Question 1

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 2

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 shares of...

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 her brother's basis, which is $20,000. Since she sold the asset for $12,000, she has a loss of $8,000 ($20,000 - $12,000). However, since she purchased the asset from her brother, the loss is limited to the lesser of her basis ($20,000) or the fair market value at the time of the sale ($12,000). Therefore, Dana can only recognize a loss of $3,000 ($15,000 purchase price - $12,000 sale price) and her basis in the asset would be reduced to $12,000 ($15,000 purchase price - $3,000 loss recognized).

Question 4

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

Accepted Answer

A sister-in-law is not considered a relative under Sec. 267 for the purposes of loss disallowance rules. The section typically includes direct family members like siblings, spouses, ancestors, and lineal descendants.

Question 5

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 6

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

The answer of Juanita knits blankets as a hobby and...

Question 7

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 shares of...

Question 8

Mackensie owns a condominium in the Rocky Mountains.During the year,Mackensie uses the condo a total of 23 days.The condo is also rented to tourists for a total of 77 days and generates rental income of $10,900.Mackensie incurs the following expenses in the condo:  Using the court's method of allocating expenses,the amount of depreciation that Mackensie may take with respect to the rental property will be

Accepted Answer

The answer of Mackensie owns a condominium in the Rocky...

Question 9

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 10

Abby owns a condominium in the Great Smokey Mountains.During the year,Abby uses the condo a total of 21 days.The condo is also rented to tourists for a total of 79 days and generates rental income of $12,500.Abby incurs the following expenses:  Using the IRS method of allocating expenses,the amount of depreciation that Abby may take with respect to the rental property will be

Accepted Answer

The answer of Abby owns a condominium in the Great...

Question 11

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 12

Vanessa owns a houseboat on Lake Las Vegas that she personally uses for 25 days out of the year and rents for 280 days.For tax purposes,the houseboat is classified as:

Accepted Answer

Since Vanessa is using the houseboat for personal use for only 25 days out of the year and renting it out for the remaining 280 days, the property is classified as rental property for tax purposes. Expenses in excess of income may be deducted, but the net income or loss is subject to passive activity rules.

Question 13

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 14

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. She also indirectly owns 24% of Elton Corporation through her ownership in EST Partnership (since she is an equal partner with Erin and Timmy, who each own 24% of Elton Corporation). Therefore, her total ownership in Elton Corporation (direct + indirect) is 40% + 24% = 64%.

Question 15

Bart operates a sole proprietorship for which he uses the accrual method of accounting.Bart's sister Samantha,a cash method taxpayer,did some advertising work for Bart's business in November 2013.In December,Bart received a billing statement from Samantha for $5,000.Bart paid Samantha the $5,000 in January 2014.Samantha is a calendar year taxpayer.When may Bart deduct the $5,000?

Accepted Answer

Under the accrual method of accounting, business expenses are deductible in the year in which they are incurred, even if payment is made in a subsequent year. In this case, the advertising work was done in November 2013, so the expense was incurred in 2013. However, since Bart paid Samantha in January 2014, he may only deduct the $5,000 in 2014, when the payment was actually made. The fact that Samantha is Bart's sister does not prevent the expense from being deductible.

Question 16

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 17

For the years 2009 through 2013 (inclusive)Mary,a best-selling author,has been involved in operating an antique store.In 2009,2010 and 2011 her revenue exceeded the expenses from the activity.In 2012 and 2013,the antique store generated a loss.Which statement is correct?

Accepted Answer

The presumption is that the activity is a business since Mary has had revenue exceeding expenses for three out of five years. However, the IRS may still attempt to prove that it is actually a hobby.

Question 18

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 19

For the years 2009 through 2013 (inclusive)Max,a surgeon,has been involved in raising poodles.Only in 2012 and 2013 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 does not make a profit in at least 3 of the last 5 years. However, Max can provide evidence to prove it is a business.

Question 20

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 Kyle's race car activity is not engaged in for profit, he cannot take any deductions for depreciation. Therefore, the allowable deduction is $0. Option A is incorrect. Option B is incorrect because Kyle cannot deduct any amount for depreciation. Option D is incorrect because Kyle cannot deduct any amount for depreciation.

Quiz 6: Deductions and Losses