SIMULATED EXAM 1

Question 1

In a situation where the taxpayer pulls out early on a CD

Answer 1

What they are doing is forfeiting there right to the rest of the interest
( The penalty from the bank for pulling the money out is an adjustment )

SO, you record the (ALL)as taxable ) interest income ( all of it that they would earn ) and the penalty would be and adjustment

Question 2

In a Partnership

Answer 2

REMEMBER THAT LIABILITIES ARE INCLUDED IN THE BASIS OF THE PARTNER

Question 3

US TAX COURT

Answer 3

Specialized trial court that hears only Federal Tax Cases

The Trials are by judge and NOT by a jury

Question 4

SECURITY INTEREST ATTACH

Answer 4

LAST TO OCCUR ON THE FOLLOWING:

1. Parties must agree to create the security interest by taking possession of the collateral or a written security agreement that has the collateral and is signed by the debtor

2.Creditor must give value in exchange for the security interest AND debtor must have rights in the collateral

FILLING is NOT NECESSARY

Question 5

When Both Parties agree to new terms that are different from original contract and a new agreement has been established then its called accord.

Answer 5

When agreement is fulfilled, the fulfillment is called satisfaction

An Accord AND Satisfaction

Question 6

1/2 Of Self-Employed taxpayers self-employment tax

Answer 6

Is for the Employer Portion of taxes AND is an adjustment ( FOR AGI )

The other half is personal and is NOT deductible

Question 7

Increases on Accumulated Adjustments account of an S-Corp

AKA Triple AAA account

Answer 7

It is increased by separately stated and non-separately stated income and gains

(Exception: Tax-Exempt income & Certain Life Insurance Proceeds)

Question 8

CIRCULAR 230

Answer 8

Prohibits a practitioner from endorsing or negotiating refund checks which the IRS has issued to the client

Question 9

Federal Law prohibits a state from imposing an income tax on net income

Answer 9

If orders are taken within the state
Accepted at corporate headquarters outside of the state
AND
Shipped from a location outside of the state

Fed Law will prohibit the state from imposing an income tax on net income

The Company has no physical presence in the state

Question 10

Voluntary OR Involuntary Petition

Answer 10

May be filed under Chapter 7 or 11

Question 11

Corporations making Charitable Contributions to recognized the allowed deduction of 10% of taxable income

Taxable income is calculated before the deduction of:

Just REMEMBER THE TRUE TAXABLE INCOME OF THE CORP

Answer 11

1. Any Charitable Contribution
2. The dividends-received deduction
3. Any Capital loss Carryback

Question 12

INCOME TO BE TAXABLE ON A TAX RETURN

Answer 12

IT MUST BE BOTH REALIZED AND RECOGNIZED

Question 13

SEC 179

Answer 13

OVER $3,050,000 SUBTRACT IT

WHATEVER IN EXCESS SUBTRACT FROM

$1,220,000

Question 14

MODIFICATIONS OF A SALES CONTRACT UNDER UCC

Answer 14

If its been modified the contract AS IT HAS BEEN MODIFIED that determines whether a writing is required under the STATUE of Frauds

Question 15

Primary activity for Foundations is

Answer 15

Making grants to other charitable org and ind

Question 16

Personal reputation awards and punitive damage awards

Answer 16

Are both included in taxable income

Question 17

IRS PUBLICATIONS

Answer 17

Are NOT considered a primary authoritative source when one is conducting tax research

Question 18

REAL PROPERTY

Answer 18

Includes land and all items permanently affixed to the land

EX: Bldg, paving etc

Question 19

Workers’ Comp

Answer 19

Covers both occupational diseases and aggravations of preexisting diseases.

Question 20

The Statue of Frauds requires contracts involving

Answer 20

The Sale of goods to be evidenced by a writing if the price is $500 or more

HOWEVER, if any of these exceptions apply,
An oral contract will be enforceable

Specifically manufactured goods

Written confirmation

Admitted in court

Performed (extent of the performance of the party sought to be held liable)

Question 21

A Security Interest in accounts

Answer 21

May be perfected by filing

NOT through Possession

NOR Attachment

Question 22

Tom can deduct medical expenses he paid for his mother-in-law

Answer 22

The definition of “dependent” for purposes of qualifying medical expenses does NOT consider the gross income limit

