Chapter 08 Rental Property, Royalties, and Income from Flow-Through Entities (Line

17, Form 1040, and Schedule E)

1) Rental income is generally reported on Schedule C.

A) True
B) False

2) Capital improvements on rental properties may be deducted in the current year.

A) True
B) False

3) A security deposit for a rental property is not reported as income.

A) True
B) False

4) Residential rental properties are depreciated using the straight-line method over 27½ years.
A) True
B) False

5) If a tenant pays an expense normally paid by the taxpayer (landlord) in lieu of rent (or the full rent),
that expense is not considered part of rental income to the taxpayer.
A) True
B) False

6) Rental properties that are also used as vacation homes fall under one of three categories: (1)
primarily rental, (2) primarily personal, and (3) personal/rental.
A) True
B) False

7) If a family member of a taxpayer uses the rental property and pays full rental value, then those days
rented are considered rental days.
A) True
B) False

8) In the case of personal/rental property, a taxpayer can deduct expenses only to the extent that there
is rental income.
A) True
B) False

9) Jennifer's beach house, rented for 175 days and used by her and her family for 15 days, is
considered personal/rental property.
A) True
B) False

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 10) Jonathan and Sandy rented their cabin for 123 days and used the cabin for personal use for 55 days.
The cabin is considered personal/rental property.
A) True
B) False

11) There are two methods available to taxpayers to allocate expenses between personal and rental use
of properties.
A) True
B) False

12) A property rented for less than 15 days and used for personal use the remainder of the year, should
have the rental income reported on Schedule E.
A) True
B) False

13) A personal/rental property (that is not a trade or business) may report its income and expenses on
Schedule A.
A) True
B) False

14) A royalty is a payment for the right to use intangible property.

A) True
B) False

15) When royalties are paid, the amount paid is reported to the recipient by the payer at the end of the
year on a Schedule K-1.
A) True
B) False

16) Generally, a taxpayer uses Schedule C to report royalty income.

A) True
B) False

17) Royalties resulting from a non-trade or non-business activity should be reported on a Schedule E.
A) True
B) False

18) Entities such as partnerships, LLCs, and S Corporations are known as flow-through entities.
A) True
B) False

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 19) Flow-through entities are named as such because they are taxed continuously.
A) True
B) False

20) Flow-through entities supply each owner at the end of the year with a Schedule E, indicating
his/her income and expenses to report.
A) True
B) False

21) Flow-through entities file "informational returns."

A) True
B) False

22) The income from a partnership to its partner is considered self-employment income.
A) True
B) False

23) Rental activities by definition are passive activities.

A) True
B) False

24) If a taxpayer materially participates in his/her rental activity as a real estate professional, the
activity is considered a trade or business and not a passive activity.
A) True
B) False

25) A taxpayer with a rental activity may be allowed up to $25,000 of rental losses against other (active
or portfolio) income.
A) True
B) False

26) Rental income may be reported on a Schedule A or a Schedule C.

A) True
B) False

27) All rental properties are depreciated using the straight-line method over 39 years.
A) True
B) False

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 28) If a tenant provides service for the rental property in lieu of rental payment, the fair market value of
the service is considered rental income and must be reported as income.
A) True
B) False

29) All advance rental payments received, including security deposits for a rental property, must be
reported as income when received.
A) True
B) False

30) Alexis's cabin in the mountains that was rented for 125 days and used by her for 12 days is
considered personal/rental property.
A) True
B) False

31) Joey and Susan rented their house for 2 weeks and used it for personal use for the remainder of the
year. The house is considered personal/rental property.
A) True
B) False

32) Rental properties that are also used as vacation homes fall under one of two categories: (1)
primarily rental; or (2) primarily personal.
A) True
B) False

33) In the case of a primarily personal property, a taxpayer may report a net loss as long as the correct
allocation method was used.
A) True
B) False

34) The two methods that may be used to allocate expenses between personal and rental use of
properties are the IRS method and the Tax Court method.
A) True
B) False

35) A primarily rental property may report its income and expenses on a Schedule E.
A) True
B) False

36) A taxpayer may use a Schedule C or a Schedule E to report royalty income.

