Fundamentals of Taxation 2018 Edition 11th Edition Cruz Test Bank

Fundamentals of Taxation 2018 Edition
11th Edition Cruz Test Bank

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Fundamentals of Taxation 2018 Edition, 11e (Cruz)
Chapter 6 Self-Employed Business Income (Line 12 of Form 1040 and Schedule C)
1) A sole proprietor's trade or business income or loss is reported on Schedule C, Form 1040.
Answer: TRUE
Difficulty: 1 Hard
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
Accessibility: Keyboard Navigation
2) For an expense to be ordinary, it must be customary or usual in the taxpayer's particular

business.
Answer: TRUE
Difficulty: 1 Hard
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.
Answer: FALSE
Explanation: Necessary refers to an expense that is appropriate and helpful to the taxpayer's
business.
Difficulty: 1 Hard
EA: Yes
4) Fines paid that are ordinary and necessary in a trade or business generally are deductible.
Answer: FALSE
Difficulty: 1 Hard
EA: Yes
1
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5) Depreciation is allowed for every tangible asset (except land) used either in a trade or business
or for the production of income.
Answer: TRUE
Difficulty: 1 Hard
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.
Answer: FALSE
Explanation: The basis is generally the fair market value at the date of death.
Difficulty: 2 Medium
Topic: Depreciation
EA: Yes
7) Under MACRS, the half-year convention is used for all real property.
Answer: FALSE
Explanation: The half-year convention applies to personal property.
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.
Answer: FALSE
Explanation: The above refers to the mid-quarter convention.
Topic: Depreciation
EA: No
2
9) The cost of all personal property is recovered using a 200% declining-balance rate under
MACRS.
Answer: TRUE
Difficulty: 1 Hard
Topic: Depreciation
EA: Yes
10) Under MACRS, the straight-line method is required for all depreciable real property.
Answer: TRUE
Difficulty: 1 Hard
Topic: Depreciation
EA: Yes
11) The §179 expense deduction is limited to earned income.
Answer: TRUE
Explanation: The §179 deduction cannot create a net operating loss. However, the total amount
of wages, salaries, tips, or other income earned as an employee is included as income derived
from a trade or business.
Topic: Depreciation
EA: Yes
12) "Listed property" includes only passenger automobiles.
Answer: FALSE
Explanation: Assets with some personal use component.
Topic: Depreciation
EA: Yes
3
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.
Answer: FALSE
Explanation: Excess MACRS depreciation must be recaptured in the year the business use test
is not met.
Topic: Depreciation
EA: Yes
14) The luxury auto limits on depreciation must be reduced if business use is less than 100%.
Answer: TRUE
Topic: Depreciation
EA: Yes
15) Transportation costs are deductible when a taxpayer goes to a business meeting away from
his or her regular workplace.
Answer: TRUE
Difficulty: 1 Hard
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.
Answer: FALSE
deductibility.
EA: Yes
4
17) The standard mileage rate encompasses depreciation or lease payments, maintenance and
repairs, gasoline, oil, insurance, and vehicle registration fees.
Answer: TRUE
deductibility.
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.
Answer: TRUE
Difficulty: 1 Hard
deductibility.
EA: Yes
19) Meals and entertainment expenses are limited to 50%.
Answer: TRUE
Difficulty: 1 Hard
deductibility.
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.
Answer: FALSE
Explanation: Business bad debts are ordinary deductions when either partially worthless or
completely worthless.
Difficulty: 3 Hard
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
5
21) For a cash-basis taxpayer, any account receivable that is not collected can be written off as a
bad debt.
Answer: FALSE
Explanation: For a cash-basis taxpayer, no income would have been recognized thus no bad
debt expense can be deducted.
Difficulty: 3 Hard
business bad debts.
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.
Answer: FALSE
Explanation: The casualty is an ordinary loss deduction.
Difficulty: 3 Hard
business bad debts.
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.
Answer: TRUE
Topic: Hobby Losses/Educational Expenses
Learning Objective: 06-06 Explain the hobby loss rules and the limits on education expense
deductibility.
EA: Yes
6
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.
Answer: FALSE
Explanation: Education expenses are not deductible if they qualify the taxpayer for a new trade
or business.
Difficulty: 3 Hard
deductibility.
EA: Yes
25) Sole proprietors must pay self-employment tax on 100% of their self-employment income.
Answer: FALSE
Explanation: They must pay tax on 92.35% of their SE income.
Difficulty: 3 Hard
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) Supplies expenses.
C) Political lobbying expenses.
D) Bribes.
Answer: B
Difficulty: 1 Hard
EA: Yes
7
27) If inventory is a material amount, what method of accounting is acceptable for a sole
proprietorship to use?
A) The cash method.
B) Accrual method.
C) Hybrid method.
D) Both Accrual method and Hybrid method.
Answer: D
Difficulty: 1 Hard
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) $0.
B) $239,100.
C) $240,000.
D) $258,000.
Answer: D
Explanation: $275,000 - $8,000 - $5,000 - $3,000 - $1,000 = $258,000. Illegal items are not
deductible.
EA: Yes
8
29) Which of the following is not a "trade or business" expense?
A) Mortgage interest on a warehouse.
B) Depreciation on business equipment.
C) Mortgage interest on a personal residence.
D) Cost of goods sold.
Answer: C
Difficulty: 1 Hard
EA: Yes
30) Trade or business expenses are treated as:

