Practice Exam 9.5.23

Question 1

Which of the following statements is true with respect to tax-exempt organizations?

A. A partnership may qualify as an organization exempt from federal income tax if it is organized and operated exclusively for one or more of the purposes found in Sec. 501(c)(3).

B. A foundation may qualify for exemption from federal income tax if it is organized for the prevention of cruelty to animals.

C. An individual can qualify as an organization exempt from federal income tax.

D. In order to qualify as an exempt organization, the organization must be a corporation.

Answer 1

B. A foundation may qualify for exemption from federal income tax if it is organized for the prevention of cruelty to animals.

Exempt status generally depends on the nature and purpose of an organization. Among the types of organizations that may qualify as exempt are corporations, trusts, foundations, funds, community funds, etc. A more complete list can be found in Sec. 501(c) along with the permitted stated purposes and requirements.

Question 2

A tax return preparer may disclose or use tax return information without the taxpayer’s consent to

A. Facilitate a supplier’s or lender’s credit evaluation of the taxpayer.

B. Solicit additional nontax business.

C. Accommodate the request of a financial institution that needs to determine the amount of taxpayer’s debt to it to be forgiven.

D. Be evaluated by a quality or peer review organization.

Answer 2

D. Be evaluated by a quality or peer review organization.

An income tax return preparer who discloses information furnished in connection with preparation of any return or uses the information for any purpose other than to prepare or assist in preparation of the return is subject to a penalty. However, disclosure for evaluation by an official quality or peer review organization is not absolutely prohibited.

Question 3

A man’s wife dies of an illness in April of the current tax year. The surviving spouse is also ill and does not work, but he lives off his IRA account and retirement from a former employer, and provides over half of the cost of maintaining his own home. He has not remarried and lived in the home the entire year. Which filing status below is the surviving spouse eligible to use and provides the lowest tax rate?

A. Single.
B. Married filing jointly.
C. Head of household.
D. Married filing separately.

Answer 3

B. Married filing jointly.

An individual whose spouse dies during the current tax year may file under married filing jointly, which has the lowest tax rate, even if the individual has not remarried by the end of the tax year.

Question 4

At the close of the prior year, an individual taxpayer transferred assets into an irrevocable trust, retaining the right to the income from the trust for life. During the year, the assets earned ordinary dividends and interest income. The tax liability on the income earned will be paid

A. By the trust on the interest income only, and by the individual taxpayer for the dividend income.
B. Entirely by the trust.
C. By the trust on the dividend income only, and by the individual taxpayer for the interest income.
D. Entirely by the individual taxpayer.

Answer 4

D. Entirely by the individual taxpayer.

Generally, the only way a grantor can avoid taxation on the income from the trust is to give up control and benefits of the assets assigned to the trust and give up the right to revoke or amend the trust. The taxpayer retains the right to income from the trust for life, so the taxpayer must pay taxes on the income earned by the trust.

Question 5

In 2023, Smith, a divorced person, provided over one-half the support for his widowed mother, Ruth, and his son, Clay, both of whom are U.S. citizens. During 2023, Ruth did not live with Smith. She received $10,250 in Social Security benefits. Clay, a full-time graduate student, and his wife lived with Smith. Clay had no income but filed a joint return for 2023, owing an additional $500 in taxes on his wife’s income. How many dependents was Smith entitled to claim on his 2023 tax return?

A. 0
B. 1
C. 2
D. 3

Answer 5

B. 1

Only Smith’s mother may be claimed as a dependent. Smith provided over one-half of her support, and they do not need to live together. The Social Security benefits are not taxable (provisional income not in excess over base amount of $25,000) and therefore not included in gross income. However, a taxpayer loses the claim as a dependent for a married dependent filing a joint return, but not if only to claim a refund. Despite providing over one-half of their support, the taxpayer cannot claim his son or his daughter-in-law as dependents.

Question 6

In February 2023, Paul and Jean, a married couple, cashed a qualified Series EE savings bond they bought in November 2010. They received proceeds of $7,132, representing principal of $5,000 and interest of $2,132. In 2023, they helped pay their daughter’s college tuition. The qualified education expenses they paid in 2023 totaled $4,000. They are not claiming an education credit for the expenses, and they do not have an education IRA. How much interest income can Paul and Jean exclude?

