Fundamentals of Taxation 2017 Edition 10th Edition Cruz Test Bank

Fundamentals of Taxation 2017 Edition 10th Edition Cruz Test Bank
Fundamentals of Taxation 2017 Edition 10th Edition

Cruz Test Bank
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Chapter 06 Self-Employed Business Income (Line 12 of Form 1040 and Schedule C)
Answer Key
1) A sole proprietor's trade or business income or loss is reported on Schedule C, Form 1040.
A) True
B) False
Answer: A
Explanation:
Diff: 1
Topic: Income for a Schedule C Trade or Business
Learning Objective: 06-01 Describe how income and expenses for a self-employed individual are recognized and reported.
EA: Yes
2) For an expense to be ordinary, it must be customary or usual in the taxpayer's particular business.
A) True
B) False
Answer: A
Explanation:
Diff: 1
Topic: Trade or Business Expense
Learning Objective: 06-02 Explain the concept of ordinary and necessary business expenses.
EA: Yes
3) For an expense to be necessary, it must be essential to the taxpayer's business.

A) True
B) False
Answer: B
Explanation:
Diff: 1
EA: Yes
4) Fines paid that are ordinary and necessary in a trade or business generally are deductible.
A) True
B) False
Answer: B
Explanation:
Diff: 1
EA: Yes
Copyright © McGraw-Hill Education.All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
5) Depreciation is allowed for every tangible asset (except land) used either in a trade or business or
for the production of income.
A) True
B) False
Answer: A
Explanation:
Diff: 1
Topic: Depreciation
Learning Objective: 06-03 Explain the calculation of depreciation for trade or business assets.
EA: Yes
6) If property is inherited, the property's basis for purposes of depreciation is the same as the
decedent's basis.
A) True
B) False
Answer: B
Explanation:
Diff: 2
Topic: Depreciation
EA: Yes
7) Under MACRS, the half-year convention is used for all real property.
A) True
B) False
Answer: B
Explanation:
Diff: 2
Topic: Depreciation
EA: Yes
8) Taxpayers must use the mid-month convention when more than 40% of the personal property is
placed in service during the last three months of the tax year.
A) True
B) False
Answer: B
Explanation:
Diff: 2
Topic: Depreciation
EA: No
9) The cost of all personal property is recovered using a 200% declining-balance rate under MACRS.
A) True
B) False
Answer: A
Explanation:
Diff: 1
Topic: Depreciation
EA: Yes
10) Under MACRS, the straight-line method is required for all depreciable real property.
A) True
B) False
Answer: A
Explanation:
Diff: 1
Topic: Depreciation
EA: Yes
11) The §179 expense deduction is limited to earned income.

A) True
B) False
Answer: A
Explanation:
Diff: 2
Topic: Depreciation
EA: Yes
12) "Listed property" includes only passenger automobiles.

A) True
B) False
Answer: B
Explanation:
Diff: 2
Topic: Depreciation
EA: Yes
13) Once the more-than-50% business-use test is met for listed property, it does not matter if the
business use falls below 50% in subsequent years.
A) True
B) False
Answer: B
Explanation:
Diff: 2
Topic: Depreciation
EA: Yes
14) The luxury auto limits on depreciation must be reduced if business use is less than 100%.
A) True
B) False
Answer: A
Explanation:
Diff: 2
Topic: Depreciation
EA: Yes
15) Transportation costs are deductible when a taxpayer goes to a business meeting away from his or
her regular workplace.
A) True
B) False
Answer: A
Explanation:
Diff: 1
Topic: Transportation/Entertainment Business Expenses
Learning Objective: 06-04 Describe travel and entertainment expenses and discuss their deductibility.
EA: Yes
16) The standard mileage rate includes parking fees, tolls, and property taxes on the vehicle.
A) True
B) False
Answer: B
Explanation:
Diff: 2
EA: Yes
17) The standard mileage rate encompasses depreciation or lease payments, maintenance and repairs,
gasoline, oil, insurance, and vehicle registration fees.
A) True
B) False
Answer: A
Explanation:
Diff: 2
EA: Yes
18) The significance of meeting the "travel away from home" standard is that it allows the deduction of
meals, lodging, and other incidental expenses such as dry cleaning.
A) True
B) False
Answer: A
Explanation:
Diff: 1
EA: Yes
19) Meals and entertainment expenses are limited to 50%.