A) Deductible only if the activity had substantial income.
B) An itemized deduction if not reimbursed.
C) Deductible as itemized deductions subject to the 2% AGI floor.
D) Deductible as a for AGI deduction.
Answer: D
Difficulty: 1 Hard
EA: Yes
31) On May 26, 2013, 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, 2017, he sells the
machinery to a scrap metal dealer. What is his cost recovery deduction for 2017 rounded to the
nearest dollar?
A) $0.
B) $1,340.
C) $2,679.
D) $4,287.
Answer: B
Explanation: $30,000 × 8.93% × ½ = $1,339.50.
Topic: Depreciation
EA: Yes
9
32) On July 15, 2015, 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,
2017, he sells the equipment. What is his cost recovery deduction for 2017?
A) $0.
B) $1,749.
C) $2,858.
D) $3,498.
Answer: B
Explanation: $20,000 × 17.49% × ½ = $1,749.
Topic: Depreciation
EA: Yes
33) Della purchased a warehouse on February 25, 2017, for $350,000. $45,000 of the price was
for the land. What is her cost recovery deduction for 2017 rounded to the nearest dollar?
A) $6,853.
B) $7,865.
C) $9,705.
D) $11,137.
Answer: A
Explanation: $350,000 - $45,000 = $305,000 Basis × 2.247% = $6,853.35.
Topic: Depreciation
EA: Yes
34) Paola purchased an office building on January 5, 2015, for $450,000. $30,000 of the price
was for the land. On September 25, 2017, he sold the office building. What is the cost recovery
deduction for 2017 rounded to the nearest dollar?
A) $0.
B) $7,321.
C) $7,628.
D) $10,769.
Answer: C
Explanation: $450,000 - $30,000 = $420,000 Basis × 2.564% × 8½/12 = $7,627.90.
Topic: Depreciation
EA: Yes
10
35) On November 30, 2017, Constance purchased an apartment building for $750,000 (assume
this is the Depreciable Cost excluding any Land valuation). Determine her cost recovery
deduction for 2017 rounded to the nearest dollar.
A) $0.
B) $2,400.
C) $3,413.
D) $26,138.
Answer: C
Explanation: $750,000 × 0.455% = $3,412.50
Topic: Depreciation
EA: Yes
36) In June 2017, 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) $14,858.
D) $26,000.
Answer: A
Explanation: ($26,000 × 14.29%) = $3,715.40
Topic: Depreciation
EA: Yes
11
37) In July 2017, 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) $27,500.
C) $31,430.
D) $55,000.
Answer: C
Explanation: ($55,000 × 50%) = $27,500 plus regular depreciation on the remaining basis of
$27,500 × 14.29% = 3,929.75 (total $31,429.75).
Difficulty: 3 Hard
Topic: Depreciation
EA: Yes
38) §179 expense is available for all of the following business assets except:
A) Bulldozer.
B) Phone system.
C) Apartment complex.
D) Office furniture.
Answer: C
Explanation: Section 179 is not available for real property.
Difficulty: 1 Hard
Topic: Depreciation
EA: Yes
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) FMV of the asset.
C) The cost of a new similar asset at the date of conversion.
D) The lower of the cost or FMV at the date of conversion.
Answer: D
Difficulty: 1 Hard
Topic: Depreciation
EA: Yes
12
40) The adjusted basis of an asset is:
A) The cost basis less any accumulated depreciation.
B) The cost of the asset.
C) The fair market value of the asset.
D) The trade-in value of the asset.
Answer: A
Difficulty: 1 Hard
Topic: Depreciation
EA: Yes
41) Which of the following properties is not eligible for the §179 expense election when
purchased?
A) A business automobile.
B) A business computer.
C) Rental property.
D) Manufacturing equipment.
Answer: C
Difficulty: 1 Hard
Topic: Depreciation
EA: Yes
42) Under MACRS, 5-year property includes:

