qualified small business stock
- Nonbusiness deductions in excess of nonbusiness income
- Net operating loss deduction
- Qualified business income deduction
- Domestic production activities deduction
- The permitted NOL is computed as follows for this problem.
INCOME
Wages from part-time job $2,000
Interest on savings 450
Add net long-term capital gain on
sale of business property 3,000
Stephanie’s total income $5,450
=======
DEDUCTIONS
Net loss from business $7,000
Net capital loss on sale of
business equipment 1,000
Standard deduction 13,850
Stephanie’s total deductions $21,850
=======
- Stephanie’s deductions exceed her income by $16,400 ($21,850 − $5,450). To figure whether she has an NOL, certain deductions are not allowed. The following items are not allowed on Form 1045 (Schedule A).
Nonbusiness net short-term capital loss: $0
Nonbusiness deductions (standard deduction): $13,850
Minus nonbusiness income (interest): $450
Total adjustments to net loss: $13,400
- Therefore, Stephanie’s NOL for 2023 is figured as follows:
Stephanie’s total 2023 income: $5,450
Less:
Stephanie’s original 2023 total deductions: $21,850
Reduced by the disallowed items: $(13,400)
$21,850 - $13,400 = $8,450
Stephanie’s NOL for 2023: $(3,000)
A taxpayer sold his rental house for $190,000 in May 2023. The depreciation taken under MACRS was $67,840. If the taxpayer had used the straight-line method, the depreciation would have been $64,960. How much Section 1250 gain did this taxpayer have when the house was sold?
A. $2,880.
B. $64,960.
C. $67,840.
D. $110,000.
A. $2,880.
- Publication 544, page 26, provides that IRC Section 1231 gains and losses are taxable gains and losses from Section 1231 transactions but does not include any of the gain that is ordinary income as a result of any recapture provisions. In the case of a sale or exchange of real property that is used in a trade or business and held longer than 1 year, the sale or exchange is a Section 1231 transaction.
- In addition, all real property that is subject to an allowance for depreciation and that is not and never has been IRC Section 1245 property (see Publication 544, pages 27 and 28, for Section 1245 property definition) is known as IRC Section 1250 property, and the gain on its disposition is treated as ordinary income to the extent of additional depreciation allowed or allowable on the property (Publication 544, page 29).
- The additional depreciation for Section 1250 property that is held longer than 1 year is the actual depreciation adjustments that are more than the depreciation figured using the straight-line method. (Publication 544, pages 29)
- In this problem, the taxpayer’s Section 1250 gain is the difference between the MACRS and straight-line depreciation, which is $2,880 ($67,840 − $64,960).
Sally’s business office was condemned to make way for an expanded highway on May 1, 2023. Sally’s adjusted basis in her building was $20,000 ($80,000 original cost less $60,000 in depreciation). Her proceeds from condemnation were $220,000. Sally replaces her office on November 10, 2023, at a cost of $185,000. Sally must recognize a gain of:
A. $200,000.
B. $0.
C. $35,000.
D. $60,000.
C. $35,000.
- Publication 544, page 9, provides that an involuntary conversion occurs when a taxpayer’s property is destroyed, stolen, condemned, or disposed of under the threat of condemnation, and the taxpayer receives other property or money in payment, such as insurance or a condemnation award.
- However, the taxpayer does not report the gain if the taxpayer receives property that is similar or related in service or use to the converted property. The taxpayer’s basis for the new property is the same as the basis for the converted property. This means that the gain is deferred until a taxable sale or exchange occurs.
- If the taxpayer’s net condemnation award is more than the adjusted basis of the condemned property, the taxpayer has a gain. In this case, the taxpayer can postpone reporting gain from a condemnation if the taxpayer buys replacement property, within a specified period (Publication 544, page 9).
- To postpone reporting all of the gain, the taxpayer must buy replacement property costing at least as much as the amount realized for the condemned property. If the cost of the replacement property is less than the amount realized, the taxpayer must report the gain up to the unspent part of the amount realized (Publication 544, page 10–12).
- Since Sally’s proceeds from the condemnation were $220,000 and the adjusted basis in the property was $20,000, Sally has a gain of $200,000. However, she purchases replacement property for $185,000, which triggers a recognizable gain of $35,000 ($220,000 − $185,000).
A business with a relatively small amount of SSTB activity can qualify for the QBI deduction under the de minimis rule. What is the annual gross receipts limit for the business and the annual percent limit of gross receipts associated with the SSTB?
A. No more than $29 million in gross receipts and less than 5% of SSTB activity.
B. More than $29 million in gross receipts and no more than 10% of SSTB activity.
C. No more than $29 million in gross receipts and less than 10% of SSTB activity.
D. More than $29 million in gross receipts and no more than 5% of SSTB activity.
C. No more than $29 million in gross receipts and less than 10% of SSTB activity.
- Regulation Section 1.199A-5(c)(1) provides a de minimis rule for those businesses that are involved in only a relatively small amount of SSTB (specified service trade or business) type of activities. The threshold for qualifying under the de minimis rule is:
- For those businesses in which annual gross receipts do not exceed $29 million, the business is not considered an SSTB if less than 10% of its gross receipts are related to the types of services associated with an SSTB.
- For those businesses in which annual gross receipts are above the $29 million threshold, the business is not considered an SSTB if less than 5% (rather than 10%) of its gross receipts are related to the types of services associated with an SSTB.
- The rule also provides that activities that are done incidentally to performing the services is part of performing the services for this test. More importantly, this threshold level of gross receipts is, in effect, a cliff because if it is exceeded, the entire business is an SSTB. That is, there is no phase-in range.
What is the maximum depreciation amount that a taxpayer can claim in 2023 for an automobile that was purchased and put into service on July 1, 2023, and is used 100% for business?
A. $12,200.
B. $19,500.
C. $19,200.
D. $20,200.
D. $20,200.
- Publication 946, pages 59 through 61, provides that deduction limits and other special rules apply to certain listed property. Passenger automobiles are included as listed property.
- The depreciation is $20,200 for an automobile that is acquired and placed in service in 2023 and is a passenger automobile (including trucks and vans) (or $12,200 if special depreciation is not elected or if property is not qualified to elect) (Publication 946, page 60).
- With respect to other vehicles purchased in 2023, the depreciation limit for an electric vehicle, trucks and vans is $20,200 (the same as for a passenger automobile). (Publication 946, pages 60–61).
Richard, a self-employed attorney, began a fishing guide business in 2017. He reports income and expense from this fishing guide activity on a Schedule C (Form 1040) separate from his reported earnings as an attorney. The fishing guide business reported net losses each year while Richard’s legal business showed significant net earnings in each of the years from 2017 to 2022. In 2023, Richard’s business as an attorney showed a net profit of $50,000. Richard’s fishing guide business had the following income and expenses in 2023:
Gross income $5,500
Depreciation of a boat and motor $(3,000)
Real estate taxes $(500)
Insurance $(250)
Mortgage interest allocated $(1,500)
Utilities allocated $(1,250)
Supplies $(1,000)
Richard has itemized deductions that he will report on Schedule A of his 2023 Form 1040. How much of allowable deductions can Richard report from his fishing guide business activity in 2023?
