REG 1

Question 1

Corporations owing $500 or more in income tax for the tax year are required to make estimated tax payments or be subject to an interest penalty. The payments must be equal to the lesser of 100% of the tax liability for the current year (i.e., the annualized income method) or the preceding year (i.e., the preceding-year method). The payments cannot be based on the preceding year if: (1) the corporation did not file a return showing a tax liability for that year (e.g., the corporation experienced a net operating loss); (2) the preceding year was less than 12 months; or (3) the corporation had taxable income of over $1,000,000.

Answer 1

Corporations owing $500 or more in income tax for the tax year are required to make estimated tax payments or be subject to an interest penalty. The payments must be equal to the lesser of 100% of the tax liability for the current year (i.e., the annualized income method) or the preceding year (i.e., the preceding-year method). The payments cannot be based on the preceding year if: (1) the corporation did not file a return showing a tax liability for that year (e.g., the corporation experienced a net operating loss); (2) the preceding year was less than 12 months; or (3) the corporation had taxable income of over $1,000,000.

Question 2

The required annual amount is usually the lower of 90% of the tax shown on the taxpayer’s current year return or 100% of the tax shown on the taxpayer’s prior year return. If the taxpayer’s adjusted gross income exceeded $150,000 in the prior year and the taxpayer elects to base his/her required annual amount on the prior year, then the taxpayer would have to use 110% of the prior year’s return.

Answer 2

The required annual amount is usually the lower of 90% of the tax shown on the taxpayer’s current year return or 100% of the tax shown on the taxpayer’s prior year return. If the taxpayer’s adjusted gross income exceeded $150,000 in the prior year and the taxpayer elects to base his/her required annual amount on the prior year, then the taxpayer would have to use 110% of the prior year’s return.

Question 3

The Ultramares rule holds that ordinary negligence is insufficient for liability to third parties because of lack of privity of contract between the third party and the auditor, unless the third party is a primary beneficiary

Answer 3

The Ultramares rule holds that ordinary negligence is insufficient for liability to third parties because of lack of privity of contract between the third party and the auditor, unless the third party is a primary beneficiary

Question 4

The parol evidence rule prohibits the introduction of evidence that additional terms were agreed upon before the contract was signed. In effect, it dictates that a written contract will have the final say on what agreements are present
The parol evidence rule will not allow evidence of prior agreements to be admitted as evidence.

Answer 4

The parol evidence rule prohibits the introduction of evidence that additional terms were agreed upon before the contract was signed. In effect, it dictates that a written contract will have the final say on what agreements are present
The parol evidence rule will not allow evidence of prior agreements to be admitted as evidence.

Question 5

The Statute of Frauds requires that all contracts of $500 or more for a sale of goods be in writing (unless they are custom goods). Although a book is a good, this contract does not call for its sale but for its repair. The repair of a book is a service, and so is not covered by the Statute of Frauds and the writing requirement. In addition, any modifications of a service contract require consideration to support the modifications.

Answer 5

The Statute of Frauds requires that all contracts of $500 or more for a sale of goods be in writing (unless they are custom goods). Although a book is a good, this contract does not call for its sale but for its repair. The repair of a book is a service, and so is not covered by the Statute of Frauds and the writing requirement. In addition, any modifications of a service contract require consideration to support the modifications.

Question 6

The right of replevin has to do with recovering identified property that is being improperly held by the seller when the buyer cannot find another seller.

Answer 6

The right of replevin has to do with recovering identified property that is being improperly held by the seller when the buyer cannot find another seller.

Question 7

In order for a creditor to become a secured party—that is, a party with a legal right to take possession of collateral in the event of the debtor’s failure to pay—the creditor must take special steps. These steps are known as attachment of a security interest.

Answer 7

In order for a creditor to become a secured party—that is, a party with a legal right to take possession of collateral in the event of the debtor’s failure to pay—the creditor must take special steps. These steps are known as attachment of a security interest.

Question 8

In order for a secured party to more fully ensure its legal rights in the event that other parties are asserting an interest in the same piece of collateral, the secured party must take additional steps. These additional steps are known as perfecting a security interest.

Answer 8

In order for a secured party to more fully ensure its legal rights in the event that other parties are asserting an interest in the same piece of collateral, the secured party must take additional steps. These additional steps are known as perfecting a security interest.

Question 9

For a security interest to ATTACH, the following must be present:

1. Underlying debt/obligation;
2. Either a security agreement or possession of the collateral by the creditor; and
3. Debtor must have interest in the property

Until all three are present, the security interest does not attach.

Answer 9

For a security interest to ATTACH, the following must be present:

1. Underlying debt/obligation;
2. Either a security agreement or possession of the collateral by the creditor; and
3. Debtor must have interest in the property

Until all three are present, the security interest does not attach.