A) True
B) False
Answer: A
Explanation:
Diff: 1
EA: Yes
20) A business bad debt is treated as a short-term capital loss and can be deducted only when it
becomes completely worthless.
A) True
B) False
Answer: B
Explanation:
Diff: 3
Topic: Bad Debt/Home Office
Learning Objective: 06-05 Apply the rules for deducting the business portion of a residence and business bad debts.
EA: Yes
21) For a cash-basis taxpayer, any account receivable that is not collected can be written off as a bad
debt.
A) True
B) False
Answer: B
Explanation:
Diff: 3
EA: Yes
22) When business property is lost in a fire, storm, shipwreck, theft, or other casualty, the taxpayer
normally receives a capital loss deduction.
A) True
B) False
Answer: B
Explanation:
Diff: 3
EA: Yes
23) If an activity is characterized as a hobby, expenses are deductible only to the extent of income from
the hobby, subject to certain ordering rules.
A) True
B) False
Answer: A
Explanation:
Diff: 2
Topic: Hobby Losses/Educational Expenses
Learning Objective: 06-06 Explain the hobby loss rules and the limits on education expense deductibility.
EA: Yes
24) Education expenses are deductible if the education maintains or improves existing skills or if the
education helps the taxpayer qualify for a new trade or business.
A) True
B) False
Answer: B
Explanation:
Diff: 3
EA: Yes
25) Sole proprietors must pay self-employment tax on 100% of their self-employment income.
A) True
B) False
Answer: B
Explanation:
Diff: 3
Topic: Self-Employment Taxes
Learning Objective: 06-07 Describe the calculation of self-employment taxes.
EA: Yes
26) Which expenses incurred in a trade or business are deductible?

A) Fines and penalties.
B) Bribes.
C) Political lobbying expenses.
D) Supplies expenses.
Answer: D
Explanation: A)
B)
C)
D)
Diff: 1
EA: Yes
27) If inventory is a material amount, what method of accounting is acceptable for a sole proprietorship
to use?
A) Accrual method.
B) Both Accrual method and Hybrid method.
C) The cash method.
D) Hybrid method.
Answer: B
Explanation: A)
B)
C)
D)
Diff: 1
Topic: Income for a Schedule C Trade or Business
Learning Objective: 06-01 Describe how income and expenses for a self-employed individual are recognized and reported.
EA: No
28) Patricia, a professional gambler, had the following income and expenses in her business:
Gambling winnings $ 275,000

Expenses
Fees paid for illegal information 18,000
Travel costs $ 8,000
Office expenses 5,000
Supplies 3,000
Business long-distance phone charges 1,000
Tickets for illegal parking 900
How much net income must Patricia report from this business?
A) $258,000.
B) $239,100.
C) $240,000.
D) $0.
Answer: A
Explanation: A) $275,000 - $8,000 - $5,000 - $3,000 - $1,000 = $258,000. Illegal items are not
deductible.
B) $275,000 - $8,000 - $5,000 - $3,000 - $1,000 = $258,000. Illegal items are not
deductible.
C) $275,000 - $8,000 - $5,000 - $3,000 - $1,000 = $258,000. Illegal items are not
deductible.
D) $275,000 - $8,000 - $5,000 - $3,000 - $1,000 = $258,000. Illegal items are not
deductible.
Diff: 2
EA: Yes
29) Which of the following is not a "trade or business" expense?
A) Mortgage interest on a warehouse.
B) Mortgage interest on a personal residence.
C) Cost of goods sold.
D) Depreciation on business equipment.
Answer: B
Explanation: A)
B)
C)
D)
Diff: 1
EA: Yes
30) Trade or business expenses are treated as:

A) Deductible as itemized deductions subject to the 2% AGI floor.
B) Deductible as a for AGI deduction.
C) An itemized deduction if not reimbursed.
D) Deductible only if the activity had substantial income.
Answer: B
Explanation: A)
B)
C)
D)
Diff: 1
EA: Yes
31) On May 26, 2012, Jamal purchased machinery for $30,000 to be used in his business. He did not
elect to expense the equipment under §179 or the bonus. On October 10, 2016, he sells the
machinery to a scrap metal dealer. What is his cost recovery deduction for 2016 rounded to the
nearest dollar?
A) $1,340.
B) $2,679.
C) $4,287.
D) $0.
Answer: A
Explanation: A) $30,000 × 8.93% × 1/2 = $1,339.50.
B) $30,000 × 8.93% × 1/2 = $1,339.50.
C) $30,000 × 8.93% × 1/2 = $1,339.50.
D) $30,000 × 8.93% × 1/2 = $1,339.50.
Diff: 2
Topic: Depreciation
EA: Yes
32) On July 15, 2014, Travis purchased some office furniture for $20,000 to be used in his business.
He did not elect to expense the equipment under §179 or bonus. On December 15, 2016, he sells
the equipment. What is his cost recovery deduction for 2016?
A) $1,749.
B) $2,858.
C) $3,498.
D) $0.
Answer: A
Explanation: A) $20,000 × 17.49% × 1/2 = $1,749.
B) $20,000 × 17.49% × 1/2 = $1,749.
C) $20,000 × 17.49% × 1/2 = $1,749.
D) $20,000 × 17.49% × 1/2 = $1,749.
Diff: 2
Topic: Depreciation
EA: Yes
10
33) Della purchased a warehouse on February 25, 2016, for $350,000. $45,000 of the price was for the
land. What is her cost recovery deduction for 2016 rounded to the nearest dollar?
A) $7,865.
B) $11,137.
C) $9,705.
D) $6,853.
Answer: D
Explanation: A) $350,000 - $45,000 = $305,000 Basis × 2.247% = $6,853.35.
B) $350,000 - $45,000 = $305,000 Basis × 2.247% = $6,853.35.
C) $350,000 - $45,000 = $305,000 Basis × 2.247% = $6,853.35.
D) $350,000 - $45,000 = $305,000 Basis × 2.247% = $6,853.35.
Diff: 2
Topic: Depreciation
EA: Yes
34) Paola purchased an office building on January 5, 2014, for $450,000. $30,000 of the price was for
the land. On September 25, 2016, he sold the office building. What is the cost recovery deduction
for 2016 rounded to the nearest dollar?
A) $0.
B) $10,769.
C) $7,628.
D) $7,321.
Answer: C
Explanation: A) $450,000 - $30,000 = $420,000 Basis × 2.564% × 8½/12 = $7,627.90.
B) $450,000 - $30,000 = $420,000 Basis × 2.564% × 8½/12 = $7,627.90.
C) $450,000 - $30,000 = $420,000 Basis × 2.564% × 8½/12 = $7,627.90.
D) $450,000 - $30,000 = $420,000 Basis × 2.564% × 8½/12 = $7,627.90.
Diff: 2
Topic: Depreciation
EA: Yes
11
35) On November 30, 2016, Constance purchased an apartment building for $750,000. Determine her
cost recovery deduction for 2016 rounded to the nearest dollar.
A) $26,138.
B) $3,413.
C) $2,400.
D) $0.
Answer: B
Explanation: A) $750,000 × 0.455% = $3,412.50
B) $750,000 × 0.455% = $3,412.50
C) $750,000 × 0.455% = $3,412.50
D) $750,000 × 0.455% = $3,412.50
Diff: 2
Topic: Depreciation
EA: Yes
36) In June 2016, Kelly purchased new equipment for $26,000 to be used in her business. Assuming
Kelly has net income from her business of $75,000 prior to the deduction, what is the maximum
amount of cost recovery Kelly can deduct rounded to the nearest dollar, assuming she does not
elect §179 expense or bonus depreciation?
A) $3,715.
B) $13,000.
C) $26,000.
D) $14,858.
Answer: A
Explanation: A) ($26,000 × 14.29%) = $3,715.40
B) ($26,000 × 14.29%) = $3,715.40
C) ($26,000 × 14.29%) = $3,715.40
D) ($26,000 × 14.29%) = $3,715.40
Diff: 2
Topic: Depreciation
EA: Yes
12
37) In July 2016, Cassie purchases equipment for $55,000 to be used in her business. Assuming Cassie
has a small net loss from her business prior to the deduction, what is the maximum amount of cost
recovery Cassie can deduct?
A) $7,860.
B) $55,000.
C) $27,500.
D) $31,430.
Answer: D
Explanation: A) ($55,000 × 50%) = $27,500 plus regular depreciation on the remaining basis of
$27,500 × 14.29% = 3,929.75 (total $31,429.75).
B) ($55,000 × 50%) = $27,500 plus regular depreciation on the remaining basis of
$27,500 × 14.29% = 3,929.75 (total $31,429.75).
C) ($55,000 × 50%) = $27,500 plus regular depreciation on the remaining basis of
$27,500 × 14.29% = 3,929.75 (total $31,429.75).
D) ($55,000 × 50%) = $27,500 plus regular depreciation on the remaining basis of
$27,500 × 14.29% = 3,929.75 (total $31,429.75).
Diff: 3
Topic: Depreciation
EA: Yes
38) §179 expense is available for all of the following business assets except:
A) Phone system.
B) Office furniture.
C) Apartment complex.
D) Bulldozer.
Answer: C
Explanation: A) Section 179 is not available for real property.
B) Section 179 is not available for real property.
C) Section 179 is not available for real property.
D) Section 179 is not available for real property.
Diff: 1
Topic: Depreciation
EA: Yes
13
39) If property is converted from personal-use property to business property, the depreciable cost basis
is which of the following?
A) Cost of the asset.
B) The cost of a new similar asset at the date of conversion.
C) FMV of the asset.
D) The lower of the cost or FMV at the date of conversion.
Answer: D
Explanation: A)
B)
C)
D)
Diff: 1
Topic: Depreciation
EA: Yes
40) The adjusted basis of an asset is:

A) The cost of the asset.
B) The cost basis less any accumulated depreciation.
C) The trade-in value of the asset.
D) The fair market value of the asset.
Answer: B
Explanation: A)
B)
C)
D)
Diff: 1
Topic: Depreciation
EA: Yes
14
41) Which of the following properties is not eligible for the §179 expense election when purchased?
A) Rental property.
B) A business automobile.
C) A business computer.
D) Manufacturing equipment.
Answer: A
Explanation: A)
B)
C)
D)
Diff: 1
Topic: Depreciation
EA: Yes
42) Under MACRS, 5-year property includes:

A) Fruit-bearing trees.
B) Warehouse.
C) Apartment complex.
D) Automobiles and light trucks used in a trade or business.
Answer: D
Explanation: A)
B)
C)
D)
Diff: 1
Topic: Depreciation
EA: Yes
43) The standard mileage rate encompasses all of the following auto costs except for:
A) Auto property taxes.
B) Depreciation or lease payments.
C) Gasoline, oil, and insurance.
D) Maintenance and repairs.
Answer: A
Explanation: A)
B)
C)
D)
Diff: 2
EA: Yes
15
44) Which of the following is incorrect regarding luxury automobile limitations?
A) The luxury limitations do not apply to the Section 179 expense deduction.
B) The limits are reduced further if the business use is less than 100%.
C) Light trucks or vans that are less than 6,000 pounds are subject to the limits.
D) Passenger autos with a gross weight of less than 6,000 pounds are subject to the limits.
Answer: A
Explanation: A) Section 179 expense is limited as well.
B) Section 179 expense is limited as well.
C) Section 179 expense is limited as well.
D) Section 179 expense is limited as well.
Diff: 2
Topic: Depreciation
EA: Yes
45) Marcus has two jobs. He works as a night auditor at the Midnight Motel. When his shift at the motel
is over, he works as a short order cook at the Break-An-Egg Restaurant. On a typical day, he drives
the following distances:
Home to Midnight Motel 4 miles

Midnight Motel to restaurant 12 miles
Restaurant to home 8 miles
How many miles per day would qualify as transportation expenses for tax purposes?
A) 12.
B) 0.
C) 4.
D) 24.
Answer: A
Explanation: A) Commuting does not count as business mileage.
B) Commuting does not count as business mileage.
C) Commuting does not count as business mileage.
D) Commuting does not count as business mileage.
Diff: 2
EA: Yes
16
46) Marion drives 20 miles a day from his first job to his second job. He worked 125 days during 2016
on both jobs. What is Marion's mileage deduction rounded to the nearest dollar assuming he uses
the standard mileage rate and mileage is incurred ratably throughout the year?
A) $1,400.
B) $1,350.
C) $1,438.
D) $70.
Answer: B
Explanation: A) 125 days × 20 miles/day = 2,500 miles × .54 = 1,350
B) 125 days × 20 miles/day = 2,500 miles × .54 = 1,350
C) 125 days × 20 miles/day = 2,500 miles × .54 = 1,350
D) 125 days × 20 miles/day = 2,500 miles × .54 = 1,350
Diff: 2
EA: Yes
47) Which of the following statements is false with respect to the standard mileage rate?
A) The standard mileage rate encompasses depreciation.
B) Section 179 cannot be used on a standard mileage rate auto.
C) The taxpayer can have an unlimited number of autos and use the mileage rate.
D) The standard mileage rate cannot be used on a taxi.
Answer: C
Explanation: A) The standard mileage rate cannot be used if five or more cars are used
simultaneously in the business operations.
B) The standard mileage rate cannot be used if five or more cars are used
C) The standard mileage rate cannot be used if five or more cars are used
D) The standard mileage rate cannot be used if five or more cars are used
Diff: 2
EA: Yes
17
48) Cole purchased a car for business and personal use. In 2016, he used the car 60% for business
(13,000 total use miles) and used the standard mileage rate to calculate his vehicle expenses. He
also paid $1,500 in interest and $360 in county property tax on the car. What is the total business
deduction related to business use of the car rounded to the nearest dollar?
A) $1,860.
B) $6,072.
C) $5,328.
D) $4,212.
Answer: C
Explanation: A) 13,000 miles × 60% = 7,800 business miles; (7,800 miles × .54 cents/mile) +
((1,500 + 360) × .60) = 5,328.
B) 13,000 miles × 60% = 7,800 business miles; (7,800 miles × .54 cents/mile) +
((1,500 + 360) × .60) = 5,328.
C) 13,000 miles × 60% = 7,800 business miles; (7,800 miles × .54 cents/mile) +
((1,500 + 360) × .60) = 5,328.
D) 13,000 miles × 60% = 7,800 business miles; (7,800 miles × .54 cents/mile) +
((1,500 + 360) × .60) = 5,328.
Diff: 2
EA: Yes
18
49) Byron took a business trip from Philadelphia to Rome. He was away 16 days of which he spent 9
days on business (including two travel days) and 7 days vacationing. His expenses are as follows:
Airfare $ 1,100
Lodging (16 days × $140) 2,240
Meals (16 days × $115) 1,840
Byron's total travel (including meals and lodging) expense deduction rounded to the nearest dollar is:
A) $2,878.
B) $2,396.
C) $3,395.
D) $5,180.
Answer: B
Explanation: A) ($1,100 × 9/16 foreign travel) + (9 days × $140/day) + (9 days × $115/day × 50%)
= 2,396.25.
B) ($1,100 × 9/16 foreign travel) + (9 days × $140/day) + (9 days × $115/day × 50%)
= 2,396.25.
C) ($1,100 × 9/16 foreign travel) + (9 days × $140/day) + (9 days × $115/day × 50%)
= 2,396.25.
D) ($1,100 × 9/16 foreign travel) + (9 days × $140/day) + (9 days × $115/day × 50%)
= 2,396.25.
Diff: 2
EA: Yes
50) Chris runs a business out of her home. She uses 500 square feet of her home exclusively for the
business. Her home is 2500 square feet in total. Chris had $36,000 of business revenue and $32,000
of business expenses from her home business. The following expenses relate to her home:
Mortgage interest $ 12,400