A. $1,000
B. $4,000
C. $1,196
D. $2,132

Answer 6

C. $1,196

If the gross proceeds are greater than the educational expenses, the amount of interest that is excludable is determined by taking the applicable fraction of interest. The applicable fraction is determined by dividing the total qualified educational expenses by the gross proceeds of the bond redemption ($4,000 ÷ $7,132). This percentage is then multiplied by the amount of interest to obtain the exclusion amount ($2,132 × .561). Therefore, Paul and Jean can exclude $1,196 of interest from income.

Question 7

Of the organizations listed below, which organization could not receive approval for tax-exempt status under Internal Revenue Code Sec. 501(c)(3)?

A. A local boys club.
B. A partnership for scientific research.
C. A college alumni association.
D. A local chapter of the Salvation Army.

Answer 7

B. A partnership for scientific research.

Organizations formed and operated exclusively for religious, charitable, scientific, educational, literary, or similar purposes are a broad class of exempt organizations. A partnership cannot qualify as an exempt organization, and no part of the net earnings may accrue to the benefit of any private shareholder or individual.

Question 8

Which of the following is treated as income from a passive activity with respect to loss limitations of Sec. 469?

A. Interest on bank accounts.

B. Annuity income from an insurance contract.

C. Rental income from an office building in which the owner earns 80% of her gross income and materially participates for 700 hours of service during the year.

D. An individual’s fees for managing a passive activity.

Answer 8

C. Rental income from an office building in which the owner earns 80% of her gross income and materially participates for 700 hours of service during the year.

In general, a passive activity is any activity that involves the conduct of a trade or business or the production of income and in which the taxpayer does not materially participate [Sec. 469(c)(1)]. Losses from rental real estate are no longer subject to the passive activity rules if the taxpayer meets two requirements: (1) More than 50% of the individual’s personal services are performed in real property trades or businesses in which they materially participate during the year and (2) the individual performs more than 750 hours of service in the real property trades or businesses in which the individual materially participates.

Question 9

In order to show that a tax preparer’s application of tax law was in line with the intent of the tax law, the preparer should cite which of the following types of authoritative sources to make the most convincing case?

A. IRS publication.
B. Committee report.
C. Technical advice memorandum of another, similar case.
D. Delegation order.

Answer 9

B. Committee report.

Committee reports are useful tools in determining Congressional intent behind certain tax laws and helping examiners apply the law properly. The committee reports are very high authority.

Question 10

All of the following payments made to employees would be currently deductible as business expenses except

A. Reasonable salary paid to a corporate officer owning a controlling interest for services she rendered.

B. Wages paid to employees for constructing a new building to be used in the business.

C. Vacation pay paid to an employee when the employee chooses not to take a vacation.

D. Lump-sum payment made to the beneficiary of a deceased employee that is reasonable in relation to the employee’s past services, i.e., payment equivalent to compensation.

Answer 10

B. Wages paid to employees for constructing a new building to be used in the business.

Normally, Sec. 162(a)(1) allows a deduction for a reasonable allowance for salaries or other compensation for personal services actually rendered. However, Sec. 263A requires all direct costs and a proper share of indirect costs allocable to property produced by the taxpayer to be capitalized. Wages paid to employees for constructing a new building would be direct costs allocable to that building. Those costs are capitalized and depreciated as part of the cost of the building rather than currently deductible.

Question 11

A CPA is permitted to disclose confidential client information without the consent of the client to

A. III only.
B. II only.
C. II and III only.
D. I and III only.

Answer 11

A. III only.

The Confidential Client Information Rule states that a member may not disclose any confidential client information except with the specific consent of the client. But this rule should not be understood to preclude a CPA from responding to an inquiry made by (1) an investigative body of a state CPA society, (2) the trial board of the AICPA, or (3) an AICPA or state peer review body, or in response to a validly issued and enforceable subpoena.

Question 12

Jefferson’s investment income consisted of $2,000 in interest from a U.S. Treasury bond and $1,000 interest from a municipal bond. Jefferson also paid $4,000 in investment interest expense. Assuming that Jefferson itemizes, what amount can Jefferson deduct for investment interest expense?