Question 10

A purchase money security interest in noninventory collateral has priority if it is perfected before the debtor takes possession or within 20 days thereafter

Answer 10

A purchase money security interest in noninventory collateral has priority if it is perfected before the debtor takes possession or within 20 days thereafter

Question 11

The 1933 Act makes several types of securities exempt from its registration requirements. Among them are securities of charities, government entities, banks, savings and loans, and farmers’ co-operatives. Some issues by insurance companies are exempt, but only if the issuing company is a state-regulated company. Otherwise, an insurance company’s issues must be registered.

Answer 11

The 1933 Act makes several types of securities exempt from its registration requirements. Among them are securities of charities, government entities, banks, savings and loans, and farmers’ co-operatives. Some issues by insurance companies are exempt, but only if the issuing company is a state-regulated company. Otherwise, an insurance company’s issues must be registered.

Question 12

Rule 504 does not set a limit on the overall number of investors. So long as a company’s total offerings for a year are under $1mn, and the company is not an investment company, Rule 504 may be used.

Answer 12

Rule 504 does not set a limit on the overall number of investors. So long as a company’s total offerings for a year are under $1mn, and the company is not an investment company, Rule 504 may be used.

Question 13

A plaintiff must generally show several things to win a Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 only if the plaintiff proves that:

(1) intentionally or recklessly
(2) made a misstatement of material fact or omitted a material fact
(3) that was relied upon by the defendant

Answer 13

A plaintiff must generally show several things to win a Section 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934 only if the plaintiff proves that:

(1) intentionally or recklessly
(2) made a misstatement of material fact or omitted a material fact
(3) that was relied upon by the defendant.

Question 14

The articles of incorporation must include:

(1) the name of the corporation
(2) the number of shares it is authorized to issue
(3) the street address of its registered office and the name of its agent at that address; and
(4) the name and address of each incorporator

Answer 14

The articles of incorporation must include:

(1) the name of the corporation
(2) the number of shares it is authorized to issue
(3) the street address of its registered office and the name of its agent at that address; and
(4) the name and address of each incorporator

Question 15

Rule 506 of Regulation D provides two distinct exemptions from registration for companies when they offer and sell securities. Companies relying on the Rule 506 exemptions can raise an unlimited amount of money.

Answer 15

Rule 506 of Regulation D provides two distinct exemptions from registration for companies when they offer and sell securities. Companies relying on the Rule 506 exemptions can raise an unlimited amount of money.

Question 16

Section 1231 Assets: Assets used in a business and held for over 12 months (long- term). Section 1231 assets include realty and depreciable property but exclude capital assets, inventory, accounts receivable, copyrights, and government publications.

Section 1231 also applies to all involuntary conversions of business assets

Answer 16

Section 1231 Assets: Assets used in a business and held for over 12 months (long- term). Section 1231 assets include realty and depreciable property but exclude capital assets, inventory, accounts receivable, copyrights, and government publications.

Section 1231 also applies to all involuntary conversions of business assets

Question 17

For income-tax purposes, capital assets are any property held by a taxpayer, other than properties listed in Code Section 1221. Properties listed in Code Section 1221 include inventory, accounts receivable and depreciable properties or real estate used in trade or business.

This response is correct, because the U.S. Treasury bonds are property owned by the corporation and not listed in Code Section 1221.

Answer 17

For income-tax purposes, capital assets are any property held by a taxpayer, other than properties listed in Code Section 1221. Properties listed in Code Section 1221 include inventory, accounts receivable and depreciable properties or real estate used in trade or business.

This response is correct, because the U.S. Treasury bonds are property owned by the corporation and not listed in Code Section 1221.

Question 18

All assets can be divided into one of three mutually exclusive categories: ordinary, capital, and Section 1231. Capital assets do not include inventory, property used in a trade/business, and accounts/notes receivable. Most other types of property, including property held for investment use and personal use, are capital assets.

Answer 18

All assets can be divided into one of three mutually exclusive categories: ordinary, capital, and Section 1231. Capital assets do not include inventory, property used in a trade/business, and accounts/notes receivable. Most other types of property, including property held for investment use and personal use, are capital assets.

Question 19

The deduction for business gifts is limited to $25 per donee per year.

Answer 19

The deduction for business gifts is limited to $25 per donee per year.

Question 20

Dues are not deductible. All of the other expenses are deductible but subject to the 50% limitation for meals and entertainment. Note that the deduction for the Super Bowl tickets is limited to the face value of the tickets, before the 50% limitation. The allowable deduction is $2,250 (($2,000 + $1,500 + $1,000) × 50%).

Answer 20

Dues are not deductible. All of the other expenses are deductible but subject to the 50% limitation for meals and entertainment. Note that the deduction for the Super Bowl tickets is limited to the face value of the tickets, before the 50% limitation. The allowable deduction is $2,250 (($2,000 + $1,500 + $1,000) × 50%).

Question 21

Special rules apply to realty that is used for both personal and rental purposes. If the number of rental days is less than 14 then the property is treated as if it was used 100% for personal use. In that case, the rental revenue is ignored (i.e., does not have to be recognized).

