chapter 05 tb - business deductions

Chapter 05 - Business Deductions

True / False

1. An expense need not be recurring in order to be “ordinary.” a. True b. FalseANSWER: TrueRATIONALE: An expense is ordinary if it is normal, usual, or customary in the type of business conducted by the

taxpayer and is not capital in nature. However, the expense need not be recurring to be deductible as ordinary.

POINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES:

SIIT.HOSM.15.LO: 6-01 - LO: 6-01

NATIONAL STANDARDS:

United States - BUSPORG: Analytic

STATE STANDARDS:

United States - AK - AICPA: FN-Reporting

KEYWORDS: Bloom's: KnowledgeOTHER: Time: 2 min.

2. Aaron, a shareholder-employee of Pigeon, Inc., receives a $300,000 salary. The IRS classifies $100,000 of this amount as unreasonable compensation. The effect of this reclassification is to decrease Aaron’s gross income by $100,000 and increase Pigeon’s gross income by $100,000. a. True b. FalseANSWER: FalseRATIONALE: While Aaron’s dividend income increases by $100,000, his salary income decreases by $100,000.

Thus, his gross income does not change. Pigeon’s gross income does increase by $100,000.POINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES:

SIIT.HOSM.15.LO: 6-01 - LO: 6-01

NATIONAL STANDARDS:


STATE STANDARDS:

United States - AK - AICPA: FN-Measurement - AICPA: FN-Measurement

KEYWORDS: Bloom's: ApplicationOTHER: Time: 5 min.

3. The portion of a shareholder-employee’s salary that is classified as unreasonable has no effect on the amount of a shareholder-employee’s gross income, but results in an increase in the taxable income of the corporation. a. True b. FalseANSWER: TruePOINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES: SIIT.HOSM.15.LO: 6-01 - LO: 6-01Cengage Learning Testing, Powered by Cognero


NATIONAL STANDARDS: United States - BUSPORG: AnalyticSTATE STANDARDS: United States - AK - AICPA: FN-Measurement -

AICPA: FN-MeasurementKEYWORDS: Bloom's: KnowledgeOTHER: Time: 2 min.

4. Generally, a closely-held family corporation is not permitted to take a deduction for a salary paid to a family member in calculating corporate taxable income. a. True b. FalseANSWER: FalseRATIONALE: Only unreasonable salaries are not deductible.

POINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES: SIIT.HOSM.15.LO: 6-01 - LO: 6-01NATIONAL STANDARDS: United States - BUSPORG: AnalyticSTATE STANDARDS: United States - AK - AICPA: FN-ReportingKEYWORDS: Bloom's: KnowledgeOTHER: Time: 2 min.

5. The cash method can be used even if inventory and cost of goods sold are an income producing factor in the business. a. True b. FalseANSWER: FalseRATIONALE: The accrual method must be used in these cases.


6. A taxpayer’s note or promise to pay satisfies the “actually paid” requirement for the cash basis method of accounting. a. True b. FalseANSWER: FalseRATIONALE: Promising to pay or issuing a note does not satisfy the actually paid requirement.

POINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES: SIIT.HOSM.15.LO: 6-02 - LO: 6-02NATIONAL STANDARDS: United States - BUSPORG: AnalyticSTATE STANDARDS: United States - AK - AICPA: FN-ReportingKEYWORDS: Bloom's: Knowledge

Cengage Learning Testing, Powered by Cognero


OTHER: Time: 2 min.

7. Isabella owns two business entities. She may be able to use the cash method for one and the accrual method for the other. a. True b. FalseANSWER: TruePOINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES: SIIT.HOSM.15.LO: 6-02 - LO: 6-02NATIONAL STANDARDS: United States - BUSPORG: AnalyticSTATE STANDARDS: United States - AK - AICPA: FN-ReportingKEYWORDS: Bloom's: KnowledgeOTHER: Time: 2 min.

8. None of the prepaid rent paid on September 1 by a calendar year cash basis taxpayer for the next 18 months is deductible in the current period. a. True b. FalseANSWER: FalseRATIONALE: The amount paid for the 18-month period is not all deductible in the current tax year because the

prepayment period extends substantially beyond the end of the tax year (i.e., must be capitalized). However, that portion of the prepaid rent which relates to September through December of the current tax year may be deducted in the current tax year.


SIIT.HOSM.15.LO: 6-02 - LO: 6-02

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STATE STANDARDS:



9. The period in which an accrual basis taxpayer can deduct an expense is determined by applying the economic performance and all events tests. a. True b. FalseANSWER: TruePOINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES: SIIT.HOSM.15.LO: 6-02 - LO: 6-02NATIONAL STANDARDS: United States - BUSPORG: AnalyticSTATE STANDARDS: United States - AK - AICPA: FN-ReportingKEYWORDS: Bloom's: KnowledgeCengage Learning Testing, Powered by Cognero


OTHER: Time: 2 min.

10. The amount of the addition to the reserve for bad debts for an accrual method taxpayer is allowed as a deduction for tax purposes, but is not allowed for a cash method taxpayer. a. True b. FalseANSWER: FalseRATIONALE: A reserve for estimated expenses (e.g., bad debt) is not allowed to an accrual method taxpayer for tax

purposes because the economic performance test cannot be satisfied. For a cash method taxpayer, there is no addition to the reserve for bad debts because income has not been recognized that would have generated a debt.


SIIT.HOSM.15.LO: 6-02 - LO: 6-02

NATIONAL STANDARDS:


STATE STANDARDS:



11. Fines and penalties paid for violations of the law (e.g., illegal dumping of hazardous waste) are deductible only if they relate to a trade or business. a. True b. FalseANSWER: FalseRATIONALE: Fines and penalties paid for violations of laws are never deductible.


12. Two-thirds of treble damage payments under the antitrust law are not deductible. a. True b. FalseANSWER: TrueRATIONALE: Only one-third of such payments is deductible.

POINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES: SIIT.HOSM.15.LO: 6-03 - LO: 6-03NATIONAL STANDARDS: United States - BUSPORG: AnalyticSTATE STANDARDS: United States - AK - AICPA: FN-Measurement - Cengage Learning Testing, Powered by Cognero



13. Legal fees incurred in connection with a criminal defense are not deductible even if the crime is associated with a trade or business. a. True b. FalseANSWER: FalseRATIONALE: In this circumstance, the legal fees are deductible.


14. If a taxpayer operates an illegal business, no deductions are permitted. a. True b. FalseANSWER: FalseRATIONALE: The usual expenses for operating an illegal business are deductible. But § 162 disallows a deduction

for fines, bribes to public officials, illegal kickbacks, and other illegal payments. However, for illegal trafficking in drugs, § 280E disallows all deductions.


SIIT.HOSM.15.LO: 6-03 - LO: 6-03

NATIONAL STANDARDS:


STATE STANDARDS:



15. Ordinary and necessary business expenses, other than cost of goods sold, of an illegal drug trafficking business do not reduce taxable income. a. True b. FalseANSWER: TrueRATIONALE: Cost of goods sold is part of the gross income calculation and is not considered to be an expense.

Thus, the § 280E prohibition on deductions does not affect cost of goods sold.POINTS: 1DIFFICULTY: EasyLEARNING OBJESIIT.HOSM.15.LO: 6-03 - LO: 6-03Cengage Learning Testing, Powered by Cognero


CTIVES: NATIONAL STANDARDS:


STATE STANDARDS:



16. Jacques, who is not a U.S. citizen, makes a contribution to the campaign of a candidate for governor. Cassie, a U.S. citizen, also makes a contribution to the same campaign fund. If contributions by noncitizens are illegal under state law, the contribution by Cassie is deductible, while that by Jacques is not. a. True b. FalseANSWER: FalseRATIONALE: Deductions are not permitted for political contributions.


17. A baseball team that pays a star player an annual salary of $25 million can deduct the entire $25 million as salary expense. If the same amount is paid to the CEO of IBM, only $1 million is deductible. a. True b. FalseANSWER: TrueRATIONALE: The $1 million limit on deducting compensation applies only to executive compensation of publicly

traded companies.POINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES:

SIIT.HOSM.15.LO: 6-03 - LO: 6-03

NATIONAL STANDARDS:


STATE STANDARDS: United States - AK - AICPA: FN-Measurement - AICPA: FN-Measurement


18. For a taxpayer who is engaged in a trade or business, the cost of investigating a business in the same field is deductible only if the taxpayer acquires the business. a. True b. FalseANSWER: False



RATIONALE: For a taxpayer who is engaged in a trade or business, the cost of investigating a business in the same field is deductible regardless of whether or not it is acquired.


SIIT.HOSM.15.LO: 6-03 - LO: 6-03

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STATE STANDARDS:



19. Investigation of a business unrelated to one’s present business never results in a current period deduction of the entire amount if the amount of the investigation expenses exceeds $5,000. a. True b. FalseANSWER: TrueRATIONALE: Even if the business is acquired, some or all of the expenses must be capitalized and amortized over a

minimum 180-month period. If the business is not acquired, no deduction results.POINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES:

SIIT.HOSM.15.LO: 6-03 - LO: 6-03

NATIONAL STANDARDS:


STATE STANDARDS:



20. LD Partnership, a cash basis taxpayer, purchases land and a building for $200,000 with $150,000 of the cost being allocated to the building. The gross receipts of the partnership are less than $100,000. LD must capitalize the $50,000 paid for the land, but can deduct the $150,000 paid for the building in the current tax year. a. True b. FalseANSWER: FalseRATIONALE: Both the cost of the land and the building must be capitalized. The $150,000 paid for the building can

be depreciated over the MACRS statutory period.POINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES:

SIIT.HOSM.15.LO: 6-03 - LO: 6-03

NATIONAL STANDARDS:


STATE STANDARDS:




KEYWORDS: Bloom's: ComprehensionOTHER: Time: 5 min.

21. Purchased goodwill must be capitalized, but can be amortized over a 60-month period. a. True b. FalseANSWER: FalseRATIONALE: Goodwill is a § 197 intangible. Although it must be capitalized, it can be amortized over a 15-year

statutory period.POINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES:

SIIT.HOSM.15.LO: 6-03 - LO: 6-03

NATIONAL STANDARDS:


STATE STANDARDS: United States - AK - AICPA: FN-ReportingKEYWORDS: Bloom's: ComprehensionOTHER: Time: 2 min.

22. Marge sells land to her adult son, Jason, for its $20,000 appraised value. Her adjusted basis for the land is $25,000. Marge’s recognized loss is $5,000 and Jason’s adjusted basis for the land is $25,000 ($20,000 cost + $5,000 recognized gain of Marge). a. True b. FalseANSWER: FalseRATIONALE: Marge’s recognized loss is $0; Jason’s adjusted basis for the land is his cost of $20,000.

POINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES: SIIT.HOSM.15.LO: 6-03 - LO: 6-03NATIONAL STANDARDS: United States - BUSPORG: AnalyticSTATE STANDARDS: United States - AK - AICPA: FN-Measurement -

AICPA: FN-MeasurementKEYWORDS: Bloom's: ApplicationOTHER: Time: 5 min.

23. For purposes of the § 267 loss disallowance provision, a taxpayer’s aunt is a related party. a. True b. FalseANSWER: FalseRATIONALE: An aunt is not a related party for § 267 loss disallowance purposes.

POINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES: SIIT.HOSM.15.LO: 6-03 - LO: 6-03NATIONAL STANDARDS: United States - BUSPORG: AnalyticSTATE STANDARDS: United States - AK - AICPA: FN-Reporting




24. On December 16, 2015, the directors of Quail Corporation (an accrual basis, calendar year taxpayer) authorized a cash donation of $5,000 to the American Cancer Society, a qualified charity. The payment, which is made on April 11, 2016, may be claimed as a deduction for tax year 2015. a. True b. FalseANSWER: FalseRATIONALE: In order to be deductible in the year authorized by the board of directors, a charitable contribution must

be paid within 2 1/2 months of the end of the year of authorization (March 15, 2016, in this case) and must involve an accrual basis corporation. Because payment was made on April 11, 2016, the contribution is deductible in 2016.


SCPE.HRMY.15.LO: 2-02 - LO: 2-02

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STATE STANDARDS:



25. In the current year, Oriole Corporation donated a painting worth $30,000 to the Texas Art Museum, a qualified public charity. The museum included the painting in its permanent collection. Oriole Corporation purchased the painting 5 years ago for $10,000. Oriole’s charitable contribution deduction is $30,000 (ignoring the taxable income limitation). a. True b. FalseANSWER: TrueRATIONALE: The painting is capital gain property which the museum puts to a use that is related to its exempt

function. Thus, the amount of the deduction is equal to the fair market value of the painting, or $30,000.POINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES:

SCPE.HRMY.15.LO: 2-02 - LO: 2-02

NATIONAL STANDARDS:


STATE STANDARDS:



26. Crow Corporation, a C corporation, donated scientific property (basis of $30,000, fair market value of $50,000) to State University, a qualified charitable organization, to be used in research. Crow had held the property for four months as inventory. Crow Corporation may deduct $50,000 for the charitable contribution (ignoring the taxable income limitation). a. True



b. FalseANSWER: FalseRATIONALE: The scientific property is ordinary income property but it qualifies for the increased deduction amount

available for certain corporate contributions of inventory. As such, the amount of the deduction is equal to the lesser of (1) the sum of the inventory’s basis plus 50% of the appreciation on the property [$40,000 = $30,000 + 50%($50,000 – $30,000)] or (2) twice the basis [$60,000 = $30,000 × 2]. In this case, the ceiling does not apply, and the deduction amount is $40,000.


SCPE.HRMY.15.LO: 2-02 - LO: 2-02

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27. Heron Corporation, a calendar year C corporation, had an excess charitable contribution for 2014 of $5,000. In 2015, Heron made a further charitable contribution of $20,000. Heron’s 2015 deduction is limited to $15,000 (10% of taxable income). The 2015 contribution must be applied first against the $15,000 limitation. a. True b. FalseANSWER: TrueRATIONALE: The current year's (2015) contribution must be applied first against the taxable income limitation

and the carryover (2014) used last.POINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES:

SCPE.HRMY.15.LO: 2-02 - LO: 2-02

NATIONAL STANDARDS:


STATE STANDARDS:



28. For a corporation, the domestic production activities deduction is equal to 9% of the lesser of (1) qualified production activities income or (2) taxable income. However, the deduction cannot exceed 50% of the W-2 wages related to qualified production activities income. a. True b. FalseANSWER: TrueRATIONALE: For a corporation, the domestic production activities deduction is equal to 9% of the lower of (1)

qualified production activities income or (2) taxable income. The deduction cannot exceed 50% of the W-2 wages related to qualified production activities income.

POINTS: 1



DIFFICULTY: EasyLEARNING OBJECTIVES:

SCPE.HRMY.15.LO: 2-02 - LO: 2-02

NATIONAL STANDARDS:


STATE STANDARDS:



29. Research and experimental expenditures do not include the cost of consumer surveys. a. True b. FalseANSWER: TruePOINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES: SIIT.HOSM.15.LO: 7-05 - LO: 7-05NATIONAL STANDARDS: United States - BUSPORG: AnalyticSTATE STANDARDS: United States - AK - AICPA: FN-ReportingKEYWORDS: Bloom's: KnowledgeOTHER: Time: 2 min.

30. The cost of depreciable property is not a research and experimental expenditure. a. True b. FalseANSWER: TruePOINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES: SIIT.HOSM.15.LO: 7-05 - LO: 7-05NATIONAL STANDARDS: United States - BUSPORG: AnalyticSTATE STANDARDS: United States - AK - AICPA: FN-ReportingKEYWORDS: Bloom's: KnowledgeOTHER: Time: 2 min.

