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Daryl’s gross receipts from the manufacture and sale of boots have exceeded $1,000,000 for 3 consecutive years. He is changing from the cash method of accounting to the accrual method of accounting. He reports the business activity as a sole proprietor on a Schedule C with his individual income tax return. He does not need the Commissioner’s approval to change his method of accounting.
- Approval required.The following are examples of changes in accounting method that require IRS approval.
A change from the cash method to an accrual method or vice versa
A change in the mehtod or basis used to value inventory.
A change in the depreciation or amortization method (except for certain permitted changes to the straight-line method)
The Pine Tree Partnership produces and sells toys. It had gross receipts of $1,000,000 in 2004. It had gross receipts of $500,000 in 2001, $1,000,000 in 2002, and $1,500,000 in 2003. Pine Tree may use the cash methodof accounting.
- Because the Pine Tree Partnership manufactures and sells inventory (their toys) they can't use the cash method but rather the accrual method of accounting.
Alayna bought a parcel of improved property on October15, 2003. On April 15, 2004, Alayna traded this property for a parcel of unimproved property. On October 14,2004, Alayna sold the unimproved property. Alayna’s holding period of the unimproved property includes theholding period of the improved property.
- Nontaxable exchange. If yo acquire an asset in exchange for another asset and your basis for the new asset is figured, in whole or in part, by using your basis in the old property, the holding period of the new proplerty INCLUDES the holding period of the old property. That is, it begins on the same day as your holding period for the old property.
Ralph transfers property with a basis of $50,000 to a corporation,which is an investment company, in exchangefor stock that has a fair market value of $100,000. After the exchange, Ralph owns 80% of the total combined voting power of the stock and 80% of the outstandingshares. Ralph is not required to recognize any gain onthis transaction.
- If you transfer property (or money and property) to a corporation in exchange for stock in that corporation (other than nonqualified preferred stock, described later), and immediately afterward you are in control of the corporation (80%), the exchange is usually not taxable. This rule applies both to individuals and to groups who transfer property to a corporation. It also applies whether the corporation is being formed or is already operating. It does not apply in the following situations:
The corporation is an investment company.
You transfer the property in a bankruptcy or similar proceeding in exchange for stock used to pay creditors.
The stock is received in exchange for the corporation's debt (other than a security) or for interest on the corporation's debt (including a security) that accrued while you held the debt.
And because Ralph's exchange involved stock from an investment company he MUST recognize a gain and report his taxable gain on the exchange.
The cost of inventory must be reduced by any trade discounts received.
- Discounts. A trade discount is a discount allowed regardless of when the payment is made. Generally, it is for volume or quantity purchases. You must reduce the cost of inventory by a trade (or quantity) discount.
For an employee’s pay to be considered deductible, it must be reasonable, ordinary and necessary, paid for services actually performed, and paid or incurred duringthe tax year.
Generally, a worker who performs services for you is your employee. This remains the case even if you do not have the right to control how the worker performs those services.
- Under common-law rules, anyone who performs services for you is your employee if you have the right to control what will be done and HOW it will be done.
Direct sellers and qualified real estate agents are by law considered non-employees. They are treated as self-employed for all Federal tax purposes, including income and employment taxes
- TRUE. pg. 6 Publication 15-A
- Direct sellers are one of the categories of statutory nonemployees. Direct sellers and licensed real estate agents are treated as self-employed for all federal tax purposes, including income and employment taxes.
There are two ways of figuring depletion: cost depletion and percentage depletion. For mineral property, you generally must use the method that gives you the largest deduction.
- TRUE. pg. 33 Publication 535 Business Expenses
- There are two ways of figuring depletion: cost depletion and percentage depletion. For mineral property, you generally must use the method that gives you the larger deduction. For standing timber, you must use cost depletion.
John has a Schedule C business and timely files his individual income tax return. However, he fails to pay his tax bill timely and is assessed interest on the past due taxes. Because the past due tax is related to his Schedule C business income, John can deduct the interest as a business deduction when paid.
FALSE*** (look it up
The entire sales tax paid on depreciable business property is a currently deductible expense.
FALSE. pg. 17 Publication 535 Business Expenses
If the property is depreciable , ADD the sales tax to the basis for deprecation.
You don't deduct the business expense but rather incorporate it into the basis of the business property.
In 2004, Bob sold 100 shares of a large publicly traded company at fair market value to his sister Phyllis. Bob had purchased these shares in 1999 for $5,000. At the time of sale these shares were worth only $3,000. Bob cannot currently deduct any part of his $2,000 loss.
- Related persons include sisters, and any loss that Bob incurred he cannot deduct.
John maintains an inventory of ski equipment at his lodge in Winter Park Colorado. He is an accrual basis taxpayer and reports his business income on a Schedule C each year. In November of 2004 an avalanche destroyed 50% of the equipment. John will reflect his loss of inventory by properly reporting both his beginning and ending inventory in his cost of goods sold.
TRUE. pg.20 Publication 538 Accounting Methods and Periods
You claim a casualty or theft loss of inventory, including items you hold for sale to customers, through the increase in the cost of goods sold by properly reporting your opening and closing inventories.
John is a partner in the Milo partnership. During 2004, John personally assumed $10,000 of the partnership’s liabilities. The assumption of partnership debt by John is treated as a distribution of money to John by the partnership and decreases John’s basis in the partnership.
- FALSE. pg. 9 Pulbication 541 Partnerships
- Adjustments to Basis
- Increases. A partner's basis is increased by the following items
The partner's additional contributions to the partnership, including an increased share of, or assumption of, partnership liabilities
The partner's distributive share of taxable and nontaxable partnership income
The partner's distributive share of the excess of the deductions for depletion over the basis of the depletable property, unless the property is oil or gas wells whose basis has been allocated to partners.
An individual is considered as owning the partnership interest that is directly or indirectly owned by or for his or her family. Family includes only brothers, sisters, halfbrothers,half-sisters, spouse, ancestors, and lineal descendants.
TRUE. pg. 7 Publication 541 Partnerships
- More than 50% ownership. To determine if there is more than 50% ownership in partnership capital or profits, the following rules apply.
- 2. An individual is considered to own the interest directly or indirectly owned by, or for, the individual's family. For this rule, "family" includes only brothers, sisters, half-brothers, half-sisters, spouses, ancestors, and lineal descendants.
If a partner contributes property to a partnership, the partnership’s basis for determining depreciation, depletion, and gain or loss on the disposition of the property is the same as the partner’s adjusted basis for the property when it was contributed, increased by any gain recognized by the partner at the time of contribution.
TRUE. pg. 8 Publication 541 Partnerships
Basis of contributed property. If a partnership contributes property to a partnership, the partnership's basis for determining depreciation, depletion, gain, or loss for the property is the same as the partner's adjusted basis for the property when it was contributed, increased by any gain recognized by the partner at the time of contribution.
In 2004, Charlie retired from the Atlas Partnership. He received $250,000 in exchange for his interest in partnership property. The $250,000 is considered a distributive share to Charlie, and Atlas can deduct the $250,000.
FALSE pg. 12 Publication 541 Partnerships
Liquidating payments. Payments made in liquidation of the interest of a retiring or deceased partner in exchange for his or her interest in partnership property are considered a distribution, NOT distributive share or guaranteed payment that could give rise to a deduction (or its equivalent) for the partnership.
Karen has a Schedule C business requiring the use of a large warehouse for her inventory. To assist her employeesin getting around the warehouse, she purchased five Segway Human Transporters in 2004. These two wheeled vehicles are powered by an electric motor drawing current from rechargeable batteries. All five vehicles qualify for the Electric Vehicle Credit.