The only items that can be deducted are real estate taxes and mortgage and these items must be reported on Schedule A.

Answer 21

Special rules apply to realty that is used for both personal and rental purposes. If the number of rental days is less than 14 then the property is treated as if it was used 100% for personal use. In that case, the rental revenue is ignored (i.e., does not have to be recognized).

The only items that can be deducted are real estate taxes and mortgage and these items must be reported on Schedule A.

Question 22

For head of household filing status, the following costs are considered in determining whether the taxpayer has contributed more than one-half the cost of maintaining the household: rent; mortgage interest; taxes; insurance on the home; repairs; utilities; and food eaten in the home. The following costs may not be considered: clothing; education; medical treatment; vacations; life insurance; transportation; rental value of home owned by taxpayer; and the value of services provided by the taxpayer or a member of the taxpayer’s household.

Answer 22

For head of household filing status, the following costs are considered in determining whether the taxpayer has contributed more than one-half the cost of maintaining the household: rent; mortgage interest; taxes; insurance on the home; repairs; utilities; and food eaten in the home. The following costs may not be considered: clothing; education; medical treatment; vacations; life insurance; transportation; rental value of home owned by taxpayer; and the value of services provided by the taxpayer or a member of the taxpayer’s household.

Question 23

Certain tax credits can result in a refund, even if the individual had no income tax liability. Tax credits resulting in a refund are credits for earned income, tax withheld, excess Social Security tax withheld, and excise tax for certain nontaxable uses of fuels and lightweight diesel vehicles.

Answer 23

Certain tax credits can result in a refund, even if the individual had no income tax liability. Tax credits resulting in a refund are credits for earned income, tax withheld, excess Social Security tax withheld, and excise tax for certain nontaxable uses of fuels and lightweight diesel vehicles.

Question 24

Generally speaking, the Act of ’33 addresses investment disclosure, which includes the requirement that issuers register with the Securities and Exchange Commission (SEC). The Act of ’34, on the other hand, created exchanges for trading securities.

What’s the bottom line?

The ’33 Act regulates the process of registering with the SEC, while the ’34 Act oversees securities once they are issued and trading in the marketplace.

Answer 24

Generally speaking, the Act of ’33 addresses investment disclosure, which includes the requirement that issuers register with the Securities and Exchange Commission (SEC). The Act of ’34, on the other hand, created exchanges for trading securities.

What’s the bottom line?

The ’33 Act regulates the process of registering with the SEC, while the ’34 Act oversees securities once they are issued and trading in the marketplace.

Question 25

The Dividends Received Deduction (DRD) allows a company that receives a dividend from another company to deduct that dividend from its income and reduce its income tax accordingly. However, several technical rules apply that must be followed for corporate shareholders to be entitled to the DRD. The amount of DRD that a company may claim depends on its percentage of ownership in the company paying the dividend.

There are three tiers of possible deductions. First, the general rule states that the DRD is equal to 50 percent of the dividend received. Second, if the company receiving the dividend owns more than 20 percent but less than 80 percent of the company paying the dividend, the DRD amounts to 65 percent of the dividend received. Finally, if the company receiving the dividend owns more than 80 percent of the company paying the dividend, the DRD equates to 100 percent of the dividend.

Answer 25

The Dividends Received Deduction (DRD) allows a company that receives a dividend from another company to deduct that dividend from its income and reduce its income tax accordingly. However, several technical rules apply that must be followed for corporate shareholders to be entitled to the DRD. The amount of DRD that a company may claim depends on its percentage of ownership in the company paying the dividend.

There are three tiers of possible deductions. First, the general rule states that the DRD is equal to 50 percent of the dividend received. Second, if the company receiving the dividend owns more than 20 percent but less than 80 percent of the company paying the dividend, the DRD amounts to 65 percent of the dividend received. Finally, if the company receiving the dividend owns more than 80 percent of the company paying the dividend, the DRD equates to 100 percent of the dividend.

Question 26

Corporations cannot be shareholders in S Corporations

Answer 26

Corporations cannot be shareholders in S Corporations

Question 27

Section 179 of the United States Internal Revenue Code (26 U.S.C. § 179), allows a taxpayer to elect to deduct the cost of certain types of property on their income taxes as an expense, rather than requiring the cost of the property to be capitalized and depreciated. The maximum amount expensed in any year is limited to the lesser of business income or $1,000,000 for 2018
Note - land is not Section 179 property

Answer 27

Section 179 of the United States Internal Revenue Code (26 U.S.C. § 179), allows a taxpayer to elect to deduct the cost of certain types of property on their income taxes as an expense, rather than requiring the cost of the property to be capitalized and depreciated. The maximum amount expensed in any year is limited to the lesser of business income or $1,000,000 for 2018
Note - land is not Section 179 property

Question 28

A preferential transfer is simply one that is made on a debt that existed before filing for bankruptcy, within 90 days of that filing. The debtor is presumed insolvent during this period.