31. If an election is made to defer deduction of research expenditures, the amortization period is based on the expected life of the research project if less than 60 months. a. True b. FalseANSWER: FalseRATIONALE: The amortization period is not less than 60 months regardless of the life of the research

project.POINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES: SIIT.HOSM.15.LO: 7-05 - LO: 7-05NATIONAL STANDARDS: United States - BUSPORG: Analytic





32. The domestic production activities deduction (DPAD) for a sole proprietor is calculated by multiplying a percentage rate (currently 9%) times adjusted gross income. a. True b. FalseANSWER: FalseRATIONALE: For a sole proprietor, modified adjusted gross income is used for the DPAD calculation.



33. If qualified production activities income (QPAI) cannot be used in the calculation of the domestic production activities deduction because of the taxable income limitation, the product of the amount not allowed multiplied by the DPAD percentage rate (currently 9%) can be carried over for 5 years. a. True b. FalseANSWER: FalseRATIONALE: In this case, any amount not allowed is lost forever.


34. The limit for the domestic production activities deduction (DPAD) uses all W-2 wages paid to employees by the taxpayer during the tax year. a. True b. FalseANSWER: FalseRATIONALE: The 50% limit is for W-2 wages paid only to employees engaged in qualified domestic

production activities.POINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES:

SIIT.HOSM.15.LO: 7-06 - LO: 7-06



NATIONAL STANDARDS:




35. Property which is classified as personalty may be depreciated. a. True b. FalseANSWER: TruePOINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES: SIIT.HOSM.15.LO: 8-01 - LO: 8-01NATIONAL STANDARDS: United States - BUSPORG: AnalyticSTATE STANDARDS: United States - AK - AICPA: FN-ReportingKEYWORDS: Bloom's: KnowledgeOTHER: Time: 2 min.

36. Antiques may be eligible for cost recovery if they are used in a trade or business. a. True b. FalseANSWER: FalsePOINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES: SIIT.HOSM.15.LO: 8-01 - LO: 8-01NATIONAL STANDARDS: United States - BUSPORG: AnalyticSTATE STANDARDS: United States - AK - AICPA: FN-ReportingKEYWORDS: Bloom's: KnowledgeOTHER: Time: 2 min.

37. The basis of cost recovery property must be reduced by at least the cost recovery allowable. a. True b. FalseANSWER: TrueRATIONALE: The basis of cost recovery property must be reduced by the cost recovery allowed but not less than

the cost recovery allowable.POINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES:

SIIT.HOSM.15.LO: 8-01 - LO: 8-01

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38. The key date for calculating cost recovery is the date the asset is placed in service. a. True b. FalseANSWER: TrueRATIONALE: The key date for calculating cost recovery is the date the asset is placed in service, not the

purchase date.POINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES:

SIIT.HOSM.15.LO: 8-01 - LO: 8-01

NATIONAL STANDARDS:


STATE STANDARDS: United States - AK - AICPA: FN-ReportingKEYWORDS: Bloom's: KnowledgeOTHER: Time: 2 min.

39. Land improvements are generally not eligible for cost recovery. a. True b. FalseANSWER: FalseRATIONALE: Land improvements are 15-year class property.


40. The cost recovery basis for property converted from personal use to business use may be the fair market value of the property at the time of the conversion. a. True b. FalseANSWER: TrueRATIONALE: This would occur for the loss basis if the fair market value is less than the adjusted basis of the

property.POINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES:

SIIT.HOSM.15.LO: 8-01 - LO: 8-01

NATIONAL STANDARDS:


STATE STANDARDS: United States - AK - AICPA: FN-ReportingCengage Learning Testing, Powered by Cognero



41. The maximum cost recovery method for all personal property under MACRS is 150% declining balance. a. True b. FalseANSWER: FalseRATIONALE: MACRS uses both 200% and 150% declining balance depending on the class of the

property.POINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES: SIIT.HOSM.15.LO: 8-02 - LO: 8-02NATIONAL STANDARDS: United States - BUSPORG: AnalyticSTATE STANDARDS: United States - AK - AICPA: FN-Measurement -


42. The cost recovery period for 3-year class property is 4 years. a. True b. FalseANSWER: TruePOINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES: SIIT.HOSM.15.LO: 8-02 - LO: 8-02NATIONAL STANDARDS: United States - BUSPORG: AnalyticSTATE STANDARDS: United States - AK - AICPA: FN-Measurement -


43. All personal property placed in service in 2015 and used in a trade or business qualifies for additional first-year depreciation. a. True b. FalseANSWER: FalseRATIONALE: Only new property placed in service in 2015 qualifies for additional first-year depreciation.POINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES: SIIT.HOSM.15.LO: 8-02 - LO: 8-02NATIONAL STANDARDS: United States - BUSPORG: AnalyticSTATE STANDARDS: United States - AK - AICPA: FN-Measurement -




44. If more than 40% of the value of property, other than real property, is placed in service during the last quarter, all of the property placed in service in the second quarter will be allowed 7.5 months of cost recovery. a. True b. FalseANSWER: TruePOINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES: SIIT.HOSM.15.LO: 8-02 - LO: 8-02NATIONAL STANDARDS: United States - BUSPORG: AnalyticSTATE STANDARDS: United States - AK - AICPA: FN-Measurement -


45. Under MACRS, if the mid-quarter convention is applicable, all property sold is treated as being sold at the mid-point of the quarter in which it is placed in service. a. True b. FalseANSWER: FalseRATIONALE: All property sold is treated as being sold at the mid-point of the quarter in which it is sold.



46. The factor for determining the cost recovery for eligible real estate under MACRS, in the year of disposition, is taken from the month of the disposition. a. True b. FalseANSWER: FalseRATIONALE: The factor is taken from the month the real estate is placed in service.





47. Residential rental real estate includes property where 80% or more of the net rental revenues are from nontransient dwelling units. a. True b. FalseANSWER: FalseRATIONALE: The test is 80% or more of gross rental revenues.



48. Motel buildings have a cost recovery period of 27.5 years. a. True b. FalseANSWER: FalseRATIONALE: Motel buildings are classified as nonresidential real estate with a recovery period of 39 years.



49. Taxpayers may elect to use the straight-line method under MACRS for personalty. a. True b. FalseANSWER: TruePOINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES: SIIT.HOSM.15.LO: 8-02 - LO: 8-02NATIONAL STANDARDS: United States - BUSPORG: AnalyticSTATE STANDARDS: United States - AK - AICPA: FN-Measurement -


50. Under the MACRS straight-line election for personalty, only the half-year convention is applicable. a. True b. FalseCengage Learning Testing, Powered by Cognero


ANSWER: FalseRATIONALE: The mid-quarter convention is applicable under the MACRS straight-line election for

personalty.POINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES: SIIT.HOSM.15.LO: 8-02 - LO: 8-02NATIONAL STANDARDS: United States - BUSPORG: AnalyticSTATE STANDARDS: United States - AK - AICPA: FN-Measurement -


51. The cost recovery method for new farm equipment is 200% declining balance. a. True b. FalseANSWER: FalseRATIONALE: The cost recovery method is 150% declining balance.



52. In a farming business, MACRS straight-line cost recovery is required for all fruit bearing trees. a. True b. FalseANSWER: TruePOINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES: SIIT.HOSM.15.LO: 8-02 - LO: 8-02NATIONAL STANDARDS: United States - BUSPORG: AnalyticSTATE STANDARDS: United States - AK - AICPA: FN-Measurement -


53. In a farming business, if the uniform capitalization rules are not used, cost is recovered using the ADS straight-line method. a. True b. FalseANSWER: TruePOINTS: 1



DIFFICULTY: EasyLEARNING OBJECTIVES: SIIT.HOSM.15.LO: 8-02 - LO: 8-02NATIONAL STANDARDS: United States - BUSPORG: AnalyticSTATE STANDARDS: United States - AK - AICPA: FN-Measurement -


54. For personal property placed in service in 2015, the § 179 maximum deduction is limited to $500,000. a. True b. FalseANSWER: TruePOINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES: SIIT.HOSM.15.LO: 8-03 - LO: 8-03NATIONAL STANDARDS: United States - BUSPORG: AnalyticSTATE STANDARDS: United States - AK - AICPA: FN-Measurement -


55. The § 179 deduction can exceed $500,000 in 2015 if the taxpayer had a § 179 amount which exceeded the taxable income limitation in the prior year. a. True b. FalseANSWER: FalseRATIONALE: The § 179 amount eligible for expensing in a carryforward year is limited to the lesser of (1) the

statutory dollar amount ($500,000 in 2015 and 2014) reduced by the cost of § 179 property placed in service in excess of the appropriate acquisition limit in the carryforward year or ($2 million in 2015 and 2014) (2) the business income limitation in the carryforward year.


SIIT.HOSM.15.LO: 8-03 - LO: 8-03

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56. Any § 179 expense amount that is carried forward is subject to the business income limitation in the carryforward year. a. True b. FalseANSWER: TrueCengage Learning Testing, Powered by Cognero




57. Taxable income for purposes of § 179 limited expensing is computed by including the MACRS deduction. a. True b. FalseANSWER: TrueRATIONALE: MACRS depreciation is a deduction in computing taxable income for purposes of the § 179

limitations.POINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES:

SIIT.HOSM.15.LO: 8-03 - LO: 8-03

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58. The basis of an asset on which $20,000 has been expensed under § 179 will be reduced by $20,000, even if $20,000 cannot be expensed in the current year because of the taxable income limitation. a. True b. FalseANSWER: TruePOINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES: SIIT.HOSM.15.LO: 8-03 - LO: 8-03NATIONAL STANDARDS: United States - BUSPORG: AnalyticSTATE STANDARDS: United States - AK - AICPA: FN-Measurement -

AICPA: FN-MeasurementKEYWORDS: Bloom's: ComprehensionOTHER: Time: 2 min.

59. Property used for the production of income is not eligible for § 179 expensing. a. True b. FalseANSWER: TruePOINTS: 1





60. The luxury auto cost recovery limits applies to all automobiles. a. True b. FalseANSWER: FalseRATIONALE: The statutory cost recovery limits under § 280F apply only to automobiles which meet the definition of

a passenger automobile (e.g., do not apply to a taxi).POINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES:

SIIT.HOSM.15.LO: 8-04 - LO: 8-04

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61. The § 179 limit for a sports utility vehicle with a GVW of 7,000 pounds will not apply if the sports utility vehicle is used as a taxi. a. True b. FalseANSWER: FalseRATIONALE: The § 179 limit applies if the sports utility vehicle is used in a trade or business.POINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES: SIIT.HOSM.15.LO: 8-03 - LO: 8-03

SIIT.HOSM.15.LO: 8-04 - LO: 8-04NATIONAL STANDARDS: United States - BUSPORG: AnalyticSTATE STANDARDS: United States - AK - AICPA: FN-Measurement -


62. Once the more-than-50% business usage test is passed for listed property, it still matters if the business usage for the property drops to 50% or less during the recovery period. a. True b. FalseANSWER: TrueCengage Learning Testing, Powered by Cognero


RATIONALE: If the business usage declines to 50% or less, the straight-line method must be used and the property is subject to cost recovery recapture.


SIIT.HOSM.15.LO: 8-04 - LO: 8-04

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63. For a new car that is used predominantly in business, the "luxury auto" limit depends on whether the taxpayer takes MACRS or straight-line depreciation. a. True b. FalseANSWER: FalseRATIONALE: The statutory cost recovery limits apply regardless of whether MACRS or straight-line

depreciation is used.POINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES:

SIIT.HOSM.15.LO: 8-04 - LO: 8-04

NATIONAL STANDARDS:




64. If an automobile is placed in service in 2015, the limitation for cost recovery in 2017 will be based on the cost recovery limits for the year 2015. a. True b. FalseANSWER: TrueRATIONALE: The cost recovery limits will be based on the limits in place when the automobile is placed in

service.POINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES:

SIIT.HOSM.15.LO: 8-04 - LO: 8-04

NATIONAL STANDARDS:






65. The "luxury auto" cost recovery limits change if mid-quarter cost recovery is used. a. True b. FalseANSWER: FalseRATIONALE: The § 280F limits apply to all passenger automobiles, regardless of the MACRS convention

used.POINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES:

SIIT.HOSM.15.LO: 8-04 - LO: 8-04



66. A used $35,000 automobile that is used 100% for business is placed in service in 2015. If the automobile fails the 50% business usage test in the second year, no cost recovery will be recaptured. a. True b. FalseANSWER: TrueRATIONALE: The total cost recovery deduction for the first year would be $3,160 (§ 280F limit) which is less than

$7,000 ($35,000 × 20%). The cost recovery in the first year using straight-line would be $3,160 (§ 280F limit) which is less than $3,500 ($35,000 × 10%). Therefore, there is no cost recovery recapture.


SIIT.HOSM.15.LO: 8-04 - LO: 8-04

NATIONAL STANDARDS:


STATE STANDARDS:



67. The inclusion amount for a leased automobile is adjusted by a business usage percentage. a. True b. FalseANSWER: TrueRATIONALE: The inclusion amount for a leased automobile is adjusted for business use.

POINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES: SIIT.HOSM.15.LO: 8-04 - LO: 8-04





68. All listed property is subject to the substantiation requirements of § 274. a. True b. FalseANSWER: TruePOINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES: SIIT.HOSM.15.LO: 8-04 - LO: 8-04NATIONAL STANDARDS: United States - BUSPORG: AnalyticSTATE STANDARDS: United States - AK - AICPA: FN-Measurement -


69. MACRS depreciation is used to compute earnings and profits. a. True b. FalseANSWER: FalseRATIONALE: ADS straight-line depreciation is used to compute earnings and profits.



70. Under the alternative depreciation system (ADS), the half-year convention must be used for personalty. a. True b. FalseANSWER: FalseRATIONALE: The half-year and mid-quarter conventions apply.


AICPA: FN-MeasurementKEYWORDS: Bloom's: KnowledgeCengage Learning Testing, Powered by Cognero


OTHER: Time: 2 min.

71. A taxpayer may elect to use the alternative depreciation system (ADS) to compute depreciation for earnings and profits. a. True b. FalseANSWER: TruePOINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES: SIIT.HOSM.15.LO: 8-05 - LO: 8-05NATIONAL STANDARDS: United States - BUSPORG: AnalyticSTATE STANDARDS: United States - AK - AICPA: FN-Measurement -


72. An election to use straight-line under ADS is made on an asset-by-asset basis for property other than eligible real estate. a. True b. FalseANSWER: FalseRATIONALE: The election is made on a class-by-class basis for property other than eligible real property.



73. For real property, the ADS convention is the mid-month convention. a. True b. FalseANSWER: TruePOINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES: SIIT.HOSM.15.LO: 8-05 - LO: 8-05NATIONAL STANDARDS: United States - BUSPORG: AnalyticSTATE STANDARDS: United States - AK - AICPA: FN-Measurement -


74. The cost of a covenant not to complete for 10 years incurred in connection with the acquisition of a business is



amortized over 10 years. a. True b. FalseANSWER: FalseRATIONALE: A covenant not to compete is amortized over a statutory 15 years.



75. Goodwill associated with the acquisition of a business cannot be amortized. a. True b. FalseANSWER: FalseRATIONALE: Such goodwill is a § 197 intangible and is amortized over a 15-year period.



76. A purchased trademark is a § 197 intangible. a. True b. FalseANSWER: TruePOINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES: SIIT.HOSM.15.LO: 8-07 - LO: 8-07NATIONAL STANDARDS: United States - BUSPORG: AnalyticSTATE STANDARDS: United States - AK - AICPA: FN-Measurement -


77. Cost depletion is determined by multiplying the depletion cost per unit by the number of units sold. a. True b. FalseANSWER: TrueCengage Learning Testing, Powered by Cognero


RATIONALE: Cost depletion is determined by multiplying the depletion cost per unit by the number of units sold (not produced).