A) Warehouse.
B) Apartment complex.
C) Automobiles and light trucks used in a trade or business.
D) Fruit-bearing trees.
Answer: C
Difficulty: 1 Hard
Topic: Depreciation
EA: Yes
13
43) The standard mileage rate encompasses all of the following auto costs except for:
A) Depreciation or lease payments.
B) Auto property taxes.
C) Maintenance and repairs.
D) Gasoline, oil, and insurance.
Answer: B
deductibility.
EA: Yes
44) Which of the following is incorrect regarding luxury automobile limitations?

A) Passenger autos with a gross weight of less than 6,000 pounds are subject to the limits.
B) Light trucks or vans that are less than 6,000 pounds are subject to the limits.
C) The limits are reduced further if the business use is less than 100%.
D) The luxury limitations do not apply to the Section 179 expense deduction.
Answer: D
Explanation: Section 179 expense is limited as well.
Topic: Depreciation
EA: Yes
14
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) 0.
B) 4.
C) 12.
D) 24.
Answer: C
Explanation: Commuting does not count as business mileage.
deductibility.
EA: Yes
46) Marion drives 20 miles a day from his first job to his second job. He worked 125 days during
2017 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) $77.
B) $1,338.
C) $1,400.
D) $3,905.
Answer: B
Explanation: 125 days × 20 miles/day = 2,500 miles × .535 = 1,338
deductibility.
EA: Yes
15
47) Which of the following statements is false with respect to the standard mileage rate?
A) The standard mileage rate encompasses depreciation.
B) The taxpayer can have an unlimited number of autos and use the mileage rate.
C) Section 179 cannot be used on a standard mileage rate auto.
D) The standard mileage rate cannot be used on a taxi.
Answer: B
Explanation: The standard mileage rate cannot be used if five or more cars are used
simultaneously in the business operations.
deductibility.
EA: Yes
48) Cole purchased a car for business and personal use. In 2017, 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) $4,173.
C) $5,289.
D) $6,033.
Answer: C
Explanation: 13,000 miles × 60% = 7,800 business miles; (7,800 miles × .535 cents/mile) +
((1,500 + 360) × .60) = 5,289.
deductibility.
EA: Yes
16
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) $2,396.
B) $2,878.
C) $3,395.
D) $5,180.
Answer: A
Explanation: ($1,100 × 9/16 foreign travel) + (9 days × $140/day) + (9 days × $115/day × 50%)
= 2,396.25.
deductibility.
EA: Yes
17
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
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: 500/2,500 = 20% Business Use; $4,000 net - $2,480 - $360 - $640 - $520 = $0;
Excess insurance of $130 + $1,750 of depreciation = $1,880 carryover.
Difficulty: 3 Hard
business bad debts.
EA: Yes
18
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) There must be no other fixed business location.
C) The taxpayer's most important activities must occur in the home.
D) The home office must be for the convenience of his or her employer.
Answer: D
Difficulty: 3 Hard
business bad debts.
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) None of the income connected with the activity is included in income.
C) The deductible expenses connected with the activity are limited to the income from the
activity.
D) The IRS has the burden to prove an activity is a hobby.
Answer: C
Difficulty: 3 Hard
deductibility.
EA: Yes
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) A medical doctor who attends a review course to obtain a financial consultant license.
C) A lawyer who goes to law school to get a specialized tax degree.
D) An accounting bookkeeper that takes a CPA review course to pass the CPA exam and become
a CPA.
Answer: C
Difficulty: 3 Hard
deductibility.
EA: Yes
19
54) Deductible education expenses include all of the following except:
A) Tuition.
B) Books.
C) Travel.
D) Room and board.
Answer: D
Difficulty: 1 Hard
deductibility.
EA: Yes
55) Shante is employed by a local pharmaceutical company where she earned $48,000 in 2017.
During the year, she also had self-employment income of $18,000. Her self-employment tax
rounded to the nearest dollar is:
A) $0.
B) $2,061.
C) $2,543.
D) $2,754.
Answer: C
Explanation: $18,000 × 92.35% = 16,623 × 15.3% = $2,543.32
EA: Yes
56) What form is filed to report the self-employment tax?