Real estate taxes 1,800
Repairs 3,200
Utilities 2,600
Insurance 650
Depreciation (on business use portion of home) 1,750
19
What is Chris' net income from her business and the amount of expenses carried over to the
following year, if any?
Net Income Carryover

a. $ 0 $ 1,880
b. $ 0 $ 0
c. $ 4,000 $ 4,130
d. $ 36,000 $ 0
A) Option A
B) Option B
C) Option C
D) Option D
Answer: A
Explanation: A) 500/2,500 = 20% Business Use; $4,000 net - $2,480 - $360 - $640 - $520 (limited
to $390) = $0; Excess insurance of $130 + $1,750 of depreciation = $1,880
carryover.
B) 500/2,500 = 20% Business Use; $4,000 net - $2,480 - $360 - $640 - $520 (limited
carryover.
C) 500/2,500 = 20% Business Use; $4,000 net - $2,480 - $360 - $640 - $520 (limited
carryover.
D) 500/2,500 = 20% Business Use; $4,000 net - $2,480 - $360 - $640 - $520 (limited
carryover.
Diff: 3
EA: Yes
20
51) In order for an employee to deduct home office expenses, which of the following must occur:
A) The business use of the home must be specifically for trade or business purposes.
B) The taxpayer's most important activities must occur in the home.
C) There must be no other fixed business location.
D) The home office must be for the convenience of his or her employer.
Answer: D
Explanation: A)
B)
C)
D)
Diff: 3
EA: Yes
52) If an activity is considered a hobby, which of the following is true?

A) None of the expenses connected with the activity are deductible.
B) The deductible expenses connected with the activity are limited to the income from the
activity.
C) The IRS has the burden to prove an activity is a hobby.
D) None of the income connected with the activity is included in income.
Answer: B
Explanation: A)
B)
C)
D)
Diff: 3
EA: Yes
21
53) Which of the following individuals can deduct his or her education expenses?
A) An accountant who attends law school to get a law degree.
B) An accounting bookkeeper that takes a CPA review course to pass the CPA exam and
become a CPA.
C) A medical doctor who attends a review course to obtain a financial consultant license.
D) A lawyer who goes to law school to get a specialized tax degree.
Answer: D
Explanation: A)
B)
C)
D)
Diff: 3
EA: Yes
54) Deductible education expenses include all of the following except:

A) Tuition.
B) Books.
C) Room and board.
D) Travel.
Answer: C
Explanation: A)
B)
C)
D)
Diff: 1
EA: Yes
22
55) Shante is employed by a local pharmaceutical company where she earned $48,000 in 2016. During
the year, she also had self-employment income of $18,000. Her self-employment tax rounded to the
nearest dollar is:
A) $2,543.
B) $2,754.
C) $0.
D) $2,061.
Answer: A
Explanation: A) $18,000 × 92.35% = 16,623 × 15.3% = $2,543.32
B) $18,000 × 92.35% = 16,623 × 15.3% = $2,543.32
C) $18,000 × 92.35% = 16,623 × 15.3% = $2,543.32
D) $18,000 × 92.35% = 16,623 × 15.3% = $2,543.32
Diff: 2
EA: Yes
56) What form is filed to report the self-employment tax?

A) Schedule SE.
B) Form 1040.
C) Schedule C.
D) Schedule D.
Answer: A
Explanation: A)
B)
C)
D)
Diff: 1
EA: Yes
23
57) Katherine earned $100,000 from her job at a local business in 2016. She also had $42,000 in
self-employed consulting income. What is the amount of her self-employment tax rounded to the
nearest dollar?
A) $6,426.
B) $0.
C) $3,419.
D) $6,333.
Answer: C
Explanation: A) $42,000 × 92.35% = $38,787; ($118,500 to limit for social security × 12.4%) +
($38,787 × 2.9%) = $3,418.82.
B) $42,000 × 92.35% = $38,787; ($118,500 to limit for social security × 12.4%) +
($38,787 × 2.9%) = $3,418.82.
C) $42,000 × 92.35% = $38,787; ($118,500 to limit for social security × 12.4%) +
($38,787 × 2.9%) = $3,418.82.
D) $42,000 × 92.35% = $38,787; ($118,500 to limit for social security × 12.4%) +
($38,787 × 2.9%) = $3,418.82.
Diff: 3
EA: Yes
58) For 2016, what is the social security tax rate and income limit for a self-employed individual?
Rate Income Limit

a. 2.9 % Unlimited income.
b. 12.4 % Unlimited income.
c. 15.3 % $118,500.
d. 12.4 % $118,500.
A) Option A
B) Option B
C) Option C
D) Option D
Answer: D
Explanation: A) The social security limit increased to $118,500 for 2016 and the rate is 12.4%.
B) The social security limit increased to $118,500 for 2016 and the rate is 12.4%.
C) The social security limit increased to $118,500 for 2016 and the rate is 12.4%.
D) The social security limit increased to $118,500 for 2016 and the rate is 12.4%.
Diff: 3
EA: Yes
24
59) During 2016, Regina, a sole proprietor, had the following income and expenses from her home
jewelry business. Regina is also employed as an office assistant at a local business:
W-2 wages from employer $ 28,000

