McGraw-Hill_s Essentials of Federal Taxation 2018 Edition 9th Edition by Brian C. Spilker Profe tb

McGraw-Hill_s Essentials of Federal Taxation 2018 Edition 9th Edition by Brian C. Spilker Profe tb

Essentials of Federal Taxation, 2018 Edition, 9e (Spilker)
Chapter 6 Individual for AGI Deductions

1) The profit motive distinguishes “business” activities from “personal” activities.

2) All business expense deductions are claimed as “above the line” deductions.

3) All investment expenses are itemized deductions.

4) Rental or royalty expenses are deductible “for” AGI.

5) To be deductible, business expenses must be directly related to a business activity.

6) The phrase “ordinary and necessary” means that an expense must be appropriate and helpful for generating a profit.

7) Generally, losses from rental activities are considered to be active losses.

8) Passive losses that exceed passive income are deferred until the taxpayer generates passive income to offset these passive losses.

9) A loss from a passive activity is fully deductible as long as the taxpayer has sufficient tax basis in the activity.

10) A passive activity is any activity that involves a trade or business or rental activity in which the taxpayer does not materially participate.

11) To qualify under the passive activity rental real estate exception, the taxpayer must (1) own at least 15 percent of the property and (2) participate in the process of making management decisions.

12) In certain circumstances, a taxpayer could rent her personal residence at a profit and not pay any tax on the income.

13) Taxpayers who use a vacation home for both personal and rental use generally must allocate expenses associated with the home to the personal use and the rental use.

14) When allocating expenses of a vacation home between personal use and rental use, the amount of depreciation expense allocated to the rental use is always the ratio of rental days over rental days plus personal use days.

15) Expenses of a vacation home allocated to rental use are deductible for AGI.

16) Compared to the Tax Court method of allocating expenses between rental use and personal use, the IRS method tends to allocate more expenses to personal use than does the Tax Court method.
17) Taxpayers renting a home would generally report the rental income and expenses on Schedule E.

18) Jorge owns a home that he rents for 360 days and uses for personal purposes for five days. Jorge is not required to allocate expenses associated with the home between rental and personal use.

19) Jennifer owns a home that she rents for 364 days and uses for personal purposes for one day. Jennifer is required to allocate expenses associated with the home between rental and personal use.

20) A tax loss from a rental home is generally a passive activity loss.

21) A self-employed taxpayer reports home office expenses as for AGI deductions while employees report home office expenses as from AGI deductions.

22) Taxpayers with home offices must allocate indirect expenses of the home between personal use and home office use. Only expenses allocated to the home office use are deductible.

23) In general, total deductible home office expenses are limited to the gross income derived from the business minus business expenses unrelated to the home. (This is net Schedule C income before home office expenses.)

24) Taxpayers who participate in an employer-sponsored retirement plan are not allowed to deduct contributions to individual retirement accounts (IRAs).

25) Qualifying distributions from traditional IRAs are nontaxable while qualifying distributions from Roth IRAs are fully taxable as ordinary income.

26) Taxpayers contributing to and receiving distributions from a Roth IRA generally earn a before-tax rate of return on their contributions equal to their after-tax rate of return.

27) If a taxpayer’s marginal tax rate is decreasing, a taxpayer contributing to a traditional IRA can earn an after-tax rate of return greater than her before-tax rate of return.

28) A SEP IRA is an example of a self-employed retirement account.

29) All reasonable moving expenses are deductible if the move is a minimum of 35 miles in distance from the taxpayer’s old residence to the taxpayer’s new residence.

30) To deduct a moving expense, the taxpayer must be employed or self-employed for a specific amount of time after the move.
31) Self-employed taxpayers can deduct the cost of health insurance as long as they do not actually participate in their spouses’ employer-provided health plan.

32) Self-employed taxpayers can choose between claiming a deduction or a credit for the employer portion of self employment taxes paid.

33) An individual who forfeits a penalty for prematurely withdrawing a certificate of deposit (CD) is allowed to net the penalty against the interest income from the CD.

34) Qualified education expenses for purposes of the deduction of interest on educational loans are expenses paid for the education of the taxpayer, the taxpayer’s spouse, or a taxpayer’s dependent to attend a post-secondary institution of higher education.

35) The definition of qualifying expenses is more restrictive for the qualified educational expense deduction than it is for the education loan interest expense deduction.

36) What is the correct order of the loss limitation rules?
A) Tax basis, at-risk amount, passive loss limits.
B) At-risk amount, tax basis, passive loss limits.
C) Passive loss limits, at-risk amount, tax basis.
D) Tax basis, passive loss limits, at-risk amount.
E) Passive loss limits, tax basis, at-risk amount.