A) True
B) False

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 37) Royalty income is income received from the use of books, stories, plays, copyrights, trademarks,
etc. owned by the taxpayer.
A) True
B) False

38) When royalties are paid, the amount paid is reported to the recipient by the payer on a Form
1099-MISC.
A) True
B) False

39) Flow-through entities include, but are not limited to, LLCs, S Corporations, trusts and estates.
A) True
B) False

40) In general, losses from passive activities may be deducted only to the extent that there is passive
income.
A) True
B) False

41) On June 1 of the current year, Jack and Angie purchased a rental beach house for $900,000 and
rented it right away. Of that amount, $600,000 was for the land value. How much depreciation
deduction can Jack and Angie take in the current year? (You may need to refer to the depreciation
tables.)
A) $10,909
B) $5,910
C) $11,820
D) $17,730

42) Jamison owns a rental cabin in Mammoth, and travels there for maintenance three times a year,
between January and June. The round trip to Mammoth from San Diego where Jamison lives, is
approximately 405 miles. How much travel costs can Jamison deduct per year related to his rental
cabin? (Round your answer to the nearest whole number)
A) $656
B) $1,215
C) $233
D) $743

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 43) Brad and Kate received $9,500 for rent from Mike and Janet, who are renting their home in Santa
Ana, California. Brad and Kate did not use this property for personal use. The rent covers eight
months from August 1 of the current year to March 31 of the following year. The amount also
includes a security deposit of $1,500. How much should Brad and Kate report as rental income in
the current tax year?
A) $5,000
B) $8,000
C) $9,500
D) $1,500

44) Georgia owns a home in Colorado that she rents for $1,200 per month (she does not use the home
personally). While she was in Europe in November, the roof in her rental home leaked and her
tenant repaired it for $900. For the following month's rent (December), her tenant paid her $300 for
rent ($1,200 - $900). What amounts should Georgia include for rental income and repair expense,
respectively, for December?
A) $1,200; $900
B) $1,200; $300
C) $900; $300
D) $300; $900

45) If a taxpayer materially participates in a real estate activity as a real estate professional, the income
and expenses of the activity should be reported on:
A) Schedule E
B) Schedule C
C) Schedule A
D) None of these

46) Naomi and Matt received the following amounts from a tenant who is renting their condominium
during the current year (rent is $1,500 per month):

2 months rent $ 2,200

Deposit 1,600

Rent for two months would normally have been $3,000, but the tenant paid $800 for a plumbing
repair. The repair would normally have been paid by Naomi and Matt but the problem occurred
while they were out of town. How much should Naomi and Matt report as rental income for the
current tax year?
A) $2,400
B) $2,200
C) $3,000
D) $4,600

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 47) Which of the following is not considered an ordinary expense for a rental activity?
A) Property taxes
B) Insurance
C) Advertising
D) All of these are deductible as ordinary expense

48) Which of the following is not considered a capital improvement for a rental activity?
A) Addition of a bathroom
B) Repair of a leaky water pipe
C) New landscaping
D) Replacement of the roof

49) What is the proper tax treatment of capital improvements for a residential or commercial rental
property?
A) Can be deducted as ordinary expenses.
B) Must be depreciated using straight-line over 27½ or 39 years.
C) Must be depreciated using the double-declining balance method.
D) IRC section 179 may be claimed.

50) Which of the following expense items is(are) deductible as rental expense for a rental property?
A) Repairs and maintenance
B) Travel related to the property
C) Management fees
D) All are deductible expenses

51) May owns a four-plex in Garden Grove, CA. She rents out 3 units and lives in the fourth. Her
income and expenses for the entire four-plex are as follows: mortgage interest $8,200, property
taxes $9,000, insurance $3,000, utilities $2,000, repairs and maintenance $1,000, depreciation on
the entire complex of $5,000, and rental income of $25,000. What amount of net rental income or
loss should May report on her current tax return?
A) $3,200 net loss
B) $3,850 net income
C) $25,000 net income
D) $21,150 net loss

52) A property that has been rented for 120 days and used for personal use for 13 days should be
categorized as:
A) Primarily rental
B) Personal/rental
C) Primarily personal
D) None of these

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 53) Charles and Sarah own a home in Palm Springs, CA. During the year, they rented the house for 40
days for $5,000 and used it for personal use for 18 days. The house remained vacant for the
remainder of the year. The expenses for the house included $16,000 in mortgage interest, $4,500 in
property taxes, $1,000 in utilities, $1,200 in maintenance, and $9,800 in depreciation. What is the
deductible loss for the rental of their home (without considering the passive loss limitation)? Use
the Tax Court method for allocation of expenses.
A) $27,500 net loss
B) $0
C) $5,000 net income
D) $17,414 net loss

