SIMULATED EXAM II

Question 1

Worker’s Comp Laws

Answer 1

Employers are generally strictly liable for injuries to employees

Question 2

Filing of a position in Bankruptcy invokes

Answer 2

an automatic STAY against all attempts to collect on most debt of the debtor

Question 3

If a company chooses to NOT take a credit for Foreign Taxes Paid

Answer 3

Then they can deduct them instead

Question 4

S Corp revoked then

Answer 4

They need to wait 5 years before making a new S election

Question 5

In Corporations

Answer 5

1. State Income Taxes are deductible
2. Interest Earned on US Treasury bonds are taxable
3. Int Exp on bank loans to purchase US Treasury bonds are deductible since the interest income earned on US Treasury bonds is taxable

Note: Int exp to carry municipal bonds is not deductible

Question 6

Statute of Limitations for an alleged breach of contract

Answer 6

Commences on the date of the alleged breach

The Statute of Limitations refers to the time period in which the case must be filed

Time period varies from state to state depending on the type of case

Question 7

Statue of frauds

Answer 7

Contracts are not enforceable unless they have evidence
by a writing

EX: A contract to employ someone for life is not such a contract, since the person might not live a year. So this kind of contract is enforceable even absent a writing

Question 8

Nonresidential real property

Answer 8

Is depreciated straight-line over 39 yrs

Question 9

Casualty Losses

Answer 9

Smaller loss ( lesser of cost or decrease in FMV )

Question 10

Earned Income Credit

Answer 10

If the Taxpayer files Married Filing Separately

This disqualifies the taxpayer from getting the credit

Question 11

A CPA owns his workpapers

Answer 11

BUT
Needs to get client’s consent or a court order to disclose

Question 12

Only 50% of business meals are deductible

Answer 12

Doesn’t matter if company reimburses their employees for meals and the reimbursement are not treated as wages subject to WH

Question 13

When a CPA discovers and error on Tax Return

Answer 13

They must notify the client of the error

Question 14

A security Interest

Answer 14

Is perfected in the new collateral for 20 Days from the debtor’s receipt of the proceeds

Question 15

A home mortgage lien

Answer 15

is NOT subject to state homestead exemption if it is a purchase money mortgage

Question 16

Worthless Security

Answer 16

Is treated as being sold or exchanged on the last day of the yr is becomes worthless

Question 17

A Corp that has been an S Corp from its inception

Answer 17

Have Passive investment income in excess of 25% of gross receipt for 3 consecutive years

Be owned by a bankruptcy estate

Question 18

US Tax Court is the only Fed Trial Court where

Answer 18

Taxpayers may have disputes litigated W/O first paying the disputed tax liability

Question 19

For S Corp

Answer 19

Section 1231 Gain is separately stated

Question 20

A 1245 Gain

Answer 20

Goes on as Ordinary Income

Question 21

Organization Expense

Answer 21

Deduction are limited to $5,000 in first year

Anything over these expenses will be amortized for 15 years or 180 months

Question 22

Special Assessment for Sidewalks on Annual Property Tax Statement are NOT deductible

Answer 22

Make sure you subtract this from the statement

Principal Residence Taxes are Tax Deductible
Vacation residence also Real Estate Taxes are Deductible

Question 23

NOTE Max SALT deduction

Answer 23

Limited to $10,000
State
And
Local
Tax

Question 24

In a Partnership

Answer 24

Retirement Plan Contributions for partners are separately stated

• Separately Stated Deduction BUT Deducted from Federal Income Tax Purposes &raquo_space;DO NOT INCLUDE RETIREMENT IN DEDUCTION FOR OBI only include the employee portion

Health Insurance Premiums for Partners are treated as Guaranteed Payments to Partners

-Health Insurance Premiums are separately stated BUT Deducted from Federal Income Tax Purposes AND for OBI

Question 25

MACRS

Answer 25

The greater than 40% RULE only applies to Personal Property places in use in 4th Quarter

**NOTE: Very important , the table that you use when it was purchased is the table that you will use when you sell the asset

EX: you bought in 4th quarter you sold it in Feb, your going to use 4th QTR Convention then adjust manually when selling it
$60,000 X 22.80% * 1.5/12 Last month in Jan

Question 26

MACRS (When selling an item)

Portion of Year Owned Depends on Convention

Answer 26

– For Half-Year, its always 6/12
– For Mid-Qtr, its 1.5/12, 4.5/12, 7.5/12 or 10.5/12
So if we sold it Jan 1 your going to say 1.5 months throughout the year
OR, if you sold it Dec 31st your go to the middle of the 4th qtr

– For Mid-month, it can be 0.5/12 throughout 11.5/12 (12 options based on months)

When sold real prop (bldg) then you use the month it was purchased as convention then when selling use same month then multiply for month sold

For ex: asset purchased May, use convention for May then it was sold in Dec.
$300,000 X (May convention) 2.564% * (month sold dec) 11.5/12 = $7,372

Question 27

Business expense for a client

Answer 27

is limited to $25

Question 28

Summary of a Substantial Understatement

Answer 28

IND: An understatement is substantial if it exceeds the greater of:
A) 10% of the correct tax, OR
B) $5,000

CORP: An understatement is substantial if it exceeds the lesser of:
A) The Greater of 10% of the correct tax, or $10 k, or
B) $10,000,000

Question 29

If Understatement is not substantial, it is considered a “negligence or a disregard of tax rules”

Answer 29

Penalty for both unsubstantial & substantial understatements = 20% of the portion of the underpayment

Question 30

It can be Unsubstantial

Answer 30

OR For Negligence or disregard of the tax rules its considered Substantial

Question 31

Guaranteed Payments is included

Answer 31

In a Partners Taxable Income

Question 32

For a teacher

Answer 32

Max allowed deduction is $300

Question 33

Max Allowed Deduction for student loan Interest is

Answer 33

$2,500

Question 34

In Casualty Loss

Answer 34

Smaller of
The Damages
OR
Decrease in basis