Question 1: Aaron has a successful business with $50,000 of income in 2012. He purchased one new asset in 2012, a new machine that is 7-year MACRS property, with a cost of $7,000. Of the options available for allocating the cost of the asset over time, for tax purposes, what is the largest write-off Aaron can obtain in 2012?
a. $1,000
b. $3,500
c. $500
d. $7,000
Question 2: ABC Corp bought a production machine on January 1, 2011 for $30,000. The company elected out of Section 179 expensing and elected out of claiming bonus depreciation in 2011, and is depreciating the machine using the MACRS accelerated depreciation tables for 5-year property. What is the 2012 depreciation (year 2) deduction for the machine?
a. None of the above is correct.
b. $6,000
c. $24,000
d. $9,600
e. $12,000
Question 3: Amy is a calendar year taxpayer reporting on the cash basis. Indicate which of the following income or expense items should not be included in her 2012 tax return.
a. She sends out a big bill to a customer on January 1, 2013, even though she did all of the work in December of 2012.
b. She pays all her outstanding invoices for standard business expenses in the last week of December.
c. On April 15, 2013, she makes a deductible contribution to an IRA for 2012.
d. She prepays half a year of interest in advance on her mortgage on the last day of 2012.
Question 4: An asset other than a passenger automobile is placed in service on May 15, 2012 and has a depreciable basis of $32,000. The asset is in the 7-year recovery class. What is the maximum depreciation deduction that may be claimed for 2012, excluding the election to expense and bonus depreciation?
a. None of the above
b. $2,286
c. $2,960
d. $32,000
e. $4,573
Question 5: Becky is a cash basis taxpayer with the following transactions during her calendar tax year:
Cash basis revenue $54,000
Cash basis expenses, except rent 25,000
Rent expense (paid on December 1) for use of a building for 6 months 12,000
What is the amount of Becky's taxable income from her business for this tax year?
a. $17,000
b. None of the above
c. $23,000
d. $25,000
e. $27,000
Question 6: Choose the incorrect statement.
a. The choice to file on a fiscal year-end basis must be made with an initial tax return.
b. Almost all individuals file tax returns using a calendar year accounting period.
c. An individual may request IRS approval to change to a fiscal year-end basis if certain conditions are met.
d. Books and records may be kept on a different year-end basis than the year-end used for tax purposes.
Question 7: Cork Oak Corporation purchased a heavy-duty truck (not considered a passenger automobile for purposes of the listed property and luxury automobile limitations) on June 1, 2012 for use in its business. The truck, with a cost basis of $18,000, has a 5-year estimated life. It also is 5-year recovery property. How much depreciation should be taken on the truck for the 2012 calendar tax year using the conventional (for financial accounting purposes) straight-line depreciation method?
a. None of the above
b. $3,600
c. $1,800
d. $2,100
e. $2,567
Question 8: During 2012, Travis purchases $130,000 of used manufacturing equipment (7-year property) for use in his business. Travis has taxable income from his business of $500,000. What is the maximum amount that Travis may deduct under the election to expense?
a. $250,000
b. $18,571
c. $0
d. $130,000
e. None of the above
Question 9: From the records of Tom, a cash basis sole proprietor, the following information was available:
Gross receipts $30,000
Dividend income (on personal investments) 200
Cost of sales 15,000
Other operating expenses 3,000
State business taxes paid 300
What amount should Tom report as net earnings from self-employment?
a. $10,900
b. $12,000
c. $15,000
d. None of the above
e. $11,700
Question 10: If a loss from sale or exchange of property between related parties is disallowed and the property is subsequently sold to an unrelated party,
a. The unrelated party may claim the loss previously disallowed.
b. The disallowed loss may be used if there is a further loss on the subsequent sale.
c. The disallowed loss may be used to offset gain on the subsequent sale.
d. An amended return may be filed to claim the loss previously disallowed.
e. The disallowed loss is lost forever.
Question 11: Jasper is a self-employed businessman. On March 5, 2012 he purchases a personal computer for use at his home. He uses the computer for personal purposes 50 percent of the time and for business use the remainder of the time. The computer cost $2,100. Jasper wants to claim the maximum amount of depreciation possible for 2012, including the election to expense, if it is available. What is the amount of depreciation that Jasper should claim on the computer for 2012?
a. $420
b. $2,100
c. $210
d. $1,050
e. Some amount less than the above amounts
Question 12: Jenny constructed a building for use as a residential rental property. The cost of the building was $180,000, and it was placed in service on August 1, 1990. The building has a 27.5 year MACRS life. What is the amount of depreciation on the building for 2012 for tax purposes?
a. $6,000
b. $2,000
c. $3,000
d. $6,547
e. None of the above
Question 13: Jerry and Julie are brother and sister. Jerry sold stock to Julie for $5,000, its fair market value. The stock cost Jerry $10,000 5 years ago. Also, Jerry sold Carol (an unrelated party) stock for $2,000 that cost $10,000 3 years ago. What is Jerry's recognized loss before the $3,000 capital loss limitation?
