Business 123C Spring 2012 Quiz Chapters 6 and 7 1.

Deductions for adjusted gross income include all of the following except a. contributions to individual retirement arrangements. b. alimony. c. expenses attributable to production of rental income. d. unreimbursed employee business expenses. e. None of the above. Answer: d Explanation: d All except unreimbursed employee business expenses, deductible only as an itemized deduction, are specifically included as "For AGI" deductions. Page Ref.: I:6-3 2. In 2011, Sean, who is single and age 44, received $55,000 of gross income and had $4,000 of deductions for AGI and $4,600 of itemized deductions. Sean's taxable income is a. $40,650. b. $41,500. c. $46,400. d. $47,350. e. None of the above Answer: b Gross income Deductions for AGI Adjusted gross income Standard deduction Exemption Taxable income Page Ref.: I:6-3 and I:6-4 $55,000 ( 4,000) $51,000 ( 5,800) ( 3,700) $41,500

3. Liz, who is single, lives in a single family home and owns a second single family home that she rented for the entire year at a fair rental rate. Liz had the following items of income and expense during the current year. Income: Gross salary and commissions from Ace Corporation $50,000 Rent received from tenant in Liz's rental house 13,000 Dividends received on her portfolio of stocks 5,000 Expenses: Unreimbursed professional dues 200 Subscriptions to newsletters recommending stocks 900 Taxes, interest and repair expenses on rental house 3,500 Depreciation expense on rental house 2,300 What is her adjusted gross income for the year? a. $53,750 b. $61,100 c. $62,200 d. $68,000 e. None of the above. Answer: C Explanation: C) Gross salary and commissions from Ace Corporation Rent received from tenant in Liz's rental house Dividends received on her portfolio of stocks Gross income $50,000 13,000 5,000 $68,000

For AGI Deductions: Taxes, interest and repair expenses on rental house Depreciation expense on rental house Adjusted Gross Income Page Ref.: I:6-4

( 3,500) ( 2,300) $62,200

4. During the current year, Martin purchases undeveloped land as an investment. Martin intends to rent the land as pastureland and hopefully sell it later for a profit. In the current year, Martin receives no rent but he does pay taxes of $2,800, mortgage interest of $900 and liability insurance of $500. How much of these expenses can Martin deduct (before any limitations) on his current tax return? a. $0 b. $1,400 c. $3,700 d. $4,200 e. None of the above. Answer: D Explanation: D) $2,800 + $900 + 500 = $4,200. Page Ref.: I:6-7; Example I:6-5 5. Emeril borrows $340,000 to finance taxable and tax-exempt investments. He incurs $18,000 investment interest expense, allocate equally between the taxable and tax-exempt investments. Ignore any possible investment interest expense limitation. How much of the interest expense is deductible, and where is it deductible? a. $18,000 for AGI b. $18,000 from AGI c. $9,000 for AGI d. $9,000 from AGI e. None of the above. Answer: D Explanation: D) Interest incurred to acquire tax-exempt investments is not deductible. Page Ref.: I:6-12; Example I:6-14 6. Donald sells stock with an adjusted basis of $38,000 to his son, Kiefer, for its fair market value of $30,000. Kiefer sells the stock three years later for $32,000. Kiefer will recognize a gain on the subsequent sale of a. $-0-. b. $2,000. c. ($6,000). d. ($8,000). e. None of the above. Answer: A Explanation: A) Selling Price $32,000 Minus: Cost (30,000) Gain $2,000 Minus: Previously disallowed loss ($30,000 - $38,000) ( 2,000) Taxable gain $ -0The previously disallowed loss cannot reduce the gain below zero. Page Ref.: I:6-28; Example I:6-35 7. For the years 2007 through 2011 (inclusive) Mary, a a best-selling author, has been involved in operating an antique store. In 2007, 2008 and 2009 her income exceeded the expenses from the activity. In 2010 and 2011, the antique store generated a loss. Which statement is correct? a. The activity is a business. The IRS cannot prove it is a hobby. b. The activity is a hobby. Mary cannot prove it is a business. c. The activity is presumed to be a business. However, the IRS may prove it is a hobby. d. The activity is presumed to be a hobby. However, Mary may prove it is a business.

e. None of the above are correct. Answer: C Explanation: C) Under the presumption rule, if an activity results in income in 3 of 5 years, the burden of proof falls to the IRS to prove that the activity is a hobby rather than a trade or business. Page Ref.: I:6-29 8. Juan has a casualty loss of $32,500 on investment property, after receiving an insurance settlement. This is Juan's only casualty transaction this year. Juan's loss is a. an ordinary loss. b. a capital loss. c. a Sec. 1231 loss. d. a Sec. 1244 loss. e. None of the above. Answer: A Explanation: A) Although real estate is a capital asset, the $32,500 loss is ordinary since a casualty is not a sale or exchange. Page Ref.: I:8-5; Example I:8-4 Problems: 1. Margaret, a single taxpayer, operates a small pottery business in her spare time. During the current year, she reported the following income and expenses from this activity which is classified as a hobby: Revenue from sale of pottery $ 4,000 Depreciation on potter's wheel ( 3,000) Property taxes on shed where she does work ( 1,100) Supplies used such as clay, etc. ( 6,500) In addition, she had a salary of $99,000, and interest income of $6,000 and itemized deductions, not including those listed above, of $1,000. On September 3, 2010, Margaret purchased 1244 stock in White Corporation for $9,000. On December 31, 2010, the stock was worth $32,000. On August 15, 2011, Margaret was notified that the stock was worthless. In addition Margaret suffered a burglary and had the following items stolen and made the following insurance claims: Fair Market Value Insurance Asset Adjusted Basis Before After Recovery Investment $8,000 $12,000 $0 $0 Stock Household 15,000 4,000 0 10,000 Goods Personal 20,000 15,000 0 6,000 computers and TV Compute her 2011 taxable income. 99000 Salary 6000 Interest Income 4000 HOBBY not net against any expenses (9000) 1244 6000 casualty gain (6000) casualty loss 100000 AGI 8000 THEFT OF INV ASSET 1000 other itemized

1100 HOBBY 2900 HOBBY (2000) 2% of AGI 2% X 100,000 3000 remaining casualty loss - $100 = 2900 10% of AGI $10,000 loss is too small no benefit 3700 personal exemption 85300 TAXABLE INCOME 2. Mackensie owns a condominium in the Rocky Mountains. During the year, Mackensie uses the condo a total of 33 days. The condo is also rented to tourists for a total of 86 days and generates rental income of $10,900. Mackensie incurs the following expenses in the condo: Expense Amount Mortgage interest $ 5,000 Property taxes 3,500 Utilities 2,500 Insurance 1,800 Depreciation 11,000 Use the court's method of allocating expenses. She earns a salary of $90,000. She pays $8,000 child support to Steve for the care of their son, William. Compute her taxable income for 2011.

90000 10900 (2003) 8500 X 86/365 1st tier (3108) 4300 X 86/119 2nd tier (5789) total $11,000 but limited so not a loss LIMITED TO ZERO 90000 AGI 6497 remaining property tax and interest 8500 2003 allocated to rental 3700 79803 taxable income
Mortgage interest Property taxes $ 5,000 3,500

8500 X 86/365 = 2003