SIIT.HOSM.15.LO: 8-08 - LO: 8-08

NATIONAL STANDARDS:




78. Percentage depletion enables the taxpayer to recover more than the cost of an asset in the form of tax deductions. a. True b. FalseANSWER: TrueRATIONALE: Percentage depletion can be taken even though the basis in the asset has been reduced to zero

by depletion deductions.POINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES:

SIIT.HOSM.15.LO: 8-08 - LO: 8-08

NATIONAL STANDARDS:




79. Intangible drilling costs must be capitalized and recovered through depletion. a. True b. FalseANSWER: FalseRATIONALE: The taxpayer may elect to expense the intangible drilling costs.



Multiple Choice



80. Which of the following is not a “trade or business” expense? a. Interest on business indebtedness. b. Property taxes on business property. c. Parking ticket paid on business auto. d. Depreciation on business property. e. All of the above are “trade or business” expenses.ANSWER: cPOINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES: SIIT.HOSM.15.LO: 6-01 - LO: 6-01NATIONAL STANDARDS: United States - BUSPORG: AnalyticSTATE STANDARDS: United States - AK - AICPA: FN-ReportingKEYWORDS: Bloom's: KnowledgeOTHER: Time: 5 min.

81. Which of the following is a required test for the deduction of a business expense? a. Ordinary b. Necessary c. Reasonable d. All of the above e. None of the aboveANSWER: dPOINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES: SIIT.HOSM.15.LO: 6-01 - LO: 6-01NATIONAL STANDARDS: United States - BUSPORG: AnalyticSTATE STANDARDS: United States - AK - AICPA: FN-ReportingKEYWORDS: Bloom's: KnowledgeOTHER: Time: 5 min.

82. Paula is the sole shareholder of Violet, Inc. For 2015, she receives from Violet a salary of $300,000 and dividends of $100,000. Violet’s taxable income for 2015 is $500,000. On audit, the IRS treats $100,000 of Paula’s salary as unreasonable. Which of the following statements is correct? a. Paula’s gross income will increase by $100,000 as a result of the IRS adjustment. b. Violet’s taxable income will not be affected by the IRS adjustment. c. Paula’s gross income will decrease by $100,000 as a result of the IRS adjustment. d. Violet’s taxable income will decrease by $100,000 as a result of the IRS adjustment. e. None of the above is correct.ANSWER: eRATIONALE: $100,000 of salary is reclassified as a dividend. Thus, Violet’s taxable income increases by $100,000

because dividends are not deductible. Paula’s gross income remains the same. Her salary income decreases by $100,000, but her dividend income increases by $100,000.

POINTS: 1DIFFICULTY: EasyLEARNING OBJESIIT.HOSM.15.LO: 6-01 - LO: 6-01Cengage Learning Testing, Powered by Cognero


CTIVES: NATIONAL STANDARDS:


STATE STANDARDS:



83. During 2014, the first year of operations, Silver, Inc., pays salaries of $175,000. At the end of the year, employees have earned salaries of $20,000, which are not paid by Silver until early in 2015. What is the amount of the deduction for salary expense? a. If Silver uses the cash method, $175,000 in 2014 and $0 in 2015. b. If Silver uses the cash method, $0 in 2014 and $195,000 in 2015. c. If Silver uses the accrual method, $175,000 in 2014 and $20,000 in 2015. d. If Silver uses the accrual method, $195,000 in 2014 and $0 in 2015. e. None of the above is correct.ANSWER: dPOINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES: SIIT.HOSM.15.LO: 6-01 - LO: 6-01NATIONAL STANDARDS: United States - BUSPORG: AnalyticSTATE STANDARDS: United States - AK - AICPA: FN-ReportingKEYWORDS: Bloom's: KnowledgeOTHER: Time: 5 min.

84. Benita incurred a business expense on December 10, 2015, which she charged on her bank credit card. She paid the credit card statement which included the charge on January 5, 2016. Which of the following is correct? a. If Benita is a cash method taxpayer, she cannot deduct the expense until 2016. b. If Benita is an accrual method taxpayer, she can deduct the expense in 2015. c. If Benita uses the accrual method, she can choose to deduct the expense in either 2015 or 2016. d. Only b. and c. are correct. e. a., b., and c. are correct.ANSWER: bRATIONALE: Choice a. is incorrect because charging the expense on a bank credit card is treated as a constructive

payment. Thus, as a cash method taxpayer, she can deduct the expense in 2015. If Benita uses the accrual method, she deducts the expense in 2015. In any event, she does not merely choose the year in which to deduct the expense (choice c.).


SIIT.HOSM.15.LO: 6-02 - LO: 6-02

NATIONAL STANDARDS:


STATE STANDARDS:


KEYWORDS: Bloom's: ComprehensionCengage Learning Testing, Powered by Cognero


OTHER: Time: 5 min.

85. Payments by a cash basis taxpayer of capital expenditures: a. Must be expensed at the time of payment. b. Must be expensed by the end of the first year after the asset is acquired. c. Must be deducted over the actual or statutory life of the asset. d. Can be deducted in the year the taxpayer chooses. e. None of the above.ANSWER: cRATIONALE: Both cash basis and accrual basis taxpayers are required to recover the cost of capital assets through

amortization, depletion, or depreciation over the actual or statutory life of the asset.POINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES:

SIIT.HOSM.15.LO: 6-02 - LO: 6-02

NATIONAL STANDARDS:


STATE STANDARDS:



86. Petal, Inc. is an accrual basis taxpayer. Petal uses the aging approach to calculate the reserve for bad debts. During 2015, the following occur associated with bad debts. Credit sales $400,000Collections on credit sales 250,000Amount added to the reserve 10,000Beginning balance in the reserve –0–Identifiable bad debts during 2015 12,000The amount of the deduction for bad debt expense for Petal for 2015 is: a. $10,000. b. $12,000. c. $22,000. d. $140,000. e. None of the above.ANSWER: bRATIONALE: Only the specific charge-off method can be used. Reserves for estimated expenses are not allowed for

tax purposes because the economic performance test cannot be satisfied.POINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES:

SIIT.HOSM.15.LO: 6-02 - LO: 6-02

NATIONAL STANDARDS:


STATE STANDAR United States - AK - AICPA: FN-Measurement -



DS: AICPA: FN-MeasurementKEYWORDS: Bloom's: ApplicationOTHER: Time: 5 min.

87. Which of the following legal expenses are deductible for AGI? a. Incurred in connection with a trade or business. b. Incurred in connection with rental or royalty property held for the production of income. c. Incurred for tax advice relative to the preparation of an individual’s income tax return. d. Only a. and b. qualify. e. a., b., and c. qualify.ANSWER: dRATIONALE: Expenses incurred for tax advice relative to the preparation of an individual’s income tax return are

classified as itemized deductions.POINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES:

SIIT.HOSM.15.LO: 6-03 - LO: 6-03

NATIONAL STANDARDS:


STATE STANDARDS:



88. Rex, a cash basis calendar year taxpayer, runs a bingo operation which is illegal under state law. During 2015, a bill designated H.R. 9 is introduced into the state legislature which, if enacted, would legitimize bingo games. In 2015, Rex had the following expenses: Operating expenses in conducting bingo games $247,000Payoff money to state and local police 24,000Newspaper ads supporting H.R. 9 3,000Political contributions to legislators who support H.R. 9 8,000

Of these expenditures, Rex may deduct: a. $247,000. b. $250,000. c. $258,000. d. $282,000. e. None of the above.ANSWER: aRATIONALE: Rex can deduct only the $247,000 of operating expenses.


AICPA: FN-MeasurementCengage Learning Testing, Powered by Cognero



89. Andrew, who operates a laundry business, incurred the following expenses during the year. ∙ Parking ticket of $250 for one of his delivery vans that parked illegally.∙ Parking ticket of $75 when he parked illegally while attending a rock concert in Tulsa.∙ DUI ticket of $500 while returning from the rock concert.∙ Attorney’s fee of $600 associated with the DUI ticket. What amount can Andrew deduct for these expenses? a. $0. b. $250. c. $600. d. $1,425. e. None of the above.ANSWER: aRATIONALE: None of these expenses are deductible. The $75 parking ticket, the $500 DUI ticket, and the $600

attorney fee are all personal expenses. The $250 parking ticket, although related to his laundry business, is not deductible because it is a violation of public policy.


SIIT.HOSM.15.LO: 6-03 - LO: 6-03

NATIONAL STANDARDS:


STATE STANDARDS:



90. Which of the following may be deductible? a. Bribes that relate to a U.S. business. b. Fines paid for violations of the law. c. Interest on a loan used in a hobby. d. All of the above. e. None of the above.ANSWER: cRATIONALE: Choices a. and b. are not deductible. Interest incurred in connection with a hobby may be deductible,

depending on the amount of the gross income from the hobby and the application of the 2%-of-AGI floor.


SIIT.HOSM.15.LO: 6-03 - LO: 6-03

NATIONAL STANDARDS:




STATE STANDARDS:



91. Terry and Jim are both involved in operating illegal businesses. Terry operates a gambling business and Jim operates a drug running business. Both businesses have gross revenues of $500,000. The businesses incur the following expenses. Terry JimEmployee salaries $200,000 $200,000Bribes to police 25,000 25,000Rent and utilities 50,000 50,000Cost of goods sold –0– 125,000Which of the following statements is correct? a. Neither Terry nor Jim can deduct any of the above items in calculating the business profit. b. Terry should report profit from his business of $250,000. c. Jim should report profit from his business of $500,000. d. Jim should report profit from his business of $250,000. e. None of the above.ANSWER: bRATIONALE:

Terry and Jim should report net profit from their businesses as follows: Terry JimGross revenues

$500,000 $500,000

Less:

Cost of goods sold

(–0–) (125,000)

Gross income

$500,000 $375,000

Less:

Expenses

Employee salaries

(200,000) (–0–)

Rent and utilities

(50,000) (–0–)

Bribes to police

(–0–) (–0–)

Net profi

$250,000 $375,000



t

For Terry, the bribes to the police of $25,000 cannot be deducted. None of Jim’s expenses can be deducted. However, the cost of goods sold is viewed as a negative item in calculating gross income (i.e., gross income = gross profit) rather than as a deduction.

POINTS: 1DIFFICULTY:

Easy

LEARNING OBJECTIVES:

SIIT.HOSM.15.LO: 6-03 - LO: 6-03

NATIONAL STANDARDS:


STATE STANDARDS:


KEYWORDS:

Bloom's: Application

OTHER: Time: 10 min.

92. Tom operates an illegal drug-running operation and incurred the following expenses: Salaries $ 75,000Illegal kickbacks 20,000Bribes to border guards 25,000Cost of goods sold 160,000Rent 8,000Interest 10,000Insurance on furniture and fixtures 6,000Utilities and telephone 20,000

Which of the above amounts reduces his taxable income? a. $0. b. $160,000. c. $279,000. d. $324,000. e. None of the above.ANSWER: bRATIONALE: Cost of goods sold of $160,000 is treated as a negative item in calculating gross income rather than as

a deduction. For a drug dealer, all deductions are disallowed.POINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES:

SIIT.HOSM.15.LO: 6-03 - LO: 6-03

NATIONAL STANDARDS:


STATE STANDARDS:


KEYWORDS: Bloom's: ApplicationCengage Learning Testing, Powered by Cognero


OTHER: Time: 5 min.

93. For a president of a publicly held corporation, which of the following are not subject to the $1 million limit on executive compensation? a. Contribution to medical insurance plan. b. Contribution to pension plan. c. Premiums on group term life insurance of $50,000. d. Only b. and c. are not subject to the limit. e. a., b., and c., are not subject to the limit.ANSWER: ePOINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES: SIIT.HOSM.15.LO: 6-03 - LO: 6-03NATIONAL STANDARDS: United States - BUSPORG: AnalyticSTATE STANDARDS: United States - AK - AICPA: FN-Measurement -


94. Tommy, an automobile mechanic employed by an auto dealership, is considering opening a fast food franchise. If Tommy decides not to acquire the fast food franchise, any investigation expenses are: a. A deduction for AGI. b. A deduction from AGI, subject to the 2 percent floor. c. A deduction from AGI, not subject to the 2 percent floor. d. Deductible up to $5,000 in the current year with the balance being amortized over a 180-month period. e. Not deductible.ANSWER: eRATIONALE: Since Tommy is not in a business that is the same as or similar to the one being investigated and did

not acquire the new business, his investigation expenses cannot be deducted.POINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES:

SIIT.HOSM.15.LO: 6-03 - LO: 6-03

NATIONAL STANDARDS:


STATE STANDARDS:



95. Iris, a calendar year cash basis taxpayer, owns and operates several TV rental outlets in Florida, and wants to expand to other states. During 2015, she spends $14,000 to investigate TV rental stores in South Carolina and $9,000 to investigate TV rental stores in Georgia. She acquires the South Carolina operations, but not the outlets in Georgia. As to these expenses, Iris should: a. Capitalize $14,000 and not deduct $9,000. b. Expense $23,000 for 2015.



c. Expense $9,000 for 2015 and capitalize $14,000. d. Capitalize $23,000. e. None of the above.ANSWER: bRATIONALE: Since Iris owns and operates TV rental outlets, all of the investigation expenses can be

deducted.POINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES:

SIIT.HOSM.15.LO: 6-03 - LO: 6-03



96. Which of the following statements is correct in connection with the investigation of a business? a. If the taxpayer is not already engaged in the trade or business, the expenses incurred are deductible if the

project is abandoned. b. If the business is acquired, the expenses may be deducted immediately by a taxpayer engaged in a similar

trade or business regardless of whether the business being investigated is acquired. c. That business must be related to the taxpayer’s present business for any expense ever to be deductible. d. Regardless of whether the taxpayer is already engaged in the trade or business, the expenses must be

capitalized and amortized. e. None of the above.ANSWER: bPOINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES: SIIT.HOSM.15.LO: 6-03 - LO: 6-03NATIONAL STANDARDS: United States - BUSPORG: AnalyticSTATE STANDARDS: United States - AK - AICPA: FN-ReportingKEYWORDS: Bloom's: ComprehensionOTHER: Time: 5 min.

97. Which of the following must be capitalized by a business? a. Replacement of a windshield of a business truck which was broken in an accident. b. Repair of a roof of a building used in business. c. Amount paid for a covenant not to compete. d. Only b. and c. must be capitalized. e. a., b., and c. can be expensed rather than capitalized.ANSWER: cRATIONALE: All of these expenses, except for the covenant, can be deducted in the current tax year. The

amortization period for the covenant is 15 years.POINTS: 1DIFFICULTY: Easy




SIIT.HOSM.15.LO: 6-03 - LO: 6-03

NATIONAL STANDARDS:


STATE STANDARDS:



98. On January 2, 2015, Fran acquires a business from Chuck. Among the assets purchased are the following intangibles: patent with a 7-year remaining life, a covenant not to compete for 10 years, and goodwill.

Of the purchase price, $140,000 was paid for the patent and $60,000 for the covenant. The amount of the excess of the purchase price over the identifiable assets was $100,000. What is the amount of the amortization deduction for 2015? a. $10,667. b. $16,000. c. $20,000. d. $32,667. e. None of the above.ANSWER: cRATIONALE:

All of these intangibles are § 197 intangibles and are amortized over a 15-year statutory period.

Patent

$140,000 ÷ 15

= $ 9,333

Covenant

$60,000

÷ 15= 4,000

Goodwill

$100,000 ÷ 15

= 6,667

$20,000POINTS: 1DIFFICULTY:

Easy


SIIT.HOSM.15.LO: 6-03 - LO: 6-03

NATIONAL STANDARDS:


STATE STANDARDS:


KEYWORDS:



99. In January, Lance sold stock with a cost basis of $26,000 to his brother, James, for $24,000, the fair market value of the stock on the date of sale. Five months later, James sold the same stock through his broker for $27,000. What is the tax



effect of these transactions? a. Disallowed loss to James of $2,000; gain to Lance of $1,000. b. Disallowed loss to Lance of $2,000; gain to James of $3,000. c. Deductible loss to Lance of $2,000; gain to James of $3,000. d. Disallowed loss to Lance of $2,000; gain to James of $1,000. e. None of the above.ANSWER: dRATIONALE: Lance’s realized loss of $2,000 ($24,000 – $26,000) is disallowed. James may reduce his realized gain

of $3,000 ($27,000 – $24,000) by Lance’s disallowed loss of $2,000. So James’ recognized gain is $1,000.