A. $4,000
B. $1,000
C. $3,000
D. $2,000

Answer 12

D. $2,000

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

Question 13

Wilson, CPA, uses a commercial tax software package to prepare clients’ individual income tax returns. Upon reviewing a client’s computer-generated Year 1 itemized deductions, Wilson discovers that the schedule’s deductible investment interest expense is less than the amount paid by the taxpayer and the amount that Wilson entered into the computer. After analyzing the entire tax return, Wilson determines that the computer-generated investment interest expense deduction is correct. Why is the computer-generated investment interest expense deduction correct?

A. Neither I nor II.
B. I only.
C. Both I and II.
D. II only.

Answer 13

B. I only.

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

Question 14

The Enduro Hunting Club, organized for nonprofitable purposes, took in the following receipts for the year:

Enduro will lose exempt status because

A. Dues represent less than 50% of total annual receipts.

B. Jerky sales account for 35% of total annual receipts.

C. Assessments for land preservation are not qualified receipts for exempt status.

D. Membership fees are not qualified receipts for exempt status.

Answer 14

B. Jerky sales account for 35% of total annual receipts.

Social clubs organized for pleasure, recreation, and other nonprofitable purposes, substantially all of the activities of which are for such purposes, are an exempt class. However, exempt status is lost if 35% or more of receipts are from sources other than membership fees, dues, and assessments. Enduro’s receipts for the year totaled $100,000, and 35% of those were from the sale of products to the public, causing loss of exempt status.

Question 15

Phil and Joan Crawley made the following payments during 2023:

The Crawleys had net investment income of $3,000 for the year. What is the maximum amount that the Crawleys can deduct as interest expense in calculating itemized deductions for 2023?

A. $7,100
B. $6,600
C. $3,600
D. $7,600

Answer 15

B. $6,600

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

Question 16

A tax return preparer is not required to

A. Notify the taxpayer regarding an omission in a filed tax return.

B. Advise the taxpayer of noncompliance under the Internal Revenue Code.

C. Notify the taxpayer when an error is discovered.

D. Discuss the tax return with a third party after oral consent by the client-taxpayer.

Answer 16

D. Discuss the tax return with a third party after oral consent by the client-taxpayer.

A tax return preparer should obtain the taxpayer’s written, formal consent authorizing disclosure for a specific purpose.

Question 17

Which of the following statements about business meals is true?

A. The IRS denies deductions for any meal expense for which substantiating evidence is not provided.

B. No deduction is allowed for meals that are lavish or extravagant.

C. Meals while traveling for business are not deductible.

D. The meal is deductible whether or not the taxpayer or their employee is present at the meal.

Answer 17

B. No deduction is allowed for meals that are lavish or extravagant.

Business meals include food and beverages provided to a customer. Meal expenses are not deductible if neither the taxpayer nor an employee of the taxpayer is present at the meal. No deduction is allowed for meals (or any portion thereof) that are lavish or extravagant under the circumstances. The IRS denies deductions for any meal expense over $75 for which the claimant did not provide substantiating evidence. Meals while traveling for business are 50% deductible.

Question 18

A tax advisor with what responsibility should take reasonable steps to ensure that the firm’s procedures for all members, associates, and employees are consistent with the best practices?

A. Overseeing either a firm’s practice of (1) providing advice concerning federal tax issues or (2) preparing or assisting in the preparation of submissions to the IRS.

B. Overseeing a firm’s practice of preparing or assisting in the preparation of submissions to the IRS.

C. Overseeing a firm’s practice of providing advice concerning federal tax issues.

D. Neither overseeing a firm’s practice of providing advice concerning federal tax issues nor preparing or assisting in the preparation of submissions to the IRS.

Answer 18

A. Overseeing either a firm’s practice of (1) providing advice concerning federal tax issues or (2) preparing or assisting in the preparation of submissions to the IRS.

Tax advisors with responsibility for overseeing a firm’s practice of (1) providing advice concerning federal tax issues or of (2) preparing or assisting in the preparation of submissions to the Internal Revenue Service should take reasonable steps to ensure that the firm’s procedures for all members, associates, and employees are consistent with the best practices.

Question 19

All of the following expenses incurred in the course of operating a business are deductible business expenses except

A. Advertising in a convention program of a political party. The proceeds from the publication of the program are for the local use of the political party.

B. Public service advertising that keeps the name of the business before the public.

C. Advertising sponsorship at public school sporting events.

D. Advertising in a concert program the local church is sponsoring.

Answer 19

A. Advertising in a convention program of a political party. The proceeds from the publication of the program are for the local use of the political party.