A) Form 1040.
B) Schedule SE.
C) Schedule C.
D) Schedule D.
Answer: B
Difficulty: 1 Hard
EA: Yes
20
57) Katherine earned $100,000 from her job at a local business in 2017. 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) $0.
B) $4,498.
C) $5,935.
D) $6,426.
Answer: B
Explanation: $42,000 × 92.35% = $38,787; ($127,200 to limit for social security: 27,200 ×
12.4%) + ($38,787 × 2.9%) = $4,497.80.
Difficulty: 3 Hard
EA: Yes
58) For 2017, 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 % $127,200.
d. 12.4 % $127,200.
A) Option A
B) Option B
C) Option C
D) Option D
Answer: D
Explanation: The social security limit increased to $127,200 for 2017 and the rate is 12.4%.
Difficulty: 3 Hard
EA: Yes
21
59) During 2017, 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 (½ 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)
Difficulty: 3 Hard
EA: Yes
22
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 )
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
EA: Yes
23
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.
EA: Yes
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).
Difficulty: 1 Hard
Topic: Depreciation
EA: Yes
24
63) Kiri acquires equipment (7-year property) on August 14, 2017, 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,
2021.
a. What is Kiri's cost recovery deduction related to the equipment in 2017 and 2021?
b. What is Kiri's cost recovery deduction related to the equipment in 2017 and 2021 if the 50%
bonus is elected?
Answer:
a. 2017 - $80,000 × .1429 = $11,432 7-yr MACRS first year.
2021 - $80,000 × .0893 × ½ = $3,572 7-yr MACRS fifth year.
b. 2017- $80,000 × 50% = $40,000 first year + ($40,000 × 14.29%) = $45,716.

2021 - $40,000 × .0893 × ½ = $1,786 fifth year.
Topic: Depreciation
EA: Yes
64) Oscar bought an $800,000 apartment building on July 28, 2017. On August 15, 2017, 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 2017?
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.
Topic: Depreciation
EA: Yes
25
65) Lateefah purchased a new office building on April 1, 2017, for $3,000,000. On August 20,
2021, 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.

Difficulty: 1 Hard
Topic: Depreciation
EA: Yes
66) Xavier bought furniture and fixtures (7-year property) on September 15, 2017 for $515,000.
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 $510,000. What is the maximum deduction Xavier can
take in 2017 for the equipment? (Round answers to the nearest dollar)
Answer:
179 Deduction $ 510,000

Cost recovery ($515,000 - $510,000 ) × .1429 715
Maximum deduction $ 510,715
Explanation: Section 179 is limited to $510,000 in 2017.