SIIT.HOSM.15.LO: 6-03 - LO: 6-03

NATIONAL STANDARDS:


STATE STANDARDS:



100. Nikeya sells land (adjusted basis of $120,000) to her adult son, Shamed, for its appraised value of $95,000. Which of the following statements is correct? a. Nikeya’s recognized loss is $25,000 ($95,000 amount realized – $120,000 adjusted basis). b. Shamed’s adjusted basis for the land is $120,000 ($95,000 cost + $25,000 disallowed loss for Nikeya). c. If Shamed subsequently sells the land for $112,000, he has no recognized gain or loss. d. Only a. and b. are correct. e. a., b., and c. are correct.ANSWER: cRATIONALE: Nikeya’s realized loss of $25,000 ($95,000 amount realized – $120,000 adjusted basis) is disallowed

because Shamed is a related party. Shamed’s adjusted basis for the land is his cost of $95,000. However, when he sells the land for $112,000, his realized gain of $17,000 ($112,000 amount realized – $95,000 adjusted basis) is not recognized because he can offset it against $17,000 of Nikeya’s $25,000 disallowed loss in calculating his taxable income.


SIIT.HOSM.15.LO: 6-03 - LO: 6-03

NATIONAL STANDARDS:


STATE STANDARDS:



101. Which of the following is not a related party for constructive ownership purposes under § 267? a. The taxpayer’s aunt.Cengage Learning Testing, Powered by Cognero


b. The taxpayer’s brother. c. The taxpayer’s grandmother. d. A corporation owned more than 50% by the taxpayer. e. None of the above.ANSWER: aRATIONALE: Taxpayer’s aunt is not a related party under § 267.


102. During the current year, Owl Corporation (a C corporation), a retailer of children’s apparel, made the following donations to qualified charitable organizations. Adjusted Basis Fair Market ValueChildren’s clothing held as inventory, to Haven for Hope $10,000 $15,000

Stock in Exxon Corporation acquired two years ago andheld as an investment, to City University

5,000 3,000

Land acquired four years ago and held as aninvestment, to Humane Society

50,000 75,000

How much qualifies for the charitable contribution deduction (ignoring the taxable income limitation)? a. $63,000 b. $65,000 c. $90,500 d. $92,500 e. None of the aboveANSWER: cRATIONALE: Since Owl is a corporation and the inventory exception is met, one-half of the appreciation on the

clothing may be claimed, or $2,500 [.50($15,000 – $10,000)]. Therefore, $12,500 ($10,000 basis + $2,500 appreciation) is the contribution amount for the inventory. The Exxon stock was loss property (fair market value less than basis); therefore, the contribution amount is the stock’s fair market value, or $3,000. The land is capital gain property, an appreciated capital asset held more than one year, and the contribution amount is the land’s fair market value, or $75,000. Thus, the total amount of contributions for Owl Corporation is $90,500 ($12,500 + $3,000 + $75,000).

POINTS: 1DIFFICULTY: ChallengingLEARNING OBJECTIVES:

SCPE.HRMY.15.LO: 2-02 - LO: 2-02

NATIONAL STANDARDS:




STATE STANDARDS:



103. In the current year, Plum Corporation, a computer manufacturer, donated 100 laptop computers to a local university (a qualified educational organization). The computers were constructed by Plum earlier this year, and the university will use the computers for research and research training. Plum’s basis in the computers is $35,000, and their fair market value is $120,000. What is Plum’s deduction for the contribution of the computers (ignoring the taxable income limitation)? a. $35,000 b. $70,000 c. $77,500 d. $85,000 e. $120,000ANSWER: bRATIONALE: The contribution of computers qualifies for the increased contribution amount available with respect to

certain inventory. The contribution amount is equal to the lesser of (1) the sum of the property’s basis plus 50% of the appreciation on the property [$77,500 = $35,000 basis + .5($120,000 fair market value – $35,000 basis)] or (2) twice the property’s basis ($70,000 = 2 × $35,000 basis). Thus, Plum’s deduction for the charitable contribution of the inventory is $70,000.

POINTS: 1DIFFICULTY: ModerateLEARNING OBJECTIVES:

SCPE.HRMY.15.LO: 2-02 - LO: 2-02

NATIONAL STANDARDS:


STATE STANDARDS:



104. During the current year, Kingbird Corporation (a calendar year C corporation) had the following income and expenses: Income from operations $200,000Expenses from operations 140,000Dividends received (15% ownership) 15,000Domestic production activities deduction 2,000On October 1, Kingbird Corporation made a contribution to a qualified charitable organization of $9,000 in cash (not included in any of the above items). Determine Kingbird’s charitable contribution deduction for the current year. a. $9,000 b. $7,500 c. $6,650 d. $6,450 e. None of the aboveANSWER: bRATIONALE: Income from

operations $200,000



Dividends received 15,000

Subtotal $215,000Less: Expenses from operations

(140,000)

Limitation base for contributions

$ 75,000

Allowable contribution percentage

× 10%

Charitable contribution allowed

$ 7,500

The charitable contribution deduction is based on taxable income determined without regard to the charitable contribution deduction, any net operating loss carryback or capital loss carryback, dividends received deduction, and domestic production activities deduction.


SCPE.HRMY.15.LO: 2-02 - LO: 2-02

NATIONAL STANDARDS:


STATE STANDARDS:



105. Regarding research and experimental expenditures, which of the following are not qualified expenditures? a. Costs of ordinary testing of materials. b. Costs to develop a plant process. c. Costs of developing a formula. d. Depreciation on a building used for research. e. All of the above are qualified expenditures.ANSWER: aPOINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES: SIIT.HOSM.15.LO: 7-05 - LO: 7-05NATIONAL STANDARDS: United States - BUSPORG: AnalyticSTATE STANDARDS: United States - AK - AICPA: FN-ReportingKEYWORDS: Bloom's: ComprehensionOTHER: Time: 5 min.

106. Blue Corporation incurred the following expenses in connection with the development of a new product:Cengage Learning Testing, Powered by Cognero


Salaries $100,000Utilities 18,000Materials 25,000Advertising 5,000Market survey 3,000Depreciation on machine 9,000Blue expects to begin selling the product next year. If Blue elects to amortize research and experimental expenditures over 60 months, determine the amount of the deduction for research and experimental expenditures for the current year. a. $0 b. $118,000 c. $143,000 d. $152,000 e. $160,000ANSWER: aRATIONALE: The qualified research expenditures are $152,000 ($100,000 + $18,000 + $25,000 + $9,000). Under

the election to amortize, the monthly amortization is $2,533 ($152,000 ÷ 60 months). However, since sales will not start until next year, there is no deduction for the current year.


SIIT.HOSM.15.LO: 7-05 - LO: 7-05

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107. Last year, Green Corporation incurred the following expenditures in the development of a new plant process: Salaries $250,000Materials 90,000Utilities 20,000Quality control testing costs 40,000Management study costs 5,000Depreciation of equipment 18,000

During the current year, benefits from the project began being realized in May. If Green Corporation elects a 60 month deferral and amortization period, determine the amount of the deduction for the current year. a. $48,000 b. $50,400 c. $54,667 d. $57,067 e. None of the aboveANSWER: bRATIONALE: Salary $250,000

Materia 90,000



lsUtilities 20,000Depreciation 18,000

Research and experimental costs

$378,000

Current deduction $50,400 [($378,000 ÷ 60) × 8 months] Neither the quality control testing costs nor the management study costs are research and experimental expenditures.


Moderate


SIIT.HOSM.15.LO: 7-05 - LO: 7-05

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STATE STANDARDS:



108. Ivory, Inc., has taxable income of $600,000 and qualified production activities income (QPAI) of $700,000 in the current year. Ivory’s domestic production activities deduction is: a. $36,000. b. $42,000. c. $54,000. d. $63,000. e. None of the above.ANSWER: cRATIONALE: DPAD is calculated for Ivory as the lesser of the following:

∙ $700,000 × 9% = $63,000 ∙ $600,000 × 9% = $54,000

So the DPAD is $54,000.POINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES: SIIT.HOSM.15.LO: 7-06 - LO: 7-06NATIONAL STANDARDS: United States - BUSPORG: AnalyticSTATE STANDARDS: United States - AK - AICPA: FN-Measurement -




109. In the current year, Amber Corporation has taxable income of $880,000, alternative minimum taxable income of $600,000, and qualified production activities income (QPAI) of $640,000. The total W-2 wages paid to employees engaged in qualified domestic production activities are $116,000. Amber’s DPAD for the current year is: a. $54,000. b. $57,600. c. $58,000. d. $79,200. e. None of the above.ANSWER: aRATIONALE: Amber’s DPAD is limited to 9% of alternative minimum taxable income of $600,000.

$600,000 × 9% = $54,000.POINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES: SIIT.HOSM.15.LO: 7-06 - LO: 7-06NATIONAL STANDARDS: United States - BUSPORG: AnalyticSTATE STANDARDS: United States - AK - AICPA: FN-Measurement -


110. Cream, Inc.’s taxable income for the current year before any deduction for an NOL carryforward of $30,000 is $70,000. Cream’s qualified production activities income (QPAI) is $60,000. What is the amount of Cream’s domestic production activities deduction (DPAD) for the current year? a. $1,200 b. $1,800 c. $2,400 d. $3,600 e. None of the aboveANSWER: dRATIONALE: Taxable income for purposes of calculating the DPAD is reduced by any NOL carryforward. Thus, the

amount of the DPAD is $3,600 [($70,000 – $30,000) × 9%].POINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES:

SIIT.HOSM.15.LO: 7-06 - LO: 7-06

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STATE STANDARDS:



111. Grape Corporation purchased a machine in December of the current year. This was the only asset purchased during the current year. The machine was placed in service in January of the following year. No assets were purchased in the following year. Grape Corporation’s cost recovery would begin: a. In the current year using a mid-quarter convention.



b. In the current year using a half-year convention. c. In the following year using a mid-quarter convention. d. In the following year using a half-year convention. e. None of the above.ANSWER: dPOINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES: SIIT.HOSM.15.LO: 8-01 - LO: 8-01

SIIT.HOSM.15.LO: 8-02 - LO: 8-02NATIONAL STANDARDS: United States - BUSPORG: AnalyticSTATE STANDARDS: United States - AK - AICPA: FN-Measurement -


112. Which of the following assets would be subject to cost recovery? a. A painting by Picasso hanging on a physician’s office wall. b. An antique vase in a doctor’s waiting room. c. Landscaping around the doctor’s office. d. a., b., and c. e. None of the above.ANSWER: cPOINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES: SIIT.HOSM.15.LO: 8-01 - LO: 8-01NATIONAL STANDARDS: United States - BUSPORG: AnalyticSTATE STANDARDS: United States - AK - AICPA: FN-ReportingKEYWORDS: Bloom's: ComprehensionOTHER: Time: 5 min.

113. On June 1 of the current year, Tab converted a machine from personal use to rental property. At the time of the conversion, the machine was worth $90,000. Five years ago Tab purchased the machine for $120,000. The machine is still encumbered by a $50,000 mortgage. What is the basis of the machine for cost recovery? a. $70,000 b. $90,000 c. $120,000 d. $140,000 e. None of the aboveANSWER: bRATIONALE: The basis is $90,000, the lower of the adjusted basis ($120,000) or fair market value ($90,000) at the

date of conversion. The mortgage of $50,000 does not affect adjusted basis.POINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES:

SIIT.HOSM.15.LO: 8-01 - LO: 8-01



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114. Tara purchased a machine for $40,000 to be used in her business. The cost recovery allowed and allowable for the three years the machine was used are computed as follows. Cost Recovery Allowed Cost Recovery AllowableYear 1 $16,000 $ 8,000Year 2 9,600 12,800Year 3 5,760 7,680If Tara sells the machine after three years for $15,000, how much gain should she recognize? a. $3,480 b. $6,360 c. $9,240 d. $11,480 e. None of the aboveANSWER: dRATIONALE: Cost $40,000

Less the greater of cost recovery allowed or allowable

($16,000 + $12,800 + $7,680) (36,480)Adjusted basis $ 3,520

The recognized gain is $11,480 ($15,000 – $3,520).POINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES:

SIIT.HOSM.15.LO: 8-01 - LO: 8-01

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STATE STANDARDS:



115. Hazel purchased a new business asset (five-year asset) on September 30, 2015, at a cost of $100,000. On October 4, 2015, Hazel placed the asset in service. This was the only asset Hazel placed in service in 2015. Hazel did not elect § 179 or additional first-year depreciation if available. On August 20, 2016, Hazel sold the asset. Determine the cost recovery for 2016 for the asset. a. $14,250 b. $19,000 c. $23,750 d. $38,000



e. None of the aboveANSWER: cRATIONALE: The asset was placed in service in October 2015; hence, the mid-quarter convention is used. 2016 is

the second year of cost recovery. ($100,000) × .38 × (2.5/4) = $23,750.POINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES:

SIIT.HOSM.15.LO: 8-02 - LO: 8-02

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STATE STANDARDS:



116. Tan Company acquires a new machine (ten-year property) on January 15, 2015, at a cost of $200,000. Tan also acquires another new machine (seven-year property) on November 5, 2015, at a cost of $40,000. No election is made to use the straight-line method. The company does not make the § 179 election and elects to not take additional first-year depreciation if available. Determine the total deductions in calculating taxable income related to the machines for 2015. a. $24,000 b. $25,716 c. $102,000 d. $132,858 e. None of the aboveANSWER: bRATIONALE: The total cost recovery is computed as follows.

10-year property MACRS cost recovery ($200,000 × .10) $20,0007-year property MACRS cost recovery ($40,000 × .1429) 5,716 Total cost recovery $25,716


SIIT.HOSM.15.LO: 8-02 - LO: 8-02

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117. James purchased a new business asset (three-year personalty) on July 23, 2015, at a cost of $40,000. James takes additional first-year depreciation but does not elect Section 179 expense on the asset. Determine the cost recovery deduction for 2015. a. $8,333



b. $26,666 c. $33,333 d. $41,665 e. None of the aboveANSWER: bRATIONALE: Additional

first-year depreciation ($40,000 × .50)

$20,000

MACRS cost recovery ($20,000 × .3333)

6,666

Total cost recovery $26,666


Easy


SIIT.HOSM.15.LO: 8-02 - LO: 8-02

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118. Alice purchased office furniture on September 20, 2014, for $100,000. On October 10, 2014, she purchased business computers for $80,000. Alice placed all of the assets in service on January 15, 2015. Alice did not elect to expense any of the assets under § 179, did not elect straight-line cost recovery, and did not take additional first-year depreciation (if available). Determine the cost recovery deduction for the business assets for 2015. a. $6,426 b. $14,710 c. $25,722 d. $30,290 e. None of the aboveANSWER: dRATIONALE: The half-year convention applies.

Regular MACRSFurniture (seven-year property) $100,000 × .1429 $14,290Computers (five-year property) $80,000 × .20 16,000 Total cost recovery $30,290

POINTS: 1DIFFICULTY: EasyCengage Learning Testing, Powered by Cognero



SIIT.HOSM.15.LO: 8-02 - LO: 8-02

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119. Barry purchased a used business asset (seven-year property) on September 30, 2015, at a cost of $200,000. This is the only asset he purchased during the year. Barry did not elect to expense any of the asset under § 179, did not take additional first-year depreciation (if available), and did not elect straight-line cost recovery. Barry sold the asset on July 17, 2016. Determine the cost recovery deduction for 2016. a. $19,133 b. $24,490 c. $34,438 d. $55,100 e. None of the aboveANSWER: bRATIONALE: The half-year convention applies in this case [$200,000 × .2449 × 1/2 = $24,490].