54) Jane and Don own a ski chalet in Lake Tahoe, NV and rented it for 12 days for $8,000. The rest of
the year, the chalet was used by them and their friends and family. What is the proper tax treatment
of the $8,000?
A) Should be reported on Schedule E
B) The amount should be reported on Schedule C
C) The amount should be reported as other income on Form 1040
D) None of the rental income is included in gross income

55) Mario owns a home in Park City, Utah, that he rented for $1,600 for three weeks during the
summer. He lived there for a total of 120 days and the rest of the year the house was vacant. The
expenses for the home included $6,000 in mortgage interest, $900 in property taxes, $1,300 in
maintenance and utilities, and $3,500 in depreciation. How much net rental income or loss from
the Park City home would Mario report for the current year? Use the IRS method for allocating
expenses.
A) $0
B) $6,000 net loss
C) $9,100 net loss
D) $1,600 net income

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 56) In the current year, Marnie rented her vacation home for 75 days, used it for personal reasons for 22
days, and left it vacant for the remainder of the year. Her income and expenses are as follows:

Rental income $ 18,000

Property taxes 2,500
Mortgage interest 3,500
Utilities 1,100
Repairs and maintenance 1,000
Depreciation 5,200

What is Marnie's net income or loss from the activity? Use the Tax Court method. (Round your
answer to the nearest whole dollar)
A) $0
B) $11,123 net income
C) $4,700 net income
D) $18,000 net income

57) Lupe rented her personal residence for 13 days to summer vacationers for $3,800. She lived in the
home for the rest of the year. She has AGI of $95,000 excluding the rental income. Related expenses
for Lupe's personal residence for the year include these:

Real property taxes $ 4,500

Utilities 5,000
Insurance 900
Mortgage interest 7,000
Repairs 800
Depreciation 1,500

What is Lupe's AGI after taking into consideration the rental income and related expenses?
A) $98,098
B) $95,000
C) $98,800
D) $115,000

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 58) Jacqueline owns a condominium on an island in Washington that was rented out all year for $30,000.
She incurred the following expenses:

Mortgage interest $ 1,300

Property taxes 800
Insurance 1,500
Utilities 1,800
Repairs 300
Depreciation 4,000

What amount of net income or loss does Jacqueline report from this rental property?
A) $0
B) $30,000 net income
C) $20,300 net income
D) $9,700 net loss

59) Hugh and Mary own a cabin in Big Bear that they rented for 45 days at $4,500. They used the cabin
for personal use for 30 days during the year. The allocated expenses related to the cabin of $6,000
resulted in a net loss of $1,500 for this rental activity. What is the proper tax treatment of these
amounts by Hugh and Mary?
A) None of the amounts should be reported
B) Report rental net loss of $1,500
C) Report net income of $4,500
D) Report income and expenses on Schedule E but expenses cannot exceed income

60) Which of the following statements is not true about vacation home properties?
A) A primarily personal property does not need to report the income from the property.
B) A property categorized as primarily personal is rented for 0 days.
C) Property rented for 15 days or more and used for personal use for 14 days or less would be
categorized as primarily rental.
D) A property rented for 15 days or more and used for personal use for more than 14 days would
be categorized as personal/rental.

10

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 61) Darius and Chantal own a cabin in Lake Arrowhead, California. During the year, they rented it for
45 days for $10,000 and used it for 12 days for personal use. The house remained vacant for the
remainder of the year. The expenses for the house included $9,000 in mortgage interest, $2,000 in
property taxes, $1,000 in utilities, $600 in maintenance, and $3,000 in depreciation. What is their
net income or loss from their cabin (without considering the passive loss limitation)? Use the IRS
method for allocation of expenses. (Round your answer to the nearest whole dollar.)
A) $10,000 net income
B) $2,316 net loss
C) $0
D) $5,600 net loss

62) Jeremy and Gladys own a cabin in Sun Valley, Idaho, which they rented for 30 days. They also
used the cabin with their family and friends for the ski season for 45 days. Their income and
expenses were as follows: rental income $4,000, mortgage interest $3,000, property taxes $2,200,
utilities $400, maintenance $400, and depreciation $4,800. How much depreciation expense can
they deduct on Schedule E for the cabin? Use the IRS method for allocation of expenses.
A) $1,600
B) $2,400
C) $4,800
D) $0