Proceeds from jewelry sales 15,000
Supplies for jewelry 5,000
Travel for jewelry 1,400
Charitable contributions to church 3,000
a. What income or loss should be reported on Schedule C?

b. What is Regina's AGI?
Answer: a.
Jewelry Sales $ 15,000

Supplies (5,000 )
Travel (1,400 )
Schedule C income $ 8,600
b. $28,000 + $8,600 - $608 (1/2 of SE tax) = $35,992 - The charitable contribution does not
go into the AGI calculation. It is a from AGI deduction.
SE tax deduction = ((8,600 × 92.35% × 15.3%) *.50)
Explanation:
Diff: 3
EA: Yes
60) Bart has the following income and expenses for his Schedule C:
1099-MISCs received:
Jack's Builders $ 42,000
Smith's Fine Homes 35,750
Murphy's Builders 24,730
Total Revenue $ 102,480
Wages (46,000 )
Payroll taxes (3,519 )
Payroll tax penalties (300 )
License fee (200 )
Supplies (5,300 )
25
Cell phone (588 )
Meals (3,000 )
Internet service (780 )
What is Bart's self-employment income?

Answer:
Total Income $ 102,480

Wages (46,000 )
Payroll Taxes (3,519 )
License Fee (200 )
Supplies (5,300 )
Cell Phone (588 )
Meals (50%) (1,500 )
Internet Service (780 )
Self-employment income $ 44,593
Explanation:
Diff: 2
EA: Yes
61) List and define the criteria for an expenditure to be deductible on Schedule C.
Answer: An expense should be ordinary, necessary, and reasonable. For an expense to be ordinary, it
must be customary or usual in the taxpayer's particular business. The "necessary" criterion
refers to an expense that is appropriate and helpful rather than one that is essential to the
taxpayer's business. The expense must also be reasonable in amount and reasonable in
relation to its purpose.
Explanation:
Diff: 2
EA: Yes
26
62) Describe each of the depreciation conventions and when each is applicable.
Answer: (1) Half-Year Convention - The half-year convention treats all property placed in service
during any taxable year as placed in service at the mid-point of such taxable year. The
half-year convention is used for all personal property unless the taxpayer is required to use the
mid-quarter convention.
(2) Mid-Quarter Convention - The mid-quarter convention treats all property placed in
service during any quarter of a taxable year as placed in service on the mid-point of such
quarter. Taxpayers must use the mid-quarter convention when more than 40% of the
personal property is placed in service during the last three months of the tax year, or if the
tax year consists of three months or less.
(3) Mid-Month Convention - The mid-month convention treats all property placed in
service during any month as placed in service on the mid-point of such month. The
mid-month convention applies only to real property (27.5-year, 31.5-year, and 39-year
property).
Explanation:
Diff: 1
Topic: Depreciation
EA: Yes
63) Kiri acquires equipment (7-year property) on August 14, 2016, for $80,000. She does not elect to
expense the asset under Section 179 or the 50% bonus. She sells the asset on January 15, 2020.
a. What is Kiri's cost recovery deduction related to the equipment in 2016 and 2020?
b. What is Kiri's cost recovery deduction related to the equipment in 2016 and 2020 if the 50%
bonus is elected?
Answer: a. 2016 - $80,000 × .1429 = $11,432 7-yr MACRS first year.
2020 - $80,000 × .0893 × 1/2 = $3,572 7-yr MACRS fifth year.
b. 2016 - $80,000 × 50% = $40,000 first year + ($40,000 × 14.29%) = $45,716.

2020 - $40,000 × .0893 × 1/2 = $1,786 fifth year.
Explanation: The 50% bonus was added with legislation in 2015.
Diff: 2
Topic: Depreciation
EA: Yes
27
64) Oscar bought an $800,000 apartment building on July 28, 2016. On August 15, 2016, he purchased
$300,000 of 5-year class assets. Oscar elects to take the maximum expense on every asset. What is
the maximum cost recovery deduction Oscar can take in 2016?
Answer:
Section 179 $ 300,000

27 ½ year Real Property ($800,000 × .01667) 13,336
Maximum Cost Recovery $ 313,336
This answer assumes that Oscar's trade or business is rental apartments and he is not limited
on the Section 179 by the income limitation.
Explanation: If the apartment building is not considered a trade or business, then the Section 179
would not be allowed.
Diff: 2
Topic: Depreciation
EA: Yes
65) Lateefah purchased a new office building on April 1, 2016, for $3,000,000. On August 20, 2020,
the building was sold. What is the cost recovery deduction for the year of purchase and the year of
sale?
Answer: Year of purchase: $3,000,000 × .01819 = $54,570.
Year of sale: $3,000,000 × .02564 × 7.5/12 = $48,075.