120. Bonnie purchased a new business asset (five-year property) on March 10, 2015, at a cost of $30,000. She also purchased a new business asset (seven-year property) on November 20, 2015, at a cost of $13,000. Bonnie did not elect to expense either of the assets under § 179, nor did she elect straight-line cost recovery. Bonnie takes additional first-year depreciation. Determine the cost recovery deduction for 2015 for these assets. a. $5,858 b. $7,464 c. $9,586 d. $19,429 e. None of the aboveANSWER: eRATIONALE: The half-year convention applies in this case. Five-year property:

Additional first-year depreciation ($30,000 × .50) $15,000 MACRS cost recovery ($15,000 × .20) 3,000Seven-year property: Additional first-year depreciation ($13,000 × .50) 6,500 MACRS cost recovery ($6,500 × .1429) 929 Total cost recovery $25,429

POINTS: 1Cengage Learning Testing, Powered by Cognero



SIIT.HOSM.15.LO: 8-02 - LO: 8-02

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121. Doug purchased a new factory building on January 15, 1990, for $400,000. On March 1, 2015, the building was sold. Determine the cost recovery deduction for the year of the sale; Doug did not use the MACRS straight-line method. a. $0 b. $1,587 c. $2,645 d. $12,696 e. None of the aboveANSWER: cRATIONALE: .03174 × $400,000 × 2.5/12 = $2,645. Non-residential real estate placed in service after December 31,

1986 and before May 13, 1993 (31.5-year life).POINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES:

SIIT.HOSM.15.LO: 8-02 - LO: 8-02

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122. Cora purchased a hotel building on May 17, 2015, for $3,000,000. Determine the cost recovery deduction for 2016. a. $48,150 b. $59,520 c. $69,000 d. $76,920 e. None of the aboveANSWER: dRATIONALE: The hotel building is nonresidential realty. .02564 × $3,000,000 = $76,920.


AICPA: FN-Measurement




123. Carlos purchased an apartment building on November 16, 2015, for $3,000,000. Determine the cost recovery for 2015. a. $9,630 b. $11,910 c. $13,950 d. $22,740 e. None of the aboveANSWER: eRATIONALE: $3,000,000 × .00455 = $13,650.



124. Diane purchased a factory building on April 15, 1993, for $5,000,000. She sells the factory building on February 2, 2015. Determine the cost recovery deduction for the year of the sale. a. $16,025 b. $19,838 c. $26,458 d. $158,750 e. None of the aboveANSWER: bRATIONALE: .03174 × $5,000,000 × 1.5/12 = $19,838. Non-residential real estate placed in service before May

3, 1993 (31.5-year life).POINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES:

SIIT.HOSM.15.LO: 8-02 - LO: 8-02

NATIONAL STANDARDS:




125. Howard’s business is raising and harvesting peaches. On March 10, 2015, Howard purchased 10,000 new peach trees at a cost of $60,000. Howard does not make an election to expense assets under § 179 and does not take additional first-year depreciation (if available). Determine the cost recovery deduction for 2015. a. $1,532Cengage Learning Testing, Powered by Cognero


b. $3,000 c. $12,000 d. $31,500 e. None of the aboveANSWER: bRATIONALE: MACRS cost recovery ($60,000 × .05) = $3,000.POINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES: SIIT.HOSM.15.LO: 8-02 - LO: 8-02NATIONAL STANDARDS: United States - BUSPORG: AnalyticSTATE STANDARDS: United States - AK - AICPA: FN-Measurement -


126. On May 15, 2015, Brent purchased new farm equipment for $200,000. Brent used the equipment in connection with his farming business. Brent does not elect to expense assets under § 179. Brent does not take additional first-year depreciation (if available). Determine the cost recovery deduction for 2015. a. $12,852 b. $21,420 c. $30,000 d. $36,000 e. None of the aboveANSWER: bRATIONALE: .1071 × $200,000 = $21,420.



127. On June 1, 2015, Sam purchased used farm machinery for $150,000. Sam used the machinery in connection with his farming business. Sam does not elect to expense assets under § 179. Sam has, however, made an election to not have the uniform capitalization rules apply to the farming business. Determine the cost recovery deduction for 2015. a. $5,000 b. $7,500 c. $10,000 d. $78,750 e. None of the aboveANSWER: bRATIONALE: .05 × $150,000 = $7,500.

POINTS: 1Cengage Learning Testing, Powered by Cognero




128. On May 30, 2014, Jane purchased a factory building to use for her business. In August 2015, Jane paid $300,000 for improvements to the building. Determine Jane’s total deduction with respect to the building improvements for 2015. a. $2,889 b. $4,173 c. $4,815 d. $25,000 e. None of the aboveANSWER: aRATIONALE:

MACRS cost recovery ($300,000 × .00963); 39-year real property; month 8 $2,889


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129. White Company acquires a new machine (seven-year property) on January 10, 2015, at a cost of $600,000. White makes the election to expense the maximum amount under § 179. No election is made to use the straight-line method. White does take additional first-year depreciation. Determine the total deductions in calculating taxable income related to the machine for 2015 assuming White has taxable income of $800,000. a. $71,593 b. $128,610 c. $385,296 d. $390,868 e. None of the aboveANSWER: eRATIONALE: § 179

expense $500,000

Additional first-year

50,000



depreciation [($600,000 – $500,000) × .50]MACRS cost recovery ($50,000 × .1429)

7,145

Total $557,145POINTS: 1DIFFICULTY:

Moderate


SIIT.HOSM.15.LO: 8-02 - LO: 8-02SIIT.HOSM.15.LO: 8-03 - LO: 8-03

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130. Augie purchased one new asset during the year (five-year property) on November 10, 2015, at a cost of $650,000. She would like to use the § 179 election and will also take additional first-year depreciation, if available. The income from the business before the cost recovery deduction and the § 179 deduction was $600,000. Determine the total cost recovery deduction with respect to the asset for 2015. a. $22,500 b. $154,550 c. $500,000 d. $600,700 e. None of the aboveANSWER: eRATIONALE: The mid-quarter convention applies to the MACRS calculation.

§ 179 expense $500,000

Additional first-year depreciation [($650,000 – $500,000) ´ .50] $75,000MACRS cost recovery ($75,000 ´ .05) 3,750Total $78,750

Income from the business before cost recovery $600,000Less: Total cost recovery (78,750)§ 179 business income limitation $521,250

Hence, Augie’s total cost recovery deduction is $578,750 ($500,000 + $78,750).

POINTS: 1



DIFFICULTY: ModerateLEARNING OBJECTIVES:


NATIONAL STANDARDS:




131. In 2014, Gail had a § 179 deduction carryover of $30,000. In 2015, she elected § 179 for an asset acquired at a cost of $115,000. Gail’s § 179 business income limitation for 2015 is $140,000. Determine Gail’s § 179 deduction for 2015. a. $25,000 b. $115,000 c. $130,000 d. $140,000 e. None of the aboveANSWER: dRATIONALE: $145,000; $30,000 + $115,000 limited to $140,000.



132. The only asset Bill purchased during 2015 was a new seven-year class asset. The asset, which was listed property, was acquired on June 17 at a cost of $50,000. The asset was used 40% for business, 30% for the production of income, and the rest of the time for personal use. Bill always elects to expense the maximum amount under § 179 whenever it is applicable. The net income from the business before the § 179 deduction is $100,000. Determine Bill’s maximum deduction with respect to the property for 2015. a. $1,428 b. $2,499 c. $26,749 d. $33,375 e. None of the aboveANSWER: bRATIONALE: The listed property does not pass the predominantly business usage test. Therefore, neither § 179

expensing nor additional first-year depreciation (if available) can be taken. In addition, only straight-line cost recovery can be used.

Maximum deducti

$2,499



on ($50,000 × .0714 × 70%)


SIIT.HOSM.15.LO: 8-02 - LO: 8-02SIIT.HOSM.15.LO: 8-03 - LO: 8-03SIIT.HOSM.15.LO: 8-04 - LO: 8-04

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133. Mary purchased a new five-year class asset on March 7, 2015. The asset was listed property (not an automobile). It was used 60% for business and the rest of the time for personal use. The asset cost $900,000. Mary made the § 179 election. The income from the business before the § 179 deduction was $600,000. Mary also takes additional first-year depreciation (if available). Determine the total deductions with respect to the asset for 2015. a. $72,000 b. $271,600 c. $524,000 d. $600,000 e. None of the aboveANSWER: cRATIONALE: Cost for business use: $540,000 (60% × $900,000)

§ 179 expense (no business income limitation)

$500,000

Additional first-year depreciation [($540,000 - $500,000) × 50%

$20,000



MACRS cost recovery ($20,000 × .20)

4,000

Total deduction

$524,000


Easy



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134. Hans purchased a new passenger automobile on August 17, 2015, for $30,000. During the year the car was used 40% for business and 60% for personal use. Determine his cost recovery deduction for the car for 2015. a. $500 b. $1,000 c. $1,224 d. $1,500 e. None of the aboveANSWER: eRATIONALE: The car, which is listed property, does not pass the predominantly business usage test. Therefore,

neither § 179 expensing nor additional first-year depreciation (if available) can be taken. $30,000 × .100 = $3,000 (not over $3,160 limit*). $3,000 × 40% = $1,200. *These depreciation limits are indexed annually.


SIIT.HOSM.15.LO: 8-04 - LO: 8-04

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135. On June 1, 2015, Irene places in service a new automobile that cost $21,000. The car is used 70% for business and 30% for personal use. (Assume this percentage is maintained for the life of the car.) She does not take additional first-year depreciation (if available). Determine the cost recovery deduction for 2016.Cengage Learning Testing, Powered by Cognero


a. $3,160 b. $3,290 c. $3,570 d. $6,720 e. None of the aboveANSWER: cRATIONALE: $21,000 × 32% = $6,720 (limited to $5,100*).

$5,100 × 70% = $3,570. *These depreciation limits are indexed annually.


SIIT.HOSM.15.LO: 8-04 - LO: 8-04



136. On June 1, 2015, James places in service a new automobile that cost $40,000. The car is used 60% for business and 40% for personal use. (Assume this percentage is maintained for the life of the car.) James does not take additional first-year depreciation (if available). Determine the cost recovery deduction for 2015. a. $1,776 b. $1,896 c. $4,800 d. $8,000 e. None of the aboveANSWER: bRATIONALE: MACRS cost recovery ($40,000 × .20) × .60 $ 4,800

Limited to ($3,160 × .60) $ 1,896



137. On May 2, 2015, Karen placed in service a new sports utility vehicle that cost $60,000 and has a gross vehicle weight of 6,300 lbs. The vehicle is used 60% for business and 40% for personal use. Determine the cost recovery for 2015. Karen wants to maximize her deductions. a. $7,200 b. $25,000 c. $26,800Cengage Learning Testing, Powered by Cognero


d. $37,000 e. None of the aboveANSWER: cRATIONALE: Cost for business use: $36,000 (60% × $60,000)

§ 179 expense

$25,000

MACRS cost recovery [($36,000 – $25,000) × .20]

1,800

Total $26,800POINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES:

SIIT.HOSM.15.LO: 8-04 - LO: 8-04

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STATE STANDARDS:



138. On July 17, 2015, Kevin places in service a used automobile that cost $25,000. The car is used 80% for business and 20% for personal use. In 2016, he used the automobile 40% for business and 60% for personal use. Determine the cost recovery recapture for 2016. a. $0 b. $528 c. $2,000 d. $2,500 e. None of the aboveANSWER: bRATIONALE: Cost recovery recapture in 2016:

MACRS ($25,000 × .20) = $5,000 (limited to $3,160*); $3,160 × 80% $2,528

Straight-line ($25,000 × .10) = $2,500 (limited to $3,160*); $2,500 × 80% (2,000)

Cost recovery recapture in 2016 $ 528 * These depreciation limits are indexed annually.

POINTS: 1DIFFICULTY: EasyLEARNING OBJSIIT.HOSM.15.LO: 8-04 - LO: 8-04Cengage Learning Testing, Powered by Cognero


ECTIVES: NATIONAL STANDARDS:


STATE STANDARDS:



139. On July 10, 2015, Ariff places in service a new sports utility vehicle that cost $70,000 and weighed 6,300 pounds. The SUV is used 100% for business. Determine Ariff’s maximum deduction for 2015, assuming Ariff’s § 179 business income is $110,000. Ariff does not take additional first-year depreciation (if available). a. $2,960 b. $25,000 c. $34,000 d. $70,000 e. None of the aboveANSWER: cRATIONALE: Since the SUV weighs over 6,000 pounds, it is not subject to the statutory dollar limits on luxury

automobiles.

§ 179 expensing (limited to $25,000 for such SUVs)

$25,000

Regular MACRS [($70,000 – $25,000) × .20]

9,000

Total $34,000POINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES:


NATIONAL STANDARDS:


STATE STANDARDS:


KEYWORDS: Bloom's: ApplicationOTHER: Time: 5 min.Cengage Learning Testing, Powered by Cognero


140. On March 1, 2015, Lana leases and places in service a passenger automobile. The lease will run for five years and the payments are $500 per month. During 2015, she uses her car 60% for business and 40% for personal activities. Assuming the dollar amount from the IRS table for auto leases is $70, determine Lana’s gross income attributable to the lease. a. $0 b. $35 c. $59 d. $70 e. None of the aboveANSWER: bRATIONALE: $70 × 306/365 × 60% = $35.POINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES: SIIT.HOSM.15.LO: 8-04 - LO: 8-04NATIONAL STANDARDS: United States - BUSPORG: AnalyticSTATE STANDARDS: United States - AK - AICPA: FN-Measurement -


141. On June 1, 2015, Norm leases a taxi and places it in service. The lease payments are $1,000 per month. Assuming the dollar amount from the IRS table for such leases is $241, determine Norm’s gross income inclusion amount. a. $0 b. $241 c. $907 d. $1,687 e. None of the aboveANSWER: aRATIONALE: A taxi is not a passenger automobile. Thus, it is not subject to the lease inclusion amount

provision.POINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES:

SIIT.HOSM.15.LO: 8-04 - LO: 8-04

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142. Bhaskar purchased a new factory building and land on September 10, 2015, for $3,700,000. ($500,000 of the purchase price was allocated to the land.) He elected the alternative depreciation system (ADS). Determine the cost recovery deduction for 2016. a. $23,328



b. $80,000 c. $82,048 d. $92,500 e. None of the aboveANSWER: bRATIONALE: .025 × $3,200,000 = $80,000.



143. Pat purchased a used five-year class asset on March 15, 2015, for $60,000. He did not elect § 179 expensing. Determine the cost recovery deduction for 2015 for earnings and profits purposes. a. $2,000 b. $3,000 c. $6,000 d. $12,000 e. None of the aboveANSWER: cRATIONALE: .10 × $60,000 = $6,000.



144. George purchases used seven-year class property at a cost of $200,000 on April 20, 2015. Determine George’s cost recovery deduction for 2015 for alternative minimum tax purposes, assuming George does not elect § 179 and does not take additional first-year depreciation, if available. a. $2,500 b. $10,000 c. $14,280 d. $28,580 e. None of the aboveANSWER: eRATIONALE: .1071 × $200,000 = $21,420.

