Question 1

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 2

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. However, she also indirectly owns a portion of the remaining 60% through her ownership in EST Partnership. Since she is an equal partner in EST Partnership and Erin has a 24% ownership in the remaining 60% of Elton Corporation, Sarah's indirect ownership through EST Partnership is 36% (60% x 0.6 = 36%). Therefore, Sarah's total direct and indirect ownership in Elton Corporation is 40% + 36% = 76%.

Question 3

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

Sheila will have a capital loss of $5,000 ($12,000 basis - $7,000 selling price) when she sells the stock to her daughter. However, since the daughter sold the stock for only $5,000, she will have a capital loss of $2,000 ($7,000 purchase price - $5,000 selling price). The daughter's loss cannot be used to offset Sheila's gain because they are related parties.

Question 4

Ashley,a calendar year taxpayer,owns 400 shares of Yale Corporation stock that she purchased two years ago for $4,000.In the current year Ashley sells all 400 shares of the Yale Corporation stock for $2,400 on December 27.On January 4 of the following year,Ashley purchases 300 shares of Yale Corporation stock for $800.Ashley's recognized loss and her basis in the newly purchased 300 shares of Yale Corporation stock are

Accepted Answer

Ashley's recognized loss is the difference between the sales price ($2,400) and the basis in the stock ($4,000), which is $1,600. Since Ashley sold the stock in the current year, this loss is a capital loss that can be used to offset any capital gains she may have for the year.

When Ashley buys the 300 shares of Yale stock on January 4 of the following year, her basis in the new shares is $800, the amount she paid for them. The recognized loss from the previous year's sale of the 400 shares cannot be used to reduce the basis in the new shares.

Therefore, Ashley's recognized loss is $1,600 and her basis in the newly purchased 300 shares is $800.

Choice B is the correct answer.

Question 5

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 6

Abigail's hobby is sculpting.During the current year,Abigail sold three of her sculptures for a total of $3,200.Her related expenses include $1,500 in utilities,$1,200 in supplies and $900 in depreciation.Of the total expenses incurred,Abigail may deduct

Accepted Answer

C)Since the activity is classified as a hobby,hobby expenses are deductible to the extent of hobby income of $3,200.Further,they are deducted in a specific order-those that are otherwise allowable such as property taxes and interest; those related to the activity other than those that decrease basis; and those that reduce basis (depreciation).

Question 7

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

Victor's recognized loss is determined by subtracting the sale price ($4,000) from the adjusted basis of the stock ($5,000). The adjusted basis is determined by adding any adjustments (such as commissions or fees) to the original purchase price. In this case, there are no adjustments, so the adjusted basis is $5,000. Therefore, the recognized loss is $5,000 - $4,000 = $1,000. However, because Victor repurchased stock within 30 days after the sale, the loss is considered a "wash sale" and is disallowed. Therefore, Victor's recognized loss is $0. Since Victor repurchased 60 shares, his new adjusted basis would be $5,000 - $1,000 = $4,000 for the remaining 40 shares.

Question 8

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 9

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

This is correct according to the IRS rules on short-term rentals of a taxpayer's primary residence. If the property is rented for less than 15 days per year, the taxpayer does not have to report the rental income or claim any expenses related to the rental, except for mortgage interest and property taxes.

Question 10

Samuel,a calendar year taxpayer,owns 100 shares of R Corporation common stock which was purchased two years ago for $3,600.Samuel sells all 100 shares on December 27 of the current year for $1,000.On January 4 of the following year,Samuel purchases 40 shares of R Corporation preferred stock.Samuel's recognized loss will be

Accepted Answer

Samuel's recognized loss is calculated as the difference between the selling price and the purchase price of the stock. He sold the stock for $1,000 and originally purchased it for $3,600, resulting in a loss of $2,600. The purchase of preferred stock does not affect the recognition of the loss on the common stock.

Question 11

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 12

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 13

For the years 2011 through 2015 (inclusive)Max,a surgeon,has been involved in bowling competitions.Only in 2014 and 2015 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 3 of the last 5 years. Max's activity only made a profit in 2014 and 2015, so it is presumed to be a hobby, but he can provide evidence to prove it is a business.

Question 14

Juanita knits blankets as a hobby and sells them.In the current year,she earns $5,000 from her blanket sales and incurs expenses of $600.Juanita does not itemize deductions.On her tax return,she should

Accepted Answer

Since Juanita does not itemize deductions, she cannot deduct hobby expenses. She must report the full $5,000 as income without any deductions for expenses.

Question 15

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 the same as her brother's basis ($20,000). Since she sold the asset for $12,000, she will recognize a loss of ($8,000). However, since her basis is only $15,000, she can only deduct up to that amount. Therefore, her recognized loss will be limited to ($3,000).

Question 16

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...

Question 17

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 2015.In December,Octo received a billing statement from Samantha for $5,000 and paid Samantha the $5,000 in January 2016.Samantha is a calendar year taxpayer.When may Octo deduct the $5,000?

Accepted Answer

Since Octo Corporation uses the accrual method, the expense is deductible in the year in which the expense was incurred and all events have occurred to establish the fact of the liability. In this case, the advertising work was done in November 2015 but Octo did not receive a billing statement until December 2015. Therefore, the liability to pay Samantha was not established until December 2015, and the expense can only be deducted in 2016 when the payment was actually made.

Question 18

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" according to the IRS regulations includes a home office used for administrative or management activities if no other fixed location exists for those activities.

Question 19

Kyle drives a race car in his spare time and on weekends.His records regarding this activity reflect the following information for the year.  What is the allowable deduction (before any AGI limitation)for depreciation assuming that this activity is not engaged in for profit and Kyle can itemize his deductions?

Accepted Answer

Since the activity is not engaged in for profit, Kyle cannot take any deduction for depreciation. However, if he can itemize his deductions, he can deduct up to $1,400 for his car as a miscellaneous itemized deduction. This deduction is subject to a 2% of AGI limitation, but since the question asks for the allowable deduction before any AGI limitation, the answer is $1,400.

Question 20

For the years 2011 through 2015 (inclusive)Mary,a best-selling author,has been involved in operating an antique store.In 2011,2012 and 2013 her revenue exceeded the expenses from the activity.In 2014 and 2015,the antique store generated a loss.Which statement is correct?

Accepted Answer

The activity is presumed to be a business since Mary has had positive revenue in three out of the five years. However, the IRS may still try to prove it is a hobby.

Quiz 12: Deductions and Losses