Explanation:
Diff: 1
Topic: Depreciation
EA: Yes
28
66) Xavier bought furniture and fixtures (7-year property) on September 15, 2016 for $505,000. He
elects to expense as much as possible under Section 179 but does not elect the 50% bonus. Xavier's
earned income for the year is $500,000. What is the maximum deduction Xavier can take in 2016
for the equipment? (Round answers to the nearest dollar)
Answer:
179 Deduction $ 500,000

Cost recovery ($505,000 - $500,000 ) ×.1429 715
Maximum deduction $ 500,715
Explanation: Section 179 is limited to $500,000 in 2016.

Diff: 3
Topic: Depreciation
EA: Yes
29
67) Tonia acquires the following 5-year class property in 2016:
Asse Date of Acquisition Cost

t
X January 15 $ 70,000
Y May 28 45,000
Z November 23 90,000
Total $ 205,000
Tonia does not elect §179 or bonus depreciation. Tonia has $300,000 of taxable income from her
business. Determine her total cost recovery deduction for the year.
Answer: Since more than 40% ($90,000/$205,000 = 44%) of the assets were purchased in the 4th
quarter, Tonia must use the mid-quarter convention.
Asset X:
$70,000 × .35 24,500
Asset Y:
$45,000 × .25 11,250
Asset Z:
$90,000 × .05 4,500
Total cost recovery deduction $ 40,250
Explanation:
Diff: 2
Topic: Depreciation
EA: Yes
30
68) On April 23, 2016, Bailey purchased an automobile for $25,000. The car is used 80% for business
and 20% for personal use. What is the cost recovery deduction for 2016 and 2017 assuming the
50% bonus was taken? (Round answers to the nearest dollar)
Answer: 2016 $25,000 × 80% × 50% = $10,000 but limited to $8,928 ($11,160 × .80 luxury limit).
2017 ($25,000 × 80%) - $8,928 = $11,072 × 32% 2nd year MACRS = $3,543 - there is no
further limitation because it is below the max of $4,080 ($5,100 × .80 luxury limit).
Explanation:
Diff: 2
Topic: Depreciation
EA: Yes
69) Nancy purchased a computer on July 15, 2016, for $5,000. The computer was used 70% of the time
in her business and the rest of the time her children used the computer to surf the Web. In 2017, the
computer was used 40% for business and 60% for personal use. What are the cost recovery
deductions for 2016 and 2017? (No §179 or bonus). Is there any recapture of depreciation in 2017?
Answer: Cost recovery for 2016 is $700 [$5,000 × .20 × .70].
Cost recovery for 2017 is $400 [$5,000 × 1/5 SL × .40]
Cost recovery recapture in 2017 is $350 computed as follows:
Depreciation taken in 2016 ($5,000 × .20 × .70) $ 700

Straight-line ($5,000 × .20 x ½ year convention × .70) (350 )
Recapture $ 350
Explanation:
Diff: 3
Topic: Depreciation
EA: Yes
31
70) Ted purchased a vehicle for business and personal use. In 2016, Ted used the vehicle 70% for
business (10,000 business miles) and used the standard mileage rate to calculate his vehicle
expenses. Ted also paid $1,200 in interest and $380 in county property tax on the car. What is the
total business deduction related to business use of the car in 2016?
Answer: The total business deduction related to business use of the car is calculated as follows:
Standard mileage rate (10,000 × 54 cents /mile) 5,400

Interest ($1,200 × 70%) 840
Property taxes ($380 × 70%) $ 266
Total auto deduction on Schedule C $ 6,506
The 30% personal interest is disallowed and the $114 of personal property taxes is deducted
on Schedule A if the personal property taxes are based on the vehicles value.
Explanation:
Diff: 2
EA: Yes
32
71) Terry, a CPA, flew from Dallas to New York to attend a conference. The conference lasted four
days. Then she took three days of vacation to go sightseeing. Terry's expenses for the trip are as
follows:
Airfare $ 525
Lodging (7 days × $155) 1,085
Meals (7 days × $120) 840
Taxi from airport to hotel and back 70
Calculate Terry's travel expense deduction.

Answer: Terry's travel expense deduction is calculated as follows:
Airfare $ 525
Lodging (4 days × $155) 620
Meals (4 days × $120 × 50%) 240
Taxi from airport to hotel and back 70
Total travel expense deduction $ 1,455
Explanation:
Diff: 2
EA: Yes
33
72) Bob took a business trip from Chicago to London. He was away 12 days of which he spent six days
on business (including two travel days) and six days vacationing. His expenses are as follows:
Airfare $ 1,400
Lodging (12 days × $125) 1,500
Meals (12 days × $100) 1,200
Calculate Bob's travel expense deduction.