63) Stephen and Joy own a duplex in Newport Beach, CA. They live in one unit and rent the other to
another couple. Their rental income for the year was $24,000. They incurred the following expenses
for the entire duplex:

Insurance $ 8,000
Maintenance 800
Utilities 1,800
Depreciation 4,000

What amount of net income from the duplex should Stephen and Joy report for the current year?
A) $7,300
B) $24,000
C) $9,400
D) $16,700

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 64) Reggie and Bebe own an apartment building in Portland, Oregon, with 8 identical units. They live in
one and rent the remaining units. Their rental income for the year was $45,000. They incurred the
following expenses for the entire building:

Advertising for available units $ 850

Maintenance 9,000
Repairs 7,500
Utilities 12,000
Depreciation 8,000

What amount of net income should Reggie and Bebe report for the current year for this rental?
(Round your answer to the nearest whole dollar)
A) $12,213
B) $38,350
C) $7,650
D) $45,000

65) Nathan owns a tri-plex in Santa Maria, California. He lives in one and rents the other two remaining
units. All three units are identical. He incurred the following expenses for the entire building:

Mortgage interest $ 20,000

Maintenance 6,200
Property taxes 9,000
Utilities 5,000
Depreciation 4,000

How much in rental expenses can Nathan deduct against the rental income on a Schedule E in the
current year (without considering any passive loss limitations)? (Round your answers to the nearest
whole dollar)
A) $14,733
B) $29,467
C) $20,000
D) $44,200

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 66) Royalties can be earned from allowing others the right to use:
A) Trademarks
B) Books
C) Plays
D) All of these

67) When royalties are paid, at the end of the year the payer sends the recipient a Form ________.
A) Schedule C
B) Schedule K-1
C) 1099-INT
D) 1099-MISC

68) Samantha is a full-time author and recently published her 8th romance novel. She should report the
royalty income she receives from the publisher this year on what Schedule/Form?
A) 1099-INT
B) 1099-MISC
C) Schedule K-1
D) Schedule C

69) Royalties can be earned from allowing others the right to use or exploit:
A) Copyrights
B) Coal mines
C) Formulas
D) All of these

70) Which of the following statements is true with regard to the reporting of royalty income?
A) It must be reported on Schedule C only.
B) It must be reported on Schedule E only.
C) Royalty income reported on Schedule E is subject to self-employment tax.
D) It can be reported on Schedule C but generally on Schedule E.

71) Which of the following entity(ies) is(are) considered flow-through?

A) S corporation
B) C corporation
C) Sole proprietorship
D) Publicly traded corporation

72) From which of the following flow-through entities is the ordinary income (K-1) considered
self-employment income?
A) Trusts
B) Estates
C) Partnerships
D) S corporations

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 73) Alex, Ellen and Nicolas are equal partners in a local restaurant. The restaurant reports the following
items for the current year:

Business revenue $ 770,000

Business expenses 470,000
Investment expenses 150,000

Each partner receives a Schedule K-1 with one-third of the preceding items reported to him/her. How
must each individual report these results on his/her Form 1040?
A) $300,000 income on Schedule E; $50,000 investment expense on Schedule A
B) $300,000 income on Schedule E; $150,000 investment expense on Schedule A
C) $100,000 income on Schedule E; $50,000 investment expense on Schedule A
D) $257,667 income on Schedule E; $50,000 investment expense on Schedule A

74) Ariel, Bob, Candice and Dmitri are equal partners in a local ski resort. The resort reports the
following items for the current year:

Business revenue $ 1,200,000

Business expenses 750,000
Short-term capital gains 107,000
Short-term capital losses (103,000 )

Each partner receives a Schedule K-1 with one-fourth of the preceding items reported to him/her.
How must each individual report these results on his/her Form 1040?
A) $112,500 income on Schedule E; $1,000 short-term capital gain on Schedule D
B) $100,000 income on Schedule E; $1,000 short-term capital gain on Schedule D
C) $1,200,000 income on Schedule E; $107,000 short-term capital gain on Schedule D
D) $300,000 income on Schedule E; $26,750 short-term capital gain on Schedule D

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 75) Owen and Jessica own and operate an S corporation. Each is a 50% owner. The business reports the
following results:

Business revenue $ 225,000

Business expenses 88,000
Investment expenses 16,000

How do Owen and Jessica report these items for tax purposes?
A) $225,000 income on Schedule E; $16,000 investment expense on Schedule A
B) $137,000 income on Schedule E; $88,000 investment expense on Schedule A
C) $68,500 income on Schedule E; $8,000 investment expense on Schedule A
D) $68,500 income on Schedule E; $16,000 investment expense on Schedule D

76) Which of the following statements is incorrect concerning rental properties?

