Question 1

When a business is operated as an S corporation,a disadvantage is that the shareholder must pay the tax on his or her share of the S corporation's income even though the S corporation did not distribute the income to the shareholder.

Accepted Answer

This is true. S corporations are pass-through entities, meaning that the profits and losses of the business are passed through to the shareholders' personal tax returns. Shareholders are responsible for paying taxes on their share of the profits, whether or not they actually received the money.

Question 2

Rhonda has a 30% interest in the capital and profits of the ABC Partnership.In the first year of the partnership,2017,it earned $150,000.However,the partners agreed that nothing would be distributed until after the end of March 2018,before Rhonda filed her 2017 tax return.The distributions were to be delayed because it was unclear as to whether business conditions would remain good in 2018.Things were going well in 2018 and therefore the partnership distributed $30,000 to Rhonda at the end of March,as a portion of her share of the partnership's 2017 earnings.The partnership's income for 2018 was $60,000.As a result,Rhonda must recognize $30,000 of gross income in 2017 and $18,000 in 2018.

Accepted Answer

The answer of Rhonda has a 30% interest in the...

Question 3

Ted earned $150,000 during the current year.He paid Alice,his former wife,$75,000 in alimony.Under these facts,the tax is paid by the person who benefits from the income rather than the person who earned the income.

Accepted Answer

According to the IRS guidelines, the person who receives alimony payments is responsible for paying taxes on the income they receive. In this case, Alice received $75,000 in alimony and would be responsible for paying taxes on that amount, not Ted who earned the income.

Question 4

Paula transfers stock to her former spouse,Fred.The transfer is pursuant to a divorce agreement.Paula's cost of the stock was $75,000 and its fair market value on the date of the transfer is $95,000.Fred later sells the stock for $100,000.Fred's recognized gain from the sale of the stock is $5,000.

Accepted Answer

Fred's basis in the stock is the same as Paula's basis, which is $75,000. When he sells the stock for $100,000, his recognized gain would be $25,000.

Question 5

If the alimony recapture rules apply,the recipient of the alimony decreases his or her AGI by a portion of the amount included in gross income as alimony in a prior year or years.

Accepted Answer

This is true. The alimony recapture rules require the recipient of alimony to decrease his or her AGI by a portion of the amount included in gross income as alimony in a prior year or years, if certain conditions are met. These rules are designed to prevent an ex-spouse from characterizing property settlements or other payments as alimony in order to take advantage of tax benefits, and then reverting back to a property settlement in subsequent years.

Question 6

Samantha and her son,Brent,are cash basis taxpayers.Samantha gave Brent a corporate bond with a face amount and fair market value of $10,000.On the date of the gift,March 31,2017,the accrued interest on the bond was $100.On December 31,2017,Brent collected $400 interest on the bond.Brent must include in gross income the $300 interest earned after the date of the gift.

Accepted Answer

As cash basis taxpayers, Samantha and Brent only report income when it is received, not when it is earned. Therefore, Brent must only include the $300 interest earned after the date of the gift (March 31, 2017) in his gross income for 2017. The $100 accrued interest on the date of the gift is not included in Brent's income since it was not received in 2017.

Question 7

The B & W Partnership earned taxable income of $140,000 for the year.Bryan is entitled to 50% of the profits,but Bryan withdrew only $60,000 during the year.Bryan's gross income from the partnership for the year is $60,000.

Accepted Answer

The answer of The B & W Partnership earned taxable...

Question 8

April,a calendar year taxpayer,is a 40% partner in Pale Partnership,whose fiscal year ends on September 30th.For the fiscal year ending September 30,2017,the partnership had $400,000 net income and for fiscal year ending September 30,2018,the partnership had $300,000 net income.April withdrew $100,000 in December of each year.April's gross income from the partnership for 2017 is $160,000 ($400,000 × 40%).

Accepted Answer

April's gross income from the partnership for 2017 is $160,000 ($400,000 × 40%). Since she withdrew $100,000 in December of that year, her net income from the partnership for 2017 is $60,000 ($160,000 - $100,000).

Question 9

Tom,a cash basis taxpayer,purchased a bond on March 31 for $10,000,plus $100 accrued interest.In December,Tom collected $500 interest from the bond.Tom's interest income from the bond for the year is $500.

Accepted Answer

The answer of Tom,a cash basis taxpayer,purchased a bond on...