A. $(5,500).
B. $(7,500).
C. $(2,000).
D. $0.
C. $(2,000).
- Publication 334, page 39, provides the general rules for situations where a taxpayer is not carrying his or her business or investment activity to make a profit. In this case, a taxpayer is operating a hobby and, as such, cannot use a loss from the activity to offset other income.
- Activities a taxpayer does as a hobby, or mainly for sport or recreation, are often not entered into for profit. An activity is presumed carried on for profit if it produced a profit in at least 3 of the last 5 tax years, including the current year.
- In this case, Richard appears to be operating a not-for-profit business and therefore he can only deduct the real estate taxes of $500 and mortgage interest of $1,500 for a total of $2,000.
The Jones Corporation was formed on December 1, 2023. Qualifying organizational expenditures were incurred and paid as follows:
Incurred and paid in December 2023 $10,000
Incurred in December 2023 but paid in January 2024 4,000
Incurred and paid in February 2024 3,000
Assume that the Jones Corporation makes a timely election under IRC Section 248. What amount may be deducted in the corporation’s first tax year if it adopts a calendar year and the accrual basis of accounting for tax purposes?
A. $-0-.
B. $83.
C. $5,050.
D. $10,022.
C. $5,050.
- When a company opens for business, the company can elect to amortize certain costs for the set-up and organization of the business. The amortization period starts with the month the company’s active trade or business begins. For costs paid or incurred after September 8, 2008, a taxpayer can elect to deduct a limited amount of start-up and organization costs. The costs that are not deducted currently can be amortized ratably over a 180-month period.
- A taxpayer can elect to deduct up to $5,000 of business start-up costs and $5,000 of organizational costs as a current business expense in the current tax year. The $5,000 deduction is reduced by the amount the total start-up or organizational costs exceed $50,000. Any remaining costs must be amortized ratably over a 180-month period. (Publication 583, pages 9 and 10)
- Publication 583, page 9, provides that the costs of organizing a corporation are the direct costs of creating the corporation. Organization costs can be amortized only if they meet all of the following tests:
- They are for the creation of the corporation,
- They are chargeable to a capital account,
- They could be amortized over the life of the corporation if the corporation had a fixed life, and
- They are incurred before the end of the first tax year in which the corporation is in business.
- Since the Jones Corporation made the timely election, $5,050 may be amortized in the corporation’s first tax year if it adopts a calendar year and the accrual basis of accounting for tax purposes, computed as follows:
Incurred and paid in December 2023: $10,000
Incurred in December 2023 but paid in January 2024: $4,000
Total qualifying organizational costs: $14,000
Organizational expenditure deducted (Amounts incurred in 2023 are limited to $5,000.): 5,000
Balance of qualifying organizational costs: $9,000
Divided by amortization period of 180 months: 180
Amortization per month: $50
Multiplied by months of operation in 2023: 1
2023 yearly amortization expense: $50
======================================
Organizational expenditure deducted: $5,000
2023 yearly amortization expense: $50
======================================
Total 2023 deductible expense: $5,050
Arthur is a proprietor of Arthur’s Pizza Emporium. He bought a commercial building several years ago. He made a down payment of $20,000 in cash and assumed a mortgage for $100,000. After he paid off the mortgage, Arthur later sold the building for $180,000. Straight-line depreciation taken up to the date of sale was $18,000. What is the total gain on the sale?
A. $78,000.
B. $80,000.
C. $60,000.
D. $160,000.
A. $78,000.
- Publication 544, page 26, provides that IRC Section 1231 gains and losses are taxable gains and losses from Section 1231 transactions but does not include any of the gain that is ordinary income as a result of any recapture provisions. In the case of a sale or exchange of real property that is used in a trade or business and held longer than 1 year, the sale or exchange is a Section 1231 transaction.
- All real property that is subject to an allowance for depreciation and that is not and never has been IRC Section 1245 property (see Publication 544, pages 27 and 28, for Section 1245 property definition) is known as IRC Section 1250 property and the gain on its disposition is treated as ordinary income to the extent of additional depreciation allowed or allowable on the property (Publication 544, page 29).
- The additional depreciation for Section 1250 property that is held longer than 1 year is the actual depreciation adjustments that are more than the depreciation figured using the straight-line method (Publication 544, page 29). In this problem, Arthur did not elect MACRS depreciation; hence, he does not have any additional depreciation.
- In this problem, Arthur’s commercial building qualifies as Section 1250 property.
- The adjusted basis for the property is $102,000, which is the original basis of $120,000 ($20,000 + $100,000) less the straight-line depreciation of $18,000.
- Hence, the Section 1231 gain is $78,000, which is the sales price of $180,000 less the adjusted basis of $102,000.
NOTE: The term “recapture” refers to the excess amount of accelerated depreciation taken on real property over straight-line depreciation if it had been taken. This amount is subject to ordinary tax rates instead of Section 1231 gain tax rates.
In 2023, Mr. Robbers incurred the following expenses:
- Rental of hospitality room displays of business products: $1,000
- Breakfast for 3 business associates that preceded a substantial business discussion: $150
- Dinners for other business associates who took turns paying without regard to whether any business purpose was served: $300
What amount can Mr. Robbers deduct as an expense?
A. $1,075.
B. $1,125.
C. $1,225.
D. $0.
A. $1,075.
- Publication 463, pages 7 and 8, provides that for meals and entertainment expenses paid or incurred after December 2017, the tax law has changed. Traditionally, meals and entertainment expenses have followed the same set of rules. For expenses after December 2017, meals are now treated differently from entertainment expenses. Entertainment includes any activity generally considered to provide entertainment, amusement, or recreation. Generally, entertainment expenses are nondeductible after December 2017. However, the taxpayer’s kind of business may determine if a particular activity is considered entertainment. For example, if a taxpayer is a dress designer and has a fashion show to introduce new designs to buyers, the show is not considered entertainment. But if an appliance distributor holds a fashion show for the spouses of retailers, the show generally is considered entertainment.
- As discussed above, entertainment expenses are generally nondeductible. However, a taxpayer may continue to deduct 50% of the cost of business meals if the taxpayer or an employee is present, and the food and beverages are not considered lavish or extravagant and provided by a restaurant. The meals may be provided to a current or potential business customer, client, consultant, or similar business contact.
- One limitation to a deductible meal expense results when a group of business acquaintances takes turns picking up each other’s meal checks primarily for personal reasons, without regard to whether any business purposes are served. In this case, no member of the group can deduct any part of the expense (Publication 463, page 11).
- Mr. Robbers, in this problem, is able to deduct $1,075, which is 100% of the room rental of $1,000 to show his business products that should not be considered an entertainment expense and 50% of the breakfast meal with the business discussion of $150.
Which of the following fringe benefits for meals is subject to the 50% deduction limit?
A. Meals furnished to your employees at the work site when you operate a restaurant.
B. Meals furnished to your employees as part of the expense of a company picnic.
C. Meals furnished to your employees at your place of business when more than half of these employees are provided the meals for your convenience.