37) Sue invested $5,000 in the ABC Limited Partnership and received a 10 percent interest in the partnership. The partnership had $20,000 of debt she is not responsible to repay because she is a limited partner. Sue is allocated a 10 percent share of the debt resulting in a tax basis of $7,000 and an at risk amount of $5,000. During the year, ABC LP generated a ($70,000) loss. How much of Sue’s loss is disallowed due to her tax basis or at-risk amount?
A) Zero; all of her loss is allowed to be deducted.
B) $2,000 disallowed because of her at-risk amount.
C) $2,000 disallowed because of her tax basis.
D) $4,000 disallowed because of her tax basis.
E) $4,000 disallowed because of her at-risk amount.
38) Which taxpayer would not be considered a material participant of an activity?
A) taxpayer materially participated in the activity for any five of the preceding ten years.
B) taxpayer participated on a regular, continuous, and substantial basis during the year.
C) taxpayer participated 95 hours during the year and participation is not less than any other participants for the year.
D) taxpayer participated in the activity for 995 hours during the year.
E) None of the choices are correct.

39) Generally, which of the following does not correctly categorize the type of income?
A) rental real estate – passive income/loss.
B) salary – active income/loss.
C) dividends – portfolio income/loss.
D) capital losses – passive income/loss.
E) All of the choices are correct.

40) Michelle is an active participant in the rental condominium property she owns. During the year, the property generates a ($15,000) loss; however, Michelle has sufficient tax basis and at-risk amounts to absorb the loss. If Michelle has $115,000 of salary, $10,000 of long-term capital gains, $3,000 of dividends, and no additional sources of income or deductions, how much loss can Michelle deduct?
A) Zero; losses from rental property are passive losses and can only be offset by passive income.
B) $4,000.
C) $11,000.
D) $15,000.
E) None of the choices are correct.

41) The rental real estate exception favors:
A) lower income taxpayers (AGI less than $80,000).
B) middle income taxpayers (AGI greater than $80,000 and less than $150,000).
C) upper income taxpayers (AGI greater than $150,000).
D) lower income taxpayers (AGI less than $80,000), and middle income taxpayers (AGI greater than $80,000 and less than $150,000).
E) middle income taxpayers (AGI greater than $80,000 and less than $150,000), and upper income taxpayers (AGI greater than $150,000).

42) On the sale of a passive activity, any suspended losses can be used to offset income from:
A) other passive activities.
B) capital gains.
C) interest income.
D) wages and tips.
E) All of the choices are correct.
43) A taxpayer’s at-risk amount in an activity is increased by:
A) a reduction in the amount of debt related to the activity that the taxpayer is responsible for paying.
B) cash contributions to the activity.
C) cash distributions from the activity.
D) a reduction in the amount of debt related to the activity that the taxpayer is responsible for paying, and cash contributions to the activity.
E) a reduction in the amount of debt related to the activity that the taxpayer is responsible for paying, and cash distributions from the activity.

44) Kenneth lived in his home for the entire year except when he rented his home (near a very nice ski resort) to a married couple for 14 days in December. The couple paid Kenneth $14,000 in rent for the two weeks. Kenneth incurred $1,000 in expenses relating to the home for the 14 days. Which of the following statements accurately describes the manner in which Kenneth should report his rental receipts and expenses for tax purposes?
A) Kenneth would include the rental receipts in gross income and deduct the rental expenses for AGI.
B) Kenneth would exclude the rental receipts from gross income and deduct the rental expenses for AGI.
C) Kenneth would include the rental receipts in gross income and would not deduct the rental expenses because he used the residence for personal purposes for most of the year.
D) Kenneth would exclude the rental receipts, and he would not deduct the rental expenses.

45) Katy owns a second home. During 2017, she used the home for 20 personal use days and 50 rental days. Katy allocates expenses associated with the home between rental use and personal use. Katy did not incur any expenses to obtain tenants. Which of the following statements is correct regarding the tax treatment of Katy’s income and expenses from the home?
A) Katy includes the rental receipts in gross income and deducts the expenses allocated to the rental use of the home for AGI.
B) Katy deducts from AGI interest expense and property taxes associated with the home not allocated to the rental use of the home.
C) Assuming Katy’s rental receipts exceed the interest expense and property taxes allocated to the rental use, Katy’s deductible expenses for 2017 may not exceed the amount of her rental receipts (she may not report a loss from the rental property).
D) All of the choices are correct.
46) Which of the following statements regarding the IRS and/or Tax Court approaches to allocating home-related expenses between rental use and personal use is correct?
A) The Tax Court approach allocates more property tax and interest expense to rental use than does the IRS approach.
B) The Tax Court and the IRS approaches allocate the same amount of expenses other than interest expense and property taxes to rental use.
C) The IRS approach allocates interest expense and property taxes to rental use based on the ratio of the number of days of rental use to the total days of the year.
D) None of the choices are correct.