a. $13,000
b. $0
c. $8,000
d. $14,000
e. $5,000
Question 14: John purchases residential rental property on October 31, 2012 for a cost of $290,000. Of this amount, $140,000 is allocable to the cost of the home and the remaining $150,000 is allocable to the cost of the land. What is John's maximum depreciation deduction for 2012?
a. $1,099
b. $1,061
c. $2,198
d. None of the above
e. $850
Question 15: Kate is an accrual basis, calendar-year taxpayer. On November 1, 2012, Kate leased out a building for $4,000 a month. On that day Kate received 6 months rental income on the building, a total of $24,000 ($4,000 ´ 6 months). How much income must Kate include on her 2012 tax return as a result of this transaction?
a. $24,000
b. $4,000
c. $16,000
d. None of the above
e. $8,000
Question 16: Mark the correct answer. In calculating depreciation:
a. Straight-line depreciation is higher than double declining balance depreciation in the early years.
b. MACRS depreciation requires that salvage value be taken into account.
c. Double declining balance is a method of straight-line depreciation.
d. Straight-line depreciation is higher than double declining balance depreciation in the later years.
Question 17: Mark the correct answer. In cash basis accounting, for tax purposes:
a. Income is recognized when it is earned regardless of when received and expenses are recognized when they are actually or constructively incurred.
b. The cash basis is not allowed for businesses reported on Schedule C.
c. Income is recognized when it is actually or constructively received and expenses are recognized when they are actually or constructively incurred, regardless of when paid.
d. Income is generally recognized when it is actually or constructively received and expenses are generally recognized when they are paid.
Question 18: Mark the correct answer. Section 197 intangibles:
a. Must be amortized over a 15-year life, regardless of their actual life
b. Do not include purchased goodwill or going-concern value.
c. Are amortized based on current fair market value rather than their actual cost
d. Include intangible assets created and not purchased by the taxpayer
Question 19: Mark the correct statement.
a. Nonresidential real property is depreciated over 27 1/2 years.
b. Depreciation on real property starts at the beginning of the year in which the property is placed in service.
c. Residential real property is depreciated over 39 years.
d. Nonresidential real property is depreciated over 39 years.
Question 20: Mary sells to her father, Robert, her shares in AA Corp for $55,000. The shares cost Mary $80,000. How much loss may Mary claim from the sale?
a. $80,000
b. $25,000
c. $55,000
d. $0
e. None of the above is correct.
Question 21: On January 1, 2012, Roxburgia Company places a commercial storage building in service. The costs allocated to construction of the building total $300,000 and land is accounted for separately. Which of the following is a true statement with respect to the depreciation of the building?
a. The depreciation expense for Year 2 would be the same regardless of whether the building is placed in service on January 1, 2012 or February 1, 2012.
b. All of the above
c. The period over which the building must be depreciated is shorter than the period over which a residential building must be depreciated.
d. Since the building was placed in service on the first day of the year, the depreciation expense for each year the building is used, except for the year of disposition, will be the same amount.
e. Since the land is accounted for separately, the amount of depreciation expense for the building cannot be determined from the information given.
Question 22: On January 1, 2012, Sandy, a sole proprietor, purchased for use in her business a used production machine (7-year property) at a cost of $40,000. Sandy does not purchase any other property during 2012 and has net income from her business of $80,000. If the standard recovery period table would allow $5,716 of depreciation expense on the $40,000 of equipment purchased in 2012, what is Sandy's maximum depreciation deduction, including bonus depreciation and the Section 179 election to expense, for 2012?
a. $40,000
b. $8,000
c. $5,716
d. $25,716
e. None of the above
Question 23: On January 1, 2012, Ted purchased a small software company for $200,000. He paid $95,000 for the fixed assets of the company and $105,000 for goodwill. How much amortization may Ted deduct on his 2012 tax return for the purchased goodwill?
a. $0
b. $21,000
c. $105,000
d. $7,000
e. $15,000
Question 24: On June 1, 2012, Cork Oak Corporation purchased a passenger automobile for 100 percent use in its business. The auto, with a cost basis of $22,000, has a 5-year estimated life. It also is 5-year recovery property. How much depreciation should be taken for 2012, assuming Cork Oak Corporation uses the accelerated depreciation method under MACRS but does not choose to make the election to expense or take bonus depreciation?
a. $2,100
b. $3,160
c. $4,900
d. $4,400
e. None of the above
Question 25: On June 1, 2012, Sandalwood Corporation purchases a passenger automobile for 100 percent use in its business. The automobile is in the 5-year cost recovery class and has a basis for depreciation of $30,000. Assuming that the corporation elects the accelerated method of cost recovery for the asset and does not elect to expense any of its cost or take bonus depreciation, what is the total tax depreciation deduction for the 2012 calendar tax year (Year 1)?
a. $3,160
b. $3,060
c. None of the above
d. $6,000
e. $4,287
Question 26: Section 197 intangibles:
a. Include goodwill, going-concern value, and information bases.
b. Are amortized over a 15-year period
c. Are not amortized over the actual estimated useful life of the intangible asset
d. Were defined in the Revenue Reconciliation Act of 1993
e. All of the above are true.