D. Meals furnished to a customer during a business discussion.
D. Meals furnished to a customer during a business discussion.
- Publication 463, page 10, states that, in general, a taxpayer can no longer take a deduction for any expense related to activities generally considered entertainment, amusement, or recreation. A taxpayer, however, can continue to deduct 50% of the cost of business meals if the taxpayer (or their employee) is present and the food or beverages aren’t considered lavish or extravagant. For more information, see pages 10 and 11 of Pub. 463.
- The 50% limit does not apply to an expense for food or beverage that is excluded from the gross income of an employee because it is a de minimis fringe benefit.
- Publication 15-B, page 17, provides the following examples:
- Coffee, doughnuts, or soft drinks
- Occasional meals or meal money provided to enable an employee to work overtime (However, the exclusion does not apply to meal money figured on the basis of hours worked.)
- Occasional parties or picnics for employees and their guests
- The cost of food and beverages a taxpayer provides primarily to the employees on the taxpayer’s business premises is deductible. This includes the cost of maintaining the facilities for providing the food and beverages. These expenses are subject to the 50% limit unless they qualify as a de minimis fringe benefit. Publication 15-B, page 18, provides that a taxpayer can exclude the value of meals the taxpayer furnishes to an employee from the employee’s wages if they meet the following tests:
- They are furnished on the taxpayer’s business premises.
- They are furnished for the taxpayer’s convenience.
- This exclusion does not apply if the taxpayer allows the employee to choose to receive additional pay instead of meals.
- Generally, for this exclusion, the employee’s place of work is the taxpayer’s business premises. Furthermore, if more than half of the taxpayer’s employees who are furnished meals on the taxpayer’s business premises are furnished the meals for the taxpayer’s convenience, the taxpayer can treat all meals furnished to employees on the business premises as furnished for the taxpayer’s convenience.
- This exclusion also applies to any meal or meal money the taxpayer provides to an employee if it has so little value (taking into account how frequently the taxpayer provides meals to his or her employees) that accounting for it would be unreasonable or administratively impracticable.
- As a result of the above information, meals furnished to a customer during a business discussion are subject to the 50% deduction limit.
Which of the following statements with respect to the exchange of like-kind property is correct?
A. If there is an exchange of like-kind property in which you also received cash and the exchange results in a loss to you, you are allowed to deduct a loss to the extent of cash received.
B. If there is an exchange of like-kind property in which you also give cash and the exchange results in a gain to you, you must report any gain to the extent of the cash given.
C. If there is an exchange of like-kind property in which you also receive cash and the exchange results in a gain to you, you do not have to report the gain.
D. If there is an exchange of like-kind property in which you also give cash and the exchange results in a loss to you, you cannot deduct a loss.
D. If there is an exchange of like-kind property in which you also give cash and the exchange results in a loss to you, you cannot deduct a loss.
- Publication 544, pages 16 and 17, provides 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.
- In addition, the taxpayer doesn’t 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.
- Publication 544, page 20, further provides that if, in addition to like-kind property, a taxpayer receives money or unlike property in an exchange on which the taxpayer realizes a gain, the taxpayer has a partially nontaxable exchange. In this case, the taxpayer is taxed on the gain that he or she realizes, but only to the extent of the money and the fair market value of the unlike property the taxpayer received.
- Moreover, a loss is not deductible in a nontaxable exchange in which a taxpayer receives unlike property or cash.
- In this problem, the only correct response is the one stating that if there is an exchange of like-kind property in which the taxpayer also gives cash and a loss results, the taxpayer cannot deduct the loss.
For tax year 2023, when an employer reimburses an employee for meals from a restaurant under an accountable plan while the employee is away from home, the employer must:
A. Include 50% of the cost of meals as income to the employee.
B. Deduct only 50% of the reimbursement on his/her tax return.
C. Deduct 100% of the reimbursement on his/her tax return.
D. Add 100% of the meals as income to the employee.
B. Deduct only 50% of the reimbursement on his/her tax return.
- Publication 463, page 7, provides that under an accountable plan, an employer can generally deduct only 50% of any otherwise deductible business-related meal and entertainment expenses reimbursed to the employees. The deduction limit applies even if the employer reimburses the employees for 100% of the expenses.
- Thus, the employer in this problem can deduct 50% of the reimbursement on his or her tax return.
All of the following are qualifications under the work opportunity tax credit for a qualified food stamp recipient in 2023, except:
A. The person has attained age 18 on the hiring date.
B. The person has not attained age 35 on the hiring date.
C. The person is a member of a family receiving supplemental nutritional assistance for a 6-month period ending on the hiring date.
D. All of the answer choices are correct.
B. The person has not attained age 35 on the hiring date.
- The work opportunity tax credit (WOTC) is available on an elective basis to an employer for a percentage of first-year wages paid or incurred by the employer to or for individuals who belong to one of several eligible “targeted groups.” In the case of a qualified supplemental nutritional assistance program (SNAP) recipient, the person must be certified by the designated local agency as:
- Having attained age 18 but not age 40 (not age 35) on the hiring date, and
- Being a member of a family receiving assistance under a food stamp program for a 6-month period ending on the hiring date, or
- Receiving such assistance for at least 3 months of the 5-month period ending on the hiring date.
- Caution: Sometimes the term “food stamps” is used interchangeably with the term “supplemental nutrition assistance program (SNAP).”
Which of the following statements is correct if you owe a business expense to a related party who uses the cash method of accounting?
A. You will be able to deduct the expense if the relationship with that person ends before the expense is includible in the gross income of that person.
B. You will be able to deduct the expense when paid.
C. You will be able to deduct the expense when the payment is made, and the corresponding amount is includible in the related person’s gross income.
D. None of the answer choices are correct.
C. You will be able to deduct the expense when the payment is made, and the corresponding amount is includible in the related person’s gross income.
- Publication 542, pages 9–10, provides that business expenses and interest owed to a related person who uses the cash method of accounting are not deductible UNTIL the taxpayer makes the payment and the corresponding amount is includible in the related person’s gross income.
- Determine the relationship for this rule as of the end of the tax year for which the expense or interest would otherwise be deductible. If a deduction is denied, the rule will continue to apply even if the corporation’s relationship with the person ends before the expense or interest is includible in the gross income of that person. These rules also deny the deduction of losses on the sale or exchange of property between related persons. For a list of persons related to a corporation, see pages 9–10 of Publication 542.
- Hence, the correct response in this case is: You will be able to deduct the expense when the payment is made, and the corresponding amount is includible in the related person’s gross income.
Pleasant Beach City, to improve downtown commercial business, converted a downtown business area street into an enclosed pedestrian mall. The city assessed the full cost of construction, financed with 10-year bonds, against the affected business properties. The city is paying the principal and interest with the annual payments made by the property owners. The portion that the business owners were assessed to pay the construction costs is:
A. Deductible as taxes.
B. Deductible as a business expense.
C. A nondepreciable capital expenditure.
D. A depreciable capital expenditure.
D. A depreciable capital expenditure.
- In general, a taxpayer cannot deduct taxes charged for local benefits and improvements that tend to increase the value of the taxpayer’s property. These include assessments for streets, sidewalks, water mains, sewer lines, and public parking facilities. Instead of deducting the cost, the taxpayer should increase the basis of the property by the amount of the assessment and then depreciate it as a capital expenditure.
