Income Tax

This is a business property. There is no reinvestment rule for sales without a specific code exemption such as Section 1033 (involuntary conversions). His gain from the sale would receive long term capital gains treatment and his tax obligation would be 15% of that gain after accounting for recovery of basic and any depreciation recapture ($185,500 x .15 = $27,825).

Tax planning fees may be deducted against a taxpayer's itemized deduction, Schedule A. In addition, because the taxpayer is self-employed, the portion of services related to the business and not personal may be taken as a deductible on the taxpayer's Schedule C.

The accrual accounting method recognizes income when the taxpayer has a right to collect. This occurs usually after the completion of a job and in no case later than when the invoice is prepared and sent.

Income received but not spent is applicable to the gross income test but not the support test.

The classifications of income are active, passive and portfolio. Earned income is a subset of active income while unearned income may be either a passive or portfolio income.

The FIFO method is concerned with movement of costs through inventory, not goods. The cost of the first units purchased are the first costs to be transferred to cost of goods sold when the goods are sold.

Only materials and expenses are deductible, not artistic contribution or time. No deduction is allowed for use of property; therefore, the pro-rata overhead would likely not be allowed.

Substantial authority is official words and rulings which can be relied on to support a tax opinion or position. All of these can be relied on by someone.

The adoption expense credit limit for 2015 is $13,400.

The stereo system purchased and GIVEN to Wes qualifies as support. Because the car was not GIVEN to Wes (although he is allowed to use it) it will not be considered support. However, maintenance costs, such as gas and insurance that the taxpayer provides for his use of the car will qualify as support.

Income may be deferred until cash is received and deductible expenses accelerated if paid.

Prizes and awards are fully taxable when received.

Alimony is considered earned income as is self-employment income. Investment income is portfolio income. Rental income is deemed passive income subject to "active participant" rules.

Dividends are recognized as income in the year the dividends were paid. The appreciation on the value of stock is not taxable until the stock is sold. A cash based taxpayer recognizes income when received either actually or constructively. Realization is an economic concept, recognition is a tax concept.

James' gross income is $5,000. Tuition and books are not included in income, but living expenses such as room and board are included in taxable income.

If the business is deemed to be a PHC by the IRS, then a penalty tax of 15% can be imposed on the undistributed personal holding company income.

Sara must include all $65,000. Lost wages are nothing more than recovery of wages which would have been taxable. Punitive damages are always included as taxable income. Other than damages awarded for personal injury, other damages, including punitive damages and recovery of lost wages, are taxable.

Personal use property is not subject to cost recovery since it is not used for income generating business purposes. Natural resources are subject to depletion and intangibles are subject to amortization. Personalty assets are used in business and are subject to depreciation. Real estate, as in permanent structures on land, are subject to cost recovery, but the land is not.

The cost basis to a purchaser is the acquisition cost plus any other costs associated with purchasing the property or making it useful for service. The buyer paid $100,000. The question indicates that it was the seller and not the buyer who paid the sales commission and the closing costs. Therefore, the buyer's basis is only the acquisition costs of $100,000. Cash $40,000 plus mortgage $60,000.

There is a five-year carry-over provision for charitable deductions. The total years are 6: The initial year plus five carry-over years.

Expenses incurred in connection with issuing and selling stock are not deductible. The rule is the lesser of expenditures or $5,000. Therefore, $1,650 + 150 = $1,800.

The basis of depreciable property begins with the acquisition costs plus any additional expense necessary to acquire or making such property ready for use. Here, sales tax is a required expense by law and is therefore added to the acquisition cost resulting in the depreciable basis. $25,000 (cost) + $1,250 (sales tax) = $26,250.

Options "A" and "B" are incorrect in that they would dissolve in the event of a 50% turnover in ownership in a 12-month period. Option "C" is incorrect because a C corporation generally retains income. Option "D" is correct as an S corporation holds no retained earnings since all profits or losses are passed through to its owners.