In order for a vehicle to qualify as a plug-in electric vehicle, the reason why Karen's segways can't qualify for the Electric Vehicle Credit is because it must be MANUFACTURED FOR USE ON PUBLIC STREETS, ROADS, and HIGHWAYS. THIS DOES NOT MEAN SIDEWALKS OR WAREHOUSES.
For purposes of figuring and reporting self-employment tax, if you have more than one trade or business, you must combine the net profit or loss from each business.
TRUE. pg. 42 Publication 334 Tax Guide for Small Businesses
More than One Business. If you have earnings subject to Se tax from more than one trade, business, or profession, you must combine teh net profit (or loss) from each to determine your total earnings subject to SE tax. A loss from one business reduces your from from another business.
You must have an Employer Identification Number if you do either of the following: (a) pay wages to one or more employees, or (b) file pension or excise tax returns.
- TRUE. pg. 8 Publication 15 Employer's Guide
- If you are required to report employment taxes or give tax statements to employees or annuitants, you need an employer identification number (EIN).
A partnership, S corporation or personal service corporation can elect to use a tax year other than its required
tax year, if it:
A. Elects a year that meets the deferral period requirement
B. Is not a member of a tiered structure as defined by the regulations
C. Has not previously had an election in effect to use a tax year other than its required tax year
D. All of the above
The answer is D. Publication 538 Accounting periods and methods. pg. 6
A partnership, S corporation, or PSC can make a section 444 if it meets all the following requirements.
It is not a memeber of a tiered structure (defined in section 1.444-2T of the regulations)
It has not previously had a section 444 election in effect
It elects a year that meets the deferral period requirement
Election 444 is to change it tax period
Eric, a cash basis taxpayer, owned 25% of Watson, Inc.stock. Watson, Inc. files a calendar year U.S. Corporate Income Tax Return Form 1120 employing the accrual method of accounting. Eric loaned Watson, Inc. $100,000 at the beginning of 2003. The accrued interest on this loan was $5,000 as of December 31, 2003. Watson,Inc. paid Eric the $5,000 in January of 2004. How should Eric report the interest income and Watson, Inc. report the interest expense from this transaction?
A. Watson, Inc. reports the expense in 2003 andEric reports the income in 2003
B. Watson, Inc. reports the expense in 2003 andEric reports the income in 2004
C. Watson, Inc. reports the expense in 2004 andEric reports the income in 2004
D. None of the above
The answer is B. When you use the accrual method of accounting you report expenses whenever they are incurred. And under the cash method you report income whenever you actually receive the money.
That is why Watson, Inc reports the interest expense in 2003 and Eric reports the income in 2004 (when he received the payment)
Which of the following transactions qualifies as a likekindexchange?
A. The exchange of a copyright on a novel for a copyright on a song
B. An exchange of the “goodwill or going concern value” of a business for the “goodwill or going concern value” of another business
C. An exchange of land improved with an apartment house for land improved with a store building
D. An exchange of personal property used predominantly in the United States for personal property used predominantly outside the United States
The answer is C. Publication 544 Sale and Disposition of Assets pg.12
There must be an exchange of like-kind property. Like-kind properties are properties of the same nature or character.
The exchange of a copyright on a nover for a copyright on a song isn ont a like-kind exchange.
Goodwil and going concern. The exchange of the goodwill or going concen value of a business for the goodwill or going concern value of another business is NOT a like-kind exchange.
Foreign personal property exchanges. Personal property used predominantly in the United States and personal property used predominantly outside the United states are NOT like-kind property under the like-kind exchange rules.
Special rules apply to like kind exchanges between related persons. Under these rules, related persons are:
A. The taxpayer and a member of his/her family
B. The taxpayer and a corporation in which the taxpayer has a 25% ownership
C. The taxpayer and a partnership in which the taxpayer directly or indirectly owns a 25% interest in the capital or profits
D. All of the above
The answer is (A). pg. 18 Publication 544 Sales and Other Dispositions of Assets.
Related Persons. Under these rules, related persons include, for example, you and a member of your family (spouse, brother, sister, parent, child etc.), you and a corporation in which you have more than 50% ownership, you and a partnership in which you directly or indirectly own more than a 50% interest of the capital or profits, and two partnerships in which you directly or indirectly own more than 50% of the capital interests or profits.
Which of the following does not qualify as a nontaxable exchange or transfer?
A. A life insurance contract for an annuity contract
B. A general partnership interest for a general partnership interest in the same partnership
C. A transfer of property from an individual to a former spouse, incident to divorce
D. None of the above
The answer is (B).
- pg. 19. Publication 544 Sales and Other Dipositions of Assets.
- No gain or loss is recognized if you make any of the following exchanges, and if the insured or the annuitant is the same under both contracts.
- A life insurance contract for another life insurance contract, or for an endowment or annuity contract, or for a qualified long-term care insurance contract
- pg. 19 Publication 544
- Exchanges of partnership interests do not qualify as nontaxable exchanges of like-kind property.
- pg. 20 Publication 544
- No gain or loss is recognized on a transfer of property from an individual (or in trust for the benefit of) a spouse, or a former spouse if incident to divorce.
Mark is an accrual basis taxpayer. He shipped $500 worth of merchandise to Ralph on December 30, 2004. Mark sent Ralph an invoice January 2, 2005 that was payable in 30 days. Ralph mailed his check to Mark on February 2, 2005. Mark deposited the check on February 6, 2005. Mark received and reconciled his bank statement March 3, 2005. When does Mark record the $500 in income?
A. January 2, 2005 because that is when he invoiced Ralph
B. March 3, 2005 because that is when Mark verified that the $500 check had been accepted as a deposit
C. December 30, 2004, the date when he shipped the merchandise to Ralph
D. February 6, 2005 because that is when Mark deposited the check from Ralph
- The answer is (C).
- pg. 10 Publication 538 Accounting Periods and Methods
Generally, you include an amount as gross income for the tax year in which all events that fix your right to receive the income have occurred and you can determine teh amount with reasonable accuracy. Under this rule, you report an amount in your gorss income on the earliest of the following dates:
When you receive payment
When the income amount is due to you
When you earn the income
When title has passed.
Which of the following items are generally included in inventory?
A. Goods for sale that someone else has consigned to you
B. Equipment used in your business to manufacture goods
C. Goods you have sent out on consignment for someone else to sell
D. Goods in transit to you for which title has not yet passed to you
- The answer is (C)
- Items Included in Inventory
Your inventory shoud include all of the following.
- Merchandise or stock in trade
- Raw materials
- work in process
- finished products
- supplies that physically become a part of the item intended for sale.
Include the following merchandise in inventory
Purchased merchandise if title has passed to you, even if the merchandise is in transit or you do not have physical possession for another reason
Goods under contract for sale taht you have not yet segregated and applied to the contract
Goods out on consignment
Goods held for sale in display rooms, merchandise mart room or booths located away from your place of business
Merchandise not included.
Do no include the following merchandise in inventory
Godd you have sold, but only if title has passed to the buyer
Goods consigned to you
Goods ordered for future delivery
if you do not yet have title.
Supplemental wages are compensation paid in addition to an employee’s regular wages. They do not include payments for:
A. Accumulated sick leave
B. Nondeductible moving expenses
C. Vacation pay
D. Travel reimbursements paid at the Federal Government per diem rate
- The answer is (D).Supplemental wages are wage payments to an employee that are not regular wages. They include, but are not limited to, bonuses, commissions, overtime pay, payments for accumulated sick leave, severance pay, awards, prizes, back pay, retroactive, pay increases, and payments for nondeductible moving expenses.