- A taxpayer can deduct taxes for these local benefits only if the taxes are for maintenance, repairs, or interest charges related to those benefits. If part of the tax is for maintenance, repairs, or interest, the taxpayer must be able to show how much of the tax is for these expenses to claim a deduction for that part of the tax.
- The correct response for this problem is to treat the assessed construction costs as a depreciable capital expenditure.
In 2023, Bob sold 100 shares of a large publicly traded company at fair market value to his sister Phyllis. Bob had purchased these shares in 2018 for $5,000. At the time of sale, these shares were worth only $3,000. Which of the following statements is correct?
A. Bob has a deductible capital loss of $2,000.
B. Phyllis has a basis in the stock of $5,000 if she sells the stock at a gain.
C. Bob has ordinary income of $2,000.
D. None of the answer choices are correct.
B. Phyllis has a basis in the stock of $5,000 if she sells the stock at a gain.
- The gain or loss on a sale or trade of property is found by comparing the amount realized with the adjusted basis of the property. Once the amount of the gain or loss is determined, the taxpayer must determine whether it is long term or short term. If the investment property is held for more than 1 year, any capital gain or loss is a long-term capital gain or loss. If the property is held for 1 year or less, any capital gain or loss is a short-term capital gain or loss. (Publication 544, pages 3 and 35)
- When investment property is received from a related person in a purchase or exchange and the received property from a related person had a loss, it is not a recognized loss. Rather, the taxpayer that receives the property recognizes the gain only to the extent it is more than the loss previously disallowed to the related person. This rule applies only to the original transferee. (Publication 544, page 22)
In 2023, you used a fishing lodge as an entertainment facility. Which of the following incurred expenditures may be partially deductible?
A. Depreciation expense.
B. Repairs to the lodge roof.
C. Natural gas to heat the lodge.
D. None of the listed expenses are deductible.
D. None of the listed expenses are deductible.
- Generally, a taxpayer cannot deduct any expense for the use of an entertainment facility. This includes expenses for depreciation and operating costs such as rent, utilities, maintenance, and protection.
- An entertainment facility is any property the taxpayer owns, rents, or uses for entertainment. Examples include a yacht, hunting lodge, fishing camp, swimming pool, tennis court, bowling alley, car, airplane, apartment, hotel suite, or home in a vacation resort.
- Thus, none of the items listed are deductible expenses.
In June 2023, Gail bought a new computer for her business for $7,500. She uses the computer 90% for her business and 10% for personal purposes. The business cost of the computer that she uses to figure her allowable Section 179 expense deduction is:
A. $3,978.
B. $7,500.
C. $6,750.
D. $0.
C. $6,750.
- Publication 946, page 5, provides that when property is used for business or investment purposes and for personal purposes, the taxpayer can deduct depreciation based only on the business or investment use.
- Publication 946, page 16 and 17, further states if property is used for business and nonbusiness purposes, the taxpayer can elect the Section 179 deduction only if the property is used more than 50% for business in the year that the taxpayer places it in service. If the taxpayer uses the property more than 50% for business, multiply the cost of the property by the percentage of business use. Use the resulting business cost to figure your Section 179 deduction.
- Because Gail uses the new computer 90% for business, she is able to use $6,750 for figuring her Section 179 immediate expensing amount. The $6,750 is 90% of the total cost ($7,500) of the computer.
During 2023, Frank gave the following gifts to business clients. (None of the employees of the receiving companies were to receive more than one gift.)
100 pens with Frank’s company name imprinted on them, valued at $4 each, to Corporation X: $400
25 bottles of wine valued at $30 each to Corporation Y: $750
Wrapping for the 25 bottles of wine: $50
15 floral arrangements valued at $25 each to Z Company: $375
The amount that Frank can deduct for business gifts in 2023 is:
A. $1,575.
B. $1,000.
C. $1,400.
D. $1,250.
B. $1,000.
- Publication 463, page 17, provides a general set of rules for gift giving. Specifically, if a taxpayer gives gifts in the course of his or her trade or business, the taxpayer can deduct all or part of the cost. The limit for deducting the cost of gifts is $25 for business gifts that the person gives directly or indirectly to any one person during the taxpayer’s tax year. A gift to a company that is intended for the eventual personal use or benefit of a particular person or a limited class of people will be considered an indirect gift to that particular person or to the individuals within that class of people who receive the gift.
- The following items are not considered gifts for purposes of the $25 limit:
- An item that costs $4 or less and (a) has your name clearly and permanently imprinted on the gift and (b) is one of a number of identical items you widely distribute (e.g., pens, desk sets, and plastic bags and cases)
- Signs, display racks, or other promotional material to be used on the business premises of the recipient
- In addition, incidental costs, such as engraving on jewelry, or packaging, insuring, and mailing, are generally not included in determining the cost of a gift for purposes of the $25 limit.
- As a result, Frank can deduct $1,000 for business gifts during the tax year, which is the sum of the 25 bottles of wine at $25 (not $30) apiece ($625) and the 15 floral arrangements ($375).
The following information is available from the books of ABC Corporation. Determine what taxable income should be reported on Form 1120.
- $55,000 in federal income tax accrued for the tax year
- $148,000 in net income per books, after tax
- $17,000 in life insurance premiums (not deductible on return)
- $15,000 in tax-exempt interest income
A. $150,000.
B. $201,000.
C. $205,000.
D. $220,000.
C. $205,000.
- There are several steps in calculating a corporation’s taxable income. Income items that are required to be included for tax purposes must be separated from income that is tax-exempt. Additionally, expenses that are deductible for tax purposes must be separated from those expenses that are not tax-deductible.
- Accordingly, ABC Corporation’s taxable income is $205,000, computed as follows (see Form 1120, page 6 Schedule M-1):
Net income per books: $148,000
Plus:
Federal income tax per book add-back: $55,000
Excess of capital losses over gains: $0
Expenses deducted on books but not on return:
Life insurance premiums: $17,000
Less income recorded on books but not on return:
Tax-exempt interest: $(15,000)
Taxable income: $205,000
All of the following would be included in the gross receipts of a business for a tax year EXCEPT:
A. Sales made but income not collected during the tax year for a business using an accrual accounting method.
B. Sales taxes collected by a business using the cash accounting method.
C. The fair market value of property the business received in exchange for a good or service bartered.
D. Lease bonus and lease cancellation payments received from a lessee renting personal property or real estate from the taxpayer.
B. Sales taxes collected by a business using the cash accounting method.
- Publication 334, page 14, provides that under an accrual method, a taxpayer generally included an amount in gross income for the tax year in which all events that fix the taxpayer’s right to receive the income have occurred and they can determine the amount with reasonable accuracy. For a taxpayer with an applicable financial statement or other financial statement as the Secretary may specify, the all-events test for an item of gross income is considered met no later than when taken into account in an applicable financial statement or such other financial statement.
- In addition, Publication 334, page 25, provides that State and local sales taxes imposed on the buyer, which you were required to collect and pay over to state or local governments, are not income.
- Thus, all of the items listed are income, except for the collected sales taxes.