Answer 28

A preferential transfer is simply one that is made on a debt that existed before filing for bankruptcy, within 90 days of that filing. The debtor is presumed insolvent during this period.

Question 29

The MACRS five-year property classification includes autos and taxis, light and heavy general-purpose trucks, calculators, copiers, computers, and peripheral equipment.
The MACRS seven-year property classification includes office furniture, fixtures, and equipment, as well as agricultural machinery and equipment. Here, the $3,000 computer and $25,000 delivery van fall within the five-year property classification, while the computer desk and office furniture would be classified as seven-year property.

Answer 29

The MACRS five-year property classification includes autos and taxis, light and heavy general-purpose trucks, calculators, copiers, computers, and peripheral equipment.
The MACRS seven-year property classification includes office furniture, fixtures, and equipment, as well as agricultural machinery and equipment. Here, the $3,000 computer and $25,000 delivery van fall within the five-year property classification, while the computer desk and office furniture would be classified as seven-year property.

Question 30

Be sure to understand the difference between REALIZED gain and RECOGNIZED gain.

Ex/ If stock of a subsidiary is liquidated by its parent company, any realized gain on the transaction is, in general, not recognized. The realized gain to parent is $150 ($250 property received – $100 basis). The recognized gain is zero.

Answer 30

Be sure to understand the difference between REALIZED gain and RECOGNIZED gain.

Ex/ If stock of a subsidiary is liquidated by its parent company, any realized gain on the transaction is, in general, not recognized. The realized gain to parent is $150 ($250 property received – $100 basis). The recognized gain is zero.

Question 31

Sec. 1244 permits an individual to deduct an ordinary loss on the sale or worthlessness of stock. The amount of ordinary loss deduction is annually limited to $50,000 ($100,000 for a married taxpayer filing a joint return), with any excess loss treated as a capital loss. Since Dinah is married filing a joint return, her ordinary loss is limited to $100,000, with the remaining $25,000 recognized as a capital loss.

Answer 31

Sec. 1244 permits an individual to deduct an ordinary loss on the sale or worthlessness of stock. The amount of ordinary loss deduction is annually limited to $50,000 ($100,000 for a married taxpayer filing a joint return), with any excess loss treated as a capital loss. Since Dinah is married filing a joint return, her ordinary loss is limited to $100,000, with the remaining $25,000 recognized as a capital loss.

Question 32

When you dispose of BUSINESS PROPERTY, your taxable gain or loss is usually a section 1231 gain or loss. … When you dispose of DEPRECIABLE PROPERTY(section 1245 property or section 1250 property) at a gain, you may have to recognize all or part of the gain as ordinary income under the depreciation recapture rules.

Answer 32

When you dispose of BUSINESS PROPERTY, your taxable gain or loss is usually a section 1231 gain or loss. … When you dispose of DEPRECIABLE PROPERTY(section 1245 property or section 1250 property) at a gain, you may have to recognize all or part of the gain as ordinary income under the depreciation recapture rules.

Question 33

A key difference between a S Corp and a Partnership is that a PARTNER is allowed to include his share of the borrowed funds in his basis, while an S corp SHAREHOLDER cannot add borrowed money to his basis. As an example, consider a business with two owners who each put in $10,000 cash as an initial investment and then the company borrows another $20,000. For each S corp shareholder, the starting basis will be $10,000. For each partner in a partnership, the basis would be $20,000.hip as it pertains to basis in the company is that

Answer 33

A key difference between a S Corp and a Partnership is that a PARTNER is allowed to include his share of the borrowed funds in his basis, while an S corp SHAREHOLDER cannot add borrowed money to his basis. As an example, consider a business with two owners who each put in $10,000 cash as an initial investment and then the company borrows another $20,000. For each S corp shareholder, the starting basis will be $10,000. For each partner in a partnership, the basis would be $20,000.hip as it pertains to basis in the company is that

Question 34

When selling the partnership and calculating a gain or loss, liabilities have to be subtracted out.

Ex - $40K basis, with $15K in capital and $25K in liabilities. Sale it for $30K. This would result in $15K capital gain ($40K-$25K)

Answer 34

When selling the partnership and calculating a gain or loss, liabilities have to be subtracted out.

Ex - $40K basis, with $15K in capital and $25K in liabilities. Sale it for $30K. This would result in $15K capital gain ($40K-$25K)

Question 35

If a spouse dies during the year, you may continue to file Married Filing Jointly for that year. For two years after that, you may be eligible for the Qualifying Widow (or Widower) with Dependent Child filing status. Meaning if you don’t have kids, you file as single.

Answer 35

If a spouse dies during the year, you may continue to file Married Filing Jointly for that year. For two years after that, you may be eligible for the Qualifying Widow (or Widower) with Dependent Child filing status. Meaning if you don’t have kids, you file as single.

Question 36

Divorce is a nontaxable event as it pertains to the sell of the primary residence, up to $250K.

Answer 36

Divorce is a nontaxable event as it pertains to the sell of the primary residence, up to $250K.