Difficulty: 3 Hard
Topic: Depreciation
EA: Yes
26
67) Tonia acquires the following 5-year class property in 2017:
Asset Date of Acquisition Cost

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
Topic: Depreciation
EA: Yes
68) On April 23, 2017, 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 2017 and 2018
assuming the 50% bonus was taken? (Round answers to the nearest dollar)
Answer: 2017 $25,000 × 80% × 50% = $10,000 but limited to $8,928 ($11,160 × .80 luxury
limit).
2018 ($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).
Topic: Depreciation
EA: Yes
27
69) Nancy purchased a computer on July 15, 2017, 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 2017 and 2018? (No §179 or bonus). Is there any recapture of
depreciation in 2017?
Answer:
Cost recovery for 2017 is $700 [$5,000 × .20 × .70].

Cost recovery for 2018 is $400 [$5,000 × 1/5 SL × .40]
Cost recovery recapture in 2018 is $350 computed as follows:
Depreciation taken in 2017 ($5,000 × .20 × .70) $ 700
Straight-line ($5,000 × .20 × ½ year convention × .70) (350 )
Recapture $ 350
Difficulty: 3 Hard
Topic: Depreciation
EA: Yes
70) Ted purchased a vehicle for business and personal use. In 2017, 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 2017?
Answer: The total business deduction related to business use of the car is calculated as follows:
Standard mileage rate (10,000 × 53.5 cents /mile) 5,350

Interest ($1,200 × 70%) 840
Property taxes ($380 × 70%) $ 266
Total auto deduction on Schedule C $ 6,456
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.
deductibility.
EA: Yes
28
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
deductibility.
EA: Yes
29
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
deductibility.
EA: Yes
73) Sandy is the owner of ABC Loan Company. On June 2, 2016, ABC loaned Randy $80,000.
In 2017, 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 2018 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:
2016 - zero.
2017 - $56,000 [$80,000 (loan) - $24,000 (expected settlement)].
2018 - $4,000 [$24,000 (balance) - $20,000 (proceeds)].
business bad debts.
EA: Yes
30
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.
Adjusted Basis FMV Before FMV After Insurance 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 )
business bad debts.
EA: Yes
31
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.
deductibility.
EA: Yes
32
76) Beau earned $35,000 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 2017? (Round calculations to the nearest dollar)
Answer: Beau's self-employment tax for 2017 is calculated as follows:
Soc sec. ceiling amount $ 127,200

Less: soc. sec wages (100,000 )
Net ceiling $ 27,200
Net self-employment income ($35,000 × .9235) $ 32,323
Lesser of net ceiling or net self-employment income $ 27,200
Social security portion of the tax ($27,200 × .124) $ 3,373
Self-employment earnings subject to the Medicare portion of
the self-employment tax: $32,323 × .029 937
Total self-employment tax $ 4,310
Difficulty: 3 Hard
EA: Yes
33

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11th Edition Cruz Test Bank

2) For an expense to be ordinary, it must be customary or usual in the taxpayer's particular

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:

42) Under MACRS, 5-year property includes:

44) Which of the following is incorrect regarding luxury automobile limitations?

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?

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

Answer: An expense should be ordinary, necessary, and reasonable. For an expense to be

b. 2017- $80,000 × 50% = $40,000 first year + ($40,000 × 14.29%) = $45,716.

Section 179 $ 300,000

Answer: Year of purchase: $3,000,000 × .01819 = $54,570.

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

179 Deduction $ 510,000

Explanation: Section 179 is limited to $510,000 in 2017.

Asset Date of Acquisition Cost

Cost recovery for 2017 is $700 [$5,000 × .20 × .70].

Standard mileage rate (10,000 × 53.5 cents /mile) 5,350

Calculate Terry's travel expense deduction.

Answer: Terry's travel expense deduction is calculated as follows:

Calculate Bob's travel expense deduction.

Air fare ($1,400 × 50%) $ 700

Adjusted Basis FMV Before FMV After Insurance Proceeds

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

Answer: Alice's income and expenses would be reported as follows:

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

Answer: Beau's self-employment tax for 2017 is calculated as follows:

Soc sec. ceiling amount $ 127,200

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