Question 23

Taxpayer can avoid any penalty by showing that the taxpayer acted in good faith

Answer 23

Had reasonable cause to support the tax return position

Did NOT have willful neglect

Question 24

Organizations that test products for public safety

Answer 24

Are Classified as 501C3 public charities

Question 25

FUTA - FEDERAL UNEMPLOYMENT TAX ACT

Answer 25

Credits for this tax are allowed to employers for certain state unemployment taxes paid by the employer

Question 26

Property, other than real property,

Answer 26

Is depreciated at Half-yr Convention unless the mid-quarter exception applies

Mid-Quarter Convention for equipment
Mid-month Convention for BLDG

Question 27

A minor can effectively disaffirm a contract up until

Answer 27

The time of 18th BD
AND
Shortly thereafter

Up until that time, a minor is without capacity for contracts not involving necessities

Question 28

Medical Expenditures

Answer 28

Includes:
Services Rendered by physicians, surgeons, dentists, and other medical professional
Equipment, Supplies, and diagnostic devices needed for these purposes

Common items:
1. Prescription Drugs ( not recommended drugs )
2. Surgery that fixes and injury/condition ( NOT elective surgeries )
3. Other supplies related to medical conditions
4. Doctor office visits ( like a physical )
5. Med insurance premiums ( or long-term care premiums )

Reduce the expenditures by the insurance reimbursement received in that YEAR ( ONLY )

Question 29

When Dealing with MACRS
Type of Property

Answer 29

• Personal Property (things you can touch but not land or bldg)
• Real Property (things you can touch that are land or bldg)
• Intangible Property (things you can’t touch)

Question 30

Depreciable Lives

Answer 30

Personal Prop - 1/2 Yr or Mid- Qtr
- 5 yrs - Comp equipment, automobiles
- 7 yrs - Furn, fixtures, machinery, and equipment

Real Prop - Mid-Month
- 27.5 yrs - Residential
- 39 yrs- Non- Residential

Intangible Prop:
- 180 months (15 years ) for most intangibles ( but not all )

Question 31

MACRS (CONVENTIONS)

Answer 31

Personal Prop:
- Half-yr (default )
- Mid-Qtr (if more than 40% of personal prop was placed in service in 4th qtr) 5YR & 7YR Personal Prop

Real Prop:
- Mid-month

Intangible Prop:
- Full-month (ALWAYS GETS FULL MONTH)

Question 32

BASIC CALCULATION

Answer 32

Basis X MACRS DEP FACOTR = Current year cost recovery

MACRS Tables account for the depreciation convention in the 1st YR ONLY

NEVER get a full YR of Cost Recovery in YR Sold

Question 33

Special issues when it comes to MACRS

Answer 33

• Land is NEVER DEPRECIATED
• MACRS tables account for the depreciation convention in the 1st year only
• If we sell prop, we must manually apply the depreciation convention
  (NEVER get a full year of cost recovery in year sold!)

Question 34

Calculation if Prop sold during yr

Answer 34

Basis X MACRS Dep Factor X Portion of Yr Owned = CY Cost Recovery

Portion of yr owned depends on convention
- 1/2 yr = 6/12
- Mid Qtr, its 1.5/12, 4.5/12, 7.5/12, or 10.5/12
- For Mid Month, 0.5/12 through 11.5/12 (12 options based on month)

So middle of the last month

Question 35

Calculating Tax for IRA distributions

Answer 35

Deductible Contributions + Earnings = Taxable Portion of IRA
Taxable Portion / Total Account Balance = Taxable %

Taxable % X Distribution for that year = Taxable Portion of IRA

Question 36

Remember BASE
When calculating Partner’s adjusted basis

Answer 36

• Beginning Basis
• Additions
• Subtractions
• Ending Basis

Always Set - Up Like this
Capital + Liabilities = Basis

Question 37

When an Involuntary petition for Bankruptcy is filed

Answer 37

Pay attention cause that means that there is a gap of when the petition was filed and when the order of relief started

Question 38

In involuntary petition for Bankruptcy

Answer 38

REMEMBER
SAG, WEG, CTI

Order of Distribution:
A. Secured debt paid first

B. Priority debt paid second as follows

SAG
Support Obligations
Admin Exp
Gap Claims

WEG
Wages
Employee benefit w/in 6 mos
Grain Farmers & Fishermen

CTI
Consumer Deposits
Tax Claims
Injuries from DWI/DUI

C. General unsecured debt