47) Brady owns a second home that he rents to others. During the year, he used the second home for 50 days for personal use and for 100 days for rental use. Brady collected $20,000 of rental receipts during the year. Brady allocated $7,000 of interest expense and property taxes, $10,000 of other expenses, and $4,000 of depreciation expense to the rental use. What is Brady’s net income from the property and what type and amount of expenses will he carry forward to next year, if any?
A) $0 net income. $1,000 depreciation expense carried forward to next year.
B) ($1,000) net loss. $0 expenses carried over to next year.
C) $0 net income. $1,000 of other expense carried over to next year.
D) $0 net income. $1,000 of interest expense and property taxes carried over to next year.

48) Braxton owns a second home that he rents to others. During the year, he used the second home 50 days for personal use and 100 days for rental use. After allocating the home-related expenses between personal use and rental use, which of the following statements regarding the sequence of deductibility of the expenses allocated to the rental use is correct (assume taxpayer has no expenses to obtain tenants)?
A) Depreciation expense, other expenses, property taxes and interest expense.
B) Other expenses, depreciation expense, property taxes and interest expense.
C) Property taxes and interest expense, depreciation expense, other expenses.
D) Other expenses, property taxes and interest expense, depreciation expense.
E) None of the choices are correct.
49) Harriet owns a second home that she rents to others. During the year, she used the second home for 10 personal days and for 200 rental days. Which of the following statements regarding the manner in which she should account for her income and/or expenses associated with the home is incorrect?
A) Harriet’s deductible expenses are not limited to the amount of gross rental income from the property.
B) Harriet will be allowed to deduct all of the mortgage interest on the loan secured by the property.
C) Harriet is required to include all of the rental receipts in gross income.
D) Harriet is required to allocate all expenses associated with the home to rental use or personal use.

50) When a taxpayer experiences a net loss from a nonresidence (rental property):
A) The taxpayer will not be allowed to deduct the loss under any circumstance if the taxpayer does not have passive income from other sources.
B) The loss is fully deductible against the taxpayer’s ordinary income no matter the circumstances.
C) If the taxpayer is not an active participant in the rental, the taxpayer can deduct the loss even if the taxpayer does not have any sources of passive income.
D) If the taxpayer is not allowed to deduct the loss due to the passive activity limitations, the loss is suspended and carried forward until the taxpayer generates passive income or until the taxpayer sells the property.

51) Harvey rents his second home. During 2017, Harvey reported a net loss of $35,000 from the rental. If Harvey is an active participant in the rental and his AGI is $80,000, how much of the loss can he deduct against ordinary income in 2017?
A) $35,000.
B) $25,000.
C) $5,000.
D) $0.

52) Ilene rents her second home. During 2017, Ilene reported a net loss of $15,000 from the rental. If Ilene is an active participant in the rental and her AGI is $140,000, how much of the loss can she deduct against ordinary income in 2017?
A) $15,000.
B) $10,000.
C) $5,000.
D) $0.
53) Jamison is self-employed and he works out of an office in his home. After allocating the home-related expenses between the business office and the rest of the home, which of the following statements regarding the sequence of deductibility of the expenses allocated to the home office business use is correct?
A) Depreciation expense, other expenses, property taxes and interest expense.
B) Other expenses, depreciation expense, property taxes and interest expense.
C) Property taxes and interest expense, depreciation expense, other expenses.
D) Other expenses, property taxes and interest expense, depreciation expense.
E) None of the choices are correct.

54) Which of the following statements regarding limitations on the deductibility of home office expenses of employees is correct?
A) Deductible home office expenses of employees are miscellaneous itemized deductions subject to the 2 percent of AGI floor.
B) Deductible home office expenses of employees are miscellaneous itemized deductions not subject to the 2 percent floor.
C) Deductible home office expenses of employees are for AGI deductions limited to gross income from the business.
D) Deductible home office expenses of employees are for AGI deductions not limited to gross income from the business.

55) Which of the following statements regarding limitations on the deductibility of home office expenses of self-employed taxpayers is correct?
A) Deductible home office expenses are miscellaneous itemized deductions subject to the 2 percent of AGI floor.
B) Deductible home office expenses are miscellaneous itemized deductions not subject to the 2 percent floor.
C) Deductible home office expenses are for AGI deductions limited to gross income from the business minus non-home office related expenses.
D) Deductible home office expenses are for AGI deductions and may be deducted without limitation.

56) Which of the following statements regarding the home office expense deduction is correct?
A) Taxpayers allocate expenses of the home to the home office based on the size of the office relative to the size of the home.
B) A taxpayer is not allowed to deduct any home office expenses unless the taxpayer has no other place to do business.
C) A taxpayer is not allowed to deduct any depreciation associated with a home as a home office expense.
D) A taxpayer must own a home in order to claim home office expenses.