Question 27: Steve Corp bought a $925,000 apartment building in 2011. $100,000 of the building cost is allocated to the value of the land. What is the maximum amount of depreciation that the company can claim in 2012 (year 2) for the building?
a. $82,500
b. $250,000 under the election to expense business property.
c. $825,000 under the election to expense business property.
d. You cannot depreciate property costing over $800,000.
e. $29,997
Question 28: Taxpayers choosing the election to expense:
a. May not carry over any amounts elected which are not allowed because of taxable income limitations
b. Will have the maximum that can be expensed under the election reduced by $.50 for each dollar by which the cost of the asset acquired exceeds a specified limit
c. May depreciate the amount of the asset cost that exceeds the amount allowed under the election to expense
d. May expense a $125,000 automobile so long as it is used 100 percent for business
Question 29: The Dot Corporation has changed its year-end from a calendar year-end to July 31. The income for its short period from January 1 to July 31 is $35,000. The tax for this short period is:
a. $5,250
b. $9,000
c. $10,000
d. $5,833
Question 30: Vernon is a cash basis taxpayer with a calendar tax year. On November 1, 2012, Vernon entered into a lease to rent a building for use in his business at $4,000 a month. On that day Vernon paid 6 months rent on the building, a total of $24,000 ($4,000 ´ 6 months). How much may Vernon deduct for rent expense on his 2012 tax return?
a. $4,000
b. None of the above
c. $24,000
d. $8,000
e. $16,000
Question 31: What is the maximum depreciation expense deduction for Year 2 (2013) for a passenger automobile, used 100 percent for qualified business use, placed in service on June 15, 2012 and costing $12,000 (the election to expense is not made and no bonus depreciation was taken)?
a. $3,840
b. $4,900
c. $3,060
d. $2,400
e. None of the above
Question 32: What is the minimum number of years over which computers may be depreciated under MACRS?
a. 15 years
b. 3 years
c. 5 years
d. 10 years
e. 7 years
Question 33: Which of the following is not an acceptable method of accounting under the tax law?
a. All of the above are acceptable
b. The cash method
c. The hybrid method
d. None of the above
e. The accrual method
Question 34: Which of the following is true about the MACRS depreciation system?
a. No matter when equipment is purchased during the month, it is considered to have been purchased mid-month for MACRS depreciation purposes.
b. Residential rental buildings are depreciated straight-line over 20 years .
c. Commercial real estate buildings are depreciated over 39 years using accelerated depreciation.
d. No salvage value is used before depreciation percentages are applied to depreciable real estate.
Question 35: Which of the following is true with respect to the related party rules?
a. A disallowed loss on a related party transaction can be used to offset any future gain when the property is sold to an unrelated party.
b. None of the above are true.
c. Under the constructive ownership rules of Section 267, a shareholder owns 10 percent of the stock owned by a corporation in which he or she is a shareholder.
d. A taxpayer's uncle is a related party for purposes of Section 267.
e. Bill sells stock to his sister for a $3,000 loss. Bill can deduct the loss on his tax return.
Question 36: Which of the following statements with respect to the depreciation of real property under MACRS is correct?
a. Assuming the property is not disposed of during the year, the depreciation deduction for the second year of use of the real property will be greater than the depreciation deduction in the first year.
b. In some cases, where a significant amount of property is acquired during the last quarter of the taxpayer's tax year, the taxpayer may be required to use a mid-quarter convention in calculating depreciation on real property.
c. Real property is depreciated using a half-year convention.
d. Only one-half year of depreciation is allowed in the year of acquisition of real property, regardless of the actual date the property is placed in service.
e. None of the above.
Question 37: Which one of the following entities cannot use the cash method for tax purposes?
a. A nationwide law firm with $5.4 million in gross receipts.
b. A large almond farm with $40 million in gross receipts.
c. A small sole proprietorship with $150,000 in gross receipts.
d. All of the above may use the cash method.
e. A continuing education provider with $2 million in gross receipts and 20 employees.
Question 38: Which one of the following is a Section 197 intangible?
a. Computer software available for purchase by the general public.
b. An interest-earning certificate of deposit.
c. A building.
d. A stock investment.
e. Goodwill.
Question 39: Which one of the following is true about Modified Accelerated Cost Recovery System (MACRS)?
a. A building is depreciated using 200 percent declining balance depreciation.
b. All of the above are false.
c. Buildings and autos both have the same depreciation life.
d. A light duty business truck is depreciated using accelerated depreciation.
Question 40: Which one of the following may not be depreciated using an accelerated method?
a. A corn-husking machine.
b. All of the above items may be depreciated using an accelerated method.
c. A farming tractor.
d. A farm truck that is used for personal use more than 50 percent of the time.
e. A computer used strictly for the farming business.
Question 41: William, a cash-basis sole proprietor, had the following receipts and disbursements for 2012:
Gross receipts $60,000
Cost of sales 30,000
Other operating expenses 6,000
Medical expenses 600
For 2012, what amount should William report as net earnings from self-employment?
a. $23,400
b. $24,000
c. $30,000
d. None of the above
e. $24,600