REG R1 Flagged Questions #7 Flashcards
MCQ-08217
A review of Bearing’s Year 2 records disclosed the following tax information:
Wages
Taxable interest and qualifying dividends 4,000
Schedule C trucking business net income 32,000
Rental (loss) from residential property (35,000)
Limited partnership (loss) (5,000)
Bearing actively participated in the rental property and was a limited partner in the
partnership. Bearing had sufficient amounts at risk for the rental property and the
partnership. What is Bearing’s Year 2 adjusted gross income?
1. $54,000
2. $19,000
3. $14,000
4. $29,000
Explanation
Choice “4” is correct. Passive activity losses (PALs) can only be deducted up to passive activity income. There is no passive activity income indicated. Therefore, the passive loss from the partnership is not deductible. $25,000 of the $35,000 rental real estate loss is deductible under the “mom and pop” exception because Bearing actively participates in the rental property and the AGI is below the phaseout amounts. The AGI is calculated as
follows:
Wages $18,000
Taxable interest and qualifying dividends 4,000
Schedule C trucking business net income 32,000
Rental loss from residential property (25,000)
Adjusted gross income (AGI) $29,000+
Choices “3”, “2”, and “1” are incorrect per the above rule and per the above computation
MCQ-12519 The following Year 1 annual report was received by Clark from the qualified defined contribution plan provided by Clark's employer: Beginning balance $12,700 Employer contribution 600 Plan earnings 250 Ending balance $13,550 What income must be included in Clark's gross income for Year 1? 1. $600 2. $250 3. $850 4. $0
Explanation
Choice “4” is correct. Employer contributions to a qualified traditional defined contribution retirement plan and earnings on the mounts contributed are not taxable income to the employee until distributed.
Choice “1” is incorrect. The employer contribution of $600 in Year 1 is not taxable income to the employee until distributed.
Choice “2” is incorrect. The plan earnings in Year 1 are not taxable income to the employee until distributed.
Choice “3” is incorrect. The $850 employer contribution and plan earnings in Year 1 are not taxable income to the employee until distributed
MCQ-14634
Robbe, a cash-basis single taxpayer, reported $50,000 of adjusted gross income last year and claimed itemized deductions of $13,550, which included $5,500 of state income taxes paid last year. Robbe’s itemized deduction amount exceeded the standard deduction available to single taxpayers for last year by $1,150. In the current year, Robbe received a
$1,500 state tax refund relating to the prior year. What is the proper treatment of the state tax refund?
1. Include none of the refund in income in the current year.
2. Include $1,150 in income in the current year.
3. Amend the prior-year’s return and reduce the claimed itemized deductions for that
year.
4. Include $1,500 in income in the current year.
Explanation
Choice “2” is correct. Under the tax benefit rule, an itemized deduction recovered in a subsequent year is included in income in the year recovered. In this situation, the taxpayer
only received a tax benefit of $1,150, the amount by which total itemized deductions exceeded the standard deduction in the prior year. Therefore only $1,150 of the $1,500 state tax refund is included in taxable income for the current year.
Choice “1” is incorrect. The amount of the tax benefit in the prior year, not $0, is included in income in the current year.
Choice “3” is incorrect. The amount of the tax benefit in the prior year is included in income in the current year. It is not necessary to amend the prior year’s return.
Choice “4” is incorrect. Only the amount of the tax benefit in the prior year, not the entire state tax refund, is included in income in the current year
MCQ-14698 Calculate the taxpayer's qualified business income deduction for a qualified trade or business: Filing status: Single Taxable income: $100,000 Net capital gains: $0 Qualified business income (QBI): $30,000 W-2 wages: $10,000 1. $5,000 2. $70,000 3. $20,000 4. $6,000
Explanation
Choice “4” is correct. $30,000 QBI × 20% = $6,000. W-2 wage and property limits do not
apply to taxpayers with taxable income before the QBI deduction below the taxable income threshold (2021 threshold for single taxpayers = $164,900).
Choice “1” is incorrect. The W-2 wage and property limitations do not apply to taxpayers with taxable income before the QBI deduction below the taxable income threshold. Therefore, the deduction for QBI is not limited to $5,000 (W-2 wages of $10,000 × 50% = $5,000).
Choice “2” is incorrect. $30,000 QBI × 20% = $6,000
Choice “3” is incorrect. $20,000 is the overall taxable income limitation: $100,000 taxable income – $0 net capital gains = $100,000 × 20% = $20,000. The basic QBI deduction of
$6,000 is less than the overall limitation of $20,000, so the limit does not apply
MCQ-04857
Mr. and Mrs. Williams decided during the tax year to purchase their first new home. The fair market value of the home was $275,000, and a 20 percent down payment was required to
secure a mortgage in the amount of $220,000 at 5 percent for 30 years. The Williams’ decided to utilize $10,000 that was kept in an Individual Retirement Account owned by Mrs.
Williams. This amount was withdrawn on June 12 and used to fund the down payment on July 1. These amounts had been previously deducted as an adjustment by her on an
individual tax return in the year of contribution. The remaining $12,000 for the down payment was drawn from a savings account. How much of the distribution from the
Individual Retirement Account is subject to the premature distribution penalty tax, and how
much must be included in the Williams’ joint tax return in the year of distribution as gross income?
Penalty Tax Gross Income
1. $0 $0
2. $0 $10,000
3. $10,000 $0
4. $10,000 $10,000
Explanation
Choice “2” is correct. Generally, a premature distribution (prior to retirement or other
allowable age) from an individual retirement account is subject to a 10 percent penalty tax.
Certain exceptions to this tax are available and are contained in the mnemonic “HIM DEAD.”