Increase in Donee's Basis = (Appreciation of the Property/ Taxable Gift) x Gift Tax Paid FMV of Property at Date of Gift

[($57,000 ÷ $75,000 = .76) x $3,500] + $18,000 = $20,660

Section 179 recapture rules apply when the business use of an asset drops below 50% for a given year or when the asset is disposed of before it would have been fully depreciated.

Jim's profit would be as follows: $500,000 (income) - $125,000 (cost of goods sold) = $375,000 of profit. Terry's profit would be as follows: $500,000 (income) - $200,000 (wages) - $50,000 (rental expenses) = $250,000 of profit. Please note that illegal expenses such as bribes to police are neither allowable nor deductible. If the illegal business is drug running then you are limited to only deducting the cost of goods sold.

Cost recovery is a periodic expensing of tangible property, including real and personal property used in business. Amortization is a periodic expensing of the cost of intangible assets. Depletion is the expensing of natural resources as they are being used up. This expense will fluctuate with the actual taking of the resource from the land.

The maximum capital loss that a taxpayer can apply is up to the extent of any capital gains for that year plus an additional $3,000. Any excess losses are carried forward and applied as discussed above until used.

If an agreement is reached between former spouses where the decreed amount of alimony is increased to include child support, then the additional alimony would be taxable to the recipient and deductible to the payor. The additional money cannot be based on any contingency such as with the child reaching the age of majority or death.

Section 121 requires that to qualify for the exemption she must have 1) owned and 2) used as principal residence for two years out of the past 5 years. An exception to the rules exists where a taxpayer moved because of employment transfer. In this case, Cindy owned and lived in the home for 18 of the 24 months. Cindy is entitled to 75% of the allowable $250,000 gain exemption or $187,500.

Section 1231 gain is capital gain. Section 1231 gain occurs when the sale price exceeds the original purchase price.

Option "A" is incorrect because Bill reports all of the income even though part of it was Renee's. Option "B" is correct. The inherited property may be considered separate property, and therefore, in some community property states the income earned from it is separate. In others, it is community.

The appreciated property will cause a capital gain to be recognized. Because the property realizing a loss was for personal use, it will not be deductible. Capital gain on personal use property is taxable, but losses on personal use property (property not used in business) are not deductible. Therefore, the $3,000 in gains will be taxed at the appropriate capital gains rates but the $3,000 loss can neither be used as a deduction to income or to capital gains.

The five dependency tests are: 1) Gross Income Test, 2) Support Test, 3) Member of Household or Family Member Test, 4) Citizenship Test (U.S., Canada or Mexico), and 5) Joint Filing Test.

The inclusion amount is designed to help to smooth the lease expense vs. the depreciation expense. The lease is front loaded.

Section 1250 gain applies to the realized gain on real property where the accelerated method was used. The gain is the excess of accelerated over straight line (ACRS). Section 1250 gain is taxed as ordinary income. Under current law (MACRS), only straight line depreciation of real property is used.

The loss is the $40,000 decline in value, reduced by the $15,000 of insurance proceeds, $100 non-included amount and 10% of adjusted gross income for a total reduction of $17,100.$180,000 - 140,000 = 40,000 - 15,000 (insurance) = 25,000$25,000 - 7,800 (10%) - 100 = 17,100 deduction

The premiums for disability insurance and group hospitalization insurance are not included in the taxpayers income. Because James is a cash basis taxpayer, income is recognized when received. So the salary is $60,000 in the current year and though he earned his bonus in the current year, he will not recognize it until next year when it is paid.

Since John received boot and "traded down" his recognized gain equals the lesser of the realized gain or boot received, which is $25,000. John's basis will be his original basis ($75,000) less the boot received ($25,000) plus the gain recognized ($25,000) or $75,000. Ted's basis will increase by $25,000 because he is paying $25,000 in boot.

