Progress Test Screw-Ups

Question 1

Freeman, a single individual, reported the following income in the current year:
Guaranteed payment from services rendered to a partnership $ 50,000
Ordinary income from an S corporation 20,000
What amount of Freeman’s income is subject to self-employment tax?

Answer 1

$50,000

Question 2

Smith, a single individual, made the following charitable contributions during the current year. Smith’s adjusted gross income is $60,000.
Donation to Smith’s church
$5,000
Art work donated to the local art museum
(Smith purchased it for $2,000 four months ago and a local art dealer appraised it for)
3,000
Contribution to a needy family
1,000
What amount should Smith deduct as a charitable contribution?

Answer 2

Choice “d” is correct. This question is asking for the actual deduction and requires the candidate to determine which items are deductible charitable contributions. The $5,000 donation to the church is allowable. The artwork donated to the local art museum is deductible to its basis, $2,000. Although it is appreciated property, Smith held the property for only four months, making it short-term capital gain property. Donations of short-term capital gain property are deductible to the donor to the extent of his/her adjusted basis. The contribution to a needy family is not a deductible contribution, as it was not made to a qualifying organization.

Question 3

Sam's year 2 taxable income was $175,000 with a corresponding tax liability of $30,000. For year 3, Sam expects taxable income of $250,000 and a tax liability of $50,000. In order to avoid a penalty for underpayment of estimated tax, what is the minimum amount of year 3 estimated tax payments that Sam can make?
	a.	
$30,000
	b.	
$33,000
	c.	
$50,000
	d.	
$45,000

Answer 3

Choice “b” is correct. To avoid penalties, if a taxpayer owes $1,000 or more in tax payments beyond withholdings, such taxpayer will need to have paid in for taxes the lesser of:
90% of the current year’s tax ($50,000 x 90%) = $45,000, or
100% of the previous year’s tax ($30,000 x 100%) = $30,000
However, if the taxpayer had adjusted gross income in excess of $150,000 in the prior year, 110% of the prior year’s tax liability is used to compute the safe harbor for estimated payments. (Previous year’s tax $30,000 x 110% = $33,000).

Question 4

According to the Securities Act of 1933, which of the following statements is correct regarding an issuer of securities?

Answer 4

If an issuer sells a security and fails to meet certain disclosure requirements, the purchaser may sell it back to the issuer and recover the price paid.