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

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...

Question 3

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 4

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.
Sarah also indirectly owns 24% of Elton Corporation through her 1/3 ownership in EST Partnership (which owns 100% of Erin's 24% ownership).
Therefore, Sarah's total ownership in Elton Corporation is 40% + 24% = 64%.

Question 5

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 6

Which of the following is not required for an accrual method taxpayer to currently deduct the cost of services received?

Accepted Answer

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

Question 7

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 8

For the years 2010 through 2014 (inclusive)Max, a surgeon, has been involved in bowling competitions. Only in 2013 and 2014 did his revenue exceed the expenses from the activity. Which statement is correct?

Accepted Answer

The answer of For the years 2010 through 2014 (inclusive)Max,...

Question 9

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 2014. In December, Octo received a billing statement from Samantha for $5,000 and paid Samantha the $5,000 in January 2015. Samantha is a calendar year taxpayer. When may Octo deduct the $5,000?

Accepted Answer

Octo Corporation uses the accrual method of accounting, so expenses can be deducted when they are incurred and when the liability is fixed and determinable. In this case, Samantha did the work in November 2014, but Octo did not receive the billing statement until December 2014. The liability to pay Samantha was fixed and determinable in December 2014 when Octo received the billing statement. Therefore, the $5,000 expense can be deducted in 2015, the year in which it was paid. The fact that Samantha is Bart's sister does not affect the deductibility of the expense.

Question 10

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

The answer of Ashley, a calendar year taxpayer, owns 400...

Question 11

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

When Dana purchased the asset from her brother, she acquired the property at her brother's basis of $20,000. If she sells the property to an unrelated party for $12,000, she will recognize a loss of $3,000, calculated as follows: Sales price of $12,000 less the basis of $20,000 equals a loss of $8,000. However, the loss is limited to $3,000 since this is an individual taxpayer's transaction with a related party, and losses on sales between related parties are disallowed. Therefore, the answer is (C) ($3,000) loss.

Question 12

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...

Question 13

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 14

Which of the following statements is false?

Accepted Answer

The answer of Which of the following statements is false?
...

Question 15

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 16

Under the accrual method, recurring liabilities may be deducted currently and paid in the next period if all of the following are present except for

Accepted Answer

The three requirements for a recurring liability to be deducted currently under the accrual method are: 1) the all-events test is met, 2) the expense is recurring, and 3) economic performance occurs within the shorter of 8 1/2 months after the close of the year or a reasonable period after the close of the year. Materiality is not a requirement for the immediate deduction of recurring liabilities.

Question 17

For the years 2010 through 2014 (inclusive)Mary, a best-selling author, has been involved in operating an antique store. In 2010, 2011 and 2012 her revenue exceeded the expenses from the activity. In 2013 and 2014, the antique store generated a loss. Which statement is correct?

Accepted Answer

The fact that Mary's revenue exceeded expenses for three of the five years creates a presumption that the activity is a business. However, the losses in the other two years may lead the IRS to question the profitability and commerciality of the activity, and potentially argue that it is a hobby. So, while the activity is presumed to be a business, the IRS may still try to prove it is a hobby.

Question 18

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 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

According to the information provided, the allowable deduction for depreciation assuming that this activity is not engaged in for profit is $1,400.

Question 20

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

The answer of Samuel, a calendar year taxpayer, owns 100...

Quiz 6: Deductions and Losses