Vacation Pay. Vacation pay is subject to withholding as if it were a regular wage payment. When vacation pay is in addition to regular wages for the vacation period, treat it as a supplemental wage payment.
Which of the following fringe benefits for meals is subject to the 50% deduction limit?
A. Meals furnished to your employees at the work site when you operate a restaurant
B. Meals furnished to your employees as part of the expense of a company picnic
C. Meals furnished to your employees at your place of business when more than half of these employees are provided the meals for your convenience
D. Meals furnished to a customer during a business discussion
The answer is (D)
You can exclude any occasional meal or meal money you provide to an employee if it has so little value (taking into account how frequently you provide meals to your employees) that accounting for it would be unreasonalbe or administratively impracticable. The exclusion applies, for examples, to the following items.
- Coffee, doughnuts, or soft drinks
Occasional meals or meal money provided to enable an employee to work overtime. However, the exclusion does not apply to meal money figured on the basis of hours worked
Occasional parties or picnics for employees and their guests.
- This exclusion also applies to meals you provide at an employer-operated eating facility. You can exclude the value of meal you furnish to an employee from the employee's wages if they meet the following tests.
- They are furnished on your business premises
They are furnished for your convenience
Esther works as a computer programmer for a marketing firm. She performs 40% of her computer programming on a home computer during the weekend (her company is closed on the weekends) so she can take off 2 days during the regular work week. The home computer that Esther works on is identical to the computer she uses at work, and she uses it exclusively for her job related duties. Esther’s employer does not require Esther to take work home with her on the weekends—it is Esther’s choice. Because she uses the home computer exclusively for business purposes, she can use the following percentage of business usage when computing her yearly depreciation for the computer:
The answer is (D).
pg. 60 Publication 946 How to Depreciate Property
- Can Employees Claim a Deduction?If you are an employee, you can claim a depreciation deduction for the use of your listed property (whether owned or rented) in performing services as an employee only if your use is a business use. The use of your property in performing services as an employee is a business use only if both the following requirements are met:
The use is for your employer's convenience
The use is required as a condition of your employment.
Which of the following would not qualify for a depletion deduction?
A. Gas well
B. Timber lot
C. Oil refinery
D. Stone quarry
- The answer is (C) Oil refinery.
- pg. 35 Publication 535 Business Expenses
Refiners who cannot claim percentage depletion. You cannot claim percentage depletion if you or a related person REFINCE crude oil and you and the related person refined more than 75,000 barrels on any day during the tax year based on average (rather than actual) daily refinery runs for the tax year.
Walter is an accrual basis taxpayer who has a business with significant accounts receivables. In 2003, Walter had an $8,000 receivable owed to his business from Fred. Fred was unable to pay the full amount, but did transfer a parcel of land with a fair market value of $6,000 to Walter in partial payment. Walter entered on his books the $2,000 difference as a business bad debt, but was unable to take a tax benefit from this bad debt deduction as he had no taxable income at the end of 2003. In 2004, Walter sold the land received from Fred at a $3,000 gain. At the end of 2004, how much gain from the sale of this land must Walter report in taxable income?
A. $3,000 – the entire gain
B. $1,000 – the gain less the bad debt
C. $0 – any gain is limited to the amount of bad debt
D. None of the above
The answer is (A)***
In 2004 you used a fishing lodge as an entertainment facility. Which of the following incurred expenditures may be partially deductible?
A. Depreciation expense
B. Fishing bait
C. Natural gas to heat the lodge
D. Repairs to the lodge roof
The answer is (B)
Entertainment facilities. Generally, you cannot deduct any expenses for the use of an entertainment facility. This includes expenses for depreciation and opertaing costs such as rent, utilities, maintenance and protecction. An entertainment facility is any property you own rent, or use for entertainment. Examples include a yacht, hunting lodge, fishing camp, swimming pool, tennis court, bowling alley, car, airplane, apartment, hotel suite, or home in a vacation resort.
Out-of-pocket expenses. You can deduct out-of-pocket expenses, such as for food and beverages, catering, gas, and fishing bait, that you provided during entertainment at a facility. These are not expenses for the use of an entertainment facility. However, these expenses are subject to teh directly-related and associated tests and to teh 50% limit.
The standard meal allowance cannot be used to figure a deduction for:
A. Business travel if you are self-employed
B. Travel in connection with investment property
C. Travel for qualifying educational
D. Travel to obtain medical treatment
The answer is (D). pg. 6 Publication 463
Use of the standard meal allowance for other trave. You can use the standard meal allowance to figure your meal expenses when you travel in conncection with investment and other income-producing property. You can also use it to figure your meal expenses when you travel for qualifying educational purposes. You cannot use the standard meal allowance to figure the cost of your meals when you travel for medical or charitable purposes.
Under which situation below is a deduction allowable for an office in your home?
A. Your home is the only fixed location of your business of selling mechanics’ tools at retail. You regularly use your walk-in closet for storage of inventory and product samples. You also use this area occasionally for personal purposes
B. You are an attorney and use a den in your home to write legal briefs. Your family also uses the den for recreation
C. You use part of your home exclusively and regularly to read financial periodicals and reports, clip bond coupons, and carry out similar activities to monitor personal investments
D. You use your walk-in closet at home exclusively and regularly to bill customers, clients, or patients; to set up appointments; and to order supplies. You also rent office space downtown where you also conduct those same activities. You use the home office three days a week and the rented office space two days a week
The answer is (A).
pg.2 & 3 Publication 587 Business Use of your Home
- Qualifying for a Deduction...To qualify to deduct expenses for business use of your home, you must use part of your home:
Exclusively and regularly as your principal place of business (defined later)
Exclusively and regularly as a place where you meet or deal with patients, clients, or customers in the normal course of your trade or business
In each case of a separate structure which is not attached to your home in connection with your trade or business
PRINCIPAL PLACE OF BUSINESS
Your home office will qualify as your principal place of business if you meet the following requirements.
You use it exclusively and regularly for administrative or management activities of your trade or business
You have no other fixed location where you conduct substantial administrative or management activities of your trade or business.
Because you have another location where you take care of managerial and administrative tasks, (D) does not qualify.
Pleasant Beach City, to improve downtown commercial business, converted a downtown business area street into an enclosed pedestrian mall. The city assessed the full cost of construction, financed with 10-year bonds, against the affected business properties. The city is paying the principal and interest with the annual payments made by the property owners. The portion that the business owners were assessed to pay the construction costs is:
A. Deductible as taxes
B. Deductible as a business expense
C. A non-depreciable capital expenditure
D. A depreciable capital expenditure
The answer is (D)
pg.16 Publication 535 Business Expenses
- Taxes for local benefits. Generally, you cannot deduct taxes charged for local benefits and improvements that tend to increase the value of your property. These include assessments for streets, sidewalks, water mains, sewer lines, and public parking facilities. You should increase the basis of your property by the amount of the assessment.
- You can deduct taxes for these local benefits only if the taxes are for maintenance, repairs, or interest charges related to those benefits. If part of the tax is for maintenance, repairs, or interest, you must be able to show how much of the tax is for these expenses to claim a deduction for that part of the tax.
- Example. To improve downtown commercial business, Waterfront City converted a downtown business area street into an enclosed pedestrian mall. The city assessed the full cost of construction, financed with 10-year bonds, against the affected properties. The city is paying the principal and interest with teh annual payments made by the property owners.
