Question 1

Bart owns 100% of the stock of Octo Corporation,which uses the accrual method.Bart's sister Samantha,a cash method taxpayer,did some advertising work for Octo in November 2016.In December,Octo received a billing statement from Samantha for $5,000 and paid Samantha the $5,000 in January 2017.Samantha is a calendar year taxpayer.When may Octo deduct the $5,000?

Accepted Answer

Since Octo Corporation uses the accrual method of accounting, expenses are generally deductible in the year in which they are incurred, even if they are paid in a later year. The advertising work was performed in November 2016, so the expense was incurred in 2016. However, since Samantha is a cash method taxpayer and did not receive payment until January 2017, the payment is considered to have been made in 2017 for tax purposes. Therefore, the $5,000 may be deducted by Octo Corporation in 2017 when the payment was actually made.

Question 2

Kelsey enjoys making cupcakes as a hobby and occasionally sells them for parties.Kelsey receives $1,000 in revenues from cupcake sales this year and pays $1,300 for supplies.Kelsey takes the standard deduction each year.The net effect of the cupcake activity on Kelsey's taxable income is

Accepted Answer

B)Hobby expenses,limited to hobby revenue,are itemized deductions.Kelsey takes the standard deduction so her taxable income will include the full $1,000 revenue,but the hobby expenses will not be deducted at all.

Question 3

Dana purchased an asset from her brother for $15,000.Her brother's basis was $20,000.If Dana sells the asset to an unrelated party for $12,000,she will recognize

Accepted Answer

Dana's basis in the asset is $15,000, which is the amount she paid her brother. If she sells the asset to an unrelated party for $12,000, she will have a ($3,000) loss. This is because her selling price is less than her basis ($15,000 - $12,000 = $3,000).

Question 4

Which of the following factors is not used to determine whether an activity is a hobby or a business?

Accepted Answer

D)Success in dissimilar activities would not be relevant.

Question 5

Erin,Sarah,and Timmy are equal partners in EST Partnership.Sarah also owns 40% of Elton Corporation.The remaining shareholders of Elton Corporation are: Erin (24%)and Sarah's uncle (36%).What percent ownership does Sarah directly or constructively own in Elton Corporation?

Accepted Answer

Sarah directly owns 40% of Elton Corporation, and her share through EST Partnership would be 40% * 1/3 = 13.33%. Adding this to her direct ownership, Sarah's total ownership in Elton Corporation would be 40% + 13.33% = 53.33%. However, Sarah's uncle owns 36%, which means Erin owns 100% - (40% + 36%) = 24% of Elton Corporation. Therefore, Sarah's constructive ownership (through EST Partnership) and direct ownership would be a total of 53.33%, which is 40% direct ownership plus 13.33% constructive ownership.

Question 6

For the years 2012 through 2016 (inclusive)Mary,a best-selling author,has been involved in operating an antique store.In 2012,2013 and 2014 her revenue exceeded the expenses from the activity.In 2015 and 2016,the antique store generated a loss.Which statement is correct?

Accepted Answer

The activity is presumed to be a business, as Mary has been involved in operating an antique store for multiple years and generated revenue for the majority of those years. However, the IRS may still try to prove that it is a hobby, especially since Mary incurred losses in the last two years. Ultimately, the determination of whether the activity is a business or hobby will depend on various factors, such as the degree of time and effort put into the activity and the taxpayer's intent to make a profit.

Question 7

Which of the following individuals is not considered a relative for purposes of the related parties loss disallowance rules under Sec.267?

Accepted Answer

The answer of Which of the following individuals is not...

Question 8

Efrain owns 1,000 shares of RJ Inc.common stock which he purchased three years ago for $36,000.Efrain sells the 1,000 shares on October 15,2016 for $10,000.On November 12,he purchases 400 shares of RJ Inc.preferred stock for $8,000.Efrain's recognized loss on the sale of the 1,000 shares will be

Accepted Answer

Efrain's recognized loss is calculated by subtracting the sale price from the purchase price: $36,000 - $10,000 = $26,000. The purchase of preferred stock does not affect the recognition of the loss on the common stock.

Question 9

The term "principal place of business" includes a home office used by a taxpayer for administrative or management activities of the business if no fixed location exists where the taxpayer conducts these activities.

Accepted Answer

The definition of "principal place of business" given in the statement is true according to the IRS.

Question 10

Rob sells stock with a cost of $3,000 to his daughter for $2,200,which is its fair market value.Later the daughter sells the stock for $3,200 to an unrelated party.Which of the following describes the tax treatment to Rob and Daughter?

