REG 28 - Income 2 - Exclusions Flashcards
Klein, a master’s degree candidate at Briar University, was awarded a $12,000 scholarship from Briar. The scholarship was used to pay Klein’s university tuition and fees. Klein also received $5,000 for teaching two courses at a nearby college.
What amount is includible in Klein’s gross income?
A. $0
B. $ 5,000
C. $12,000
D. $17,000
B. Since the scholarship was used to pay tuition and fees, none of it is taxable. For purposes of this section, a qualified scholarship is any amount received by an individual as a scholarship or fellowship grant (as defined in paragraph (c)(3) of this section), to the extent the individual establishes that, in accordance with the conditions of the grant, such amount was used for qualified tuition and related expenses
Amounts receive for teaching are taxable. Inclusion of qualified scholarships and qualified tuition reductions representing payment for services are taxable.
Which payment(s) is(are) included in a recipient's gross income? I. Payment to a graduate assistant for a part-time teaching assignment at a university. Teaching is not a requirement toward obtaining the degree.
II. A grant to a Ph.D. candidate for his participation in a university-sponsored research project for the benefit of the university.
Both I and II. Gross income is the starting point in determining a taxpayer’s tax liability. As a result, it is broadly defined. Gross income encompasses all income from all sources, including compensation for services, business income, interests, dividends, rents, and ordinary and capital gains.
Hence, both a payment to a graduate assistant for a part-time teaching assignment at a university and a grant to a Ph.D. candidate for his participation in a university-sponsored research project for the benefit of the university would be included in a taxpayer’s gross income.
Dale received $1,000 in 2015 for jury duty.
In exchange for regular compensation from her employer during the period of jury service, Dale was required to remit the entire $1,000 to her employer in 2015.
In Dale’s 2015 income tax return, the $1,000 jury duty fee should be:
A. Claimed in full as an itemized deduction.
B. Claimed as an itemized deduction to the extent exceeding 2% of adjusted gross income.
C. Deducted from gross income in arriving at adjusted gross income.
D. Included in taxable income without a corresponding offset against other income.
C. If an employer requires jury pay to be remitted in exchange for regular compensation for the period the employee was performing jury duty, the employee may deduct the jury duty pay from her gross income as an adjustment arriving at adjusted gross income.
As Dale was required by her employer to remit the $1,000 in jury duty pay in exchange for regular compensation for the period the employee was performing jury duty, Dale should deduct the jury duty pay from her gross income in arriving at adjusted gross income.
T/F: The recipient of a Nobel Prize is taxed on the value of the prize if the prize is directly transferred to a charity.
False.
The prize money can be excluded when the following are met:
1. selected without action on his/her part
2. not required to perform services
3. the amount is paid directly to a tax-exempt or governmental organization.
T/F: Proceeds from a life insurance policy paid because of the death of the insured are taxed as income to the recipient.
False.
Life insurance proceeds are generally subject to estate tax at the time of the decendent’s death. Hence, subjecting the benficiary to income taxation upon receipt of the proceeds would constitue a double tax on the proceeds. Therefore the proceeds of life insurance received due to the death of the insured are excluded from income.
Y/N: TP received an acre of land from the estate of G. The land had a fair value of $5,000 at the time of G’s death and was included in the estate at that time. TP has income of $5,000.
No.
To avoid the double taxation of these transfers, their value is excluded from the income of the recipient.
Dart, a C corporation, distributes software over the Internet and has had average revenues in excess of $20 million dollars per year for the past three years. To purchase software, customers key-in their credit card number to a secure web site and receive a password that allows the customer to immediately download the software. As a result, Dart doesn’t record accounts receivable or inventory on its books. Which of the following statements is correct?
A. Dart may use either the cash or accrual method of accounting as long as Dart elects a calendar year end.
B. Dart may utilize any method of accounting Dart chooses as long as Dart consistently applies the method it chooses.
C. Dart must use the accrual method of accounting.
D. Dart may utilize the cash basis method of accounting until it incurs an additional $10 million to develop additional software.
C. C corporations cannot use the cash method of accounting unless their average annual gross receipts for the previous three years do not exceed $5,000,000. Once the $5,000,000 test is failed the accrual method must be used for all future tax years. Since Dart has had revenues of more than $20 million for the last three years it must use the accrual method of accounting.
A corporate taxpayer plans to switch from the FIFO method to the LIFO method of valuing inventory. Which of the following statements is accurate regarding the use of the LIFO method?
A. In periods of rising prices, the LIFO method results in a lower cost of sales and higher taxable income, when compared to the FIFO method.
B. The taxpayer is required to receive permission each year from the Internal Revenue Service to continue the use of the LIFO method.
C. The LIFO method can be used for tax purposes even if the FIFO method is used for financial statement purposes.
D. Under the LIFO method, the inventory on hand at the end of the year is treated as being composed of the earliest acquired goods.
D. The LIFO method assumes that the inventory items most recently purchased are the ones sold. Thus, the oldest inventory (earliest acquired goods) items are the ones that remain in ending inventory.
Unless the Internal Revenue Service consents to a change of method, the accrual method of tax reporting is mandatory for a sole proprietor when there are
Accounts receivable for services rendered
Year-end merchandise inventories
No, Yes
Unless the IRS consents to a change of method, taxpayers are to use the accrual method of accounting for purchases and sales if inventories are used.
Accounts receivable for services rendered does not trigger the required use of the accrual method.
This response correctly indicates that accounts receivable for services rendered would not lead to the required use of the accrual method and that the use of inventories would trigger the required use of the accrual method.
The Uniform Capitalization Rules of Code Sec. 263A apply to retailers whose average gross receipts for the preceding three years exceed what amount? A. $ 1,000,000 B. $ 2,500,000 C. $ 5,000,000 D. $10,000,000
D. The Uniform Capitalization Rules do not apply to small personal property dealers. Small personal property dealers are defined as those with $10 million or less in gross receipts during the preceding three years.
Lake Corp., an accrual-basis calendar year corporation, had the following 2013 receipts:
2014 advanced rental payments where the lease ends in 2014 $125,000
Lease cancellation payment from a 5-year lease tenant 50,000
Lake had no restrictions on the use of the advanced rental payments and renders no services. What amount of income should Lake report on its 2013 tax return? A. $0 B. $50,000 C. $125,000 D. $175,000
D. Since there are no restrictions on the advance lease payments or the lease cancellation payment and no services need to be rendered, Lake Corp. has a right to receive the advance lease payments and the lease cancellation payments in the current year. The payments also can be determined with reasonable accuracy. Hence, both the advance lease payments and the lease cancellation payments should be reported on Lake Corp.’s tax return.
The selection of an accounting method for tax purposes by a newly incorporated C corporation
A. Is made on the initial tax return by using the chosen method.
B. Is made by filing a request for a private letter ruling from the IRS.
C. Must first be approved by the company’s board of directors.
D. Must be disclosed in the company’s organizing documents.
A. Accounting methods for a new corporation are made on the initial tax return.
T/F: Indirect costs of production need not be allocated to goods produced for sale.
False.
Overhead costs are allocated to goods produced for sale as they are indirectly related to those goods.
T/F: Unless the IRS consents, a sole proprietor must generally use an accrual or hybrid method if there are accounts receivable for services rendered.
True.