- The assessments for construction costs are not deductible as taxes or as business expenses, but are depreciable capital expenses. the part of the payments used to pay the interest charges on the bonds is deductible as taxes.
On November 15, 2004, Partnership Z paid $10,000 in accounting and legal fees to prepare and file the partnership agreement. The partnership began business on December 1, 2004. Which of the following is a permissible election for treatment of the $10,000 payment?
A. Deduct $10,000
B. Deduct $5,000 and amortize the remaining $5,000 over a 5-year period
C. Deduct $5,000 and amortize the remaining $5,000 over 180 months
D. Amortize $10,000 over a 5-year period
The answer is (C)
pg.24 Publication 535 Business Expenses
- Business Start-Up and Organizational CostsBusiness start-up and organizational costs are generally capital expenditures. However, you can elect to deduct up to $5,000 of business start-up and $5,000 of organizational costs paid or incurred after October 22,2004. Any remaining costs must be amortized over a 180-month period.
Amounts paid or incurred to demolish a structure are:
A. Deductible as a casualty loss
B. Capitalized and amortized over a 180 month period
C. Treated as a reduction of the basis of the structure
D. Capitalized and added to the basis of the land where the demolished structure was located
The answer is (D) pg. 44 Publication 535 Business Expenses
Demolition expenses or losses. Amounts paid or incurred to demolish a structure are not deductible. These amounts are added to the basis of the land where the demolished structure was located. Any loss for the remaining undepreciated basis of a demolished structure would not be recognized until the property is disposed.
Which of the following statements pertaining to a net operating loss (NOL) is incorrect?
A. The carry back period for a farming loss is 5 years
B. If you choose not to carry back an NOL then you can use the NOL only in the 20-year carry forward period
C. To waive the carry back of an NOL, a separate statement must be submitted within 6 months of the original NOL year return’s due date (including extensions)
D. If you do not use an NOL within the 2-year carry back and 20-year carry forward period, you lose any remaining NOL forever
The answer is (C)
pg. 8 Publication 536 Net Operating Loss
- Waiving the Carryback Period- You can choose to not to carry back your NOL. If you make this choice, then you can use your NOL only in the 20-year carryforward period.
- To make this choice, ATTACH A STATEMENT TO YOUR ORIGINAL RETURN FILED BY THE DATE (INCLUDING EXTENSIONS) FO THE NOL YEAR.
If at least two-thirds of your gross income for 2003 or 2004 was from farming, only one estimated tax payment is due. The required annual payment is the:
A. Larger of two-thirds of your total tax for 2004 or 100% of the total tax shown on your full-year 2003 return
B. Smaller of two-thirds of your total tax for 2003 or 100% of the total tax shown on your full-year 2004 return
C. Larger of two-thirds of your total tax for 2003 or 100% of the total tax shown on your full-year 2004 return
D. Smaller of two-thirds of your total tax for 2004 or 100% of the total tax shown on your full-year 2003 return
The answer is (D).
pg. 43 Publication 17
(FOR FISHERMEM OR FARMERS)
- General rule. In most cases, you must pay estimated tax for 2012 if both of the following apply:
- 1. you expect to owe at least $1,000 in tax for 2012, after subtracting your withholding and refundable credits.
2. you expect your withholding plus your refundable credits to be less than the smaller of:
- a. 66.66% of the tax to be shown on your 2012 tax return, or
- b. 100% tax of the shown your 2011 tax return.
New ABC Partnership is organized in 2004 with three general partners. The partners include a corporation with a tax year ending on March 31 and a 60% interest in partnership capital and profits, and two individuals, each having a calendar tax year and a 20% interest in partnership capital and profits. The partnership’s required tax year ends on:
A. March 31
B. September 30
C. October 31
D. December 31
The answer is (A). pg. 5 Publication 538 Accounting Periods and Methods
The rules for the required tax year for Partnerships are as follows.
If one or more partners having the same tax year own a majority interest (more than50%) in partnership profits and capital, the partnership must use the tax year of those partners.
If there is no majority interest tax year, the partnership must use the tax year of all its principal partners. A principal partner is one who has 5% or more interest in the profit or capital of the partnership
If there is no majority interest tax year and the principal partners do not have the same tax year, the partnership must use a tax year that results in the least aggregate deferral of income to the partners.
And because one of the partners (the corporation) owns 60% interest, the partnership must use its fiscal tax year ending on March 31.
The due date, without regard to extensions, of a domestic partnership filing U.S. Return of Partnership IncomeForm 1065 is the 15th day of which month following theend of the tax year?
The answer is (B). pg. 3 Instructions to Form 1065
When to File- Generally, a domestic partnership must file Form 1065 by the 15th of the 4th (fourth) month...
A newly-formed single-member domestic limited liability company (LLC) is eligible to file an election to be taxed as a:
A. Disregarded entity
The answer is (A) Disregarded Entity or (C) Corporations. pg. 23 Instructions for 1065
If a single member Limited Liability Company (LLC) owns an interest in the partnership, and the LLC is treated as a DISREGARDED ENTITY for federal income tax purposes...
Bill and Jimmy formed a new partnership. Bill contributes property that has an adjusted basis of $1,400 and a fair market value of $2,000 to the partnership. Jimmy contributes $2,000 in cash to the partnership. Each partner’s capital account as reflected on the partnership’s books is $2,000. What is the adjusted basis of each partner’s interest?
A. Bill’s at $1,400 and Jimmy’s at $1,400
B. Bill’s at $1,400 and Jimmy’s at $2,000
C. Bill’s at $1,700 and Jimmy’s at $1,700
D. Bill’s at $2,000 and Jimmy’s at $2,000
The answer is (B). pg. 8 Publication 541 Partnerships
Basis of contributed property-If a partner contributes property to a partnership, the partnership's basis for determining depreciation, depletion, gain, or loss for the property is the same as the partner's ADJUSTED BASIS for the property when it was contributed, increased by any gain recognized by the partner at the time of contribution.
Which of the following earnings is not subject to self employment tax?
A. Gains and losses, by a dealer in options or commodities, from dealing or trading in foreign currency contracts
B. Fees earned by a professional fiduciary who administers a deceased person’s estate
C. Fees received for services performed as a notary public
D. All of the above
The answer is (C). pg. 4 Instructions to 2011 Schedule SE form 1040.
[Other income and losses INCLUDED in Net earnings from self-employment]
13. Gain or loss from section 1256 contracts or related property by an options or commodities dealer in the normal course of dealing in or trading section 1256 contracts. (A)
12. Fees you recieved as a professional fiduciary. This may also apply to fees paid to you as a nonprofessional fiduciary if the fees realte to active participation in the operation of the estate's business, or the management of an estate that required extensive management activities over a long period of time.
Income and Losses NOT INCLUDED in net earnings from self-employment
2. Fees received for services performed as a notary public.
Given the fact patterns below, which of the following entities may not use the cash method of accounting?
A. The Acme Partnership had gross receipts of $3,500,000 in 2004. Its gross receipts for 2003 were $8,000,000 and its gross receipts for 2002 were $3,000,000
B. John Jones manufactures and sells fans. His average annual gross receipts since 1999 are $975,000
C. Dallas Partnership has two partners in 2004—Joe Dallas, an individual, and Deer, Inc. a corporation. Dallas Partnership averaged annual gross receipts are $6,500,000
D. John Gibb files his 2004 Form 1040 with an attached Schedule C reflecting $11,000,000 in gross receipts from selling real estate
The answer is (C). pg. 9 Publication 583 Accounting Periods and Methods.