POINTS: 1





145. During the past two years, through extensive advertising and improved customer relations, Orange Corporation estimated that it had developed customer goodwill worth $500,000. For the current year, determine the amount of goodwill Orange Corporation may amortize. a. $16,667 b. $26,667 c. $33,333 d. $100,000 e. None of the aboveANSWER: eRATIONALE: $0. Self-created goodwill is not a § 197 intangible and thus cannot be amortized.POINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES: SIIT.HOSM.15.LO: 8-07 - LO: 8-07NATIONAL STANDARDS: United States - BUSPORG: AnalyticSTATE STANDARDS: United States - AK - AICPA: FN-Measurement -


146. On June 1, 2015, Red Corporation purchased an existing business. With respect to the acquired assets of the business, Red allocated $300,000 of the purchase price to a patent. The patent will expire in 20 years. Determine the total amount that Red may amortize for 2015 for the patent. a. $0 b. $1,667 c. $11,667 d. $35,000 e. None of the aboveANSWER: cRATIONALE: $300,000 × (7 months/180 months) = $11,667. The statutory amortization period for § 197

intangibles is 15 years.POINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES:

SIIT.HOSM.15.LO: 8-07 - LO: 8-07

NATIONAL STANDARDS:






147. On January 15, 2015, Vern purchased the rights to a mineral interest for $3,500,000. At that time it was estimated that the recoverable units would be 500,000. During the year, 40,000 units were mined and 25,000 units were sold for $800,000. Vern incurred expenses during 2015 of $500,000. The percentage depletion rate is 22%. Determine Vern’s depletion deduction for 2015. a. $150,000 b. $175,000 c. $176,000 d. $200,000 e. $250,000ANSWER: bRATIONALE: $3,500,000/500,000 = $7 per unit

25,000 units sold × $7 = $175,000 cost depletion 22% × $800,000 = $176,000 percentage depletion Percentage limit ($800,000 – $500,000) × 50% = $150,000 Thus, the deduction is $175,000.


SIIT.HOSM.15.LO: 8-08 - LO: 8-08

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Subjective Short Answer

148. Sandra owns an insurance agency. The following selected data are taken from the agency balance sheet and income statement prepared using the accrual method. Revenue $250,000Salaries and commissions 100,000Rent 10,000Insurance 5,000Utilities 6,000Accounts receivable, 1/1/2015 40,000Accounts receivable, 12/31/2015 38,000Accounts payable, 1/1/2015 12,000Accounts payable, 12/31/2015 11,000Calculate Sandra’s net profit using the cash method for 2015.ANSWER: Sandra’s accrual method net profit is calculated as follows:

Revenue $250,000

Less: Expenses Salaries

and $100,00

0



commissions

Rent 10,000 Insurance 5,000

Utilities 6,000 (121,000)

Net profit $129,000

To convert to cash method net profit, the following adjustments must be made.

Net profit—accrual method $129,000 Deduct: Decrease in accounts payable ($11,000 – $12,000) (1,000)

Add: Decrease in accounts receivable ($38,000 – $40,000) 2,000

Net profit—cash method $130,000


SIIT.HOSM.15.LO: 6-02 - LO: 6-02

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149. Alfred’s Enterprises, an unincorporated entity, pays employee salaries of $100,000 during the year. At the end of the year, $12,000 of additional salaries have been earned but not paid until the beginning of the next year. a. Determine the amount of the deduction for salaries if Alfred is a cash method taxpayer. b. Determine the amount of the deduction for salaries if Alfred is an accrual method taxpayer.ANSWER: a. The deduction for salaries is the amount paid of $100,000.

b. The deduction for salaries is calculated as follows: Salaries $100,000 Accrued salaries 12,000 Salary deduction $112,000


Moderate


SIIT.HOSM.15.LO: 6-02 - LO: 6-02

NATIONAL STANDARDS:


STATE STANDUnited States - AK - AICPA: FN-Measurement - Cengage Learning Testing, Powered by Cognero


ARDS: AICPA: FN-MeasurementKEYWORDS: Bloom's: AnalysisOTHER: Time: 10 min.

150. Petula’s business sells heat pumps which have a one-year warranty. Based on historical data, the warranty costs amount to 11% of sales. During 2015, heat pump sales are $400,000. Actual warranty expenses paid in 2015 are $40,000. a. Determine the amount of the warranty expense deduction for 2015 if Petula’s business uses the accrual method.

b. How would your answer change if Petula used the cash method for extended warranties and the purchasers paid

$25,000 for the warranties which covered the second and third years of ownership?

ANSWER: a. Even though Petula’s business uses the accrual method, reserves for estimated warranty expenses are not permitted. Therefore, the deduction for warranty expenses is the amount paid of $40,000.

b. Petula would record gross income in 2015 of $425,000 ($400,000 + $25,000). The

deduction for warranty expense would still be $40,000.POINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES:

SIIT.HOSM.15.LO: 6-02 - LO: 6-02


AICPA: FN-MeasurementKEYWORDS: Bloom's: AnalysisOTHER: Time: 10 min.

151. Beige, Inc., an airline manufacturer, is conducting negotiations for the sale of military aircraft. One negotiation is with a U.S. assistant secretary of defense. She can close the deal on the purchase of 50 attack helicopters if she is paid $750,000 under the table. Another negotiation is with the minister of defense of a third world country. To complete the sale of 20 jet fighters to his government, he demands that he be paid a $1 million grease payment. Beige makes the payments and closes the deals. How much of these payments are deductible by Beige, Inc.?ANSWER: The $750,000 payment to the U.S. assistant secretary of defense is a bribe and is not deductible. If the

grease payment of $1 million to the minister of defense of the third world country does not violate the Foreign Corrupt Practices Act of 1977, then the entire $1 million payment is deductible. However, if the grease payment does violate the Act, then none of it is deductible.


SIIT.HOSM.15.LO: 6-03 - LO: 6-03

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STATE STANDARDS:


KEYWORDS: Bloom's: AnalysisOTHER: Time: 5 min.Cengage Learning Testing, Powered by Cognero


152. Albie operates an illegal drug-running business and has the following items of income and expense. What is Albie’s adjusted gross income from this operation? Income $800,000Expenses: Rent 24,000 Utilities 9,000 Bribes to police 55,000 Medical expense 5,000 Legal fees 25,000 Depreciation 30,000 Illegal kickbacks 30,000 Cost of goods sold 300,000ANSWER: Albie is allowed to reduce his AGI only by the cost of goods sold; thus, his AGI is $500,000 ($800,000

– $300,000). Note that the cost of goods sold is treated as a negative item in calculating gross income.POINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES:

SIIT.HOSM.15.LO: 6-03 - LO: 6-03

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STATE STANDARDS:



153. Kitty runs a brothel (illegal under state law) and has the following items of income and expense. What is the amount that she must include in taxable income from her operation? Income $200,000Expenses: Rent 8,000 Utilities 2,000 Bribes to police 10,000 Office supplies 5,000 Legal fees 20,000 Depreciation 14,000 Illegal kickbacks 15,000ANSWER: Income $200,000

Expenses: Rent $ 8,000 Utilities 2,000 Office supplies 5,000 Legal fees 20,000 Depreciation 14,000 (49,000) $151,000

The bribes to police of $10,000 and illegal kickbacks of $15,000 are not deductible.POINTS: 1




SIIT.HOSM.15.LO: 6-03 - LO: 6-03

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154. Janet is the CEO for Silver, Inc., a closely held corporation. Her total compensation for 2015 is $5 million. Of this amount, $2 million is a salary and $3 million is a bonus. The bonus was calculated as 5% of Silver’s net income before the bonus and before taxes ($60 million × 5% = $3 million). The bonus provision has been in effect since Janet became CEO five years ago and is related to Silver’s performance. It is approved annually by the entire board of directors (1 of the 5 directors is an outside director) of Silver. How much of Janet’s compensation can Silver deduct for 2015?ANSWER: All of the $5 million is deductible by Silver. Since Silver is a closely held, rather than a publicly held

corporation, the $1 million statutory limit on the deduction of certain executive compensation is not applicable.


SIIT.HOSM.15.LO: 6-03 - LO: 6-03

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KEYWORDS: Bloom's: AnalysisOTHER: Time: 10 min.

155. Agnes operates a Christmas Shop in Atlantic City, NJ. She makes a weekend trip to Vero Beach, FL, for the purpose of determining the feasibility of opening another shop. Her travel expenses are $2,000 (includes $500 for meals). In addition, she pays $5,000 to a market research firm in Vero Beach to prepare a feasibility study. Determine the amount of the expenses that Agnes can deduct if: a. She opens a new shop in Vero Beach.

b. She decides not to open a new shop in Vero Beach.ANSWER: a. Because Agnes is already in the Christmas Shop business, $6,750 of the investigation

expenses ($1,500+($500*.50)+$5,000=$6,750) are deductible regardless of whether or not she opens a shop in Vero Beach. Note that, as discussed in Chapter 9, only 50% of the cost of the meals is deductible.

b. Same response as in a.

POINTS: 1DIFFICULTY: ModerateLEARNING OBJECTIVES: SIIT.HOSM.15.LO: 6-03 - LO: 6-03NATIONAL STANDARDS: United States - BUSPORG: AnalyticSTATE STANDARDS: United States - AK - AICPA: FN-Measurement -



AICPA: FN-MeasurementKEYWORDS: Bloom's: AnalysisOTHER: Time: 10 min.

156. While she was a college student, Angel lived by a bookstore located near campus. She thinks a bookstore located on the other side of campus would be successful. She incurs expenses of $42,800 (legal fees, accounting fees, marketing survey, etc.) in exploring its business potential. Her parents have agreed to loan her the money required to start the business. What amount of these investigation costs can Angel deduct if: a. She opens the bookstore on August 1, 2015. b. She decides not to open the bookstore.ANSWER: a. If Angel opens the bookstore on August 1, 2015, she can deduct the following investigation

expenses in 2015.

Allowed expense deduction in first year

$5,000

Amortization ($37,800/180 months × 5 months)

1,050

Deductible investigation expenses

$6,050

b. If Angel does not open the bookstore, she cannot deduct any of the $42,800 of expenses she incurred.


Easy


SIIT.HOSM.15.LO: 6-03 - LO: 6-03

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157. Walter sells land with an adjusted basis of $175,000 and a fair market value of $160,000 to his mother, Shirley, for $160,000. Walter reinvests the proceeds in the stock market. Shirley holds the land for one year and a day and sells it in the marketplace for $169,000. a. Determine the tax consequences to Walter.

b. Determine the tax consequences to Shirley.



ANSWER: a. Amount realized $160,000 Adjusted basis (175,000) Realized loss ($ 15,000)

Walter’s realized loss of $15,000 is disallowed because Walter and Shirley are related parties.

b. Amount realized $169,000 Adjusted basis (160,000) Realized gain $ 9,000 Walter’s disallowed loss needed to reduce Shirley’s gain to zero (9,000) Recognized gain $ –0–

Shirley may use as much of Walter’s disallowed loss as she needs to reduce her realized gain (i.e., $9,000) to $0. Thus, Shirley’s recognized gain is $0 and the $6,000 ($15,000 – $9,000) of Walter’s disallowed loss that is not used by Shirley is permanently lost.


SIIT.HOSM.15.LO: 6-03 - LO: 6-03

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158. Sandra sold 500 shares of Wren Corporation to Bob, her brother, for its fair market value. She had paid $26,000 for the stock. Calculate Sandra’s and Bob’s gain or loss under the following circumstances: a.

Sandra sold the shares to Bob for $20,000. One year later, Bob sold them for $18,000.

b.

Sandra sold the shares to Bob for $30,000. One year later, Bob sold them for $27,000.

c. Sandra sold the shares to Bob for $20,000. One year later, Bob sold them for $28,000.ANSWER: a.

Sandra has no deductible loss. Bob’s recognized loss is $2,000.

b.

Sandra has a recognized gain of $4,000. Bob has a recognized loss of $3,000. Related party transaction rules apply only to losses.

c.

Sandra has no deductible loss. Bob has a recognized gain of $2,000 ($28,000 – $20,000 = $8,000 less Sandra’s disallowed loss of $6,000).


SIIT.HOSM.15.LO: 6-03 - LO: 6-03


AICPA: FN-MeasurementCengage Learning Testing, Powered by Cognero



159. The stock of Eagle, Inc. is owned as follows: Tom 23%Tom’s uncle 22%Tom’s daughter 7%Tom’s sister 15%Tom’s spouse 15%Tom’s nephew 8%Tom’s CPA, unrelated 10%Tom sells land and a building to Eagle, Inc. for $212,000. His adjusted basis for these assets is $225,000. Calculate Tom’s realized and recognized loss associated with the sale.ANSWER: Tom’s realized loss is $13,000.

Amount realized $212,000 Adjusted basis (225,000) Realized loss ($ 13,000)

However, his recognized loss is $0 because the loss is disallowed as a § 267 related party transaction.

A related party includes a corporation more than 50% (directly or indirectly) owned by the taxpayer. Tom’s total ownership (i.e., both direct and constructive) of Eagle, Inc. is 60%.

Tom 23%Tom’s daughter 7%

Tom’s sister 15%

Tom’s spouse 15%

60%

Tom’s uncle, nephew, and the CPA are not related parties for § 267 purposes.POINTS: 1DIFFICULTY: ModerateLEARNING OBJECTIVES:

SIIT.HOSM.15.LO: 6-03 - LO: 6-03

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STATE STANDARDS:



160. Tracy invested in the following stocks and bonds during 2015. Blue, Inc. $25,000City of Falcon bonds 75,000To finance the investments, she borrowed $100,000 from Swan Bank. Interest expense paid on the loan during 2015 was Cengage Learning Testing, Powered by Cognero


$5,000. During 2015, Tracy received $1,250 of dividend income from Blue, Inc. and $3,000 of interest income on the municipal bonds. a. Determine the amount of Tracy’s gross income.

b. Determine the maximum amount of Tracy’s deductible interest expense.ANSWER: a. Tracy must include the $1,250 of dividend income in her gross income. The interest on

the municipal bonds of $3,000 is tax-exempt. b. Tracy can deduct the interest paid of $1,250 ($5,000 × 1/4) on the portion of the loan

that relates to the Blue, Inc. stock. The interest paid of $3,750 on the portion of the loan that relates to the municipal bonds is disallowed because the interest income from the bonds is tax-exempt.



161. During the current year, Gray Corporation, a C corporation in the financial services business, made charitable contributions to qualified organizations as follows: ∙

Stock (basis of $20,000, fair market value of $45,000) in Drab Corporation, held for six months as an investment, to the Salvation Army. (Salvation Army plans on selling the stock.)

∙

Painting (basis of $90,000, fair market value of $250,000), held for four years as an investment, to the Museum of Fine Arts. (The Museum plans on including the painting in its collection.)

Gray Corporation’s taxable income (before any charitable contribution deduction) is $1.8 million. a. What is the total amount of Gray’s charitable contributions for the year? b.

What is the amount of Gray’s charitable contribution deduction in the current year, and what happens to any excess charitable contribution, if any?

ANSWER: a.

Gray’s total amount of charitable contributions is $270,000 [$20,000 (stock) + $250,000 (painting)], computed as follows: Stock: this is ordinary income property, as a sale of the stock would not result in a long-term capital gain or a § 1231 gain for Gray (i.e., STCG). Thus, the amount of the contribution is the stock’s basis, or $20,000. Painting: this is capital gain property, as a sale of the painting would result in a long-term capital gain for Gray. Thus, the amount of the contribution is the painting’s fair market value, or $250,000.

b. Gray’s current year charitable deduction is limited to $180,000 [10% × $1.8 million



(taxable income before charitable deduction)], and the excess charitable contribution of $90,000 ($270,000 – $180,000) is carried forward to the five succeeding tax years.

POINTS: 1DIFFICULTY: ChallengingLEARNING OBJECTIVES: SCPE.HRMY.15.LO: 2-02 - LO: 2-02NATIONAL STANDARDS: United States - BUSPORG: AnalyticSTATE STANDARDS: United States - AK - AICPA: FN-Measurement -


162. On December 28, 2015, the board of directors of Taupe Corporation, a calendar year, accrual method C corporation, authorized a contribution of land to a qualified charitable organization. The land (basis of $75,000, fair market value of $125,000) was acquired five years ago and held as an investment. For purposes of the taxable income limitation applicable to charitable deductions, Taupe has taxable income of $800,000 and $950,000 for 2015 and 2016, respectively. Describe the tax consequences to Taupe Corporation under the following independent situations. a. The donation is made on February 16, 2016. b. The donation is made on April 11, 2016.ANSWER: In general, charitable contributions are deductible in the year made. However, in the case of an accrual

method corporation, a deduction can be claimed in the current year for a charitable contribution made in the subsequent year if (1) the contribution is approved by the board of directors of the corporation in the current year, and (2) the contribution is made on or before the fifteenth day of the third month of the subsequent year. The land is capital gain property; thus, the amount of the charitable contribution is the land’s fair market value of $125,000.

a. The requirements for an accrual of the charitable deduction are satisfied; thus, the $125,000 contribution is deductible by Taupe in 2015, subject to the taxable income limitation. For 2015, the taxable income limitation for charitable deductions is $80,000 (10% × $800,000). The excess contribution amount of $45,000 carries forward to 2016 (five-year carryover limit).

b. The requirements for an accrual of the charitable deduction are not satisfied; thus, the $125,000

contribution is deductible by Taupe in 2016 (the year the contribution is made), subject to the taxable income limitation. For 2016, the taxable income limitation for charitable deductions is $95,000 (10% × $950,000). The excess contribution amount of $30,000 carries forward to 2017 (five-year carryover limit).