Section 276 provides that advertising in a publication of a political party is not deductible as a business expense. The proceeds from the convention program are for the use of a political party. Therefore, the expenses incurred to advertise in that program are not deductible.

Question 20

Robbie, a cash-basis single taxpayer, reported $50,000 of adjusted gross income last year and claimed itemized deductions of $15,000, consisting of $10,000 of state income taxes and $5,000 of investment interest, paid last year. Robbie’s itemized deduction amount, which exceeded the standard deduction available to single taxpayers for last year by $1,150, was fully deductible, and it was not subject to any limitations or phase-outs. In the current year, Robbie received a $1,500 state tax refund relating to the prior year. What is the proper treatment of the state tax refund?

A. Include $1,500 in income in the current year.

B. Amend the prior year’s return and reduce the claimed itemized deductions for that year.

C. Include $1,150 in income in the current year.

D. Include none of the refund in income in the current year.

Answer 20

C. Include $1,150 in income in the current year.

Gross income includes items received for which the taxpayer received a tax benefit in a prior year, but amounts recovered during the tax year that did not provide a tax benefit in the prior year are excluded. Since Robbie’s itemized deduction amount for the previous year exceeded the standard deduction available to him by $1,150, Robbie only received a tax benefit for that amount and therefore must only include $1,150 of the tax refund in income for the current year.

Question 21

Jerry and Ann Jones are married and keep up a home for their two preschool children, ages 2 and 4. They claim their children as dependents and file a joint return using Form 1040. Their adjusted gross income (AGI) is $89,000. Jerry earned $44,000, and Ann earned $45,000. During the year, they pay work-related expenses of $3,000 for child care for their son, Daniel, at a neighbor’s home and $3,200 for child care for their daughter, Amy, at Pine Street Nursery School. How much of their child-care payments are eligible for the Child and Dependent Care Credit on their return?

A. $6,000
B. $3,000
C. $6,200
D. $0

Answer 21

A. $6,000

The IRC allows a child-care credit for a portion of qualifying child or dependent care expenses paid for the purpose of allowing the taxpayer to be gainfully employed. The payments cannot be to someone that you or your spouse can claim as a dependent. The maximum amount of employment-related expenses to which the credit may be applied is $3,000, if one qualifying person is involved, or $6,000, if two or more are involved, less excludable employer dependent-care assistance program payments.

Question 22

By what date must a tax return preparer furnish a copy of the original return to a taxpayer?

A. By the seventh work day after the preparer signs the completed return.

B. By the date the taxpayer pays for the preparation of the return.

C. By the date the tax return is due to be filed with the IRS.

D. By the date the tax return is presented for the signature of the taxpayer.

Answer 22

D. By the date the tax return is presented for the signature of the taxpayer.

The person who is a tax return preparer of any return of tax under Title 26 shall furnish a completed copy of the original return or claim for refund to the taxpayer not later than the time the original return or claim for refund is presented for the signature of the taxpayer. The preparer may, if (s)he wishes, request a receipt or other evidence from the taxpayer sufficient to show satisfaction of the requirement.

Question 23

The Enduro Hunting Club, an exempt organization, made the following disbursements of its net earnings during the current year:

Enduro will lose exempt status for

A. $6,000 disbursement to Geronimo.
B. $3,000 disbursement to Hoot.
C. $5,000 disbursement to Island Park.
D. $10,000 disbursement to Fountain of Youth.

Answer 23

A. $6,000 disbursement to Geronimo.

Social clubs organized for pleasure, recreation, and other nonprofitable purposes, substantially all of the activities of which are for such purposes, are an exempt class. However, no part of net earnings may inure to the benefit of any private shareholder. Geronimo is the only private shareholder Enduro made a distribution to.

Question 24

Mr. Todd, who is 43 years old, has lived apart from his wife since May 2023. For 2023, his two children, whom he can claim as dependents, lived with him the entire year, and he paid the entire cost of maintaining the household. Assuming that Mr. Todd cannot qualify to file a joint return for 2023, he must, nevertheless, file a return if his gross income is at least

A. $27,700
B. $1,850
C. $20,800
D. $13,850

Answer 24

C. $20,800

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

Question 25

Under a written agreement between Mrs. Norma Lowe and an approved religious exempt organization, a 10-year-old girl from Vietnam came to live in Mrs. Lowe’s home on August 1, 2023, in order to be able to start school in the U.S. on September 3, 2023. Mrs. Lowe actually spent $500 for food, clothing, and school supplies for the student during 2023, without receiving any compensation or reimbursement of costs. What portion of the $500 may Mrs. Lowe deduct on her 2023 income tax return as a charitable contribution?