Question 37

On May 1 of the prior year, Baker purchased equipment with a five-year useful life for a cost of $10,000. Baker adopted the MACRS depreciation system and did not utilize any special depreciation deductions. On March 1 of the current year, Baker sold the equipment. The MACRS depreciation schedule for five-year property is listed below:

First year – 20.00%
Second year – 32.00%
Third year – 19.20%

What amount of depreciation can Baker deduct in the current year?

A. $ 533
B. $1,600
C. $2,000
D. $3,200

Answer 37

b) 1600

Explanation - You get 1/2 year depreciation in the year of purchase and sale. 1/2 year is already built into year 1.

Since the equipment was sold in year 2, you can only take 1/2 year depreciation for year 2. Therefore 10,000 x 32% x 0.5 = 1,600

Question 38

Strom acquired a 25 percent interest in Ace Partnership by contributing land having an adjusted basis of $16,000 and a fair market value of $50,000. The land was subject to a $24,000 mortgage, which was assumed by Ace. No other liabilities existed at the time of the contribution. What was Strom’s basis in Ace?

a. $16,000
b. $26,000
c. $0
d. $32,000

Answer 38

c.$0

Explanation - Strom’s basis in the land ($16,000) carries over as an element of his basis in Ace. The assumption by Ace of Strom’s liabilities on the land ($24,000) is treated as a distribution of money to Strom, which reduces his basis temporarily to negative $8,000. Then, through his status as a partner of Ace, Strom is treated as re-assuming 25% of the liability, or $6,000, and this increases his basis temporarily to negative $2,000. Since it is impossible to have negative basis, Strom realizes a gain (usually capital) of $2,000, the amount necessary to bring his basis up to zero.

no the partners basis is reduced by what the OTHER partners assume in regards to liabilities. So 75% of the liability (24,000 mortgage) is 18,000 thereby reducing his basis and therefore the partner recognizing a gain. if the PARTNERSHIP were to take on a new liability then the partners basis would increase by 25%

Question 39

A personal holding company (PHC) is a C corporation in which more than 50 percent of the value of its outstanding stock is owned (directly or indirectly) by five or fewer individuals and which receives at least 60 percent of its adjusted ordinary gross income from passive sources.

Answer 39

A personal holding company (PHC) is a C corporation in which more than 50 percent of the value of its outstanding stock is owned (directly or indirectly) by five or fewer individuals and which receives at least 60 percent of its adjusted ordinary gross income from passive sources

Question 40

Passive activity losses are generally only deductible against passive activity income. If there is a net passive loss and multiple loss activities, the suspended net passive loss must be allocated to loss activities in proportion to the amount of loss generated by each activity. Since activities X and Y generated $80,000 of passive losses, the amount of the $60,000 suspended loss allocated to Activity X would be ($30,000 / $80,000) × $60,000 = $22,500.

Answer 40

Passive activity losses are generally only deductible against passive activity income. If there is a net passive loss and multiple loss activities, the suspended net passive loss must be allocated to loss activities in proportion to the amount of loss generated by each activity. Since activities X and Y generated $80,000 of passive losses, the amount of the $60,000 suspended loss allocated to Activity X would be ($30,000 / $80,000) × $60,000 = $22,500.

Question 41

If you didn’t pay enough tax throughout the year, either through withholding or by making estimated tax payments, you may have to pay a penalty for underpayment of estimated tax. Generally, most taxpayers will avoid this penalty if they either owe less than $1,000 in tax after subtracting their withholding and refundable credits, or if they paid withholding and estimated tax of at least 90% of the tax for the current year or 100% of the tax shown on the return for the prior year, whichever is smaller.

Answer 41

If you didn’t pay enough tax throughout the year, either through withholding or by making estimated tax payments, you may have to pay a penalty for underpayment of estimated tax. Generally, most taxpayers will avoid this penalty if they either owe less than $1,000 in tax after subtracting their withholding and refundable credits, or if they paid withholding and estimated tax of at least 90% of the tax for the current year or 100% of the tax shown on the return for the prior year, whichever is smaller.

Question 42

How would you calculate MACRS using the tables if you sell a property before it has been fully depreciated? I’d like to know how to do this for real estate and personalty. And mid quarter vs half year personalty.

Answer 42

You calculate half the normal depreciation for the year of disposal.

For example, say you’re using half-year convention, it’s 5-year property, and you dispose of it in the 3rd year.
Depreciation for the entire year in year 3 is 19.2% of the depreciable base (based on the MACRS table).

If you dispose of the asset ANYTIME during the third year (doesn’t matter if you dispose of it on the 2nd day of the year or the 2nd to last day of the year), you’ll pretend that the asset was disposed of in the middle of the year and thus take a half year of depreciation on the asset for year 3. This means depreciation for year 3 is 9.6% (half of 19.2%) of the depreciation base.

Same for quarter-convention. In the quarter that you sold the asset, you pretend you sold it in the middle of the quarter, so you take half that quarter’s depreciation.

Question 43

MACRS and when to apply which convention.

