Fall 2007, Test II, Multiple ChoiceMultiple Choice Identify the choice that best completes the statement or answers the question. ____ 1. Alice purchased an office condominium on September 20, 2007, for $200,000. On October 10, she purchased business assets (seven-year property) for $80,000. Alice did not elect to expense any of the assets under 179, nor did she elect straight-line cost recovery. Determine the cost recovery deduction for the business assets for 2007. a. $2,856. b. $25,999. c. $32,002. d. $41,428. 2. On May 15, 2007, Brent purchased a truck for $40,000. The truck weighed less than 13,000 lbs. Brent used the truck in connection with his farming business. Brent does not elect to expense assets under 179. Determine the cost recovery deduction for 2007. a. $4,000. b. $6,000. c. $8,000. d. $10,000. 3. 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 above. 4. Orange Corporation begins business on April 2, 2007. The corporation has start-up expenditures of $54,000. If Orange Corporation elects 195, determine the total amount that Orange may deduct in 2007. a. $1,000. b. $2,650. c. $3,650. d. $5,000. 5. Statutory employees: a. Report their expenses on Form 2106. b. Include common law employees. c. Are subject to income tax withholdings. d. Claim their expenses as deductions for AGI. e. None of the above. 6. Allowing for the cutback adjustment (50% reduction for meals and entertainment), which of the following trips, if any, will qualify for the travel expense deduction? a. Dr. Jones, a general dentist, attends a two-day seminar on developing a dental practice. b. Dr. Brown, a surgeon, attends a two-day seminar on financial planning. c. Paul, a romance language high school teacher, spends summer break in France, Portugal, and Spain improving his language skills. d. Myrna went on a two-week vacation in Boston. While there, she visited her employers home office to have lunch with former co-workers.

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7. Carolyn is single and has a college degree in finance. She is employed as a loan officer at a bank; her yearly AGI approximates $50,000. During 2006, she enrolled in a weekend MBA program and incurred the following nonreimbursed expenses: $3,900 (tuition), $300 (books), $200 (other school supplies), and $200 (transportation to and from campus). Disregarding the 2%-of-AGI limitation, as to the MBA program, Carolyn has a: a. Deduction for and deduction from AGI of $0. b. Deduction for AGI of $3,900 and deduction from AGI of $700. c. Deduction for AGI of $4,000 and deduction from AGI of $600. d. Deduction for AGI of $4,100 and deduction from AGI of $500. 8. Jeanne had an accident while hiking on vacation. She sustained nose injuries that required cosmetic surgery. While having the surgery done to restore her appearance, she had additional surgery done to reshape her chin, which was not injured in the accident. The surgery to restore her appearance cost $15,000 and the surgery to reshape her chin cost $4,000. How much of Jeannes surgical fees will qualify as a deductible medical expense (before application of the 7.5% limitation)? a. $0. b. $4,000. c. $15,000. d. $19,000. 9. Liz, who is single, travels frequently on business. Art, Lizs 84-year-old dependent grandfather, lived with Liz until this year when he moved to Granite Falls Nursing Home because he needs daily medical and nursing care. During the year, Liz made the following payments to Granite Falls on behalf of Art: Room at Granite Falls Meals for Art Doctor and nurse fees Cable TV service for Arts room Total $36,300 7,260 5,610 660 $49,830

Granite Falls has medical staff in residence. Disregarding the 7.5% floor, how much, if any, of these expenses qualifies for a medical expense deduction by Liz? a. $5,610. b. $41,910. c. $49,170. d. $49,830. ____ 10. Quinn, who is single and lives alone, is physically handicapped as a result of a diving accident. In order to live independently, he modifies his personal residence at a cost of $30,000. The modifications included widening halls and doorways for a wheelchair, installing support bars in the bathroom and kitchen, installing a stairway lift, and rewiring so he could reach electrical outlets and appliances. Quinn pays $200 for an appraisal that places the value of the residence at $129,000 before the improvements and $140,000 after. As a result of the operation of the stairway lift, Quinn experienced an increase of $680 in his utility bills for the current year. Disregarding percentage limitations, how much of the above expenditures qualify as medical expense deductions? a. $11,680. b. $30,680. c. $30,880. d. $34,880. ____ 11. In 2007, Boris pays a $4,800 premium for high-deductible medical insurance for himself and his family. In addition, he contributes $3,000 to a Health Savings Account. Which of the following statements is true? a. If Boris is self-employed, he may deduct $7,800 as a deduction for AGI. b. If Boris is self-employed, he may deduct $3,000 as a deduction for AGI and may include