A. $250
B. $200
C. $0
D. $500

Answer 25

B. $200

Amounts paid by a taxpayer to maintain an individual other than a dependent as a member of his or her household under a written agreement between the taxpayer and a qualified organization to provide educational opportunity for pupils or students in private homes are deductible up to $50 per month. The student must attend full-time in the 12th or any lower grade of a qualified educational organization located in the United States. The deduction is only available for the months the child is a full-time student, which is 4 months in this case: September-December. Mrs. Lowe’s expenditures qualify under this provision as a charitable contribution deduction of $200 ($50 × 4 months in 2023).

Question 26

Joe and Mary Day’s daughter, Julie, is a first-year student in college during 2023. Joe and Mary had an adjusted gross income (AGI) of $124,000, and Julie’s eligible expenses were $9,000. What is the amount of the American Opportunity Credit that the Days may use in 2023?

A. $0
B. $2,500
C. $9,000
D. $2,000

Answer 26

B. $2,500

The American Opportunity Credit allows taxpayers a 100% credit for the first $2,000 of tuition expenses and a 25% credit for the second $2,000 of tuition expenses. The credit is reduced subject to income limits. The phaseout range begins when AGI exceeds $160,000 for joint filers in 2023. Therefore, the Days may use the entire $2,500 credit.

Question 27

Identify the appropriate action that a practitioner should take when (s)he becomes aware of an error or omission on a client’s return.

A. Promptly advise the client of such noncompliance, error, or omission and the consequences thereof.

B. Amend the return and provide it to the client.

C. Do nothing.

D. Inform the IRS of the noncompliance, error, or omission.

Answer 27

A. Promptly advise the client of such noncompliance, error, or omission and the consequences thereof.

Section 10.21 of Treasury Department Circular 230 requires an attorney, a certified public accountant, or an enrolled agent who knows that a client has not complied with the revenue laws of the United States to promptly advise the client of the noncompliance, error, or omission and the consequences of the noncompliance, error, or omission as provided in the IRC and regulations.

Question 28

A CPA firm was hired by a company to prepare tax returns it needed to obtain a loan from a bank. The bank lent $500,000 to the company based on the CPA’s work. Fifteen months later, the company declared bankruptcy and was unable to repay the loan. The bank discovered that the CPA firm failed to discover a material overstatement of taxable income by the company. Which of the following statements is correct regarding a state court suit by the bank against the CPA firm? The bank

A. Can sue the CPA firm for the loss of the loan because of negligence.

B. Cannot sue the CPA firm because of lack of privity of contract.

C. Can sue the CPA firm for the loss of the loan because of the rule of privilege.

D. Cannot sue the CPA firm because of the statute of limitations.

Answer 28

A. Can sue the CPA firm for the loss of the loan because of negligence.

Negligence is a tort. A tort is a wrong not involving breach of a contractual duty for which judicial relief may be granted in a civil lawsuit. The plaintiff must prove in a tort case that (1) the defendant breached a legal duty to the plaintiff and (2) that the breach was the legal cause of the plaintiff’s damages. The duty of a CPA is not to commit negligence, that is, to exercise reasonable care and diligence. The issue is whether the CPA owed this duty to the bank, which was not a party to the contract between the accountant and the company. According to the majority rule, the CPA’s duty extends to foreseen (but not necessarily individually identified) third parties (foreseen users and users within a foreseen class of users). Because the bank was a clearly foreseen user of the company’s tax returns, the CPA owed a duty to it. Thus, the bank has a right to sue the CPA. The basis of the suit is that the CPA’s failure to exercise reasonable care and diligence resulted in not detecting the material overstatement.

Question 29

When should a noncorporate taxpayer elect to forgo Sec. 179 or elect out of bonus depreciation deductions in the current year?

A. When the taxpayer has low marginal tax rates in the current year and expects to be in higher marginal rates in the future.

B. When the taxpayer has high marginal tax rates in the current year and expects to be in lower marginal rates in the future.