Answer: Bob's airfare must be allocated 50% to business use and 50% to personal use because it is
foreign business travel. Bob's travel expense deduction is calculated as follows:
Air fare ($1,400 × 50%) $ 700

Lodging (6 days × $125) 750
Meals (6 days × $100 × 50%) 300
Total travel expense deduction $ 1,750
Explanation:
Diff: 2
EA: Yes
73) Sandy is the owner of ABC Loan Company. On June 2, 2015, ABC loaned Randy $80,000. In
2016, Randy filed for bankruptcy. At that time, the bankruptcy court indicated that Randy's
creditors could expect to receive 30 cents on the dollar. In August 2017 final settlement was made,
and ABC received $20,000. ABC's policy is to deduct losses as soon as permitted. How much loss
can ABC deduct and in which year?
Answer: This debt is a business bad debt so ABC can claim a bad debt (ordinary) deduction in the
following years:
2015 - zero.
2016 - $56,000 [$80,000 (loan) - $24,000 (expected settlement)].
2017 - $4,000 [$24,000 (balance) - $20,000 (proceeds)].
Explanation:
Diff: 2
EA: Yes
34
74) Alan owns a ranch in Kansas. During the year, a tornado damaged one of his barns and destroyed
some equipment. The following information provides the details of the losses Alan suffered from the
tornado.
FMV Insurance
Adjusted Basis FMV Before
After Proceeds
Barn $75,000 $90,000 $ 40,000 $30,000
Bailer $25,000 $15,000 $ 0 $15,000
Truck $15,000 $18,000 $ 0 $10,000
How much loss from the tornado can he deduct on his tax return for the current year?
Answer: The loss is a business casualty loss. The casualty loss deduction is calculated as follows:
Barn ($30,000 - $50,000) = $ (20,000 )

Bailer ($15,000 - $15,000) = 0
Truck ($10,000 - $15,000) = (5,000 )
Total casualty loss $ (25,000 )
Explanation:
Diff: 2
EA: Yes
35
75) Alice is a high school teacher who enjoys knitting. She knits scarves and sweaters and sells them in
a local boutique. Alice spends 10 to 15 hours a week knitting the scarves and sweaters. Alice had
sales of $6,000 and expenses of $10,000 related to knitting and selling the goods. Alice's $10,000
of expenses consisted of $800 of interest expense and $1,600 in property taxes for her building and
tools, $3,000 in supplies, and $4,600 in depreciation charges. How would Alice's income and
expenses be reported on her tax return if her knitting activity is characterized as a hobby?
Answer: Alice's income and expenses would be reported as follows:
Income (other income, Form 1040) $ 6,000

Interest expense (Schedule A) (800
)
Property Taxes (Schedule A) (1,600 )
Supplies (Schedule A Misc. Deductions) (3,000 )
Depreciation (Schedule A Misc. Deductions) (600 )
Income from hobby $ 0
The remaining depreciation is treated as personal and cannot be deducted or carried forward.
Explanation:
Diff: 2
EA: Yes
36
Fundamentals of Taxation 2017 Edition 10th Edition Cruz Test Bank
76) Beau earned $25,000 of net earnings from a tax preparation business that he runs during tax
season. He also earned a salary of $100,000 from his full-time job. How much self-employment tax
must he pay for 2016? (Round calculations to the nearest dollar)
Answer: Beau's self-employment tax for 2016 is calculated as follows:
Soc sec. ceiling amount $ 118,500

Less: soc. sec wages (100,000 )
Net ceiling $ 18,500
Net self-employment income ($25,000 × .9235) $ 23,088
Lesser of net ceiling or net self-employment income $ 18,500
Social security portion of the tax ($18,500 × .124) $ 2,294 Self-
employment earnings subject to the Medicare portion
of the self-employment tax: $23,088 × .029 670
Total self-employment tax $ 2,964
Explanation:
Diff: 3
EA: Yes
37
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3) For an expense to be necessary, it must be essential to the taxpayer's business.

11) The §179 expense deduction is limited to earned income.

12) "Listed property" includes only passenger automobiles.

19) Meals and entertainment expenses are limited to 50%.

26) Which expenses incurred in a trade or business are deductible?

Gambling winnings $ 275,000

30) Trade or business expenses are treated as:

40) The adjusted basis of an asset is:

42) Under MACRS, 5-year property includes:

Home to Midnight Motel 4 miles

Mortgage interest $ 12,400

Net Income Carryover

52) If an activity is considered a hobby, which of the following is true?

54) Deductible education expenses include all of the following except:

56) What form is filed to report the self-employment tax?

Rate Income Limit

W-2 wages from employer $ 28,000

a. What income or loss should be reported on Schedule C?

Jewelry Sales $ 15,000

What is Bart's self-employment income?

Total Income $ 102,480

b. 2016 - $80,000 × 50% = $40,000 first year + ($40,000 × 14.29%) = $45,716.

Section 179 $ 300,000

Year of sale: $3,000,000 × .02564 × 7.5/12 = $48,075.

179 Deduction $ 500,000

Explanation: Section 179 is limited to $500,000 in 2016.

Asse Date of Acquisition Cost

Cost recovery recapture in 2017 is $350 computed as follows:

Depreciation taken in 2016 ($5,000 × .20 × .70) $ 700

Standard mileage rate (10,000 × 54 cents /mile) 5,400

Calculate Terry's travel expense deduction.

Calculate Bob's travel expense deduction.

Air fare ($1,400 × 50%) $ 700

Barn ($30,000 - $50,000) = $ (20,000 )

Income (other income, Form 1040) $ 6,000

Soc sec. ceiling amount $ 118,500

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