Excluded Entities. The following entities cannot use the cash method, including any combination of methods that includes the cash method.
A corporation (other than an S corporation) with average annual gross receipts exceeding $5 million.
A partnership with a corporation (other than an S corporation) as a partner, and with the partnerships having average annual gross receipts exceeding $5 million
A tax shelter.
The reason why John Jones who sells and manufactures fans can use the cash method of accounting is because on pg. 14 under EXCEPTIONS he is a qualifying taxpayer under Revenue Procedure 2001-10 in Internal Revenue Bulletin 2001-2 in that his average annual gross receipts for each test year must be $1 million or less.
Setting Sun Partnership purchased a business, FamilyDry Cleaners, for $750,000. The acquired Family DryCleaners assets consisted of the following:
• $50,000 in cash,
• Equipment with a fair market value of $200,000, and
• Land and building with a fair market value of$450,000.
For real estate tax purposes, the city assessed the value of the land at $100,000 and the building at $200,000.The buyer and seller did not enter into an allocation agreement for this transaction. What basis must Setting Sun Partnership use for the land, building, and intangible asset “goodwill”?
A. Land $100,000, Building $200,000, and Goodwill$150,000
B. Land $150,000, Building $300,000, and Goodwill$0
C. Land $150,000, Building $300,000, and Goodwill$50,000
D. Land $100,000, Building $350,000, and Goodwill$50,000
The answer is (C).
pg. 4 Publication 551 Basis of Assets
- Land and Buildings
- ...Figure the basis of each asset by multiplying the lump sum (450,000 FMV) by a fraction. The numerator is the FMV or assessed value for real estate tax purposes of that asset and the denominator is the FMV or assessed value of the whole property at the time of purchase. In this case the basis for land = 100,000/300,000 [200,000+100,000] * 450,000 and the basis for the land is 200,000/300,000 * 450,000 which both equals 150,000 and 300,000 respectively.
Now to determine the value of goodwill add the value of the tangible assets acquired in the exchange (cash, equipment, land and building) and subtract it by the total amount that Sun Partnership paid for Family Dry Cleaners, 750,000 - (50,000+200,000+450,000)... 750,000-700,000 = 50,000
Mike purchased a building lot in 2001 for $25,000 and constructed his primary residence there for an additional $175,000. In 2004 Mike moved to a different city, but kept the house he constructed in 2001 and converted it to a rental property. On the date Mike made this change the fair market value of the converted property was$225,000. For depreciation purposes, what is Mike’s basis in this rental property?
The answer is (B). Publication 551 pg. 10
Property Changed to Business or Rental Use- If you hold property for personal use and then change it to business use or use it to produce rent, you must figure its basis for depreciation.
Basis for depreciation. The basis for depreciation is the lesser of the following amounts
The FMV of the property on the date of the change, or
Your adjusted basis on the date of the change
Nelson, Inc. owned a manufacturing building with a fair market value of $95,000 and an adjusted basis of $75,000. Nelson, Inc. entered into an agreement to exchange the manufacturing building for a warehouse withan adjusted basis of $80,000 and a fair market value of$90,000 with Roberts Corporation. In addition, Nelson, Inc. would pay Roberts Corporation $5,000 in cash. Nelson,Inc. also incurred and paid attorney and deed preparation fees of $5,000 on this exchange. What is Nelson, Inc.’s basis in the warehouse it received in this like-kind exchange?
The answer is (A). pg. 7 Publication 544 Sale and Other disposition of Assets.
Like-Kind Exchanges. The basis of the property you receive is the same as the basis of the property you gave up...
Property plus cash. If you trade property in a like-kind exchange and also pay money, the basis of the property received is the basis of the property you gave up increased by the money you paid. 75,000+5,000+5,000 = 85,000
Arlene traded her old computer that she used in her business, for a new computer priced at $5,000 that she will also use in her business. In addition to her old computer, Arlene paid $4,000 cash for the new computer. Her old computer was worth $2,000 and had an adjusted basis of $500. What is Arlene’s basis for depreciation in the new computer?
The answer is (C). pg. 7 Publication 551
Property plus cash. If you trade property in a like-kind exchange and also pay money, the basis of the property received is the basis of the property you gave up increased by the money you paid.
$500 (adjusted basis of old computer) + $4,000 (cash paid) = $4,500
Kayla exchanged her unimproved land with an adjusted basis of $80,000 and a fair market value of $130,000 for unimproved land with a fair market value of $100,000and $10,000 in cash. Kayla also paid $5,000 in closing costs. The unimproved land that Kayla gave up was subject to a $30,000 mortgage for which she was liable. The other party assumed this mortgage. What is Kayla’s realized gain on this exchange?
The answer is (B). pg. 7 Publication 551 Basis of Assets.
Taxable Exchanges. A taxable exchange is one in which the gain is taxable or the loss is deductible. A taxable gain or deductible loss is also known as a recognized gain or loss. If you receive property in exchange for other property in a taxable exchange, the basis of property you receive is usually its FMV at the time of the exchange. A taxable exchange occurs when you receive cash or property not similar or related in use to the property exchanged.
$20,000 gain ( 100,000- 80,000) + $30,000 (mortgage assumed by purchasing party) + $10,000( cash received) - $5,000 (closing costs) = $55,000 gain
Under the “lower of cost or market” method, what is the value of the following items that should be included in
Item Cost Market
X $450 $700
Y $250 $100
Z $300 $250
Total $1000 $1,050
The answer is (A). publication 538 pg. 18
You must value EACh item in the inventory separately. You cannot value the entire inventory at cost and at market and then use the lower of the two figures.
- Hence Item X = 450
- Y = 100
- Z = 250
- Total= 800
Michael James purchased a travel agency on July 1,2004, and immediately took over the business. The purchase contract included the following items as part of the purchase price:
• Goodwill valued at $60,000.
• Workforce in place valued at $30,000.
• Trademark valued at $60,000.
• Government Permit valued at $30,000.
What is the proper amount of Michael’s Internal Revenue Code section 197 amortization expense for 2004 assuming Michael is a calendar year taxpayer?
The answer is (C). Publication 544 pg. 28
The following assets are section 197 intangibles and must be amortized over 180 months:
Going concern value
Workforce in place
Business books and records, operating systems, or any other information base, including lists or other information concerning current or prospective customers;
A patent, copyright, formula, process, design, pattern, know-how, format, or similar item
A customer-based intangible
A supplier-based intangible
A license, permit, or toher right granted by a governmental unit or agency
a covenant not to compete entered into connection with the acquisition of an interest in a trade or business
any franchise, trademark, or trade name
and a contract for the use of, or a term interest in, any item in this list.
ALSO PAY CLOSE ATTENTION TO THE DATE IN WHICH MICHAEL PURCHASED THE TRAVEL AGENCY. 60,000+30,000+60,000+30,000 = 180,000/180mo. = 1,000/month * 6 months left in 2004 = $6,000 *(C)
In 2003, Rex, a sole proprietor of Bay View Wrecking, had gross income of $200,000, a business bad debt deduction of $6,000, and other expenses of $156,000. Bay View Wrecking employed the accrual method of accounting and used the specific charge-off method for bad debts. In 2004, Bay View Wrecking recovered $4,500 of the $6,000 previously deducted in 2003. What is the correct way for Rex to report this recovery?