Half-Year Convention - This convention applies to all depreciable tangible personal property.

Exemptions include:

• Residential rental and non residential real property
• Property subject to mid-quarter convention

If more than 40% of the total basis of property is placed in service during the last three months of the tax year, the MID-QUARTER convention applies.

Answer 43

MACRS and when to apply which convention.

Half-Year Convention - This convention applies to all depreciable tangible personal property.

Exemptions include:

• Residential rental and non residential real property
• Property subject to mid-quarter convention

If more than 40% of the total basis of property is placed in service during the last three months of the tax year, the MID-QUARTER convention applies.

Question 44

Be careful with vehicles that are used for personal and business use when calculating MACRS depreciation. You can only depreciate the percentage used for BUSINESS.
EX - Vehicle bought for $20K at beginning of year 1, was sold at end of year 2 for $18K. 75% of the miles driven are for business. Depreciation expense under MACRS would be for the business would be:
Year 1 - (20,00020%).75=3,000
Year 2 - (20,00016%).75=2,400
Remaining Basis - 20,000-3,000-2,400=14,600

NOTE - in year 2, when the vehicle is sold, you have to use the half year convention, so instead of taking the 32% MACRS depreciation, you can only take 16% MACRS depreciation.

Answer 44

Be careful with vehicles that are used for personal and business use when calculating MACRS depreciation. You can only depreciate the percentage used for BUSINESS.
EX - Vehicle bought for $20K at beginning of year 1, was sold at end of year 2 for $18K. 75% of the miles driven are for business. Depreciation expense under MACRS would be for the business would be:
Year 1 - (20,00020%).75=3,000
Year 2 - (20,00016%).75=2,400
Remaining Basis - 20,000-3,000-2,400=14,600

NOTE - in year 2, when the vehicle is sold, you have to use the half year convention, so instead of taking the 32% MACRS depreciation, you can only take 16% MACRS depreciation

Question 45

If a vehicle is used 75% for business, when calculating ACTUAL EXPENSE METHOD of the vehicle, you can only take 75% for the vehicles expense.
EX - Vehicle has expense of $7K in gas, $4K in insurance and $2K for repairs. Total is $13K in expense, but because the total use of the vehicle wass 75% related to business, the amount of ACTUAL EXPENSE is $9,750 (note - this ignores depreciation)

Answer 45

If a vehicle is used 75% for business, when calculating ACTUAL EXPENSE METHOD of the vehicle, you can only take 75% for the vehicles expense.
EX - Vehicle has expense of $7K in gas, $4K in insurance and $2K for repairs. Total is $13K in expense, but because the total use of the vehicle wass 75% related to business, the amount of ACTUAL EXPENSE is $9,750 (note - this ignores depreciation)

Question 46

Both UCC and Common Law are based on intent and predominant factors.

UCC = more physical, tangible property, except real estate

Goods
Animals
Harvested crops
Cars, boats, trucks (Vehicles)
Items that are purchased

Common Law = more service oriented

Real Estate
Employment
Services (Loans, Yard work, Consulting, Auditing, legal work such as litigation, wills and trusts)
Installation of Items

Answer 46

Both UCC and Common Law are based on intent and predominant factors.

UCC = more physical, tangible property, except real estate

Goods
Animals
Harvested crops
Cars, boats, trucks (Vehicles)
Items that are purchased

Common Law = more service oriented

Real Estate
Employment
Services (Loans, Yard work, Consulting, Auditing, legal work such as litigation, wills and trusts)
Installation of Items

Question 47

Types of Contracts:

Implied - By Conduct
Bilateral - Promise for promise
Unilateral - Action for promise
Executed - Contract performed
Executory - Contract entered into but not performed

Answer 47

Types of Contracts:

Implied - By Conduct
Bilateral - Promise for promise
Unilateral - Action for promise
Executed - Contract performed
Executory - Contract entered into but not performed

Question 48

Under U.S. tax law, goodwill and other intangibles acquired in a taxable asset purchase are required by the IRS to be amortized over 15 years, and this amortization is tax-deductible. Recall that goodwill is never amortized for accounting purposes but instead tested for impairment.

Answer 48

Under U.S. tax law, goodwill and other intangibles acquired in a taxable asset purchase are required by the IRS to be amortized over 15 years, and this amortization is tax-deductible. Recall that goodwill is never amortized for accounting purposes but instead tested for impairment.

Question 49

Taxable income before dividends and contributions is $125,000 ($200,000 − $75,000). The 10% of taxable income limitation for C corporations uses taxable income BEFORE the dividends received deduction, which is $145,000. Thus, the charitable contribution limitation is $14,500 ($145,000 × 10%).

Answer 49

Taxable income before dividends and contributions is $125,000 ($200,000 − $75,000). The 10% of taxable income limitation for C corporations uses taxable income BEFORE the dividends received deduction, which is $145,000. Thus, the charitable contribution limitation is $14,500 ($145,000 × 10%).