Question 10

Father made an interest-free loan of $25,000 to Son who used the money to buy an SUV.Son had $1,600 interest income from a certificate of deposit for the year.Father is not required to impute interest income.

Accepted Answer

The answer of Father made an interest-free loan of $25,000...

Question 11

Jacob and Emily were co-owners of a personal residence.As part of their divorce agreement,Emily paid Jacob cash for his interest in the personal residence.This cash payment results in a taxable gain to Jacob if he receives more cash than his share of the cost of the residence.

Accepted Answer

The answer of Jacob and Emily were co-owners of a...

Question 12

Alvin is the sole shareholder of an S corporation that earned $200,000 in 2017 and distributed $75,000 to Alvin.Alvin must recognize $75,000 as income from the S corporation in 2017.

Accepted Answer

The answer of Alvin is the sole shareholder of an...

Question 13

Jake is the sole shareholder of an S corporation that earned $60,000 in 2017.The corporation was short on cash and therefore distributed only $15,000 to Jake in 2017.Jake is required to recognize $60,000 of income from the S corporation in 2017.

Accepted Answer

As the sole shareholder of an S corporation, Jake is required to recognize all of the corporation's income for tax purposes, regardless of whether it was distributed to him. Therefore, Jake must recognize $60,000 of income from the S corporation in 2017, despite only receiving $15,000 in distributions.

Question 14

Linda delivers pizzas for a pizza shop.On Wednesday,December 31,2017,Linda made several deliveries and collected $400 from customers.However,Linda forgot to turn in the proceeds for the day to her employer until the following Friday,January 2,2018.The pizza shop owner recognizes the income of $400 when he receives it from Linda in 2018.

Accepted Answer

According to the revenue recognition principle, revenue should be recognized when it is earned, not when it is received. In this case, Linda earned the $400 on December 31, 2017, when she made the deliveries and collected the money from customers. Therefore, the pizza shop owner should recognize the income for December 31, 2017, regardless of when Linda turns in the proceeds.

Question 15

In all community property states,the income from property that was inherited by a spouse after the marriage is treated as all earned by the spouse who inherited the property.

Accepted Answer

The answer of In all community property states,the income from...

Question 16

Mark is a cash basis taxpayer.He is a partner in the M&M partnership,and his share of the partnership's profits for 2017 is $90,000.Only $40,000 was distributed to him in January 2017,and this was his share of the 2016 partnership profits.None of the 2017 profits were distributed.Mark's gross income from the partnership for 2017 is $40,000.

Accepted Answer

Mark's gross income from the partnership for 2017 should be $90,000, which is his share of the partnership's profits for that year. Just because he only received $40,000 in January 2017 does not mean that his gross income is limited to that amount. As a cash basis taxpayer, Mark would only need to report income that he actually received during the tax year, but that would not apply to his share of the partnership profits.

Question 17

When stock is sold after the date of declaration but before the record date,the buyer must recognize as income the dividend declared.

Accepted Answer

The answer of When stock is sold after the date...

Question 18

After the divorce,Jeff was required to pay $18,000 per year to his former spouse,Darlene,who had custody of their child.Jeff's payments will be reduced to $12,000 per year in the event the child dies or reaches age 21.During the year,Jeff paid the $18,000 required under the divorce agreement.Darlene must include the $12,000 in gross income.

Accepted Answer

Jeff paid the full amount required under the divorce agreement for the year, but if the child dies or reaches age 21, the payments will be reduced. Darlene must include the reduced amount ($12,000) in her gross income.

Question 19

Alimony recapture may occur if there is a substantial decrease in the amount of the alimony payments in the second year.

Accepted Answer

This is true. Alimony recapture is triggered if the amount of alimony paid in the second and third year decreases by more than $15,000 from the amount paid in the first year. Recapture refers to the IRS's requirement that the paying spouse recalculates the tax deductions claimed for alimony payments in the first two years and pays additional taxes if they claimed too much.

Question 20

George and Erin are divorced,and George is required to pay Erin $20,000 of alimony each year.George earns $75,000 a year.Erin is required to include the alimony payments in gross income although George earned the income.

Accepted Answer

Alimony payments are taxable income for the recipient and must be reported as part of their gross income, even though the payer earned the income. Therefore, Erin is required to include the $20,000 of alimony payments in her gross income.

Quiz 4: Gross Income: Concepts and Inclusions