SCPE.HRMY.15.LO: 2-02 - LO: 2-02

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STATE STANDARDS:


KEYWORDS: Bloom's: ApplicationCengage Learning Testing, Powered by Cognero



163. In 2014, Robin Corporation incurred the following expenditures in connection with the development of a new product: Salaries $100,000Supplies 40,000Market survey 10,000Depreciation 25,000In 2015, Robin incurred the following additional expenditures in connection with the development of the product: Salaries $125,000Supplies 50,000Depreciation 30,000Advertising 10,000In October 2015, Robin began receiving benefits from the project. If Robin elects to expense research and experimental expenditures, determine the amount and year of the deduction.ANSWER: Deductibility of research and experimental expenditures is permitted in the year of incurrence.

2014Salaries $100,000

Supplies 40,000

Depreciation

25,000

Deductible expenses

$165,000

The market survey is not a research and experimental expenditure.

2015Salaries $125,000

Supplies 50,000

Depreciation

30,000

Deductible expenses

$205,000

The advertising is not a research and experimental expenditurePOINTS: 1DIFFICULTY: Easy




SIIT.HOSM.15.LO: 7-05 - LO: 7-05

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164. In 2015, Tan Corporation incurred the following expenditures in connection with the development of a new product: Salaries $ 60,000Supplies 20,000Depreciation on research equipment 10,000Testing for quality control 5,000Advertising 8,000Overhead allocated to research 2,000Tan began selling the product in November 2015. If Tan elects to amortize research and experimental expenditures, determine Tan’s deduction for 2015.ANSWER: Salarie

s $60,000

Supplies 20,000

Depreciation 10,000

Overhead allocated to research

2,000

Total qualifying research expenditures

$92,000

[($92,000/60 months) × 2 months] = $3,067POINTS: 1DIFFICULTY:

Easy


SIIT.HOSM.15.LO: 7-05 - LO: 7-05

NATIONAL STANDARDS:


STATE STANDUnited States - AK - AICPA: FN-Measurement -



ARDS: AICPA: FN-MeasurementKEYWORDS: Bloom's: ApplicationOTHER: Time: 10 min.

165. Green, Inc., manufactures and sells widgets. During the current year, an examination of the company records showed the following items: Domestic production gross receipts $3,000,000Cost of goods sold for domestic products 750,000Expenses directly related to domestic production gross receipts (other than wages) 300,000

W-2 wages paid to employees engaged in qualified domestic production activities 300,000

Ratable portion of other expenses 100,000Total W-2 wages 325,000Taxable income 1,600,000Determine Green’s domestic production activities deduction for the current year.ANSWER: Domestic production gross receipts $3,000,000

Less: Cost of goods sold (750,000) Direct expenses (300,000) W-2 wages directly related (300,000) Allocated expenses (100,000) Qualified production activities income (QPAI) $1,550,000 Domestic production activities deduction

Lesser of: (1) QPAI × 9% ($1,550,000 × 9% = $139,500)(2) Taxable income × 9% ($1,600,000 × 9% = $144,000) $ 139,500

Limited to 50% of related W-2 wages (50% × $300,000) [no limit] $ 150,000


Challenging


SIIT.HOSM.15.LO: 7-06 - LO: 7-06

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KEYWORDS:



166. Red Company is a proprietorship owned by Sally, a single individual. Red manufactures and sells widgets. An examination of Red’s records shows the following items for the current year: Domestic production gross receipts $2,500,000



Cost of goods sold for domestic products 600,000Expenses directly related to domestic production grossreceipts (other than wages) 280,000Ratable portion of other expenses 100,000Other expenses not allocated to domestic production gross receipts 30,000W-2 wages paid to employees engaged in qualified domesticproduction activities 270,000Total W-2 wages 320,000 Sally also had the following additional items: Dividends received $ 20,000Interest income 10,000

Determine Sally’s domestic production activities deduction for the current year.ANSWER: Gross

receipts $2,500,000

Less: Cost of goods sold

(600,000)

Expenses directly related

(280,000)

Other allocated and nonallocated expenses ($100,000 + $30,000)

(130,000)

Wages (320,000)Dividends received 20,000

Interest received 10,000

Modified adjusted gross income

$1,200,000

Domestic production gross receipts

$2,500,000

Less: Cost of goods sold

(600,000)

Direct expenses (280,000)

Allocated expenses (100,000)



W-2 wages directly related

(270,000)

Qualified production activities income (QPAI)

$1,250,000

Lesser of: QPAI × 9% ($1,250,000) = $112,500

Modified AGI × 9% ($1,200,000) = $108,000

Not to exceed 50% × $270,000 = $135,000

Sally’s QPAD = $108,000


Challenging


SIIT.HOSM.15.LO: 7-06 - LO: 7-06

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STATE STANDARDS:



167. Tom purchased and placed in service used office furniture on January 3, 2015, for $40,000. Tom’s accountant depreciated the furniture using straight-line depreciation over 10 years for financial reporting purposes. The accountant also used the same depreciation amounts when filing Tom’s income tax returns. On January 10, 2020, Tom sold the furniture. Determine the tax basis of the furniture at the time of the sale.ANSWER: The cost of the asset must be reduced by the greater of the cost recovery allowed or allowable in

calculating the tax basis.

Cost $40,000Cengage Learning Testing, Powered by Cognero


2015 allowable ($40,000 × .1429)

(5,716)

2016 allowable ($40,000 × .2449)

(9,796)

2017 allowable ($40,000 × .1749)

(6,996)

2018 allowable ($40,000 × .1249)

(4,996)

2019 allowed ($40,000 × .0893)

(3,572)

2020 allowable ($40,000 × .0892 × .50)

(1,784)

Tax basis $ 7,140



NATIONAL STANDARDS:




168. Jim acquires a new seven-year class asset on September 20, 2015, for $80,000. He placed the asset in service on October 5, 2015. He does not elect to expense any of the asset under § 179 or elect straight-line, cost recovery. He takes additional first-year depreciation. He sells the asset on August 25, 2016. This is the only asset he acquires in 2015. Determine Jim’s cost recovery in 2015 and 2016.ANSWER: The mid-quarter convention applies.

2015Additional first-year depreci

$40,000



ation ($80,000 × .50)MACRS cost recovery ($40,000 × .0357)

1,428

Total for 2015

$41,428

2016 MACRS cost recovery [$40,000 × .2755 × (2.5/4)]

$ 6,888


Easy


SIIT.HOSM.15.LO: 8-02 - LO: 8-02

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STATE STANDARDS:



169. Rod paid $1,950,000 for a new warehouse on April 14, 2015. He sold the warehouse on September 29, 2020. Determine the cost recovery deduction for 2015 and 2020.ANSWER: 2015: $1,950,000 × .01819 = $35,471.

2020: $1,950,000 × .02564 × 8.5/12 = $35,415.POINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES: SIIT.HOSM.15.LO: 8-02 - LO: 8-02NATIONAL STANDARDS: United States - BUSPORG: AnalyticSTATE STANDARDS: United States - AK - AICPA: FN-Measurement -

AICPA: FN-Measurement




170. On March 3, 2015, Sally purchased and placed in service a building costing $12,000,000. The building has 10 floors. The bottom three floors are rented out to businesses. The top seven floors are residential apartments. The gross rents from the businesses are $60,000 and the gross rents from the apartments are $110,000. Determine Sally’s cost recovery for the building in 2015.ANSWER: The gross rents from the apartments are not 80% or more of the total gross rents and hence, the whole

building cannot be treated as residential rental real estate.

Residential [(70% × $12,000,000) × .02879]

$241,836

Nonresidential [(30% × $12,000,000) × .02033]

73,188

Total cost recovery

$315,024


Easy


SIIT.HOSM.15.LO: 8-02 - LO: 8-02

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171. Sid bought a new $1,210,000 seven-year class asset on August 2, 2015. On December 2, 2015, he purchased $860,000 of used five-year class assets. If Sid elects § 179 and takes additional first-year depreciation, if available, what is the maximum cost recovery deduction for these purchases for 2015?ANSWER:

§ 179 expense [$500,000 – ($2,070,000 – $2,000,000)] $430,000

Taking § 179 expense on 7-year property

7-year property§ 179 expense $ 430,000



Additional first-year depreciation [($1,210,000 – $430,000) ´ .50] 390,000MACRS cost recovery ($390,000 ´ .1429) 55,731

5-year propertyMACRS cost recovery ($860,000 ´ .20) 172,000Total deduction $1,047,731

Taking § 179 expense on 5-year property

7-year propertyAdditional first-year depreciation ($1,210,000 ´ .50) $ 605,000MACRS cost recovery ($605,000 ´ .1429) 86,455

5-year property§ 179 expense 430,000MACRS cost recovery [($860,000 – $430,000) ´ .20] 86,000Total deduction $1,207,455

Using § 179 on the used 5-year asset produces the greater total deduction in 2015.POINTS: 1DIFFICULTY: ModerateLEARNING OBJECTIVES:




172. Polly purchased a new hotel on July 20, 2015, for $6,000,000. On January 20, 2022, the building was sold. Determine the cost recovery deduction for the year of the sale.ANSWER: $6,000,000 × .02564 × .5/12 = $6,410.POINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES: SIIT.HOSM.15.LO: 8-02 - LO: 8-02NATIONAL STANDARDS: United States - BUSPORG: AnalyticSTATE STANDARDS: United States - AK - AICPA: FN-Measurement -


173. Rustin bought used 7-year class property on May 15, 2015, for $728,000. Rustin elects § 179 and straight-line cost recovery. Rustin's taxable income would not create a limitation for purposes of the § 179 deduction. Determine the maximum cost recovery deduction Rustin can claim for 2015.ANSWER: § 179 expense election $ 500,000

Cost recovery [($728,000 – $500,000) × .0714 (Table 8.3)]

16,279

Total deduction $ 516,279Cengage Learning Testing, Powered by Cognero




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174. Audra acquires the following new five-year class property in 2015: Asset Acquisition Date CostA January 10 $ 106,000B July 5 70,000C November 15 1,950,000 Total $ 2,126,000

Audra elects § 179 treatment for Asset C. Audra’s taxable income from her business would not create a limitation for purposes of the § 179 deduction. Audra claims the full available additional first-year depreciation deduction. Determine her total cost recovery deduction (including the § 179 deduction) for the year.ANSWER: $1,950,000/$2,126,000 = 91.7%. Therefore, Audra must use the mid-quarter convention.

Asset AAdditional first-year depreciation ($106,000 ´ .50) $ 53,000MACRS cost recovery ($53,000 ´ .35) 18,550

Asset BAdditional first-year depreciation ($70,000 ´ .50) 35,000MACRS cost recovery ($35,000 ´ .15) 5,250

Asset C§ 179 expense [$500,000 – ($2,126,000 – $2,000,000)] 374,000Additional first-year depreciation [($1,950,000 – $374,000) ´ .50]

788,000

MACRS cost recovery ($788,000 ´ .05) 39,400Total deduction $1,313,200



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175. On April 5, 2015, Orange Corporation purchased, and placed in service, seven-year class assets costing $540,000 and five-year class assets costing $140,000. Orange elects to expense the maximum amount under § 179. Orange does not take additional first-year depreciation (if available). Assume taxable income is not a limitation. Determine Orange Corporation’s cost recovery with respect to the assets for 2015.ANSWER: § 179 limit $ 500,000

Seven-year assets § 179 expense $ 500,000

Regular MACRS [($540,000 – $500,000) × .1429] 5,716

Five-year assets Regular MACRS ($140,000 × .20) 28,000 Total cost recovery $ 533,716



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176. Martin is a sole proprietor of a sandwich business. On March 4, 2015, Martin purchased and placed in service new seven-year class assets costing $560,000. Martin’s business reports taxable income for the year, before any deductions associated with the purchased assets, of $160,000. Martin also received $30,000 of interest income for the year, which is not related to the business. Martin wants his adjusted gross income for the year to be as low as possible. With this objective in mind, determine how Martin should recover the cost of the acquired assets.ANSWER:

Electing § 179

§ 179 expense $500,000

Business income before MACRS deductions $160,000Additional first-year depreciation[($560,000 – $500,000) ´ 50%] (30,000)MACRS cost recovery ($30,000 ´ .1429) (4,287)Business income limitation $125,713

§ 179 limit $125,713

Business income $ –0–Interest income 30,000Adjusted gross income $ 30,000

Not electing § 179



Business income before MACRS deductions $160,000Additional first-year depreciation ($560,000 ´ 50%) (280,000)MACRS cost recovery ($280,000 ´ .1429) (40,012)Business income ($160,012)Interest income 30,000Adjusted gross income ($130,012)

Not electing § 179 will produce the lowest adjusted gross income, because the § 179 expense cannot create a business loss.



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177. On February 21, 2015, Joe purchased new farm equipment for $600,000. Joe elects to not have the uniform capitalization rules apply to his farming business. He does not claim additional first-year depreciation (if available). If Joe elects § 179, what is the maximum cost recovery deduction for this purchase for 2015?ANSWER: § 179

expense

$500,000

ADS straight-line [($600,000 – $500,000) × .05]

5,000

Total deduction

$505,000


Easy



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KEYWORDS: Bloom's: ApplicationOTHER: Time: 5 min.Cengage Learning Testing, Powered by Cognero


178. On April 15, 2015, Sam placed in service a storage facility (a single-purpose agricultural structure) costing $80,000. Sam also purchased and planted fruit trees costing $40,000. Sam does not elect to expense any of the acquisitions under § 179, and he elects not to take additional first-year depreciation (if available). Determine Sam’s cost recovery from these two items for 2015.ANSWER: Stora

ge facility ($80,000 × .075) (Table 8.4)

$6,000

Trees ($40,000 × .05) (Table 8.3)

2,000

Total cost recovery

$8,000


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179. On August 20, 2015, May placed in service a building for her business. On November 28, 2015, May paid $80,000 for improvements to the building. What is May’s cost recovery deduction for the building improvements in 2015?ANSWER: MACRS cost recovery [39-year real property; month 11 ($80,000 × .00321)] $ 257POINTS: 1DIFFICULTY: ModerateLEARNING OBJECTIVES:

SIIT.HOSM.15.LO: 8-02 - LO: 8-02

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180. On July 15, 2015, Mavis paid $275,000 for improvements on a commercial building she owns. Determine the maximum total cost recovery from the improvements in 2015.ANSWER: Regular MACRS [39-year real property; month 7 ($275,000 × .01177)] $ 3,237POINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES:


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181. Joe purchased a new five-year class asset on June 1, 2015. The asset is listed property (not an automobile). It was used 55% for business and 45% for the production of income. The asset cost $1,000,000. Joe made the § 179 election. Joe’s taxable income would not create a limitation for purposes of the § 179 deduction. Joe does not take additional first-year depreciation (if available). Determine Joe’s total cost recovery (including the § 179 deduction) for the year.ANSWER: Business use: $550,000 ($1,000,000 × 55%)

§ 179 expense

$500,000

Regular MACRS [($550,000 – $500,000) × .20]

10,000

Production of income use: $450,000 ($1,000,000 × 45%)

Regular MACRS ($450,0

90,000



00 × .20)Total deduction

$600,000

*Property used for the production of income is not eligible for § 179 expensing.POINTS: 1DIFFICULTY:

Moderate



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182. Nora purchased a new automobile on July 20, 2014, for $29,000. The car was used 60% for business and 40% for personal use. In 2015, the car was used 30% for business and 70% for personal use. Nora elects not to take additional first-year depreciation. Determine the cost recovery recapture and the cost recovery deduction for 2015.ANSWER: Cost recovery in 2014:

MACRS ($29,000 × .20) = $5,800 (limited to $3,160*); $3,160 × 60%

$1,896

Straight-line ($29,000 × .10) = $2,900 (limited to $3,160*); $2,900 × 60%

(1,740)

Cost $ 156



recovery recapture in 2015

Cost recovery in 2015:

Straight-line ($29,000 × .20) = $5,800 (limited to $5,100*); $5,100 × .30

$1,530

*These depreciation limits are indexed annually.POINTS: 1DIFFICULTY: ModerateLEARNING OBJECTIVES:


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183. Norm purchases a new sports utility vehicle (SUV) on October 12, 2015, for $60,000. The SUV has a gross vehicle weight of 6,200 lbs. It is used 100% of the time for business and it is the only business asset acquired by Norm during 2015. Compute the maximum deduction with respect to the SUV for 2015. Norm does not take additional first-year depreciation (if available).ANSWER: The SUV is not classified as a passenger automobile because of its GVW exceeding 6,000 lbs. Therefore,

it is not subject to the cost recovery limits of § 280F.