Question 50

Exchange Act of 1934 has registration provisions that require specified disclosures including bonus and profit-sharing arrangements, the financial structure and nature of this business, and names of officers and directors.

Answer 50

Exchange Act of 1934 has registration provisions that require specified disclosures including bonus and profit-sharing arrangements, the financial structure and nature of this business, and names of officers and directors.

Question 51

A special account is used to track undistributed earnings of an S corporation that have been taxed to shareholders previously. Distributions from this account, known as the accumulated adjustments account (AAA), are tax-free. Essentially, the AAA is the cumulative total of undistributed nonseparately and separately stated items for S corporation taxable years beginning after 1982. Thus, the account parallels the calculation of C corporation AEP. Calculation of the AAA applies to all S corporations, but the AAA is most important to those that have been C corporations. The AAA provides a mechanism to ensure that the earnings of an S corporation are taxed to shareholders only once.

Answer 51

A special account is used to track undistributed earnings of an S corporation that have been taxed to shareholders previously. Distributions from this account, known as the accumulated adjustments account (AAA), are tax-free. Essentially, the AAA is the cumulative total of undistributed nonseparately and separately stated items for S corporation taxable years beginning after 1982. Thus, the account parallels the calculation of C corporation AEP. Calculation of the AAA applies to all S corporations, but the AAA is most important to those that have been C corporations. The AAA provides a mechanism to ensure that the earnings of an S corporation are taxed to shareholders only once.

Question 52

To arrive at accumulated adjustment account (AAA) for S Corp:
AAA Beginning 100,000
Add: Ord. Income 440,000
Sub: Distributions (30,000)
Sub: Nondeductible Exp (2,000)
Sub Separately Stated Items (24,000)
Total = $484,000

Answer 52

To arrive at accumulated adjustment account (AAA) for S Corp:
AAA Beginning 100,000
Add: Ord. Income 440,000
Sub: Distributions (30,000)
Sub: Nondeductible Exp (2,000)
Sub Separately Stated Items (24,000)
Total = $484,000

Question 53

To arrive at a 50% shareholders tax basis in S Corp:
Basis Jan. 1 = 60,000
Add: Ord income 220,000 (this is half)
Sub: Dist Share (15,000) (this is half)
Sub: Nondeductible Exp (1,000) (This is half)
Sub: Separately Stated items (12,000) (this is half)
Total = $252,000

Answer 53

To arrive at a 50% shareholders tax basis in S Corp:
Basis Jan. 1 = 60,000
Add: Ord income 220,000 (this is half)
Sub: Dist Share (15,000) (this is half)
Sub: Nondeductible Exp (1,000) (This is half)
Sub: Separately Stated items (12,000) (this is half)
Total = $252,000

Question 54

You can claim 50% of what you pay in self-employment tax as an income tax deduction. For example, a $1,000 self-employment tax payment reduces taxable income by $500. This deduction is an adjustment to income claimed on Form 1040, and is available whether or not you itemize deductions.

Answer 54

You can claim 50% of what you pay in self-employment tax as an income tax deduction. For example, a $1,000 self-employment tax payment reduces taxable income by $500. This deduction is an adjustment to income claimed on Form 1040, and is available whether or not you itemize deductions.

Question 55

The total of your casualty and theft losses on personal property must be more than 10% of your adjusted gross income (AGI). Otherwise, you can’t claim a deduction for that portion of the loss above the limit.

Answer 55

The total of your casualty and theft losses on personal property must be more than 10% of your adjusted gross income (AGI). Otherwise, you can’t claim a deduction for that portion of the loss above the limit.

Question 56

For AICPA SIM question - From the HUD statement, line 301 is the gross amount that the buyer is purchasing the building for (72,563), which is the number you should focus on. The 65,763 is the amount due after the buyer has already basically made a down payment (earnest money deposit). The old land was subject to an involuntary conversion, the price of the old land from the tax depreciation worksheet was 63,000. However, Greensburg government paid them 71,800 for the land. That results in an 8,800 gain (71,800 – 63,000). That gain is subtracted from the new purchase price of 72,563 to arrive at the basis in the new land of 63,763

Answer 56

For AICPA SIM question - From the HUD statement, line 301 is the gross amount that the buyer is purchasing the building for (72,563), which is the number you should focus on. The 65,763 is the amount due after the buyer has already basically made a down payment (earnest money deposit). The old land was subject to an involuntary conversion, the price of the old land from the tax depreciation worksheet was 63,000. However, Greensburg government paid them 71,800 for the land. That results in an 8,800 gain (71,800 – 63,000). That gain is subtracted from the new purchase price of 72,563 to arrive at the basis in the new land of 63,763

Question 57

Filing a financing statement PERFECTS a security interest. So does possessing collateral.

Answer 57

Filing a financing statement PERFECTS a security interest. So does possessing collateral.

Question 58

An antecedent debt is a prior debt to reimburse another. In terms of bankruptcy law, antecedent debt refers to a debtor’s prepetition obligation which existed before a debtor’s transfer of an interest in property.

