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Chapter 6 Sample Questions

1-57 Trade and business expenses should be treated as:


a. A deduction from AGI subject to the 2%-of-AGI floor.
b. A deduction from AGI not subject to the 2%-of-AGI floor.
c. Deductible for AGI.
d. An itemized deduction if not reimbursed.

2-58 Al is single, age 60, and has gross income of $140,000. His deductible expenses are as follows:
Alimony $20,000
Charitable contributions 4,000
Contribution to a traditional IRA 5,500
Expenses paid on rental property 7,500
Interest on home mortgage and property taxes on personal residence 7,200
State income tax 2,200

What is Als AGI?


a. $94,100.
b. $103,000.
c. $107,000.
d. $127,000.

3-65 Andrew, who operates a laundry business, incurred the following expenses during the year.
Parking ticket of $250 for one of his delivery vans that parked illegally.
DUI ticket of $500 while returning from the rock concert.
Attorneys fee of $600 associated with the DUI ticket.
What amount can Andrew deduct for these expenses?
a. $0.
b. $250.
c. $600.
d. $1,350.

4-79 Tommy, an automobile mechanic employed by an auto dealership, is considering opening a fast food franchise. If Tommy
decides not to acquire the fast food franchise, any investigation expenses are:
a. Not deductible.
b. A deduction from AGI, subject to the 2 percent floor.
c. A deduction from AGI, not subject to the 2 percent floor.
d. Deductible up to $5,000 in the current year with the balance being amortized over a 180-month period.

5-80 Iris, a calendar year cash basis taxpayer, owns and operates several TV rental outlets in Florida, and wants to expand to
other states. During 2014, she spends $14,000 to investigate TV rental stores in South Carolina and $9,000 to
investigate TV rental stores in Georgia. She acquires the South Carolina operations, but not the outlets in Georgia. As to
these expenses, Iris should:
a. Capitalize $14,000 and not deduct $9,000.
b. Expense $23,000 for 2014.
c. Expense $9,000 for 2014 and capitalize $14,000.
d. Capitalize $23,000.

6-84. Priscella pursued a hobby of making bedspreads in her spare time. Her AGI before considering the hobby is $40,000.
During the year she sold the bedspreads for $10,000. She incurred expenses as follows:
Supplies $4,000
Interest on loan to get business started 500
Advertising 6,500
Assuming that the activity is deemed a hobby, how should she report these items on her tax return?
a. Include $10,000 in income and deduct $11,000 for AGI.
b. Ignore both income and expenses since hobby losses are disallowed.
c. Include $10,000 in income, deduct nothing for AGI, and claim $10,000 of the expenses as
miscellaneous itemized deductions.
d. None of the above.
1
Chapter 6 Sample Questions

7-87 If a residence is used primarily for personal use (rented for fewer than 15 days per year), which of the following is correct?
a. No income is included in AGI.
b. No expenses are deductible.
c. Expenses must be allocated between rental and personal use.
d. Only a. and b. are correct.

8-88 Robyn rents her beach house for 60 days and uses it for personal use for 30 days during the year. The rental income is
$6,000 and the expenses are as follows:
Mortgage interest $9,000
Real estate taxes 3,000
Utilities 2,000
Maintenance 1,000
Insurance 500
Depreciation (rental part) 4,000
Using the IRS approach, total expenses that Robyn can deduct on her tax return associated with the beach house are:
a. $0.
b. $6,000.
c. $8,000.
d. $12,000.

9-96 In January, Lance sold stock with a cost basis of $26,000 to his brother, James, for $24,000, the fair market value of the
stock on the date of sale. Five months later, James sold the same stock through his broker for $27,000. What is the tax
effect of these transactions?
a. Disallowed loss to James of $2,000; gain to Lance of $1,000.
b. Disallowed loss to Lance of $2,000; gain to James of $3,000.
c. Deductible loss to Lance of $2,000; gain to James of $3,000.
d. Disallowed loss to Lance of $2,000; gain to James of $1,000.

10-97 Nikeya sells land (adjusted basis of $120,000) to her adult son, Shamed, for its appraised value of $95,000. Which of the
following statements is correct?
a. Nikeyas recognized loss is $25,000 ($95,000 amount realized $120,000 adjusted basis).
b. Shameds adjusted basis for the land is $120,000 ($95,000 cost + $25,000 disallowed loss for Nikeya).
c. If Shamed subsequently sells the land for $112,000, he has no recognized gain or loss.
d. Only a. and b. are correct.

11-114. During the year, Rita rented her vacation home for twelve days for $2,400 and she used it personally for three months.
The following expenses $(20,800) were incurred on the home:

Property taxes $ 2,200


Mortgage interest 10,800
Utilities and maintenance 1,900
Depreciation 5,000
Insurance 900

Her rental gain or loss and itemized deductions is:


a. 18,400 loss deducted in the current year against AGI.
b. No income is realized. Rita can deduct the property tax and mortgage interest as an itemized
deduction.
c. No income is realized and no loss is realized.
d. Income is realized in the amount of $2,400 and she can deduts property taxes and mortgage interest
as an itemized deduction.
Chapter 6 Sample Questions

T6-24. During the year, Jim generated $8,660 in income from his painting hobby. His total AGI excluding the hobby income
was $80,000. Jims studio was in his den and occupied approximately 10% if his home square footage. During the year
Jims expenses were:

Frames $ 1,800
Art Supplies 900
Fees paid to models 4,000
Property Tax (whole home) 2,000
Mortgage Interest (whole home) 10,000
Utilities and maintenance 4,600
Depreciation on 10% of home 500

Which statement best describes the tax treatment of his hobby:


a. Jim will increase his AGI by $8,660 and none of the expenses are deductible.
b. Jim will increase his AGI by $8,660 and all expenses are fully deduction. His total AGI will remain
$80,000.
c. Jim will increase his AGI by $8,660 and deduct $6,887 as itemized deductions.
d. No income is realized and no loss is realized.

T6-44 During the year, Alex who is single generated $18,000 in income from his painting hobby. His total AGI excluding the hobby
income was $42,000. During the year Alexs hobby expense were:

Property Tax 3,000


Art Supplies 4,500
Utilities and maintenance 2,000
Advertising 5,000
Insurance 750
Depreciation 4,500

Taking into account his personal exemption (4,050) what will Alexs taxable income be?
a. $55,950.
b. 40,750
c. 39,150
d. 36,700