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 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, which means expenses are deductible when incurred and not when paid. Samantha provided the advertising services in November 2014, so the expense was incurred in 2014. However, since Samantha is a cash method taxpayer, she did not include the payment in her income until she received it in January 2015. Therefore, Octo may deduct the $5,000 in 2015, when it was paid. The fact that Samantha is Bart's sister does not affect the deductibility of the expense.

Question 2

Which of the following statements is false?

Accepted Answer

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

Question 3

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 4

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 5

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 6

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 calculated as the selling price ($2,400) minus the adjusted basis of the sold shares, which is the original cost of $4,000. Therefore, her recognized loss is $1,600.
 
On January 4 of the following year, Ashley purchases 300 shares of Yale Corporation stock for $800, so her basis in the newly purchased 300 shares is $800.

Question 7

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

The answer of Kyle drives a race car in his...

Question 8

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

Recurring liabilities may be deducted currently under the accrual method if the all-events test is met, the expense is recurring, and 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. The materiality of the expense is not a requirement for deductibility under the accrual method.

Question 9

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 10

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 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

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 13

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 14

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 IRS presumes an activity is a hobby if it does not make a profit in at least 3 of the last 5 years. Max's activity only made a profit in 2013 and 2014, so it is presumed to be a hobby, but he can provide evidence to prove it is a business.

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 would be her brother's basis, which is $20,000. If she sells it for $12,000, she will recognize a ($8,000) loss ($12,000 - $20,000). However, she cannot recognize a loss greater than her basis, so she can only claim the loss up to $15,000 (the amount she paid). Therefore, her recognized loss will be ($3,000) ($15,000 - $12,000).

Question 16

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 17

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.

To calculate Sarah's constructive ownership, we need to add the percentage of Elton Corporation that is owned by entities in which Sarah is a partner.

Since Sarah is an equal partner in EST Partnership, we can assume that she owns 1/3 of the partnership. Therefore, her indirect ownership of Elton Corporation through EST Partnership is 1/3 * 24% = 8%.

Adding Sarah's direct ownership (40%) to her indirect ownership (8%) gives us a total of 48%.

Therefore, Sarah directly or constructively owns 48% of Elton Corporation.

Question 18

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 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

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

According to the IRS, an activity is presumed to be a business if it generates a profit in at least three of the past five years, including the current year. Since Mary's antique store generated a profit in 2010, 2011, and 2012, the activity is presumed to be a business. However, the IRS may argue that the losses incurred in 2013 and 2014 indicate that the activity is actually a hobby. So, the activity is presumed to be a business, but the IRS may prove otherwise.

Quiz 12: Deductions and Losses