REG R1 Flagged Questions #6 Flashcards
MCQ-08210
Carson owned 40% of the outstanding stock of a C corporation. During a tax year, the corporation reported $400,000 in taxable income and distributed a total of $70,000 in cash dividends to its shareholders. Carson accurately reported $28,000 in gross income on Carson’s individual tax return. If the corporation had been an S corporation and the
distributions to the owners had been proportionate, how much income would Carson have reported on Carson’s individual return?
1. $132,000
2. $28,000
3. $188,000
4. $160,000
Explanation
Choice “4” is correct. S Corporations work in a similar fashion to partnerships. The income is passed through to the shareholder and included in taxable income whether or not it is actually distributed. Therefore, Carson will report 40% of the $400,000 taxable income, or $160,000. The $28,000 distribution will not affect the taxable income, but will reduce Carson’s basis in the S Corporation stock.
Choice “1” is incorrect. This is the correct answer of $160,000 reduced by the $28,000 distribution. The $28,000 will not reduce taxable income, but will reduce Carson’s basis in the S Corporation stock.
Choice “2” is incorrect. This is simply the same answer as if the corporation were a C Corporation.
Choice “3” is incorrect. This is the correct answer of $160,000 increased by the $28,000 distribution. The $28,000 will not increase taxable income, but will reduce Carson’s basis in the S Corporation stock.
MCQ-11779
In the current year, a taxpayer reports the following items:
Salary $50,000
Ordinary business income from partnership A, in which the taxpayer materially participates 20,000
Ordinary business loss from partnership B, in which the taxpayer does not actively participate (40,000)
During the year, the taxpayer disposed of the interest in partnership B (no gain or loss). The taxpayer had a suspended passive activity loss (PAL) carryover of $10,000 from prior years for partnership B. What is the taxpayer’s adjusted gross income for the current year?
1. $30,000
2. $20,000
3. $60,000
4. $70,000
Explanation
Choice “2” is correct. The $50,000 salary and $20,000 ordinary business income from active partnership A are fully taxable active income. Generally, passive activity losses
(PALs) can only be offset against passive activity income in the current or future years. However, in the year in which a taxpayer disposes of a passive activity, any current or
suspended PALs for that activity may be offset against any other sources of income (active, passive, or portfolio). Because the taxpayer disposed of the interest in partnership B during the current year, the current year PAL of $40,000 and the suspended PALs from prior years of $10,000 can be offset against the current year active income.
Salary $50,000
Partnership A ordinary business income 20,000
Partnership B ordinary business loss (40,000)
$50,000
Partnership B suspended PALs (10,000)
Adjusted gross income $20,000
Choices “1”, “3”, and “4” are incorrect, based on the explanation above.
MCQ-04899 Miyasyke Inc., a calendar year S corporation, has 5 equal shareholders at the end of the tax year. Miyasyke had $75,000 of taxable income. Miyasyke made distributions to its shareholders of $32,000 each, for a total of $160,000. Each shareholder's basis in the S corporation is $100,000 at the beginning of the tax year. What amount from Miyasyke should be included in each shareholder's gross income? 1. $15,000 2. $0 3. $47,000 4. $32,000
Explanation
Choice “1” is correct. Each shareholder reports his/her pro rata share of the S corporation’s taxable income in his or her gross income. The distributions are not taxable to the extent the shareholders’ basis exceeds the distribution (and increased for any income reported by them during the year).
Choice “2” is incorrect. Each shareholder’s share of taxable income (non-separately stated) is reported in the shareholder’s gross income.
Choices “4” and “3” are incorrect. Choice “4” only includes the distribution, which is not taxable in this case as the shareholder’s basis exceeds the distribution. Choice “3” includes both the shareholder’s pro rata share of the taxable income and the distribution. The distribution is not taxable in this situation.