A) Generally, rental activities are reported on Schedule E.
B) Travel expenses related to the rental activity are calculated using the standard mileage rate.
C) All ordinary expenses related to the rental activity are deductible.
D) Capital improvements may be deducted as expense in the year the improvements are made.

77) On June 1st of the current year, Kayla and Ralph purchased a rental beach house for $700,000. Of
that amount, $400,000 was for the land value. How much depreciation deduction can they take in
the current year? (You may need to refer to the depreciation tables.)
A) $13,790.
B) $5,910.
C) $0.
D) $7,880.

78) On June 1st of the current year, Nancy and Dean purchased a rental beach house for $1,200,000. Of
that amount, $800,000 was for the land value. How much depreciation deduction can Nancy and
Dean take in the current year? (You may need to refer to the depreciation tables.)
A) $15,760.
B) $7,880.
C) $23,640.
D) $14,545.

15

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 79) Jackson owns a condominium in Las Vegas, Nevada, and he rents it to Joanne for $1,500 per
month, payable on the 1st of each month. While he was out of town in August, the condominium's
air conditioning broke and Joanne had it replaced for $1,350. How much rental income does
Jackson report for September if Joanne deducts the repair cost from her rent for September?
A) $1,350.
B) $0.
C) $1,500.
D) $150.

80) Eddie and Camilla received $11,600 for the rental of their rental house in Irvine, California. Eddie
and Camilla do not use this property for personal use. The rent covers six months from October 1
of the current year to March 31 of next year. The amount also includes a security deposit of $2,000.
How much should Eddie and Camilla report as rental income in the current tax year?
A) $11,600.
B) $13,600.
C) $9,600.
D) $2,000.

81) Lori and Donald own a condominium in Colorado Springs, Colorado, that they rent out part of the
time and use during the summer. The rental property is classified as personal/rental property and
their personal use is determined to be 75% (based on the IRS method). They had the following
income and expenses for the year (before any allocation):

Gross rental income $ 2,000

Interest and taxes 3,200
Utilities and maintenance 2,200
Depreciation 4,000

How much net loss should Lori and Donald report for their condominium on their tax return this
year?
A) $7,400 loss.
B) $0.
C) $9,000 loss.
D) $3,350 loss.

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 82) A property that has been rented for 120 days and used for personal use for 40 days should be
categorized as:
A) Primarily personal.
B) Personal/rental.
C) Primarily rental.
D) All of these are correct.

83) Julian and Nina own a home in Napa Valley, California, and rented it for 14 days for $10,000 to a
large corporation. The rest of the year, they lived in the home. What is the proper tax treatment of
the $10,000 they received?
A) The amount should be reported as other income.
B) None of the rental income should be included in gross income.
C) The amount should be reported on Schedule E.
D) The amount should be reported on Schedule C.

84) Richard owns a cabin in Utah that he rented for $4,000 for 21 days. He lived there for a total of 120
days. The expenses for the home included $8,000 in mortgage interest, $1,200 in property taxes,
$1,300 in maintenance and utilities, and $3,500 in depreciation. How much net income or loss
from the Utah home would Richard report for the current year (use the IRS method)? (Round your
answer to the nearest whole number)
A) $0.
B) $4,000 net income.
C) $1,915 net income.
D) $10,000 net loss.

85) Leslie and Devin own a beach cottage that they rented 30 days for $4,500. They used the cottage
for personal use for 45 days during the year. The allocated expenses related to the cottage total
$6,000, resulting in a net loss of $1,500 for this rental activity. What is the proper tax treatment of
these amounts by Leslie and Devin?
A) Report net loss of $1,500 on Schedule E.
B) None of the amounts have to be reported.
C) Report net income of $4,500 on Schedule E.
D) Report income and expenses on Schedule E but expenses cannot exceed income.