Which of the following statements is not correct concerning a taxpayer that claims a casualty or theft loss of inventory, including items held for sale to customers through the increase in the costs of goods sold by properly reporting the opening and closing inventories?
A. The taxpayer cannot claim the loss again as a casualty or theft loss.
B. Any insurance or other reimbursement received for the loss is taxable.
C. The taxpayer can choose to take the loss separately as a casualty or theft loss if they eliminate the loss from the cost of goods sold.
D. If the taxpayer takes the loss separately, the loss is reduced only by any reimbursements received.
D. If the taxpayer takes the loss separately, the loss is reduced only by any reimbursements received.
The treatment of inventory losses is covered on pages 16 and 17 of Publication 538. More specifically, 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.
- However, the taxpayer cannot claim the loss again as a casualty or theft loss. Any insurance or other reimbursement received for the loss is taxable.
- The taxpayer can choose to take the loss separately as a casualty or theft loss. If the decision by the taxpayer is to take the loss separately, adjust opening inventory or purchases to eliminate the loss items and avoid counting the loss twice.
- If the taxpayer takes the loss separately, reduce the loss by the reimbursement received or expected to receive. If the taxpayer does not receive the reimbursement by the end of the year, the taxpayer cannot claim a loss for any amounts that the taxpayer reasonably expects to recover.
- In this case, the incorrect response is if the taxpayer takes the loss separately, the loss is reduced by any reimbursements received or expected to be received.
A used car lot owner sold an adjacent lot on June 9, 2023, for $125,000. He purchased this lot on August 6, 2020. for $65,000. He did not pave this lot or make any improvements to it. He paid $4,600 in closing costs at the sale. How much gain does he have, and what type of gain is it?
A. $55,400 Section 1250 gain.
B. $55,400 Section 1231 gain.
C. $4,600 Section 1245 gain, $50,800 Section 1231 gain.
D. $4,600 Section 1245 gain, $55,400 Schedule D gain.
B. $55,400 Section 1231 gain.
- Publication 551, pages 2 and 3, provides that a taxpayer can include in the basis of property purchased by the taxpayer the settlement fees and closing costs for buying the property. However, the taxpayer cannot include fees and costs for getting a loan on the property. (A fee for buying property is a cost that must be paid even if you bought the property for cash.)
- In this problem, land is not depreciable and, as such, the taxpayer has only $55,400 of Section 1231 gains. This amount is the difference between the selling price of $125,000 and the adjusted basis of the property, which is $69,600 ($65,000 + $4,600).
Which of the following statements regarding distributions of stock is not true?
A. Distributions of stock and stock rights are never treated as property.
B. Stock rights are distributions by a corporation of rights to acquire its stock.
C. Distributions of stock dividends and stock rights are generally tax-free to shareholders.
D. Expenses of issuing a stock dividend are not deductible but must be capitalized.
A. Distributions of stock and stock rights are never treated as property.
- Distributions by a corporation of its own stock are commonly known as stock dividends. Stock rights (also known as “stock options”) are distributions by a corporation of rights to acquire its stock. Distributions of stock dividends and stock rights are generally tax-free to shareholders. However, stock and stock rights are treated as property under certain circumstances, such as:
- If any shareholder has the choice to receive cash or other property instead of stock or stock rights;
- The distribution gives cash or other property to some shareholders and an increase in the percentage interest in the corporation’s assets or earnings and profits to other shareholders;
- The distribution is in convertible preferred stock and has the same result as item 2 above;
- The distribution gives preferred stock to some common shareholders and common stock to other common shareholders; or
- The distribution is on preferred stock.
- Also, the expenses associated with issuing a stock dividend must be capitalized, not expensed, by the issuing corporation.
- Consequently, in the above question, all statements are correct in regard to distributions of stock except that distributions of stock and stock rights are never treated as property.
All of the following awards made to an employee are deductible by the employer, except:
A. A length-of-service award to an employee during his 8th year for 8 years of service.
B. A length-of-service award to an employee during his 5th year for 5 years of service.
C. A length-of-service award to an employee during his 10th year for 10 years of service; he received a similar award during his 5th year for 5 years of service.
D. All of the answer choices are deductible by the employer.
B. A length-of-service award to an employee during his 5th year for 5 years of service.
- Publication 15-A, page 22, provides that a taxpayer can generally deduct amounts paid to employees as awards, whether paid in cash or property. There are exceptions to the general rule. For example, an award will not qualify as a length-of-service award if either of the following applies:
- The employee receives the award during his or her first 5 years of employment, or
- The employee received another length-of-service award (other than one of very small value) during the same year or in any of the prior 4 years.
- In this case, the 5-year award would not qualify since it was awarded during the first 5 years of service.
IRC Section 199A(g) limits the domestic production activities deduction of taxpayers with oil-related qualified production activities income. The general calculation of the domestic production activities deduction (DPAD) for a taxpayer is 9% of:
A. The taxpayer’s qualified production activities income.
B. The taxpayer’s adjusted gross income figured without the DPAD.
C. The smaller of the taxpayer’s qualified production activities income or the taxpayer’s adjusted gross income figured without the DPAD.
D. The larger of the taxpayer’s qualified production activities income or the taxpayer’s adjusted gross income figured without the DPAD.
C. The smaller of the taxpayer’s qualified production activities income or the taxpayer’s adjusted gross income figured without the DPAD.
- The instructions for Form 8903 provide the domestic production activities deduction of taxpayers for specified agricultural or horticultural cooperatives a deduction under IRS Section 199A(g) is generally 9% of the smaller of:
- The taxpayer’s qualified production activities income (QPAI) or
- The taxpayer’s adjusted gross income figured without the domestic production activities deduction (DPAD).
- However, the DPAD generally cannot be more than 50% of the Form W-2 wages paid to the taxpayer’s employees (including Form W-2 wages allocated to the taxpayer on a Schedule K-1).
- In addition, for taxpayers with oil-related qualified production activities income, the DPAD is reduced by 3% of the least of the following: Oil-related QPAI; QPAI; or the adjusted gross income for an individual, estate, or trust (taxable income for all other taxpayers) figured without DPAD.
Which of the following statements is correct concerning business gifts?
A. Each spouse may give a $25 business gift to the same person if each spouse has a separate business.
B. Each spouse may give a $25 business gift to the same person if each spouse is separately employed.
C. If a partnership gives gifts, the partnership and the partners are treated as independent taxpayers.
D. None of the answer choices are correct.
D. None of the answer choices are correct.
- Publication 463, page 17, provides, in part, the rules for deducting business gifts. In general, a taxpayer can deduct no more than $25 for business gifts that are given directly or indirectly to any one person during the taxpayer’s tax year. A gift to a company that is intended for the eventual personal use or benefit of a particular person or a limited class of people will be considered an indirect gift to that particular person or to the individuals within that class of people who receive the gift.
- If a taxpayer and the taxpayer’s spouse both give gifts, both spouses are treated as one taxpayer. It does not matter whether they have separate businesses, are separately employed, or whether each of them has an independent connection with the recipient. If a partnership gives gifts, the partnership and the partners are treated as one taxpayer.