MCQ-14929
A taxpayer reported the following in a tax year:
Salary $122,000
Capital gain dividends 3,700
Partnership short-term capital loss (6,300)
The taxpayer acquired the partnership interest during the year in exchange for a capital contribution of $2,750, and there were no additional items affecting the taxpayer’s basis in the partnership. What is the taxpayer’s adjusted gross income for the year?
1. $119,400
2. $122,000
3. $122,700
4. $122,950
Explanation
Choice “4” is correct. The taxpayer’s adjusted gross income (AGI) for the year is $122,950. The short-term capital loss (STCL) from the partnership can only be flowed through for deduction on the partner’s individual income tax return to the extent of the partner’s tax basis in the partnership interest. In this case, the partner’s basis is the amount of his capital contribution of $2,750, so only $2,750 of the STCL is flowed through for deduction on his individual tax return. The remaining $3,550 loss ($6,300 − $2,750) is suspended until the partner’s basis is reinstated in future years. Individual taxpayers are allowed to deduct up to $3,000 of net capital losses each year, after netting all the capital gains and losses for the year together. The $2,750 STCL from the partnership is offset against the LTCG dividends of $3,700, so the taxpayer has a net LTCG for the year of $950.
Salary $122,000
Capital gain dividends (LTCG) $3,700
STCL from partnership (2,750)
Net LTCG 950
AGI 122,950
Choice “1” is incorrect. AGI of $119,400 incorrectly deducts all $6,300 of the STCL from the
partnership.
Choice “2” is incorrect. AGI of $122,000 only includes the salary, not the capital gain dividends or the STCL from the partnership.
Choice “3” is incorrect. AGI of $122,700 includes a $3,000 deduction for the STCL from the partnership ($122,000 + $3,700 − $3,000). The STCL flowed through from the partnership is limited to the taxpayer’s basis in the partnership of $2,750. Even if the STCL flowed through from the partnership was more than $3,000, the $3,000 capital loss deduction is for
net capital losses, after netting all capital gains and losses together.
MCQ-01438
Which of the following costs is not included in inventory under the Uniform Capitalization
rules for goods manufactured by the taxpayer?
1. Taxes excluding income taxes
2. Warehousing costs
3. Quality control
4. Research
Explanation
Choice “4” is correct. Uniform Capitalization rules provide guidelines with respect to capitalizing or expensing certain costs. With regard to inventory, direct materials, direct labor, and factory overhead should be capitalized as part of the cost of inventory.
Warehousing costs, quality control, and taxes, excluding income taxes, are all considered factory overhead items. The research should be expensed.
MCQ-14911
Which of the following statements about treatment of net passive activity losses of an
individual is correct?
1. Net passive activity losses are suspended and carried forward to offset passive income of future years.
2. Passive activity losses in excess of passive activity income are permanently disallowed.
3. Net passive activity losses can be offset against portfolio income in the current year.
4. A taxpayer can elect either to offset net passive activity losses against active and portfolio income or to carry the losses forward to future years.
Explanation
Choice “1” is correct. Passive activity losses can only offset passive activity income. Net passive activity losses are suspended and carried forward to offset passive activity income in future years.
Choice “2” is incorrect. Net passive activity losses are not permanently disallowed. Net passive activity losses are suspended and carried forward to offset passive activity income in future years.
Choice “3” is incorrect. Passive activity losses can only offset passive activity income, not active or portfolio income.
Choice “4” is incorrect. Passive activity losses can only offset passive activity income, not active or portfolio income.
MCQ-08791
Which of the following is the overall limitation to the qualifying business income (QBI)
deduction?
1. Lesser of: 50 percent of W-2 wages or 25 percent of W-2 wages plus 2.5 percent of the unadjusted basis of qualified property
2. Taxable income limitations based on filing status
3. Lesser of: combined QBI or 20 percent of the
taxpayer’s taxable income in excess of net capital gain
4. Lesser of: 50 percent of combined QBI or 20 percent of the taxpayer’s taxable income
in excess of net capital gain
Explanation
Choice “3” is correct. Once the QBI deduction is calculated based on the taxpayer’s eligibility, the overall deduction is limited to the lesser of combined QBI or 20 percent of the taxpayer’s taxable income in excess of net capital gain.