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the $4,800 premium when calculating his medical expense deduction. c. If Boris is an employee, he may deduct $7,800 as a deduction for AGI. d. If Boris is an employee, he may include $7,800 when calculating his medical expense deduction. Brad, who uses the cash method of accounting, lives in a state that imposes an income tax (including withholding from wages). On April 14, 2007, he files his state return for 2006, paying an additional $600 in state income taxes. During 2007, his withholdings for state income tax purposes amount to $3,550. On April 13, 2008, he files his state return for 2007 claiming a refund of $800. Brad receives the refund on August 3, 2008. If he itemizes deductions, how much may Brad claim as a deduction for state income taxes on his Federal income tax return for calendar year 2007 (filed in April 2008)? a. $3,350. b. $3,550. c. $4,150. d. $5,150. Pedros child attends a school operated by the church the family attends. Pedro made a donation of $1,000 to the church in lieu of the normal registration fee of $200. In addition, Pedro paid the regular tuition of $6,000 to the school. Based on this information, what is Pedros charitable contribution? a. $0. b. $800. c. $1,000. d. $6,800. e. $7,000. Emily, who lives in Indiana, volunteered to travel to Louisiana in March to work on a home-building project for Habitat for Humanity (a qualified charitable organization). She was in Louisiana for three weeks. She normally makes $500 per week as a carpenters assistant and plans to deduct $1,500 as a charitable contribution. In addition, she incurred the following costs in connection with the trip: $600 for transportation, $1,200 for lodging, and $400 for meals. What is Emilys deduction associated with this charitable activity? a. $600. b. $1,200. c. $1,800. d. $2,200. e. $3,700. In 2007, Cindy invested $100,000 for a 25% interest in a limited liability company (LLC) involved in an activity in which she is a material participant. The LLC reported losses of $340,000 in 2007 and $180,000 in 2008 with Cindys share being $85,000 in 2007 and $45,000 in 2008. How much of the losses can Cindy deduct? a. $0 in 2007, $0 in 2008. b. $85,000 in 2007, $0 in 2008. c. $85,000 in 2007, $15,000 in 2008. d. $85,000 in 2007, $45,000 in 2008. Carl, a physician, earns $200,000 from his medical practice in the current year. He receives $45,000 in dividends and interest during the year as well as $5,000 of income from a passive activity. In addition, he incurs a loss of $50,000 from an investment in a passive activity. What is Carls AGI for the current year after considering the passive investment? a. $195,000. b. $200,000. c. $240,000. d. $245,000. Samantha sells a passive activity (adjusted basis of $50,000) for $90,000. Suspended losses attributable to this property total $30,000. The taxable gain is:

