REG R8 Flagged Questions #8

Question 1

MCQ-14697
Calculate the taxpayer's qualified business income (QBI) deduction for a qualified trade or
business (QTB):
Filing status: Single
Taxable income before QBI deduction: $187,400
Net capital gains: $0
Qualified business income (QBI): $80,000
QTB's W-2 wages: $20,000
Assume the 2021 limitations apply.
1. $13,300
2. $10,000
3. $2,700
4. $16,000

Answer 1

Explanation
Choice “1” is correct.
Taxable income before the QBI deduction is within the phase-in range of $164,900 to $214,900 (single) for 2021, so the QBI deduction is reduced.
Tentative QBI deduction: $80,000 (QBI) × 20% = $16,000
W-2 wage limitation: $20,000 × 50% = $10,000
$16,000 − $10,000 = $6,000 excess amount
Calculation of phase-in percentage:
$187,400 taxable income − $164,900 = $22,500
$22,500 / $50,000 (phase-in range) = 45%
$6,000 excess amount × 45% phase-in percentage = $2,700 reduction amount
$16,000 tentative QBI deduction − $2,700 reduction amount = $13,300 reduced QBI deduction
Choices “4”, “2”, and “3” are incorrect. See the calculations above.

Question 2

MCQ-14928
A taxpayer employed full time as an engineer has the following income items:
Self-employment income $50,000
Rental income 15,000
Dividend income 2,000
Long-term capital gain 1,500
Short-term capital loss 1,000
What amount is the taxpayer's passive income?
1. $18,500
2. $17,500
3. $15,000
4. $2,500

Answer 2

Choice “3” is correct. The rental income of $15,000 is automatically passive unless an exception applies (mom-and-pop exception or real estate professional). The self-employment income is active income. The dividend income, long-term capital gain (LTCG), and short-term capital loss (STCL) are portfolio income.

Choice “1” is incorrect. $18,500 includes the $15,000 rental income, $2,000 dividend income, and $2,500 LTCG. Only the $15,000 rental income is passive income. The dividend income and LTCG are portfolio income.

Choice “2” is incorrect. $17,500 includes the total portfolio income of $2,500 and the rental income of $15,000. Only the $15,000 rental income is passive income.

Choice “4” is incorrect. $2,500 is the amount of portfolio income ($2,000 dividend income + $1,500 LTCG − $1,000 STCL).

Question 3

MCQ-02146
On December 1 of the prior year, Michaels, a self-employed cash basis taxpayer, borrowed
$100,000 to use in her business. The loan was to be repaid on November 30 of the current
year. Michaels paid the entire interest of $12,000 on December 1 of the prior year. What
amount of interest was deductible on Michaels’ current year income tax return?
1. $12,000
2. $0
3. $11,000
4. $1,000

Answer 3

Choice “3” is correct. Michaels may deduct $11,000 on her current year return.

Rule: Interest that is prepaid is deductible in the tax year to which, and to the extent that the interest is allocable―i.e., as it accrues. This allocation is required even by cash basis taxpayers.

Term of loan = 12 months (December 1, prior year − November 30, current year)

Interest paid − $12,000 on December 1 of the prior year.

Allocated interest per month = $12,000 ÷ 12 = $1,000/month

Interest deductible in current year = $1,000 × 11 = $11,000

Question 4

MCQ-14909
A real estate broker reported the following business income and expenses for the current
year:
Commission income $100,000
Expenses:
Auto rentals 2,000
Referral fees to other brokers (legal under state law) 20,000
Referral fees to nonbrokers (illegal under state law) 8,000
Parking fines 200
hat amount should be reported as net profit on Schedule C, Profit or Loss from Business?
1. $77,800
2. $69,800
3. $70,000
4. $78,000

Answer 4

Choice “4” is correct. The taxpayer’s Schedule C net profit is $78,000.

The taxpayer may deduct ordinary and necessary business expenses, which include the auto rentals and referral fees to other brokers that are legal under state law. The illegal referral fees to nonbrokers and parking fines are nondeductible.

Commission income	$100,000 
Auto rentals	(2,000)
Referral fees to other brokers	(20,000)
Schedule C net profit	$ 78,000 
Choice "1" is incorrect. Schedule C net profit of $77,800 deducts the auto rentals, legal referral fees to other brokers, and parking fines. The parking fines are nondeductible.

Choice “2” is incorrect. Schedule C net profit of $69,800 deducts all of the listed expenses. The illegal referral fees to nonbrokers and parking fines are nondeductible.

Choice “3” is incorrect. Schedule C net profit of $70,000 deducts the auto rentals and both the legal and illegal referral fees. The illegal referral fees to nonbrokers are nondeductible.

Question 5

MCQ-01472
Baker, a sole proprietor CPA, has several clients that do business in Spain. While on a fourweek vacation in Spain, Baker attended a five-day seminar on Spanish business practices that cost $700. Baker's round-trip airfare to Spain was $600. While in Spain, Baker spent an average of $100 per day on accommodations, local travel, and other incidental expenses, for total expenses of $2,800. What amount of total expense can Baker deduct on Form 1040 Schedule C, "Profit or Loss From Business," related to this situation?
1. $1,200
2. $1,800
3. $4,100
4. $700

Answer 5

Choice “1” is correct. Baker can deduct $1,200 in total expense on Form 1040 Schedule C, calculated as follows:

Direct educational expenses

700

[cost of the course]

Daily expenses for 5-day seminar

500

[$100 per day × 5]

Total educational expenses

1,200

Rule: If foreign travel is primarily personal in nature (e.g., a vacation), none of the travel expenses (e.g., round-trip airfare) incurred will be allowable business deductions, even if the taxpayer was involved in business activities while in the foreign country.

Choices “2” and “3” are incorrect, per the above rule.

Choice “4” is incorrect, as the expenses for the five-day period Baker attended the seminar were directly related to being in Spain for the additional period of time and are allowable business deductions.

Question 6

MCQ-14694
Dr. Merry, a self-employed dentist, incurred the following expenses:
Investment expenses $700
Custodial fees for Dr. Merry’s self-employed retirement plan 40
Work uniforms for Dr. Merry and Dr. Merry’s employees 320
Subscriptions for periodicals used in the waiting room 110
Dental education seminar 1,300
What is the amount of expenses the doctor can deduct as business expenses on Schedule
C, Profit or Loss from Business?
1. $1,730
2. $1,620
3. $1,770
4. $2,430

Answer 6

Choice “1” is correct. Business expenses include work uniforms for the taxpayer and taxpayer’s employees, subscriptions for periodicals for patient use, and continuing education expenses.

Choice “2” is incorrect. Business expenses include subscriptions for periodicals for patient use.

Choice “3” is incorrect. Business expenses do not include custodial fees for self-employed retirement accounts.

Choice “4” is incorrect. Business expenses do not include investment expenses.