Home buyer (1st time) $10,000 max if used toward first home
Insurance (medical)
Medical expenses in excess of percentage of AGI floor
Disability
Education
Adoption or birth of child made within one year from the date of birth or adoption ($5,000
maximum exclusion)
Death
The amount removed from the IRA qualifies under the “H” exception above. However, the
question states that these amounts had been previously deducted on Mrs. Williams’ individual tax return, thus this is a distribution from a traditional, deductible IRA. When distributed, funds held in a traditional, previously deducted IRA are taxable to the recipient
as ordinary income and thus would be included as gross income on the Williams’ joint tax return in the year of distribution.
Choice “1” is incorrect. The distribution would be included in the Williams’ gross income.
Choice “3” is incorrect. The amount qualifies for an exception to the penalty tax and would
be included in the Williams’ gross income.
Choice “4” is incorrect. The amount qualifies for an exception to the premature distribution
penalty tax.
MCQ-08790
Which of the following is true about the qualifying business income (QBI) deduction for taxpayers with taxable income above the taxable income limitations?
1. If the taxpayer is a specified service trade or business (SSTB), no QBI deduction is
allowed.
2. If the taxpayer is a qualified trade or business (QTB), W-2 wage and property limitations do not apply.
3. If the taxpayer is a qualified trade or business (QTB), W-2 wage and property limitations are phased in.
4. If the taxpayer is a specified service trade or business (SSTB), W-2 wage and property limitations apply.
Explanation
Choice “1” is correct. For a specified service trade or business (SSTB) over the taxable income limitation, no QBI deduction is allowed.
Choice “2” is incorrect. For a qualified trade or business (QTB) over the taxable income limitation, W-2 wage and property limitations do apply.
Choice “3” is incorrect. For a qualified trade or business (QTB) over the taxable income limitation, W-2 wage and property limitations apply in full and are not phased in.
Choice “4” is incorrect. For a specified service trade or business (SSTB) over the taxable income limitation, no QBI deduction is allowed.
MCQ-08789
Which of the following statements is true regarding taxpayers with taxable income below the taxable income limitations for the qualifying business income (QBI) deduction?
1. A qualified trade or business (QTB) and specified trade or business (SSTB) are treated the same.
2. QBI deduction is a phased-out deduction if a specified service trade or business (SSTB).
3. QBI deduction is limited to 50 percent of W-2 wages.
4. QBI deduction is only allowed if a qualified trade or business (QTB).
Explanation
Choice “1” is correct. A QTB and an SSTB are treated the same for taxpayers under the taxable income thresholds for the QBI deduction.
Choice “2” is incorrect. The QBI deduction is not phased out for an SSTB if the taxpayer is under the taxable income limitations.
Choice “3” is incorrect. The QBI deduction is not limited to 50 percent of wages if the taxpayer is under the taxable income limitations.
Choice “4” is incorrect. For taxpayers under the taxable income limitations, the QBI
deduction is allowed if the taxpayer is a QTB or an SSTB.
MCQ-06013 Kant, a cash-basis individual, owns and operates an office building. Kant received the following payments during the current year: Current rents $30,000 Advance rents for the next year 10,000 Security deposits held in a segregated account 5,000 Lease cancellation payments 15,000 What amount is included in gross income? 1. $55,000 2. $30,000 3. $60,000 4. $40,000
Rule: The basic formula for determination of net rental income or loss follows:
Gross rental income
Prepaid rental income
Rent cancellation payments
Improvements in lieu of rent
(Rental expenses)
Net rental income (loss)
If security deposits are held separately and not available to be applied to last month’s rent (as in a segregated account), they are a liability of the taxpayer and not included in income in the year received.
Choice “1” is correct. The calculation of gross income for the year follows:
Current rents
30,000
Advance rents for the next year
10,000
Security deposits held in a segregated account
−
Lease cancellation payments
15,000
Gross income from the rental activity
55,000
Choice “2” is incorrect. This answer option incorrectly includes only the current rents as part of gross income, when advance rents and lease cancellation payments also must be included.
Choice “3” is incorrect. This answer option incorrectly includes all of the payments collected for the rental activity in the year, when the security deposits that are held in a segregated account are excluded from gross income.
Choice “4” is incorrect. This answer option incorrectly includes only the current rents and the advance rents as part of gross income, when lease cancellation payments also must be included.
MCQ-12540
During a major sports event, a taxpayer rented his primary residence to spectators for 10 days. The taxpayer’s rental income and expenses were as follows:
Rental income $10,000
Prorated mortgage interest and taxes 1,000
Advertising 500
Commissions 1,000
How much net rental income must the taxpayer report on his income tax return?
1. $8,500
2. $10,000
3. $0
4. $7,500
Choice “3” is correct. The taxpayer rented his primary residence for less than 15 days during the year, so he is not required to include the rental income on his income tax return, nor is he allowed to deduct the commissions and advertising expenses related to the rental activity. He is still allowed to deduct the mortgage interest and real estate taxes as itemized deductions.
Choice “1” is incorrect. The net income from rental of the taxpayer’s residence, excluding the prorated portion of mortgage interest and real estate taxes, is $8,500. However, the taxpayer is not required to include the rental income on his income tax return because he rented his residence for less than 15 days during the year.
Choice “2” is incorrect. The taxpayer is not required to include the $10,000 of rental income on his income tax return because he rented his residence for less than 15 days during the year.
Choice “4” is incorrect. The net income from rental of the taxpayer’s residence, including a prorated portion of mortgage interest and real estate taxes, is $7,500. However, the taxpayer is not required to include the rental income on his income tax return because he rented his residence for less than 15 days during the year.