Answer 58

An antecedent debt is a prior debt to reimburse another. In terms of bankruptcy law, antecedent debt refers to a debtor’s prepetition obligation which existed before a debtor’s transfer of an interest in property.

Question 59

The 3 things needed for a security interest to be enforceable:

1. The value has been given
2. The secured party receives a security agreement describing the collateral authenticated by the debtor
3. The debtor has rights in the collateral.

Answer 59

The 3 things needed for a security interest to be enforceable:

1. The value has been given
2. The secured party receives a security agreement describing the collateral authenticated by the debtor
3. The debtor has rights in the collateral.

Question 60

Land, as a charitable contribution, has a 30% of AGI potential.

Ex - The donation of appreciated land purchased for investment and held for more than twelve months is a contribution of real capital gain property (property that would result in long-term capital gain if sold). The amount of contribution is the land’s FMV of $25,000, limited in deductibility for the current year to 30% of AGI. In this case, since 30% of AGI would be 30% × $90,000 = $27,000, the full amount of the land contribution ($25,000) is deductible for 2018.

Answer 60

Land, as a charitable contribution, has a 30% of AGI potential.

Ex - The donation of appreciated land purchased for investment and held for more than twelve months is a contribution of real capital gain property (property that would result in long-term capital gain if sold). The amount of contribution is the land’s FMV of $25,000, limited in deductibility for the current year to 30% of AGI. In this case, since 30% of AGI would be 30% × $90,000 = $27,000, the full amount of the land contribution ($25,000) is deductible for 2018.

Question 61

Generally, up to $25,000 of a rental real estate loss can be deducted against income that is not from passive activities if the taxpayer actively participates in the rental real estate activity. However, the $25,000 allowance is reduced by 50% of the taxpayer’s AGI in excess of $100,000. Here, the Jacksons can deduct $25,000 − (50%)($120,000 − $100,000) = $15,000.

Answer 61

Generally, up to $25,000 of a rental real estate loss can be deducted against income that is not from passive activities if the taxpayer actively participates in the rental real estate activity. However, the $25,000 allowance is reduced by 50% of the taxpayer’s AGI in excess of $100,000. Here, the Jacksons can deduct $25,000 − (50%)($120,000 − $100,000) = $15,000.

Question 62

A purchase money security interest in consumer goods does not require a filing for perfection.

Answer 62

A purchase money security interest in consumer goods does not require a filing for perfection.

Question 63

The first $50,000 of group-term life insurance provided by an employer is a tax-free fringe benefit. Johnson receives $200,000 of group-term life insurance, so $150,000 of this coverage is taxable. There are 150 units of $1,000 each of excess coverage, included in income at $2.76 for each unit. The income from the insurance coverage is $414 ($2.76 × $150). When the $414 is included with the $100,000 salary, gross income is $100,414

Answer 63

The first $50,000 of group-term life insurance provided by an employer is a tax-free fringe benefit. Johnson receives $200,000 of group-term life insurance, so $150,000 of this coverage is taxable. There are 150 units of $1,000 each of excess coverage, included in income at $2.76 for each unit. The income from the insurance coverage is $414 ($2.76 × $150). When the $414 is included with the $100,000 salary, gross income is $100,414

Question 64

Order for Bankruptcy Courts:

1. A secured debt properly perfected on March 20, 2018.
2. Employee wages due April 30, 2018.
3. Federal tax lien filed June 30, 2018.
4. Inventory purchased and delivered August 1, 2018.

Answer 64

Order for Bankruptcy Courts:

1. A secured debt properly perfected on March 20, 2018.
2. Employee wages due April 30, 2018.
3. Federal tax lien filed June 30, 2018.
4. Inventory purchased and delivered August 1, 2018.

Question 65

The primary things that plaintiffs must show to win their Section 11 claims under the Securities Act of 1933 are:

1. that there was a material misstatement in the registration statement on the effective date;
2. that they can trace their shares to that registration statement;
3. and that they suffered damages.

Answer 65

The primary things that plaintiffs must show to win their Section 11 claims under the Securities Act of 1933 are:

1. that there was a material misstatement in the registration statement on the effective date;
2. that they can trace their shares to that registration statement;
3. and that they suffered damages.

Question 66

The AMT is calculated by starting with your adjusted gross income (AGI) and adding back in a bunch of deductions that aren’t allowed for AMT purposes. Major examples include the deductions for state and local income taxes, personal property taxes, and deductions for a net operating loss. The mortgage interest deduction and charitable contributions are still allowed, as are “above-the-line” deductions like IRA contributions.

Answer 66

The AMT is calculated by starting with your adjusted gross income (AGI) and adding back in a bunch of deductions that aren’t allowed for AMT purposes. Major examples include the deductions for state and local income taxes, personal property taxes, and deductions for a net operating loss. The mortgage interest deduction and charitable contributions are still allowed, as are “above-the-line” deductions like IRA contributions.