- As a result, none of the responses given in this problem are correct statements with respect to deductible gifts.
Jamie owns property that was originally purchased and placed into service on February 12, 2017. Tomas has similar property that he originally purchased and placed into service on August 3, 2019. Jamie and Tomas exchange assets in a like-kind exchange on April 5, 2023. What is Jamie’s date of acquisition for the newly acquired property?
A. February 12, 2017.
B. August 3, 2018.
C. April 5, 2023.
D. April 6, 2023.
A. February 12, 2017.
- Publication 544, page 44, provides information concerning the holding period of a nontaxable exchange. If a taxpayer acquires an asset in exchange for another asset and the taxpayer’s basis for the new asset is figured, in whole or in part, by using the basis in the old property, the holding period of the new property includes the holding period of the old property. That is, it begins on the same day as the taxpayer’s holding period for the old property.
- Therefore, Jamie’s date of acquisition for the newly acquired property is the same as the date of acquisition for the old property, which is February 12, 2017.
On January 2, 2023, XYZ Partnership purchased and placed in service a machine used for production purposes. The machine cost $10,000 plus $500 sales tax. XYZ Partnership financed the entire purchase price. During 2023, XYZ Partnership paid total interest of $850 on the note. Concerning the income tax treatment of the above expenses, which of the following statements is correct?
A. Under the uniform capitalization rules, the interest and sales tax should be included in the basis of the machine.
B. Under the uniform capitalization rules, the interest should be included in the basis of the machine and the sales tax should be deducted as a current expense.
C. The interest should be deducted as a current expense, and the sales tax should be included in the basis of the machine.
D. The interest and sales tax should be deducted as current expense.
C. The interest should be deducted as a current expense, and the sales tax should be included in the basis of the machine.
- Publication 551, page 2, states that a taxpayer should treat any sales tax paid on a service or on the purchase or use of property as part of the cost of the service or property. If the service or the cost or use of the property is a deductible business expense, the taxpayer can deduct the tax as part of that service or cost. If the property is merchandise bought for resale, the sales tax is part of the cost of the merchandise. If the property is depreciable, the taxpayer should add the sales tax to the basis for depreciation.
- Publication 334, pages 34 and 35, states that a taxpayer can generally deduct as a business expense all interest paid or accrued during the tax year on debts related to the trade or business. Interest relates to the taxpayer’s trade or business if the taxpayer uses the proceeds of the loan for a trade or business expense.
- IRC Section 263A(f) provides that under the uniform capitalization rules, the taxpayer generally must capitalize interest paid or incurred on debt during the production period to produce real property or certain tangible personal property with a useful life exceeding 2 years. The property must be produced by the taxpayer for use in the taxpayer’s trade or business or for sale to customers. The taxpayer, however, cannot capitalize interest related to property that the taxpayer acquires in any other manner. Hence, it is not capitalized on debt associated with the purchase of business machinery.
- As a result, the interest should be deducted as a current expense, and the sales tax should be included in the basis of the machine in this problem.
A cafeteria plan is a written plan that allows employees to choose between receiving cash or taxable benefits instead of certain qualified benefits for which the law provides an exclusion from wages (deferral). Which of the following can be included in a cafeteria plan?
A. Life insurance premiums.
B. Membership dues to athletic facilities.
C. Archer medical savings account (MSA).
D. Tuition reduction.
A. Life insurance premiums.
- Publication 15-B, pages 3 and 4, provides, in part, that a cafeteria plan, including a flexible spending arrangement, is a written plan that allows employees to choose between receiving cash or taxable benefits instead of certain qualified benefits for which the law provides an exclusion from wages.
- Qualified benefits include the following benefits:
- Accident and health benefits (but not medical savings accounts or long-term care insurance)
- Adoption assistance
- Dependent care assistance
- Group-term life insurance coverage (including costs that cannot be excluded from wages)
- Health savings accounts
- A cafeteria plan cannot include the following benefits:
- Archer medical savings account (MSA)
- Athletic facilities
- De minimis (minimal) benefits
- Educational assistance
- Employee discounts
- Employer-provided cell phones
- Lodging on your business premises
- Meals
- No-additional-cost services
- Transportation (commuting) benefits
- Tuition reduction
- Working condition benefits
- In addition, a cafeteria plan cannot include scholarships or fellowships.
In general, the QBI deduction equals:
A. A person’s QBI Component plus their qualified REIT/PTP Component.
B. A person’s QBI Component less their qualified REIT/PTP Component.
C. A person’s QBI Component alone.
D. A person’s REIT/PTP Component alone.
A. A person’s QBI Component plus their qualified REIT/PTP Component.
- In general, the amount of a person’s QBI deduction equals their QBI Component plus their qualified REIT/PTP Component.
Which of the following individuals would not qualify as an independent contractor?
A. Jessica controls the result of the work and how it will be done.
B. Morris does not control the result of the work but does control how it will be done.
C. Stephen controls the result of the work but not how it will be done.
D. All of the individuals qualify as an independent contractor.
C. Stephen controls the result of the work but not how it will be done.
- Publication 15-A, pages 6 and 7, provides that in order to determine whether an individual is an employee or an independent contractor under the common-law, the relationship of the worker and the business must be examined. Facts that provide evidence of the degree of control and independence fall into 3 categories: behavioral control, financial control, and the type of relationship of the parties. Under behavioral control, an employee is generally subject to the business’ instructions about when, where, and how to work.
- Stephen does not control how the work will be done, but only the result, Stephen is more of an employee rather than an independent contractor.
- A business is required to report the amount paid to an independent contractor by issuing a Form 1099-NEC and a Form W-2 for wages and other compensation paid to an employee.
The FX Partnership manufactures garden hoses for sale. In the month of January, its sales were $80,000. During that month, the partnership had:
Beginning inventory, January 1 $ 0
Raw materials purchased, January 1 35,000
Raw materials shipping cost 1,585
Direct labor (production) 27,000
Factory overhead 6,000
Ending inventory, January 31 10,000
What is the cost of goods sold for the FX Partnership for the month of January?
A. $58,000.
B. $59,585.
C. $69,585.
D. $53,585.
B. $59,585.
- Publication 334, page 27, provides a table for computing a taxpayer’s cost of goods sold. In general, the calculation is as follows:Inventory at beginning of year
+ Purchases less cost of items withdrawn for personal use
+ Cost of labor (Do not include any amounts paid to taxpayer.)
+ Materials and supplies
+ Other costs
- Inventory at end of year
= Cost of goods sold - For the FX Partnership, the cost of goods sold equals $59,585, which is $0 (beginning inventory), plus $35,000 (purchases), plus $1,585 (raw material shipping costs), plus $27,000 (direct labor), plus $6,000 (factory overhead), less $10,000 (ending inventory).
Which of the following is deductible as entertainment expense?
A. The cost of a commercial dress designer’s fashion show.
B. The cost of entertaining the spouse of a client.
C. The cost of membership in an airline club.
D. None of the answer choices are deductible as entertainment expenses.
D. None of the answer choices are deductible as entertainment expenses.
- Publication 463, page 10, stipulates that entertainment expenses are nondeductible for expenses paid after December 2017. Facilities used in connection with entertainment and related membership dues (such as country club dues) are also nondeductible. Meal expenses are limited to 50% unless an exception applies.