86) A property that has been rented for 180 days and used for personal use for 16 days should be
categorized as:
A) primarily rental
B) personal/rental
C) primarily personal
D) all of these are correct

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 87) Katie and Mike own a home in Newport Beach, California. During the year, they rented the house
for 80 days for $24,000 and used it for personal use for 30 days. The expenses for the house
included $20,000 in mortgage interest, $8,500 in property taxes, $6,000 in utilities, $2,000 in
maintenance, and $12,000 in depreciation. What is the deductible loss for the rental of their home
(without considering the passive loss limitation)? Use the IRS method for allocation of expenses.
A) $27,500 net loss.
B) $17,414 net loss.
C) $5,000 net income.
D) $0.

88) Lois and Benjamin own a chalet in New Mexico and rented it for 12 days for $6,000. The rest of
the year, the chalet was used by them and their friends and family. What is the proper tax treatment
of the $6,000 income?
A) the amount should be reported on Schedule C.
B) the amount should be reported as other income.
C) the amount should be reported on Schedule E.
D) none of the rental income needs to be reported as part of gross income.

89) Which of the following statements is true concerning vacation home properties?
A) A property rented for 15 days or more and used for personal use for more than 14 days is
categorized as primarily personal.
B) A property categorized as primarily personal is one rented for zero days.
C) Report all income and expenses for a personal/rental property and the net amount reported
may be either net income or net loss.
D) A property rented for 15 days or more and used for personal use for no more than 14 days is
categorized as primarily rental.

90) Which of the following expense items is(are) deductible as rental expense?
A) Insurance.
B) Depreciation.
C) Property taxes.
D) All are deductible rental expenses.

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 91) Elizabeth rented her personal residence for 12 days to summer vacationers for $4,800. Rest of the
year, she and her family used the home as their personal residence. She has AGI of $105,000,
excluding the rental income. Related expenses for Elizabeth's personal residence for the year include
the following:

Real property taxes $ 4,500

Utilities 5,000
Insurance 900
Mortgage interest 7,000
Repairs 800
Depreciation 15,000

What is Elizabeth's AGI after taking into consideration the rental income and related expenses for her
home?
A) $4,800.
B) $105,000.
C) $100,200.
D) $109,800.

92) Robert and Melissa own a home in Big Bear Lake, California. During the year, they rented it for 55
days for $11,000 and used it for 12 days for personal use. The expenses for the house included
$12,000 in mortgage interest, $2,000 in property taxes, $1,000 in utilities, $600 in maintenance,
and $4,000 in depreciation. What is their income or loss from their cabin (without considering the
passive loss limitation)? Use the IRS method for allocation of expenses. (Round your answer to the
nearest whole number.)
A) $0.
B) $2,947 net loss.
C) $11,000 net income.
D) $5,090 net loss.

93) Colin and Megan own a cabin in the Mammoth Mountains, California. During the year, they rented
it for 45 days for $10,000 and used it 12 days for personal use. The expenses for the cabin included
$7,000 in mortgage interest, $3,000 in property taxes, $1,200 in utilities, $400 in maintenance, and
$3,000 in depreciation. What is their net income or loss from the cabin (without considering the
passive loss limitation)? Use the IRS method for allocation of expenses. (Round your answer to the
nearest whole number.)
A) $7,632 net loss.
B) $0.
C) $1,526 net loss.
D) $10,000 net income.

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 94) Royalties can be earned from allowing others the right to use:
A) plays.
B) songs.
C) patents.
D) all of these.

95) When royalty income is received, the recipient (tax payer) generally reports the income on which
form?
A) Schedule D.
B) 1099-MISC.
C) Schedule E.
D) Schedule K-1.

96) Darlene is a full-time author and recently published her third romance novel. The royalty income
she receives from the publisher this year should be reported on what schedule?
A) Schedule K-1.
B) Schedule C.
C) 1099-MISC.
D) 1099-INT.

97) Paul is a 45-year-old stockbroker. When he was in his 20s, he was a member of a band called the
Zombies and wrote several hit songs. Paul should report the royalty income he receives in the
current year from his songs on what schedule?
A) Schedule A.
B) Schedule E.
C) Schedule D.
D) Schedule C.