A. Report $4,500 as “Other Income” on Schedule C in 2004
B. Report $4,500 as “Other Income” on return form 1040 line 21 in 2004
C. Report $4,500 as “Other Income” on an amended 2003 Form 1040X return
D. Report $4,500 as a reduction of “Bad Debt” on Schedule C in 2004
The answer is (A). pg. 40 Publication 535 Business Expenses
Recovery of a Bad Debt- If you claim a deduction for a bad debt on your income tax return and later recover (collect) all or part of it, you may have to include all or part of the recovery in gross income. The amount you include is limited to the amount you actually deducted that did not recuce your tax. Report the recover as "Other income" on the appropriate business form or schedule ( in this case it was a business bad debt so it will be on the Schedule C)
You sell products to the Sienna Company. To thank the company for its business, you gave the company threebottles of champagne. Each of the company’s three executives took home a bottle for their families to share.You have no business relationship with any of the executives’ family members. If you paid $40 for each bottle,the total amount can you deduct for all three bottles is:
The answer is (C). Pg. 13 Publication 463
$25 limit. You can deduct no more than $25 for businesss gifts you give directly or indirectly to each person during your tax year. A gift to a company that is intended for the eventual personal use or benefit of a particular person or a limited class of people will be considered an indirect gift to that particular person or to the individuals within that class of people who receive the gift.
hence $25*3 = $75
Hahn Company, a calendar year taxpayer operating as asole proprietorship, reports Federal income taxes employing the accrual method of accounting. Hahn Company shows the following items of income and expense for 2004:
Sales………………………………………...$230,000Cost of Sales………………………………….(70,000)Operating Expenses…………………….(40,000)
Self-employed health insurance premium……………….......................(4,000)
Self-insurance reserve……………………(2,000)Business liability insurance premium for a 3-year policy(from 7-1-04 to 6-30-07)……………......................................(15,000)
For 2004 year tax purposes, what is the amount of HahnCompany’s net income reportable on Schedule C, “Profitor Loss from Business (Sole Proprietorship)”?
The answer is (A). Publication 334 Tax Guide for Small Businesses pg. 35 and 3
pg. 3. Self-employed health insurance deduction. For tax years beginning after 2010, you cannot deduct any self-employed health insurance deduction you report on Form 1040, line 29, from self-employment earnings.
pg. 35 Nondeductible Premiums. You cannot deduct premiums on the following kinds of insurance
Self insurance reserve funds.
Between November 1 and December 1, 2004, you paid atotal of $52,000 in start-up costs to create a new business.The business opened its doors on December 15,2004. Which of the following is a permissible election fortreatment of the $52,000 in start-up costs you paid?
A. Amortize $52,000 over a 5-year period
B. Deduct $3,000 and amortize the remaining$49,000 over 180 months
C. Deduct $5,000 and amortize the remaining$47,000 over 180 months
D. Amortize $52,000 over 180 months
The answer is (C). pg. 24 Publication 535 Business Expenses.
Business start-up and organiational costs are generally capital expenditures. However, you can elect to deduct up to $5,000 of business start-up and $5,000 or organizational costs paid or incurred after October 22, 2004. The $5,000 deduction is reduced by the amount your total start-up or organiational costs exceed $50,000. Any remaining costs must be amortized [over an 180 month period].
Richard, a self-employed attorney, began a fishing guide business in 1998. He reports income and expense from this fishing guide activity on a Form 1040 Schedule C separate from his reported earnings as an attorney. The fishing guide business reported net losses each year while Richard’s legal business showed significant net earnings in each of the years from 1998 to 2003. In2004 Richard’s business as an attorney showed a net profit of $50,000. Richard’s fishing guide business hadthe following income and expenses in 2004:
• Gross income $5,500
• Depreciation of a boat and motor$(3,000)
• Real estate taxes $(500)
• Insurance $(250)
• Mortgage interest allocated $(1,500)
• Utilities allocated $(1,250)
• Supplies $(1,000)
Richard has itemized deductions that he will report on Schedule A of his 2004 Form 1040. How much depreciation deduction can Richard report from his fishing guide business activity in 2004?
The answer is (C).*** look up!!!!!!!!
In 2000, you purchased a candy making machine for your business. The machine cost $50,000 and you claimed a $20,000 Internal Revenue Code section 179deduction for that machine. In 2004, you sold the machine for $52,000. Your accumulated depreciation from 2000 through 2004 was $18,974 (not including the section179 deduction). How much is your taxable gain and what portion of that gain must be reported as ordinary income under Internal Revenue Code section 1245?
A. Taxable gain of $40,974 and ordinary income of $38,974
B. Taxable gain of $40,974 and ordinary income of $40,974
C. Taxable gain of $20,974 and ordinary income of $18,974
D. Taxable gain of $2,000 and ordinary income of $2,000
The answer is (A).
- 1)Amount realized………………$52,000
- 3)Depreciation allowed or allowable (MACRS Deductions: $20,000+$18974)…...............................$38,974
- 4)Adjusted Basis (subtract line 3 from line 2)………......................…...$11,026
- 5) Gain realized (taxable gain line 1 – 4)……………………$40,974
- 6) Gain treated as ORDINARY INCOME
- (lesser of line 3 or line 5)………………………………………$38,974
Farmer Bob sold a breeding cow on March 8, 2004 for $2,500. Expenses related to the sale were $250.Farmer Bob deducted $1,000 in costs of raising the cow during the years the cow was raised. What is FarmerBob’s gain (loss) on the sale of the breeding cow, without regard to the Uniform Capitalization Rules?
D. None of the above
The answer is (C). pg. 53 Publication 225 Farmer's Tax Guide
Raised Livestock. Gain on the sale of raised livestock is generally the gross sales price reduced by any expenses of the sale. Expenses of sale include sales commisions, freight or hauling from farm to commision company, and other similar expenses. The basis of the animal sold is zero if the cost of raising it was deducted during the years the animal was being raised (in this case it was). Hence 2,500 - 250 = 2,250
On January 1, 2004, Ben and Jerry each own 50% of the B&J Fudge partnership. B&J Fudge employs the cash method of accounting and receives $1,000 in interest income each month from an unrelated party loan receivable. On July 1, 2005, Jerry purchased 50% of Ben’s partnership interest. There were no other changes inpartnership interest for the remainder of the 2004 year.How much does Ben report as his ratable share of the interest income for 2004?
The answer is (B). Because for the year 2004 Ben and Jerry still own 50% interest each and split interest income in half $12,000/2 = $6,000
In 2004, John and George formed a partnership that began business on July 1, 2004. They spent $4,000 in legal fees for negotiating and preparing the partnership agreement, $2,000 for accounting services setting up the partnerships books, and $1,000 in commissions associated with acquiring assets for the partnership. They made a proper election to amortize organization expensesover a 60 month period. Assuming these are their only expenses in starting their partnership, what is the proper amortization expense for 2004?
The answer is (B). pg. 27 Publication 535 Business Expenses
Organizational Costs include the following fees (for partnerships):
Legal fees for services incident to the organization of the partnership, such as negotiation and preparation of the partnership agreement.
Accounting fees for services incident to organization of the partnership.
Nonqualifying costs. The following costs cannot be amortized.
The cost of acquiring assets for the partnership or transferring assets to the partnership
The cost of admitting or removing partners, other than at the time the partnership is first organized
The cost of making a contract concerning the operation of the partnership trade or business including a contract between a partner and a partnership
The costs for issuing and marketing interests in the partnership such as brokerage, registration, and legal fees and printing costs. These "syndication" fees are capital expenses that cannot be depreciated or amortized.