- Entertainment includes any activity generally considered to provide entertainment, amusement, or recreation. Examples include entertaining guests at nightclubs; at social, athletic, and sporting clubs; at theaters; at sporting events; on yachts; or on hunting, fishing, vacation, and similar trips. Entertainment also may include meeting personal, living, or family needs of individuals, such as providing meals, a hotel suite, or a car to customers or their families.
- In addition, a taxpayer cannot deduct dues (including initiation fees) for membership in any club organized for business, pleasure, recreation, or other social purposes.
- EXAMPLE:
If a taxpayer is a dress designer and has a fashion show to introduce new designs to store buyers, the show generally is not considered entertainment. This is because fashion shows are a typical part of a taxpayer’s business. However, if the taxpayer is an appliance distributor and holds a fashion show for the spouses of the retailers, the show generally is considered entertainment. The point here is that for the dress designer, the fashion show costs are not considered entertainment but are still deductible without the limitations placed on entertainment expenses. This would be the same as when meals sold in the normal course of business, such as at a restaurant, are not considered entertainment expenses. - In addition, the cost of dues (including initiation fees) for membership in clubs organized for business are not deductible at all, including the dues paid to country clubs, golf and athletic clubs, or airline clubs.
- As a result, none of the items listed in this problem are deductible as entertainment expenses.
Which of the following statements is correct concerning the sale of a Qualified Opportunity Fund?
A. The capital gains on the sale of the fund acquired after December 1, 2018 and held for more than 10 years may be excluded.
B. The capital gains on the sale of the fund acquired after December 31, 2018 and held for more than 10 years may be excluded.
C. The capital gains on the sale of the fund acquired after December 31, 2018 and held for more than 7 years may be excluded.
D. None of the answer choices are correct.
B. The capital gains on the sale of the fund acquired after December 31, 2018 and held for more than 10 years may be excluded.
- Publication 544, page 28, provides that the capital gains on the sale of a Qualified Opportunity Fund acquired after December 31, 2018 and held for more than 10 years may be excluded.
Which of the following items are included in qualified business income?
A. W-2 income.
B. Disallowed passive loss.
C. Business interest income.
D. Commodities transactions.
C. Business interest income.
- Form 8995-A Instructions, pages 2 and 3, provides that QBI doesn’t include any losses or deductions disallowed under the basis, at-risk, passive loss, or section 461(l) limitations, as they aren’t included or allowed in determining your taxable income for the year. Instead, these losses and deductions are considered in the tax year they are included in determining your taxable income. Loss and deduction items that were generated prior to 2018, that are included in income during the year, are not included in QBI.
- Items that aren’t properly includible in income,
- Invest items such as capital gains or losses, or dividends,
- Interest income, other than interest income properly allocable to a trade or business (interest income attributable to an investment of working capital, reserves, or similar accounts is not properly allocable to a trade or business),
- W-2 income,
- Income that isn’t effectively connected with the conduct of business within the United States,
- Commodities transaction or foreign currency gains or losses described in section 954(c)(1)(C) or (D),
- Income, loss, or deductions from notional principal contracts under section 954(c)(1)(F),
- Annuities unless received in connection with the trade or business,
- Amounts received as reasonable compensation from an S corporation, - Amounts received as guaranteed payment, and
- Qualified REIT dividends or PTP income.
- As a result, business interest income would be included in the calculation of QBI.
Alayna bought a parcel of improved property on October 15, 2022. On April 15, 2023, Alayna traded this property for a parcel of unimproved property. On October 14, 2023, Alayna sold the unimproved property. What date does Alayna use as the purchase date of the unimproved property?
A. October 15, 2022.
B. April 15, 2023.
C. October 14, 2023.
D. October 15, 2023.
A. October 15, 2022.
- Publication 544, page 44, provides that if a taxpayer acquires an asset in exchange for another asset and the taxpayer’s basis for the new asset is figured, in whole or in part, by using the taxpayer’s basis in the old property, the holding period of the new property includes the holding period of the old property. That is, it begins on the same day as the taxpayer’s holding period for the old property.
EXAMPLE: A taxpayer bought machinery on December 4, 2022. On June 4, 2023, the taxpayer traded this machinery for other machinery in a nontaxable exchange. On December 5, 2022, the taxpayer sold the machinery received in the exchange. The taxpayer’s holding period for this machinery began on December 5, 2022. Therefore, the taxpayer held it longer than 1 year.
- Therefore, Alayna uses October 15, 2022, as the purchase date on the newly acquired property. In other words, Alayna’s holding period of the unimproved property includes the holding period of the improved property.
With regard to deductible travel expenses when attending a convention, all of the following statements are correct, except:
A. If you can show that your attendance benefits your trade or business, you can deduct your travel expenses if the expenses are reasonable.
B. You cannot deduct expenses for attending a convention, seminar, or similar meeting held outside of the U.S. area unless the meeting is directly related to your trade or business.
C. If you establish that a seminar held on a cruise ship is directly related to your trade or business, you may be able to deduct expenses of up to $2,000 per year.
D. You must reduce otherwise deductible travel expenses that you pay by the reimbursements not reported on your Form W-2 that you receive from others for these expenses.
B. You cannot deduct expenses for attending a convention, seminar, or similar meeting held outside of the U.S. area unless the meeting is directly related to your trade or business.
- Travel expenses are deductible if they are ordinary and necessary expenses when traveling away from home on business. The type of expense that is deductible depends on the facts and circumstances of the travel (Publication 463, page 4).
- First, a taxpayer can deduct travel expenses when attending a convention if the taxpayer can show that attendance benefits the taxpayer’s trade or business. The taxpayer, however, may not deduct the travel expenses for any family members. Second, a taxpayer can deduct up to $2,000 per year of expenses of attending conventions, seminars, or similar meetings held on cruise ships. All ships that sail are considered cruise ships. Third, deductible travel expenses are reduced by all reimbursements received by the taxpayer (Publication 463, pages 9–10).
- Publication 463, page 9, further provides that a taxpayer cannot deduct expenses for attending a convention, seminar, or similar meeting held outside the North American area unless:
- The meeting is directly related to the taxpayer’s trade or business and
- It is as reasonable to hold the meeting outside the North American area as in it.
- Given the above rules, the incorrect statement in this problem is simply the one permitting the deductibility of travel expenses outside the U.S. since it is unclear whether it is reasonable to hold the meeting at that location.
Generally, if a taxpayer has a net operating loss (NOL) for a tax year ending in 2023, the loss must be carried forward indefinitely with no carrybacks. However, there is an exception for farming losses, which do qualify for a 2-year carryback. All of the following statements about foregoing the net operating loss (NOL) carryback period are correct for those taxpayers with farming losses, except:
A. To make the election, you attach a statement to your tax return filed by the due date (including extensions) for the NOL year.