In 2015, a person under the age of 19 or under the age of 24 and a full-time student at the end of the tax year, would pay tax at their parents' rate if they had more than $2,100 in unearned income. Thus, $100 of Derek's income is taxed at the parent's highest marginal rate. Danny avoids this as $900 is under the standard deduction. Brian's income is earned and the kiddie tax applies only to unearned income and Courtney is 19. If the question stated that Courtney was a full-time college student then "B" would be the correct answer but you can't assume those facts.

Any sign of ownership, including that of an installment sale will cause a leased vehicle to be treated for tax purposes as a purchased vehicle. Rather than deducting the lease payments, the taxpayer will be required to elect either standard mileage or to take depreciation plus actual expenses.

The non-business bad debt is treated as a short-term capital loss. The loss on worthless stock held for more than one year is a long-term capital loss. The loss on small business stock Section 1244 is recognized as an ordinary loss not subject to the capital loss rules. Note the following calculation: $5,000 (long-term capital gain) - $1,000 (long-term capital loss worthless stock) = $4,000. From this amount, subtract $9,000 (non-business bad debt expense - short-term capital loss) to obtain a net short-term loss of ($5,000.) However, the maximum annual capital loss deduction is net $3,000.

A cash basis taxpayer does not recognize income not received. Since the bad debt was never recognized as income, it cannot be recognized as a loss or a bad debt expense.

Casualty loss expense for non-business losses are the excess of 10% of the taxpayers AGI less $100. The loss is calculated as follows: $4,000 (decline in fair market value) - $500 (insurance reimbursement) - $100 (decrease for non-business losses) - $2,000 (10% of $20,000 AGI) = $1,400 in deductible loss.

His gain is $9,500 - $8,000 because he has already taken depreciation down to $8,000, and he received compensation in excess of his depreciable basis.

This is a passive activity. His deduction is equal to his limited partnership income from other sources to the extent he is at risk. The maximum investment deduction may not exceed the cumulative investment income. The $60,000 non-recourse note is irrelevant to answering this question. This question also assumes that the investment occurred in the current tax year.

Substitute basis is the fair market value of an asset, reduced by gain realized, but not recognized.

He gets to net his portfolio losses against his portfolio gains. He will deduct his expenses, above the 2% limitation of AGI, and commission is deductible. The question tells you to ignore "other considerations" meaning ignore the 2% AGI limitation. "A" is the only choice that you could select. Nothing else makes sense; it is the BEST answer. Some questions on the exam are "not so great" questions, so don't fight it and go with the best answer.

Option "I" - A loss from a limited partnership in which there is no material participation is governed under the passive activity loss rules. Since there is no other passive activity income to offset the loss, the loss is not currently deductible. Option "II" - The same passive activity loss rules apply, and therefore, the loss is not currently deductible. Option "III" - Because she is a material participant in managing the S corporation, the losses are deductible. Option "IV" - Wages are always included in AGI. Option "V" - Dividend income unless excluded is included in AGI. $40,000 (wages) minus $3,000 (S corp loss) plus $1,200 (dividends) = $38,200.

To depreciate real property, the mid-month convention is used. In addition, a hotel is not considered residential real property and is therefore depreciated using straight line depreciation over 39 years1 ÷ 39 = .02564$5,000,000 x 2.564% = $128,200 of annual depreciation expense$128,200 ÷ 12 = $10,683 for one month's depreciation in the current year

This is a present value of an annuity due problem. So, N = 20, I = 8, PV = ?, PMT = 250,000, FV = 0. Put your calculator in BEGIN mode and solve for PV. Inflation is not necessary in this calculation.

In this case, more losses are not required at all. Rather, credits only are needed to improve the client’s tax position.

Options "A", "C" and "D" are incorrect as they are neither added nor subtracted from the regular income to calculate AMT. State income taxes deducted as an itemized deduction will be added back into regular income to calculate Alternative Minimum Taxable Income.