Section 179 expense

$25,000

MACRS cost recovery [($60,0

1,750



00 - $25,000) × .05] Note: The mid-quarter convention applies

Total deduction

$26,750


Easy



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184. On June 1, 2015, Gabriella purchased a computer and peripheral equipment (five-year property) for $25,000. She used the assets 40% for business, 50% for the production of income, and 10% for personal use. These are the only assets Gabriella purchased during the current year. Determine her total cost recovery deduction for the current year.ANSWER: A computer and peripheral equipment constitute listed property. Since the more-than-50% business use

test is not satisfied, Gabriella cannot elect § 179 expensing, she must use straight-line cost recovery, and is not eligible for additional first-year depreciation. The 10% of personal usage does not qualify for cost recovery.

$25,000 × .10 × 90% = $2,250.POINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES:

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185. Rick purchased a uranium interest for $10,000,000 on January 3, 2015, when recoverable reserves were estimated at 200,000 units. A total of 10,000 units were extracted in 2015 and 7,000 units were sold in 2015. Gross income from the



property was $2,800,000 and taxable income without the allowance for depletion was $1,000,000. Determine the depletion deduction for 2015.ANSWER: Cost depletion

Percentage depletion

Lesser of:22% × $2,800,000 = $616,00050% × $1,000,000 = $500,000

Therefore the depletion deduction would be $500,000.POINTS: 1DIFFICULTY: ModerateLEARNING OBJECTIVES: SIIT.HOSM.15.LO: 8-08 - LO: 8-08NATIONAL STANDARDS: United States - BUSPORG: AnalyticSTATE STANDARDS: United States - AK - AICPA: FN-Measurement -


Essay

186. Can a trade or business expense be deductible if it is necessary but not ordinary?ANSWER: No. To be deductible as a trade or business expense, the expense must be both ordinary and

necessary.POINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES:

SIIT.HOSM.15.LO: 6-01 - LO: 6-01

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STATE STANDARDS: United States - AK - AICPA: FN-ReportingKEYWORDS: Bloom's: ComprehensionOTHER: Time: 5 min.

187. Salaries are considered an ordinary and necessary expense of a trade or business if they meet what other requirement? What are the tax consequences if this requirement is not met?ANSWER: “Reasonableness” is an additional requirement that applies to salaries. Generally, the unreasonable

expense is disallowed as a deduction to the corporation and taxable as a dividend, rather than as salary, to the shareholder.


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188. If part of a shareholder/employee’s salary is classified as unreasonable, determine the effect on the: a.

Shareholder/employee’s gross income.

b. Corporation’s taxable income.ANSWER: a.

The reclassification of part of a shareholder/employee’s salary as unreasonable will have no effect on the shareholder/employee’s gross income. That is, the shareholder/employee’s salary income will decrease by the same amount as his dividend income increases. Note that if the dividends are qualified dividends, they are eligible for the same preferential tax rate of 15%/0% applicable to long-term capital gains.

b.

Salaries are deductible in calculating corporate taxable income, whereas dividends are not. So, the taxable income of the corporation will increase due to a reduced salary deduction.

POINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES: SIIT.HOSM.15.LO: 6-01 - LO: 6-01NATIONAL STANDARDS: United States - BUSPORG: AnalyticSTATE STANDARDS: United States - AK - AICPA: FN-ReportingKEYWORDS: Bloom's: AnalysisOTHER: Time: 10 min.

189. Bruce owns several sole proprietorships. Must Bruce use the same accounting method for each of these businesses?ANSWER: No. If a taxpayer owns multiple businesses, it may be possible to use the cash method for some and

the accrual method for others.POINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES:

SIIT.HOSM.15.LO: 6-02 - LO: 6-02

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190. Max opened his dental practice (a sole proprietorship) in March 2015. At the end of the year, he has unpaid accounts receivable of $62,000 and no unpaid accounts payable. Should Max use the accrual method or the cash method for his dental practice?ANSWER: A service provider generally should use the cash method. Under the cash method, Max records income

from his dental practice only as he collects from his patients and/or their insurance companies. Max has Cengage Learning Testing, Powered by Cognero


income from the uncollected accounts receivable only as he receives payment. Note that since his accounts payable can only be deducted when paid under the cash method, he should continue to minimize the accounts payable balance at the end of the tax year.


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191. Briefly discuss the two tests that an accrual basis taxpayer must apply before an expense can be deducted.ANSWER: The two tests that an accrual basis taxpayer must apply before an expense can be deducted are (1) the

all events test and (2) the economic performance test. The all events test provides that a deduction cannot be claimed until all the events that create the taxpayers liability have occurred and that the amount of the liability can be determined with reasonable accuracy. The economic performance test provides that the service, property, or use of property giving rise to the liability must have been performed for, provided to, or used by the taxpayer.


SIIT.HOSM.15.LO: 6-02 - LO: 6-02

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192. Graham, a CPA, has submitted a proposal to do the annual audit for a municipality. Owen, the city treasurer, tells Graham that for a $1,000 fee, he will use his influence to have the audit awarded to Graham. What factors are relevant in determining if Graham can deduct the $1,000 payment assuming he pays the fee to Owen?ANSWER: The payment from Graham to Owen appears to be a bribe. To be disallowed, the bribe must be illegal

under either Federal or state law and also must subject the payer to a criminal penalty or the loss of license or privilege to engage in a trade or business. For a bribe that is illegal under state law, a deduction is denied only if the state law is generally enforced.


SIIT.HOSM.15.LO: 6-03 - LO: 6-03

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KEYWORDS: Bloom's: ComprehensionCengage Learning Testing, Powered by Cognero


OTHER: Time: 5 min.

193. If a taxpayer operated an illegal business (not drug trafficking), what expenses can be deducted and what expenses are disallowed?ANSWER: The usual expenses of operating a business are deductible. However, the following expenses are

disallowed.

∙ Fines

∙ Bribes to public officials

∙ Illegal kickbacks

∙ Other illegal payments


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STATE STANDARDS: United States - AK - AICPA: FN-ReportingKEYWORDS: Bloom's: KnowledgeOTHER: Time: 5 min.

194. Bobby operates a drug trafficking business. Because he has an accounting background, he keeps detailed financial records. What expenses can Bobby deduct on his Federal income tax return?ANSWER: Bobby cannot deduct any of the expenses associated with operating his illegal drug trafficking

business. However, gross income for tax purposes is defined as sales minus cost of goods sold. So in calculating the net income of the business for tax purposes, cost of goods sold is treated as a negative income item rather than as an expense.


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195. Abner contributes $2,000 to the campaign of the Tea Party candidate for governor, $1,000 to the campaign of the Tea Party candidate for senator, and $500 to the campaign of the Tea Party candidate for mayor. Can Abner deduct these political contributions?ANSWER: No. Political contributions cannot be deducted.POINTS: 1



DIFFICULTY: EasyLEARNING OBJECTIVES: SIIT.HOSM.15.LO: 6-03 - LO: 6-03NATIONAL STANDARDS: United States - BUSPORG: AnalyticSTATE STANDARDS: United States - AK - AICPA: FN-ReportingKEYWORDS: Bloom's: KnowledgeOTHER: Time: 5 min.

196. Are there any circumstances under which lobbying expenditures are deductible?ANSWER: Yes. Lobbying expenditures are deductible under the following three circumstances.

∙ Influencing local legislation.∙ Activities devoted solely to monitoring legislation.∙ De minimis provision for annual in-house expenditures (lobbying expenses other than those paid to professional lobbyists) if such expenditures do not exceed $2,000.


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197. In applying the $1 million limit on deducting executive compensation, what corporations are subject to the deduction limit? What executives are covered?ANSWER: The $1 million limit on deducting the compensation of a covered executive applies to corporations that

have at least one class of stock registered under the Securities Exchange Act of 1934. Covered employees include the chief (or principal) executive officer, the chief (or principal) financial officer, and the three other most highly compensated officers.


SIIT.HOSM.15.LO: 6-03 - LO: 6-03

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198. Under what circumstances may a taxpayer deduct the expenses of investigating a possible business acquisition, if (1) the business is not acquired; and (2) the business is acquired?ANSWER: (1)

The expenses of investigation may be deducted if the taxpayer is in the same or similar business to that being investigated, even if the business is not acquired. If the taxpayer is not in the same or similar trade or business to the one being investigated, the investigation expenses are nondeductible if the business is not acquired.



(2)

The expenses of investigation must be capitalized by a taxpayer not in a similar business when the business is acquired. Such expenses may be immediately expensed (up to $5,000 if such expenses do not exceed $50,000) and the balance amortized over a 180-month minimum period. If the taxpayer is in the same or similar trade or business as that acquired, investigation expenses are currently deductible.

POINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES: SIIT.HOSM.15.LO: 6-03 - LO: 6-03NATIONAL STANDARDS: United States - BUSPORG: AnalyticSTATE STANDARDS: United States - AK - AICPA: FN-ReportingKEYWORDS: Bloom's: ComprehensionOTHER: Time: 10 min.

199. Briefly discuss the disallowance of deductions for capital expenditures.ANSWER: Any expenditures that add to the value or prolong the life of property or adapt the property to a new or

different use are capital expenditures which must be capitalized and depreciated or amortized.POINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES:

SIIT.HOSM.15.LO: 6-03 - LO: 6-03

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200. Why are there restrictions on the recognition of gains and losses resulting from transactions between related parties?ANSWER: Sham transactions can be structured between related parties such that no real economic change occurs

in the status of the parties, but a tax savings results. This is an abuse of the tax law which has resulted in restrictions on the recognition of such transactions.


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201. In a related party transaction where realized loss is disallowed, when can the disallowed loss be used by the buyer on the subsequent sale of the property? In the case of a related party disallowed loss transaction, can the related party seller’s disallowed loss be used by a taxpayer other than the related party buyer?ANSWER: The related party buyer is permitted to use as much of the disallowed loss of the seller as is needed to

reduce any realized gain on the subsequent sale of the property. If the property in the hands of the



buyer appreciates to at least the amount of the seller’s adjusted basis at the date of the original sale, all of the disallowed loss can be used by the buyer on the subsequent sale. The related party seller’s disallowed loss can be used only by the related party buyer.


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202. Olive, Inc., an accrual method taxpayer, is a corporation that is equally owned by Maurice and Alex, who are brothers. The corporation uses the accrual method of accounting and the shareholders use the cash method. To provide Olive with funds to acquire additional working capital, the shareholders each loan Olive $100,000 with a 6% interest rate. At the end of the tax year, there is unpaid accrued interest of $3,000 due to each shareholder. From a timing perspective, when should Olive deduct this $6,000 and when should Maurice and Alex include the $3,000 in gross income? Olive pays the $3,000 to each shareholder early next year.ANSWER: Maurice and Alex are related parties with Olive. So Olive (accrual method) must claim the deduction of

$6,000 in the same tax year that the cash method shareholders include the $3,000 each in gross income (next year). Note that this matching provision applies only if the payor uses the accrual method and the payee uses the cash method.


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203. Briefly explain why interest on money borrowed to buy tax-exempt municipal bonds is disallowed as a deduction.ANSWER: Because the interest income on municipal bonds is excludible from gross income, the related expense

should not be deductible. Otherwise, a taxpayer could borrow money, at say 10%, invest the funds in tax-exempt securities, at say 8%, and realize a profit if the interest expense were deductible. The entire profit would be derived from the tax treatment.


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204. Discuss the difference between the half-year convention and the mid-quarter convention.ANSWER: The half-year convention assumes property is placed in service at mid-year and thus provides for a

half-year’s cost recovery for that year. The mid-quarter convention assumes property placed in service during the year is placed in service at the middle of the quarter in which it is actually placed in service.


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205. Discuss the criteria used to determine whether a building is residential or nonresidential realty. Also explain the tax consequences resulting from this determination if the property is placed in service in 2015.ANSWER: Residential realty is property for which 80% or more of the gross rental revenues are from nontransient

dwelling units. Residential realty has a recovery period of 27.5 years. Nonresidential realty has a recovery period of 39 years.


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206. Discuss the effect on the cost recovery method of a taxpayer election if the uniform capitalization rules apply to a farming business.ANSWER: The cost recovery method is generally MACRS using the 150% declining-balance method.POINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES: SIIT.HOSM.15.LO: 8-02 - LO: 8-02NATIONAL STANDARDS: United States - BUSPORG: AnalyticSTATE STANDARDS: United States - AK - AICPA: FN-Measurement -

AICPA: FN-MeasurementKEYWORDS: Bloom's: ComprehensionOTHER: Time: 5 min.

207. Discuss the tax consequences of listed property being used for the production of income compared to being used in a Cengage Learning Testing, Powered by Cognero


trade or business.ANSWER: Section 179 expensing cannot be taken on property used for the production of income. However,

additional first-year depreciation can be taken (if available).POINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES:


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208. Discuss the beneficial tax consequences of an SUV not being classified as a passenger automobile.ANSWER: If an automobile is not classified as a passenger automobile, it is not subject to the statutory dollar cost

recovery limits under § 280F. In addition to a larger cost recovery deduction each year, it also results in the total recovery of the cost over a six-year period. While the automobile is still listed property, if it passes the more-than-50% business use test, MACRS cost recovery can be used as well as an election under § 179. However, the § 179 limit for SUVs is $25,000 rather than $500,000 in 2015 and 2014. The automobile also is eligible for additional first-year depreciation (if available).



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209. Discuss the reason for the inclusion amount with respect to leased automobiles.ANSWER: The purpose of the inclusion amount is to prevent taxpayers from circumventing the cost recovery

dollar limitations by leasing, instead of purchasing, an automobile.POINTS: 1DIFFICULTY: EasyLEARNING OBJECTIVES:

SIIT.HOSM.15.LO: 8-04 - LO: 8-04

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210. Discuss the requirements in order for startup expenditures to be amortized under § 195.ANSWER: The expenditures must meet two requirements.

∙ The expenditures must be paid or incurred in connection with:

∙ Creating an active trade or business; ∙ Investigating the creation or acquisition of an active trade or business; or ∙ Any activity engaged in for profit in anticipation of such activity becoming an active trade or business.

∙ Such costs must be the kinds of costs that would be currently deductible if paid or incurred in connection

with the operation of an existing trade or business in the same field as that entered into by the taxpayer.


Easy


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KEYWORDS:

Bloom's: Comprehension


211. Discuss the tax implications of a seller allocating the selling price to goodwill or a covenant not to compete.ANSWER: Goodwill is a capital asset and any gain or loss recognized on the sale of the goodwill will be capital

gain or loss. A covenant not to compete is a business asset and any gain or loss will be ordinary gain or loss.


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chapter 05 tb - business deductions

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