Accepted Answer

The answer of Rob sells stock with a cost of...

Question 11

If property that qualifies as a taxpayer's residence is rented for less than 15 days per year,the taxpayer includes no rental income in gross income and similarly may claim no expenses related to the property other than interest and taxes.

Accepted Answer

According to the IRS rules, if a taxpayer rents their residence for less than 15 days per year, they do not have to include rental income in their gross income and cannot deduct expenses related to the renting of the property, except for interest and taxes.

Question 12

Expenses related to a hobby are deductible only to the extent of the gross income from the hobby.

Accepted Answer

According to IRS rules, expenses related to a hobby can only be deducted up to the amount of gross income earned from that hobby. Any excess expenses cannot be deducted and will be considered a personal expense.

Question 13

Expenses attributable to the rental use of a taxpayer's personal residence are limited to the gross income generated by the property.

Accepted Answer

According to the IRS, expenses related to the rental use of a taxpayer's personal residence are limited to the gross income generated by the property. Any excess expenses cannot be deducted in that tax year but can be carried over to future tax years.

Question 14

Victor,a calendar year taxpayer,owns 100 shares of AB Corporation stock,which was purchased three years ago for $5,000.Victor sells all 100 shares on December 27,of the current year,for $4,000 and on January 5,of the following year,purchases 60 shares of AB Corporation stock.Victor's recognized loss will be

Accepted Answer

The answer of Victor,a calendar year taxpayer,owns 100 shares of...

Question 15

Sheila sells stock,which has a basis of $12,000,to her daughter for $7,000,the stock's fair market value.Subsequently,the daughter sells the stock to an unrelated party for $5,000.Which of the following is true for the Sheila and the Daughter?

Accepted Answer

The answer of Sheila sells stock,which has a basis of...

Question 16

The vacation home limitations of Section 280A may also apply to boats and mobile homes.

Accepted Answer

Section 280A applies to any dwelling unit, which includes boats and mobile homes used as vacation homes. Therefore, the vacation home limitations of this section may also apply to these types of properties.

Question 17

Chana purchased 400 shares of Tronco Corporation stock for $40,000 in 2014.On December 27,2016,Chana sells the 400 shares for $24,000.Chana purchases 300 shares of Tronco Corporation stock on January 16,2017 for $8,000.Chana's recognized loss on sale of the 400 shares in 2016 and her basis in her 300 new shares are

Accepted Answer

To calculate Chana's recognized loss on the sale of the 400 shares, we need to determine her adjusted basis in those shares. Adjusted basis is the original cost plus any adjustments for things like stock splits or dividends.

We know that Chana purchased the 400 shares for $40,000, so her initial basis per share is $100. We don't have any information about adjustments to the basis, so we can assume it remains at $100 per share.

When Chana sells the 400 shares for $24,000, her recognized loss is the difference between the sale price and adjusted basis. The sale price is $24,000, which divided by 400 shares equals $60 per share. So Chana's recognized loss per share is:

$100 (adjusted basis) - $60 (sale price) = $40

Her total recognized loss on the 400 shares is therefore:

$40 (recognized loss per share) x 400 (number of shares) = $16,000

Now we need to determine Chana's basis in her new 300 shares. We know she purchased them for $8,000, so her initial basis per share is:

$8,000 (purchase price) / 300 (number of shares) = $26.67 per share

Because Chana sold all of her original 400 shares before buying the new 300 shares, she cannot use any of the recognized loss from the sale to offset the purchase of new shares. Therefore, her basis in the new shares is simply the purchase price of $8,000.

Thus, the answer is B.

Question 18

For the years 2012 through 2016 (inclusive)Max,a surgeon,has been involved in bowling competitions.Only in 2015 and 2016 did his revenue exceed the expenses from the activity.Which statement is correct?

Accepted Answer

The IRS presumes an activity is a hobby if it hasn't made a profit in at least three of the last five years. Max can try to prove it is a business by showing intent to make a profit.

Question 19

Jason sells stock with an adjusted basis of $66,000 to JJ Inc. ,his 60% owned corporation,for its fair market value of $60,000.JJ Inc.sells the stock three years later for $67,000.JJ Inc.'s recognized gain or loss on the sale will be

Accepted Answer

The answer of Jason sells stock with an adjusted basis...

Question 20

Donald sells stock with an adjusted basis of $38,000 to his son,Kiefer,for its fair market value of $30,000.Kiefer sells the stock three years later for $32,000.Kiefer will recognize a gain on the subsequent sale of

Accepted Answer

The answer of Donald sells stock with an adjusted basis...

Quiz 6: Deductions and Losses