Choice “1” is incorrect. The wage and property limitation determines the calculation of the QBI deduction but is not the overall limitation to the QBI deduction.
Choice “2” is incorrect. Taxable income limitations based on filing status determine the calculation of the QBI deduction. The overall limitation to the deduction, however, is the lesser of combined QBI or 20 percent of the taxpayer’s taxable income in excess of net
capital gain.
Choice “4” is incorrect. Once the QBI deduction is calculated based on the taxpayer’s eligibility, the overall deduction is limited to the lesser of combined QBI (not 50 percent of the combined QBI) or 20 percent of the taxpayer’s taxable income in excess of net capital gain.
MCQ-01603 On December 1, Year 1, Michaels, a self-employed cash basis taxpayer, borrowed $100,000 to use in her business. The loan was to be repaid on November 30, Year 2. Michaels paid the entire interest of $12,000 on December 1, Year 1. What amount of interest was deductible on Michaels' Year 2 income tax return? 1. $12,000 2. $11,000 3. $1,000 4. $0
Explanation
Choice “2” is correct. Prepaid interest must be prorated over the time for which payment is made. This is true for both cash and accrual basis taxpayers. The loan is for 1 month in Year 1 and 11 months in Year 2. Therefore, 1/12 of the interest is deductible in Year 1 and 11/12, or $11,000 is deductible in Year 2.
Choices “1”, “3”, and “4” are incorrect. Prepaid interest must be prorated over the time for which payment is made. This is true for both cash and accrual basis taxpayers.
MCQ-01485
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.
1. II only.
2. Neither I nor II.
3. Both I and II.
4. I only.
Explanation
Choice “3” is correct.
I. A payment to a student for a part-time teaching assignment is taxable income just as a payment for any other campus job would be. This is not a scholarship or
fellowship.
II. There is no exclusion in the tax law for amounts paid to a degree candidate for participation in university-sponsored research.
MCQ-01811 Cobb, an unmarried individual, had an adjusted gross income of $200,000 in the current year before any IRA deduction, taxable Social Security benefits, or passive activity losses. Cobb incurred a loss of $30,000 in the current year from rental real estate in which he actively participated. What amount of loss attributable to this rental real estate can be used in the current year as an offset against income from nonpassive sources? 1. $30,000 2. $25,000 3. $12,500 4. $0
Explanation
Choice “4” is correct. Cobb may not use any of the loss attributable to his rental real estate as an offset against income from nonpassive sources in the current year because he does not qualify for the “Mom and Pop” exception. Under this exception, up to $25,000 of passive losses and the deduction equivalent of tax credits that are attributable to rental real estate
may be used as an offset against income from nonpassive sources. This $25,000 allowance
is reduced, but not below zero, by 50% of the amount by which the individual’s modified AGI exceeds $100,000. The $25,000 is therefore completely phased out when modified AGI reaches $150,000. Because Cobb’s AGI was $200,000, he did not qualify for the exception.
Choices “3”, “2”, and “1” are incorrect. Rental activities are passive activities and generally are not allowed to use any of the loss attributable to the rental activity to offset any income produced from nonpassive sources. There is a limited exception in the case of losses from
rental real estate in which the taxpayer actively
participates, but Cobb did not qualify for it.