Carol owns 50% of the capital interest in ABC Partnership and 50% of the profits interest in XYZ Partnership. In 2002 for $100,000, ABC Partnership sells land to XYZ Partnership, which XYZ Partnership will use in its trade or business. The ABC Partnership’s adjusted basis in the land at the time of the sale was $120,000. In 2004, the XYZ Partnership sells the land to an unrelated third party for $160,000. How much gain will the XYZ Partnership
recognize in 2004?
The answer is (C). pg. 3 Publication 544 Sales and other Dispositions of Assets.
Basis. You must know the basis of your property to determine whether you have a gain or loss from its sale or other disposition. The basis of property you buy is usually its COST. (100,000)
You are looking for the gain of XYZ Partnership and it bought the land for only 100,000 which is their basis in the land and hence when they sold it for 160,000, they realized a gain of 60,000
Archie sells his 50% interest in XYZ partnership to Hal for $5,000 cash. His outside basis in the partnership is $3,500. The partnership has inventory and a capital asset with respect to basis of $6,000 and $2,000. The respective fair market values of the inventory and capital asset are $8,000 and $1,000. Archie should properly recognize:
A. Ordinary income of $2,000 and a capital loss of $500
B. Capital gain of $1,500 on the sale of his partnership interest
C. Ordinary income of $1,500, the amount of cash he received
D. None of the above
The answer is (D) none of the above. pg. 11 Publication 541 Partnerships.
Determining gain or loss. The income or loss realized by a partner upon the sale or exchange of its interest in unrealized receivables and inventory items, discussed below, is the amount that would have been allocated to the partner if the partnership, in this case ($4000 = FMV of $8,000 in inventory), had sold all of its property for cash at fair market value, in a fully taxable transaction, immediately prior to the parnter's transfer of interest in the partnership. Any gain or loss recognized that is attributable to the unrealized recievables and inventory items will be ordinary gain or loss.
And hence the way you determine gain or loss is first you take the amount realized ($5,000) and subtract it from the adjusted basis of the partner. $5,000 - $3,500 = $1,500. And because the partnership has "hot assets" or inventory which produces ordinary income, Archie's share of assets are $4,000 which is half of the FMV of the inventory. And so because $1,500 is less than $4,000 Archie has an ordinary loss of $2,500 ($4,000- $1,500).
Gary is a calendar-year eligible small employer and wishes to take advantage of the Credit for Small Employer Pension Plan Startup Costs. He incurred $2,000 in qualified startup costs in 2004 for an eligible plan that will become effective on January 1, 2005. What is Gary’s Pension Startup Costs credit amount for calendar year 2004?
C. $0 (he gets the credit in 2005)
The answer is (C). Form 8881
First credit year. The first credit year generally is your tax year that INCLUDES the date that the ELIGIBLE EMPLOYER PLAN BECOMES EFFECTIVE. However, you may elect to have the preceding tax year be the first credit year, and claim the credit for qualified startup costs paid or incurred during that tax year.
However the problem mentions NO election that Gary made and so he takes the credit in 2005 when the plan becomes effective.
John has three employees who are certified as members of a targeted group. Two of the employees worked for John for 2 months in 2002 and came back to work for
John on January 1, 2004. The other employee began working for John on January 1, 2004. Each employee makes $1,000 per month. How much can John claim as qualified first year wages in computing the Work Opportunity
The answer is (C). All employees are considered as first-year wage***
Rob and George own an office building that was built in 1975. They opened a tax return business in 2003 and made numerous renovations during 2004 to the building to bring it into compliance with the Americans with Disabilities Act of 1990. They had gross receipts of $750,000 dollars and ten full-time employees during 2003. They spent $15,000 in eligible access expenditures. What is the current year Disabled Access Credit?
The answer is (A). Look at Form 8826 Disabled Access Credit
1 Total Eligible access expenditures......................15,000
2 Minimum amount................250
- 3 Subtract line 2 from line 1.
- If 0 or less, enter 0...............14,750
4. Maximum Amount..............10,000
- 5. Enter the SMALLER of
- line 3 or line 4........................10,000
6. Multiply line 5 by 50% (0.5).. 5,000
- 7. Disabled access credit from
- partnerships and S corp.............---
- 8. Add lines 6 and 7, but
- do not enter more than $5000......$5,000
Michael has a partnership interest with a zero basis. The partnership has inventory valued at $250,000. Michael’s share of the ordinary income to be received from the sale of the inventory would be $10,000. In 2004, Michael sells his partnership interest for $30,000. Michael will report the following gain in 2004:
A. $30,000 capital gain
B. $20,000 ordinary gain and $10,000 capital gain
C. $10,000 ordinary gain and $20,000 capital gain
D. No gain or loss
The answer is (C). pg. 11 Publication 541 Partnerships.
As mentioned in question 64. The way you find out the ordinary gain and capital gain whenever a partner sells his interest in a partnership you must find out how much his/her share of ordinary income is. And since Michael's share of interest has a zero basis. You treat the entire $30,000 as a gain.
However, you realize $10,000 as an ordinary gain and the remainder $20,000 as a capital gain.
Ryan runs a manufacturing business employing several people with young children. These employees require daycare as both parents work. He decided that, in order to make it easier for his employees to come to work each day, he would allocate some of the unused space in his manufacturing facility to a child care facility. In 2004, he incurred $20,000 in qualified childcare facility expenditures. He had no qualified childcare resource and referral expenditures and had no pass through credits. What is Ryan’s credit for 2004?
The answer is (D). Form 8882 pg. 2
The credit is 25% of the qualified childcare facility expenditures PLUS 10% of the qualified childcare resource and referral expenditures paid or incurred during the tax year. The credit is limited to $150,000 per tax year.
hence 20,000(0.25) + 0(0.10) = 5,000
In 2004, Linda sold her partnership interest for $25,000. Her adjusted basis at the time of the sale is $22,500 which includes her $12,500 share of partnership liabilities. When she initially invested in the partnership, she contributed $10,000 worth of equipment. There was no profit or loss at the partnership level at the time she sold her interest. What is the amount and nature of her gain or loss from the sale of her partnership interest in 2004?
A. $7,500 ordinary loss
B. $10,000 capital gain
C. $12,500 ordinary gain
D. $15,000 capital gain
- The answer is (D). The equipment that Linda contributed is a CAPITAL ASSET and hence she has no share in ordinary income owed to her.
- Moreover, her adjusted basis involves the 10,000 in equipment and the 12,500 in liabilties.
Linda recognizes 25,000 + 12,500 = 37,500 and you subract the adjusted basis from this amount [37,500 - 22,500 = 15,000] and the entire amount is a capital gain.
Under a partnership agreement, Fred is to receive 30% of the partnership income, but not less than $8,000. In 2004 the partnership has net income of $20,000. What is the amount of guaranteed payment that can be deducted by the partnership in 2004?
The answer is (C). pg. 7 Publication 541 Partnerships.
Guaranteed payments are thos made by a partnership to a partner that are determined without regard to the partnership's income.
Minimum Payments. If a partner is to receive a minimum payment from the partnership (in this case the $8,000), the guaranteed payment is the amount by which the minimum payment is more than the partner's distributive share of the partnership income before taking into accout the guaranteed payment.
Fred's distributive share, without regard to the minimum guarantee, is $6,000. The guaranteed payment that can be DEDUCTED by the partnership is $2,000 ($8,000 - $6,000).
The L&J Auto Parts Store operated as an accrual based partnership and filed a form 1065 for 2004. In addition to receipts from parts sales of $250,000, they had the
following other items of income and expenses for 2004:
• Salaries $(50,000)
• Insurance $( 5,000)
• Charitable Contributions $( 5,000)
• Licenses $( 5,000)
• Rental Income $ 25,000
• Guaranteed payments to Partners $(75,000)
What is the correct Ordinary Income or Loss that L&J should report on line 22 of their 2004 1065?