C. When the taxpayer expects lower rates in the future.

D. When the taxpayer expects net operating losses in the future.

Answer 29

A. When the taxpayer has low marginal tax rates in the current year and expects to be in higher marginal rates in the future.

If a taxpayer has high marginal tax rates in future years and expects to have lower marginal rates in the current year, the taxpayer should forgo Sec. 179 or bonus depreciation deductions in the current year, leaving larger depreciation deductions for future years with high marginal tax rates. This will result in a smaller total tax liability.

Question 30

Mr. and Mrs. X plan to file a joint return for 2023. Neither is over 65 or blind, nor do they have any dependents. What is the amount of gross income required before they must file a return?

A. $13,850
B. $27,700
C. $29,200
D. $30,700

Answer 30

B. $27,700

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

Question 31

Basil Company, a cash-basis taxpayer, had the following activity during Year 2:

What is the correct amount of income to be reported for Year 2?

A. $1,090,000
B. $1,040,000
C. $1,000,000
D. $1,050,000

Answer 31

D. $1,050,000

Since Basil Company reports income and expenses on the cash basis, cash and checks received are deposited and included in income. Therefore the $40,000 in uncollected sales has not been included in income. The recovery of the bad debt collections will be included in income. Basil Company will report $1,050,000 of income.

Question 32

The 2023 deduction by an individual taxpayer for interest on investment indebtedness is

A. Not limited.
B. Limited to investment interest paid in 2023.
C. Limited to the taxpayer’s 2023 interest income.
D. Limited to the taxpayer’s 2023 net investment income.

Answer 32

D. Limited to the taxpayer’s 2023 net investment income.

The deduction for interest on investment indebtedness is limited to the amount of net investment income for the taxable year. Any disallowed investment interest may be carried over and treated as investment interest paid or accrued in the succeeding taxable year.

Question 33

Paul and Lois Lee, both age 50, are married and filed a joint return for 2023. Their 2023 adjusted gross income was $138,000, including Paul’s $133,000 salary. Lois had no income of her own. Neither spouse was covered by an employer-sponsored pension plan. What amount could the Lees contribute to IRAs for 2023 to take advantage of their maximum allowable IRA deduction in their 2023 return?

A. $0
B. $14,000
C. $6,500
D. $15,000

Answer 33

D. $15,000

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

Question 34

ABC Corp. leases two buildings. The first lease started January 1, 2023, and was for 3 years at $10,000 per year rent. ABC paid $30,000 in January for the entire 3-year term. The second lease started July 1, 2023, and was for 5 years at $6,000 per year rent. ABC paid $30,000 in June for the entire 5-year term. What is the total rent expense ABC Corp. may deduct in 2023?

A. $13,500
B. $13,000
C. $60,000
D. None of the answers are correct.

Answer 34

B. $13,000

ABC will deduct $13,000 as rent expense in the current year [($10,000 × 1 year) + ($6,000 × 1/2 year)]. Because the prepayment extends beyond the tax year following the prepayment, the exception in Reg. 1.263(a)-4(f)(8) (i.e., the 12-month rule) does not apply.

Question 35

Mr. T is age 21, is single, and cannot be claimed as a dependent by another taxpayer. For 2023, he must file a federal income tax return if he had gross income of at least

A. $1,250
B. $13,850
C. $27,700
D. $20,800

Answer 35

B. $13,850

Generally, a taxpayer must file a return if his or her gross income equals or exceeds the standard deduction amount applicable to the taxpayer’s filing status [Sec. 6012(a)(1)]. For a single taxpayer, the standard deduction is $13,850 in 2023 [Sec. 63(c)]. Mr. T must file a tax return if his gross income is at least $13,850.

Question 36

Lite-Mart, a C corporation, had a beginning credit balance in its warranty reserve account of $120,000. During the year, Lite-Mart accrued estimated warranty expense of $16,000. At the end of the year, Lite-Mart’s warranty reserve had a $90,000 credit balance. What amount of warranty expense should Lite-Mart deduct?

A. $14,000
B. $46,000
C. $16,000
D. $30,000

Answer 36

B. $46,000

Warranty expense is not deducted on the tax return until paid. The warranty paid during the year equals the beginning balance in the warranty reserve plus the accrued warranty expense during the year minus the ending balance in the warranty reserve. Thus, the warranty paid during the year is $46,000 ($120,000 + $16,000 – $90,000). Lite-Mart can deduct $46,000 of warranty expense.