98) Royalties cannot be earned from which of the following:

A) stocks.
B) patents.
C) coal mines.
D) oil wells.

99) Royalties can be earned from allowing others the right to use:
A) Equipment.
B) Furniture.
C) Copyrighted material.
D) Building.

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 100) Jeremiah is a full-time professor of psychology at the University of Washington and an author of a
psychology textbook. The royalty income he receives from the publisher should be reported on:
A) Schedule E.
B) Form 1099-MISC.
C) Schedule C.
D) Schedule K-1.

101) Which of the following is not considered a flow-through entity?

A) Sole proprietorship.
B) S corporation.
C) Partnership.
D) Limited liability company.

102) Roger, Ellen, Drew and Cindy are equal partners in a local pub. The pub reports the following items
for the current year:

Business revenue $ 1,770,000

Business expenses 1,000,000
Investment expenses 160,000

Each partner receives a Schedule K-1 with one-fourth of the preceding items reported to him/her.
How must each individual report these results on his/her Form 1040?
A) $385,000 on Schedule E; $40,000 on Schedule A.
B) $257,667 on Schedule E; $40,000 on Schedule A.
C) $192,500 on Schedule E; $40,000 on Schedule A.
D) $770,000 on Schedule E; $160,000 on Schedule A.

103) Which of the following entity(ies) is(are) considered flow-through entity(ies)?

A) Sole proprietorship.
B) Estates.
C) Non-profit corporations.
D) C corporation.

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 104) Earl and Sandra own and operate a restaurant as an S corporation. Each is a 50% owner. The
business reports the following results for the year:

Revenue $ 480,000
Business expenses 398,000
Investment expenses 32,000

How do Earl and Sandra report these items for tax purposes on each of their individual returns?
A) $41,000 income on Schedule E; $16,000 investment expense on Schedule A.
B) $41,000 income on Schedule E; $32000 investment expense on Schedule A.
C) $480,000 income on Schedule E; $16,000 investment expense on Schedule A.
D) $82,000 income on Schedule E; $32,000 investment expense on Schedule A.

105) When reporting the income and expenses of a rental property, what determines the use of the
Schedule C versus the Schedule E?

106) What must the owner of rental property do with respect to the rental activity to have it be
considered: 1) material participation? 2) a trade or business?

107) What is meant by ordinary rental expenses and what criteria must be met to be deductible? Provide
some examples of deductible rental expenses. For this question, assume no personal use of the
rental property.

108) What are the criteria that determine an amount as capital improvement rather than repair and
maintenance expense? What is the proper tax treatment of a capital improvement for rental
properties?

109) Explain the three categories that a rental activity may fall under if used for both personal and rental
purposes. How are the categories determined?

110) What criteria determine a personal and rental use property as personal/rental? How is net income or
loss treated for tax purposes for a personal/rental property?

111) What are the rules concerning the deductibility of travel as it relates to rental properties? How are
travel expenses to and from rental properties calculated?

112) Kirk and Amy live in Augusta, Georgia. Every year during the Masters Golf Tournament, they rent
their primary personal residence for 10 days for $10,000 to a large corporation that uses it to
entertain clients. The rest of year, they reside full-time in their home. How should Kirk and Amy
treat the rental income? Explain.

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 113) Explain the difference between the two methods available; the Tax Court's method and the IRS
method, to allocate expenses between personal and rental use of property.

114) Explain what is considered personal use of a rental property.

115) Meredith has a vacation rental house in the Sierra Mountains. During the year, she and her
immediate family used the house for 12 days for a personal vacation. Meredith spent two more
weekends (4 days in total) repairing the deck. The house was rented for 120 days. How should the
cabin be categorized this year for tax purposes? Explain your answer.

116) Meredith has a vacation rental house in the Sierra Mountains. During the year, she and her
immediate family used the house for 12 days for a personal vacation. Meredith spent two more
weekends (4 days in total) repairing the deck. Meredith also rented her house (at fair value) to her
brother and his family for 9 days (in addition to her personal use). The house was rented for 180
days. How should the cabin be categorized this year for tax purposes? Explain your answer.

117) Define royalty income. What criteria determine which form is used and where the royalties are
reported?

118) What are the different types of income that may be reported on Schedule E?

119) What is meant by a passive activity? Why is a rental activity classified as a passive activity? Can a
rental activity be classified as active? Explain.

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