MCQ-06697 A married couple reported the following items for the current year: Salaries $95,000 Dividends 1,000 Interest income on savings account 500 Loss from rental real estate (2,000) Both spouses actively participate in the rental real estate activities. What is the taxpayers' adjusted gross income on a joint return for the year? 1. $95,000 2. $94,500 3. $96,500 4. $98,500
Explanation
Choice “2” is correct. The general rule is that losses from passive activities (including rental activities) can only be deducted against income from passive sources. However, one exception to this general rule is that up to $25,000 of net passive losses from the rental of real estate may be deducted against income from nonpassive sources if the taxpayers are actively involved in managing the real estate and the taxpayers’ AGI does not exceed $100,000 (a phase-out applies for AGI between $100,000 and $150,000). Because the taxpayers are actively involved in the rental real estate and their AGI is less than $100,000, the entire $2,000 rental real estate loss may be deducted. AGI is computed as follows:
Salaries $95,000
Dividends 1,000
Interest income on savings account 500
Loss from rental real estate (2,000)
AGI $94,500
Choice “1” is incorrect. The $1,000 of dividends and the $500 of interest income are both included in AGI, and the $2,000 loss from the rental real estate is deductible because the taxpayers are actively involved with the rental real estate and their AGI is less than
$100,000.
Choice “3” is incorrect. The $2,000 loss from the rental real estate is deductible because the taxpayers are actively involved with the rental real estate and their AGI is less than $100,000.
Choice “4” is incorrect. The $2,000 from the rental real estate is a loss, not income, and thus, if deductible, it must be subtracted and not added. Also, the $2,000 loss from the rental real estate is deductible because the taxpayers are actively involved with the rental
real estate and their AGI is less than $100,000.
MCQ-01751
A guaranteed payment by a partnership to a partner for services rendered may include an
agreement to pay:
I. A salary of $5,000 monthly without regard to partnership income.
II. A 25 percent interest in partnership profits.
1. II only.
2. Neither I nor II.
3. Both I and II.
4. I only.
Explanation
Choice “4” is correct.
I. A guaranteed payment is a salary or other payment to a partner that is not calculated with respect to partnership income.
II. Since the 25% interest is calculated with respect to partnership profits, it is not a guaranteed payment.
Choices “1”, “3”, and “2” are incorrect, per the above explanation
MCQ-11778
Which of the following statements regarding an individual’s suspended passive activity
losses is correct?
1. Suspended losses can be carried forward, but not back, until utilized.
2. Suspended losses must be carried back three years and forward five years.
3. $3,000 of suspended losses can be utilized each year against portfolio income.
4. A maximum of 50 percent of the suspended losses can be used each year when an election is made to forgo the carryback period.
Explanation
Choice “1” is correct. Tax rules allow suspended passive losses to be carried forward, but not back, until utilized.
Choice “2” is incorrect. This rule is not correct. There is no carryback allowed for suspended passive losses. This is the carryback/carryforward period for C corporation capital losses.
Choice “3” is incorrect. This is the rule for capital losses. It does not apply to passive losses.
Choice “4” is incorrect. This rule is not correct. There is no carryback allowed for suspended passive losses.
MCQ-08705 A painter and an accountant agree to trade their services. The painter provides services valued at $550, and the accountant provides services worth $500. What amount should the accountant report as income or expense? 1. $50 income. 2. $550 income. 3. $50 expense. 4. $500 income.
Explanation
Choice “2” is correct. In the case of noncash income, the amount of income to be reported is the fair market value of the property or services received. Since the accountant received services valued at $550, the account must report income of $550.
Choice “1” is incorrect. In the case of noncash income, the amount of income to be reported is the fair market value of the property or services received. The fair market value of any services rendered is irrelevant; thus, the difference between the fair market value of
services received and the fair market value of services rendered does not result in additional income or expense.
Choice “3” is incorrect. In the case of noncash income, the amount of income to be reported is the fair market value of the property or services received. The fair market value of any services rendered is irrelevant; thus, the difference between the fair market value of
services received and the fair market value of services rendered does not result in additional income or expense.
Choice “4” is incorrect. In the case of noncash income, the amount of income to be reported is the fair market value of the property or services received, not the fair market value of services rendered.