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a. $70,000 taxable gain. b. $40,000 taxable gain. c. $0 taxable gain. d. $10,000 taxable gain. Josh has investments in two passive activities. Activity A, acquired three years ago, produces income in the current year of $60,000. Activity B, acquired last year, produces a loss of $100,000 in the current year. At the beginning of this year, Joshs at-risk amounts in Activities A and B are $10,000 and $100,000, respectively. What is the amount of Joshs suspended passive loss with respect to these activities at the end of the current year? a. $0. b. $36,000. c. $40,000. d. $100,000. Roxanne, who is single, has $95,000 of salary, $10,000 of income from a passive limited partnership, and a $26,000 passive loss from a real estate rental activity in which she actively participates. Her modified adjusted gross income is $95,000. Of the $26,000 loss, how much is deductible? a. $0. b. $10,000. c. $25,000. d. $26,000. Which of the following normally produces positive AMT adjustments? a. Charitable contributions of property. b. Standard deduction. c. Personal exemption deduction. d. Only b. and c. are correct. e. a., b., and c. are correct. Akeem, who does not itemize, incurred a net operating loss (NOL) of $50,000 in 2006. His deductions in 2006 included AMT tax preference items of $20,000, and he had no AMT adjustments. Assuming the NOL is not carried back, what is Akeems ATNOLD carryover to 2007? a. $50,000. b. $30,000. c. $20,000. d. $40,000. Red Corporation hires two persons certified to be eligible employees for the work opportunity tax credit (e.g., food stamp recipients), each of whom is paid $8,000 during the year. As a result of this event, Red Corporation may claim a work opportunity credit of: a. $2,100. b. $4,200. c. $4,800. d. $6,400. Rex and Dena are married and have two children, Michelle (age 7) and Nancy (age 5). During 2007, Rex earned a salary of $60,000, received interest income of $200, and filed a joint income tax return. Dena had $0 gross income. Their child tax credit for the year is: a. $0. b. $1,000. c. $2,000. d. $4,000. In describing FICA taxes, which (if any) of the following statements is incorrect? a. The base amounts for 2008 probably will increase from the 2007 amounts.

b. The base amounts for the Social Security and Medicare portions are the same. c. If both spouses work, excess FICA taxes need not result. d. Excess FICA taxes can be claimed as an income tax credit. ____ 25. The ceiling amounts and percentages for 2007 for the two portions of the self-employment tax are: Social Security portion a. $94,200; 12.4% b. $94,200; 15.3% c. $97,500; 12.4% d. $97,500; 15.3% Medicare portion Unlimited; 2.9% Unlimited; 15.3% Unlimited; 2.9% Unlimited; 15.3%

Fall 2007, Test II, Multiple Choice Answer SectionMULTIPLE CHOICE 1. ANS: A The mid-quarter convention applies in this case for the personalty. Regular MACRS ($80,000 .0357) PTS: 1 REF: p. 8-4 to 8-7 | Table 8-2 2. ANS: B .15 $40,000 = $6,000. PTS: 1 REF: p. 8-10 | Table 8-4 3. ANS: E Self-created goodwill is not a 197 intangible and thus cannot be amortized. PTS: 1 REF: p. 8-20 4. ANS: C Deductible amount [$5,000 ($54,000 $50,000)] Amortizable amount {[($54,000 $1,000)/180] 9 months} Total deduction $2,856

$1,000 2,650 $3,650

PTS: 1 REF: p. 8-21 | Example 34 5. ANS: D Their expenses are reported on Schedule C, not on Form 2106 (choice a.). Although subject to Social Security tax, they are not subject to income tax withholdings (choice c.). PTS: 1 REF: p. 9-4 6. ANS: A PTS: 1 REF: Example 13 | Example 14 | Example 18 | Example 21 7. ANS: B Section 222 allows up to $4,000 for qualified tuition and related expenses. As Carolyn spent only $3,900, this is the amount she can claim as a deduction for AGI. The remaining expenses of $700 ($300 + $200 + $200) can be claimed as deductions from AGI. PTS: 1 REF: Example 28 8. ANS: C Cosmetic surgery is necessary (and therefore deductible) when it ameliorates (1) a deformity arising from a congenital abnormality, (2) a personal injury, or (3) a disfiguring disease. The $15,000 cost incurred in connection with the restorative surgery (required as a result of the accident) is deductible because the surgery was necessary. Amounts paid for the unnecessary cosmetic surgery ($4,000 for reshaping the chin) are not deductible as a medical expense. PTS: 1 9. ANS: C REF: Example 2 | Example 3