B. A taxpayer has 3 years to amend a prior year’s return to include the election.
C. Once the election is made, the taxpayer cannot later revoke the election.
D. Once the election is made, you can use your NOL indefinitely until it is fully absorbed.
B. A taxpayer has 3 years to amend a prior year’s return to include the election.
- A taxpayer that has farming loses, an exception to the general no carryback rule, qualifies for a 2-year carryback period but may elect not to carry back the NOL. Publication 536, pages 4 to 5, states in general:
- If a taxpayer with a farming loss makes this choice, then the taxpayer can use the NOL indefinitely until it is fully absorbed.
- The taxpayer with a farming loss 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 with the farming loss 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 (not 3 years) of the due date of the taxpayer’s original return (excluding extensions).
- Once the taxpayer with the farming loss elects to waive the carryback period, it is irrevocable.
Esther works as a computer programmer for a marketing firm. She performs 40% of her computer programming on a home computer during the weekend (her company is closed on the weekends) so she can take off 2 days during the regular work week. The home computer that Esther works on is identical to the computer she uses at work, and she uses it exclusively for her job-related duties. Esther’s employer does not require Esther to take work home with her on the weekends—it is Esther’s choice. Because she uses the home computer exclusively for business purposes, she can use the following percentage of business usage when computing her yearly depreciation for the computer:
A. 100%.
B. 40%.
C. 25%.
D. 0%.
D. 0%.
- Publication 587 addresses the issues associated with a person that uses his or her home for business. An employee can no longer claim any miscellaneous itemized deductions subject to the 2% floor on Schedule A, including expenses for using one’s home as an employee.
- Since Esther is an employee, she cannot claim any percentage of business usage when computing her yearly depreciation for the computer. Publication 17, page 101, does include exceptions of categories of employees who can claim unreimbursed expenses on Form 2106. These are:
- Armed Forces reservists
- Qualified performing artists
- Fee-basis state or local government officials
- Employees with impairment-related work expenses
Which of the following statements is correct?
A. A business owner that receives $10,000 in cash in the course of that trade or business must file Form 8300.
B. A business owner that receives two payments of $6,000 in cash on a related transaction in the course of that trade or business must file Form 8300.
C. A related transaction is one conducted between a payer and the recipient only if it is completed within a 24-hour period.
D. All of the responses are correct.
B. A business owner that receives two payments of $6,000 in cash on a related transaction in the course of that trade or business must file Form 8300.
- As provided in the instructions for Form 8300, each person engaged in a trade or business that, in the course of that trade or business, receives more than $10,000 in cash in one transaction or in two or more related transactions, must file Form 8300. Any transactions conducted between a payer (or its agent) and the recipient in a 24-hour period are related transactions.
- Transactions are considered related even if they occur over a period of more than 24 hours if the recipient knows, or has reason to know, that each transaction is one of a series of connected transactions.
- Hence, the only correct response for this question is a business owner that receives two payments of $6,000 in cash on a related transaction in the course of that trade or business must file Form 8300.
Listed property is any of the following, except:
A. Passenger autos.
B. Transportation property.
C. Property generally used for entertainment.
D. An ambulance.
D. An ambulance.
- Publication 946, pages 51–53, provides, in part, that listed property is any of the following:
- Passenger automobiles weighing 6,000 pounds or less
- Any other property used for transportation, unless it is an excepted vehicle
- Property generally used for entertainment, recreation, or amusement (including photographic, phonographic, communication, and video-recording equipment)
- The following vehicles are NOT considered passenger automobiles and, as such, do not qualify as listed property (Publication 946, page 53):
- An ambulance, hearse, or combination ambulance-hearse used directly in a trade or business
- A vehicle used directly in the trade or business of transporting persons or property for pay or hire
- A truck or van that is a qualified nonpersonal-use vehicle
- Given the items included in this problem, an ambulance is the only one that is not listed property.
Passive activity rules apply to:
A. Closely held corporations.
B. Partnerships.
C. S corporations.
D. Grantor trusts.
A. Closely held corporations.
- Publication 925, page 2, states that the passive activity rules apply to individuals, estates, trusts (other than grantor trusts), personal service corporations, and closely held corporations.
- Even though the rules do not apply to grantor trusts, partnerships, and S corporations directly, they do apply to the owners of these entities. For information about personal service corporations and closely held corporations, including definitions and how the passive activity rules apply to these corporations, see Form 8810 and its instructions.
Fran’s car, which she used 75% for business, was stolen in 2023. It cost $30,000 in 2020. She had properly claimed depreciation of $5,220. The insurance company reimbursed her $19,000, which was the fair market value at the time of the theft. What is the amount of the business portion of Fran’s theft loss?
A. $3,030.
B. $4,030.
C. $4,335.
D. $5,780.
A. $3,030.
- Publication 544, pages 39 and 40, provides that IRC Section 1231 gains and losses are taxable gains and losses from Section 1231 transactions but does not include any of the gain that is ordinary income as a result of any recapture provisions.
- In the case of a disposition (including casualty or theft) of IRC Section 1245 property that is used in a trade or business and held longer than 1 year, the sale or exchange is a Section 1231 transaction, and the gain is treated as ordinary income to the extent of depreciation allowed or allowable on the property. Any gain recognized that is more than the part that is ordinary income from depreciation is a Section 1231 gain.
- In this problem, Fran sustains a loss of $5,780 ($30,000 − $5,220 − $19,000). Since Fran’s car is used 75% for business, it is only the business portion that qualifies for Section 1231 treatment, which is calculated as follows:
- The adjusted basis for the business portion of the property is $17,280, which is the original basis of $22,500 (75% of $30,000) less the depreciation expense of $5,220.
- Hence, the business portion of the loss is $3,030, which is the adjusted basis of $17,280 less the business portion of the insurance of $14,250 (75% of $19,000).
Which of the following statements is correct concerning the cost of inventory?
A. It must be increased by the cost of any trade discounts received.
B. It must be decreased by any cash discounts taken.
C. Cash discounts are a reduction in the invoice price for paying one’s bill in a timely manner.
D. All of the answer choices are correct.
C. Cash discounts are a reduction in the invoice price for paying one’s bill in a timely manner.
- Publication 538, page 15, discusses a trade discount as a discount allowed regardless of when the payment is made on purchased inventory. Generally, it is for volume or quantity purchases. When a taxpayer receives a trade discount, the taxpayer must reduce the cost of inventory by a trade (or quantity) discount.
- A cash discount is a reduction in the invoice or purchase price for paying within a prescribed time. The taxpayer can choose either to deduct cash discounts or include them in income, but the taxpayer must treat them consistently from year to year.
Which of the following statements is correct in 2023?
A. The work opportunity credit and the welfare-to-work credit can be claimed with respect to wages paid to the same employee.
B. The welfare-to-work credit is claimed on Form 8941.
C. The work opportunity credit is claimed on Form 5884.
D. None of the answer choices are correct.
C. The work opportunity credit is claimed on Form 5884.
- 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. Form 5884 is used to claim the work opportunity credit for qualified first- and/or second-year wages a taxpayer paid to or incurred for targeted group employees during the tax year. The taxpayer’s business does not have to be located in an empowerment zone or rural renewal county to qualify for this credit.
- The business can claim or elect not to claim the work opportunity credit any time within 3 years from the due date of the owner’s tax return on either the original return or an amended return.