- The answer is (B). Instructions for Form 1065
- pg. 19. Other Deductions- In this section you include insurance premiums, amortization, legal and professional fees, supplies used and consumed in the business, utilities, certain business start-up and organizational costs...
- pg. 11 Reporting of rental activities. In reporting the partnership's income or losses and credits from rental activities, the partnership must SEPARATELY report rental real estate activities...
- the rest of the expenses have their own specific categories on Form 1065
- and so 250,000 - (50,000+75,000+5,000+5,000) = 115,000
Farmer Judy is a calendar-year taxpayer who uses thecash method of accounting. She normally sells 200 head of sheep a year. Because of a drought, she sold 250head of sheep in 2004. Farmer Judy realized $50,000from the sale. The affected area was declared a disaster area eligible for federal assistance on March 12,2004. How much, if any, income can Farmer Judy postpone to 2005?
D. $0, since only sales because of flooding qualify for postponement
- The answer is (A)
- pg. 9 Publication 225 Farmer's Tax Guide
- In order to find the total gain that can be postponed:
- 1) divide the total income realized from the sale of all livestock in the class during teh tax year ($50,000) by the total number of such livestock sold (250).
- 2) multiply the result in (1) by the excess number of such livestock sold solely becasue of weather-related conditions (250-200 = 50)
(50,000/250) * 50 = $10,000 gain can be postponed
In 1998, XYZ Corporation issued qualified small business stock to you at a cost of $1,500. In 2004, you sold that stock for $50,000. How much of the gain on that sale is excludable from gross income?
The answer is (C). pg. 68 Publication 550 Investment Income and Expenses
You generally can exclude from your income up to 50% of your gain from the sale or trade of qualified small business stock held by you for more than 5 years.
- In this case you held the small business stock for 6 years and your gain is 50,000-1,500 = 48,500 and the amount you can exclude from your gross income is half your gain of 48,500 which is 24,250.
You are a self-employer caterer. To encourage the continuation of an existing business relationship, you took one of your clients to a Broadway show. The visit to the show occurred directly after a substantial business discussion with that client. You paid a ticket broker $300 for two tickets to that show. The face value of each ticket was $100 ($200 total). What is your total deductible expense for both tickets?
The answer is (A). pg. 11 Publication 463 Travel, Entertainment, Gift and Car Expenses
Generally (2) Self-employed. If you are self-employed, your deductible meal and entertainment expenses are not subject to the 50% limit if ALL of the following requirements are met.
You have these expenses as an independent contractor
Your customer or client reimburses you or give you an allowance for these expenses in connection with services you perform
you provide adequate records of these expenses to your customer or client.
This means that you CANNOT deduct the expenses but rather your client can and is subject to the 50% limit.
But since your client did not reimburse you in this case, you are subject to the 50% limit and your maximum deduction is (2*100 face value)* 0.5 = 100
Sandy and Buffy formed the S&B Partnership in November of 2004. They began business operations in December 2004. During 2004 they incurred the following costs:
• $2,500 to their attorney for negotiating and preparing the partnership agreement.
• $250 for filing fees for the partnership agreement.
• $1,000 to their CPA for services incident to the organization of the partnership.
• $500 in costs associated with transferring assets to the partnership.
What is the maximum dollar amount that S&B Partnership can elect to amortize as organizational costs?
The answer is (A). pg. 27 Publication 535 Business Expenses
Organizational costs include the following fees.
Legal fees for services incident to the organization of the partnership, such as negotiation and preparation of the partnership agreement
Accounting fees for services incident to the organization of the partnership
Nonqualifying costs. the following costs cannot be amortized.
The cost of acquiring assets for the partnership or transferring assets to the partnership
The cost of admitting or removing a contract concerning the operation of the partnership trade or business including a contract between a partner and the partnership
The cost for issuing and marketing interests in the partnership such as brokerage, registration, and legal fees and printing costs. These "syndication fees" are capital expenses that cannot be depreciated or amortized.
the only amounts you add are 2,500 + 250 + 1,000 = 3750
Jim is a cash basis taxpayer and is an electrician. He received the following in 2004:
• Schedule C income of $25,000,
• Rental receipts of $6,000,
• 2005 advanced lease payments of $1,000 received in December, 2004,
• Dividend income of $500,
• A 2003 personal bad debt recovery of $1,000;,and
• $1,500 worth of electrical work in exchange for his friend installing a sprinkler system for him with a fair market value of $1,500.
How much does Jim have to report in his income for 2004?
The answer is (B).****
You include all of the items presented even the exhcange electrical work for a sprinkler system
John purchased a new gasoline-electric hybrid automobile on July 2, 2003, for $18,000. He also claimed a $2,000 clean-fuel vehicle deduction on his 2003 tax return for that vehicle. In 2003, John used this automobile only for personal purposes. On January 1, 2004, he began using the hybrid automobile exclusively for business purposes. The fair market value of the automobile on that day was $17,000. What is the automobile’s depreciable basis as of January 1, 2004?
The answer is (B). pg. 10 Publication 551 Basis of Assets
- Property Changed to Business or Rental Use
If you hold property for personal use and then change it to business use or use it to produce rent, you must figure its basis for depreciation. An example of changing property held for personal use to business use would be renting out your former main home.
Basis for depreciation.
The basis for depreciation is the lesser of the following amounts.
The FMV of the property on the date of the change, or
Your adjusted basis on the date of the change.
The FMV on the date of the change is $17,000. The adjusted basis is $18,000 - $2,000( the deduction taken) = $16,000 so you use the 16,000 as the basis
Sally exchanges an apartment building with an adjusted basis of $400,000 for an office building with a fair market value of $750,000. She also agrees to assume the mortgage on the office building in the amount of $200,000 and paid exchange expenses of $25,000. The other party agreed to assume Sally’s mortgage on the apartment building in the amount of $125,000. What is Sally’s adjusted basis in the new office building?
The answer is (B). pg. 7 Publication 551 Basis of Assets
The basis of the property you receive is the same as the basis of the property you give up ($400,000).
- However there are certain adjustments to basis.
- The increases to basis are the exchange expenses (25,000) and the assumption of mortgage of the other building (200,000) which in total is 400,000+ 225,000 = 625,000
Moreover, there is a decrease in basis with the other party agreeing to assume Sally's mortgage of 125,000 which results in 625,000-125,000 = 500,000 as the adjusted basis of the new building exhcanged.
Rich, Inc., a calendar-year taxpayer employing the accrual method of accounting, acquired a business warehouse building in 2003 for $100,000. Rich, Inc. deducted $3,000 in warehouse asset depreciation expense on December 31, 2003. In January of 2004, Rich, Inc. incurred a $2,000 legal bill, successfully defending its title to the building. Later in the year a second floor office was added to the warehouse at a cost of $10,000. Rich, Inc. deducted $5,000 in warehouse asset depreciation expense on December 31, 2004. What is Rich, Inc.’s adjusted basis in the warehouse asset on January 1, 2005?
The answer is (B). Publication 551 Basis of Assets
At the end of 2003 the basis of the warehouse for Rich Inc is $97,000 (100,000 - $3,000 (deduction))
At the end of 2004 the basis of the warehouse is $104,000 because 97,000+ $2,000 (legal bill) = 99,000 + 10,000 (second-floor addition) = 109,000 - 5,000 (deduction from warehouse asset depreciation) = 104,000