The amount that qualifies for the medical expense deduction is $49,170 ($36,300 + $7,260 + $5,610). The room and board for Granite Falls qualifies because the move was motivated by Arts need for medical care. The cable TV fee is a personal expense. PTS: 1 REF: p. 10-3 | Example 4 10. ANS: B Quinn, who is physically handicapped, modified his residence so he could live independently. Therefore, the $30,000 cost of the improvements is not reduced by the $11,000 ($140,000 $129,000) increase in the value of the house. The additional operating expenses of $680 are deductible as a medical expense. The $200 appraisal fee is not deductible as a medical expense, but rather as a miscellaneous itemized deduction subject to the 2% of AGI floor. So $30,680 ($30,000 + $680) qualifies as medical expenses. PTS: 1 REF: p. 10-4 | p. 10-5 11. ANS: A Boris, who is self-employed, may deduct 100% of the premium ($4,800) as a deduction for AGI. He may also deduct the $3,000 HSA contribution as a deduction for AGI. PTS: 1 REF: Example 15 12. ANS: C Brad is a cash basis taxpayer. His deduction is limited to the amounts paid in 2007. The $800 refund is reported as income in 2008 under the tax benefit rule. Brads state income tax deduction for 2007 is determined as follows: Paid April 14, 2007, for 2006 Withholdings for 2007 Total deduction $ 600 3,550 $4,150

PTS: 1 REF: p. 10-13 13. ANS: B The taxpayers donation of $1,000 in lieu of the normal $200 registration fee would be deductible to the extent of $800 [$1,000 $200 benefit received (the registration fee)]. The tuition of $6,000 is a personal expense that cannot be deducted as a charitable contribution. PTS: 1 REF: p. 10-20 14. ANS: D Emily cannot deduct the estimated value of $1,500 of her contributed services. However, she can deduct outof-pocket costs of $2,200 ($600 for transportation, $1,200 for lodging, and $400 for meals). PTS: 1 REF: p. 10-21 15. ANS: C Cindys losses are not subject to the passive activity loss rules in either year because she is a material participant. However, the at-risk rules limit her losses to $100,000 over the period ($85,000 in 2007 and $15,000 in 2008). PTS: 1 REF: p. 11-3 | p. 11-4 16. ANS: D Carls net income after considering the passive investments is $245,000 ($200,000 active income + $45,000 portfolio income). He is not allowed to offset the net passive loss against active or portfolio income. PTS: 1 REF: Example 6

17. ANS: D $90,000 amount realized $50,000 adjusted basis = $40,000 realized gain $30,000 suspended loss = $10,000 taxable gain. PTS: 1 REF: Example 7 18. ANS: C The $60,000 of passive income from Activity A is offset by $60,000 of the passive loss from Activity B, leaving a net passive loss of $40,000. None of the $40,000 net passive loss is deductible in the current year. The $40,000 net passive loss is suspended. PTS: 1 REF: p. 11-6 | p. 11-18 19. ANS: D $26,000. A loss of $10,000 is deducted against the passive income from the limited partnership interest. Of the remaining $16,000 real estate rental loss, up to $25,000 is deducted against Roxannes salary because she actively participates in the activity. (The special $25,000 offset for rental real estate is reduced only if AGI exceeds $100,000.) PTS: 1 REF: p. 11-20 | p. 11-21 20. ANS: D PTS: 1 REF: Concept Summary 12-1 21. ANS: B $50,000 NOL $20,000 AMT preferences included in NOL = $30,000 ATNOLD. PTS: 1 REF: Example 17 22. ANS: C $4,800 = ($6,000 40% 2). PTS: 1 REF: p. 13-9 | Example 11 23. ANS: C Maximum earned income credit ($11,790 40%) Less: Phaseout [($20,200 $17,390) 21.06%] Allowable earned income credit PTS: 1 24. ANS: B 25. ANS: C

$4,716 (592) $4,124

REF: p. 13-15 to 13-17 | Table 13-2 PTS: 1 REF: p. 13-31 | p. 13-32 | Example 38 | Example 40 | Table 13-5 PTS: 1 REF: p. 13-38 | p. 13-39 | Table 13-9